Fitch Ratings said on Tuesday that Islamic finance-specific rules issued by the Saudi Central Bank (SAMA) since 2020 are enhancing Islamic banking regulations through better transparency and reporting requirements as well as standardisation and Sharia governance.
While Saudi Arabia’s Islamic banking market is the largest globally, persisting issues include low standardisation, still-developing Islamic finance regulations, and fragmented disclosures.
The ratings agency said the lack of a centralised Sharia board could further harmonise industry practices. The regulations issued cover profit-sharing investment accounts (PSIAs) and aim to enhance Sharia compliance, raise transparency, and set minimum regulatory requirements.
Saudi Arabia’s Islamic banks have included PSIA-related disclosures in their financial statements since the end of 2023. PSIAs grew to 7.1% of sharia-compliant deposits at end-2022 (2021: 6.4%).
SAMA issued additional capital adequacy requirements for Sharia-compliant banking. It intends to ensure risks associated with Islamic banking products and contracts are appropriately captured, with capital requirements for credit risk and market risk.
The central bank released a risk-management framework for banks practising Islamic banking, including establishing minimum principles for risk management.
The apex lender has released a Sharia governance framework for local banks and finance companies, with the aim of strengthening sharia-governance procedures and boosting confidence in the Islamic finance sector.
SAMA also issued a standard retail consumer finance contract, which covers murabaha and tawarruq, and is likely to aid standardisation.
Rules on new banking products and services include the need for sharia committee approvals for new Islamic products, among other requirements. A further planned government initiative is to set up a centralised Sharia board to harmonise all banks’ approaches to Sharia compliance. Several of these regulatory initiatives follow SAMA’s implementation of the Islamic Financial Services Board standards.
