ISLAMIC FINANCE

IN SAUDI ARABIA:
Leading the Way to Vision 2030
© Islamic Research and Training Institute, Islamic Development Bank, 2020
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Disclaimer
This work is a product of the staff of the Islamic Research and Training Insti-
tute (IRTI) with external contributions. The findings, interpretations, and con-
clusions expressed in this work do not necessarily reflect the views of IRTI
or IsDB, or IsDB Board of Executive Directors. IRTI Does not guarantee the
accuracy of the data included in this work. Content of this report is intended
to provide general information only and as such should not be considered as
legal or professional advice.

II
 CORPORATE PROFILE
ISLAMIC RESEARCH AND TRAINING INSTITUTE
ESTABLISHMENT
The Islamic Research and Training Institute
(IRTI), a Member of the Islamic Development
Bank (IsDB) Group, was established in 1981
with the primary aim of supporting the IsDB’s
mission of providing development finance in
accordance with the Islamic law.
STRATEGIC GOAL
To develop knowledge-based Islamic economic
and financial solutions to support socio-econo-
mic development in IsDB Member Countries
and Muslim communities worldwide.
MISSION
• To lead in providing innovative, knowledge-
based solutions for development
challenges facing IsDB Member Countries
in accordance with the principles of Islamic
Economics and Finance.
• To lead in providing learning and capacity
building for IsDB Member Countries to
achieve the Sustainable Development Goals
(SDGs).
• To work with partners to deliver cutting-
edge research, enhance human capital and
provide information services to support
the development of the Islamic financial
industry worldwide.
III
MAIN FUNCTIONS
• Conduct pioneering research to address de-
velopment challenges facing IsDB member
countries.
• Lead a problem-solving approach to know-
ledge creation and dissemination in Islamic
Economics and Finance.
• Undertake capacity building of future
knowledge leaders in Islamic Economics
and Finance who shall lead entrepreneurial
development of IsDB Member Countries.
• Development and delivery of innovative and
effective learning, training, and certification
programs, to enhance knowledge and skills
of individuals, institutions and other stake-
holders.
• Produce and disseminate high-quality,
high-value, publications in the area of Isla-
mic Economics and Finance.
• Develop and ensure effective use of
knowledge and information dissemination
channels, to disseminate Islamic financial
knowledge and engage stakeholders.
• Design and structuring of innovative, know-
ledge-based solutions of development chal-
lenges of IsDB Member Countries in line
with the principles of Islamic Economics
and Finance.
• Identify new opportunities and emerging
needs for the delivery of state-of-the-art ap-
plications of Islamic Fintech.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CONTENTS
EXCLUSIVE INTERVIEWS...........................................................................................................................................VIII
LETTER OF TRANSMITTAL..........................................................................................................................................IX
FOREWORD........................................................................................................................................................................X
ACKNOWLEDGEMENT...................................................................................................................................................XI
EXECUTIVE SUMMARY................................................................................................................................................ XII

CHAPTER I: ECONOMIC AND FINANCIAL LANDSCAPE 2

Overview........................................................................................................................................................................... 3
Economic Performance................................................................................................................................................. 4
Inflation....................................................................................................................................................................... 4
Monetary and Fiscal Policy..................................................................................................................................... 5
Openness of the Saudi Economy........................................................................................................................... 6
Competitiveness of the Saudi Economy.............................................................................................................. 8
Oil Production............................................................................................................................................................ 9
Alignment of Vision 2030 with Sustainable Development Goals........................................................................10
Financial Industry Structure and Landscape...........................................................................................................12
Financial Institutions Play a Key Role in Saudi Arabia...........................................................................................12
The Architecture of Saudi Financial System...........................................................................................................13
Overview of Islamic Finance in KSA..........................................................................................................................15
The Financial Sector Development Program (FSDP).............................................................................................16
Financial Regulatory System......................................................................................................................................18
Saudi Arabian Monetary Authority (SAMA)........................................................................................................18
Saudi Capital Market Authority (CMA)................................................................................................................19
Conclusion.....................................................................................................................................................................20

CHAPTER II: BANKING SECTOR 26

Overview.........................................................................................................................................................................27
Sector Size and Growth...............................................................................................................................................28
Saudi Banks are Highly Concentrated......................................................................................................................30
The Development of Islamic Banks..........................................................................................................................31
Islamic Banking Assets are On the Rise.............................................................................................................32
The Lion’s Share of Banking Assets....................................................................................................................34
Sharīʿah-Compliant Banking Maintains Strong Position in Operational Efficiency.....................................35
Stable Capital Adequacy Ratio.............................................................................................................................38
Saudi Islamic Asset is leading in the GCC Region..................................................................................................41
Liquidity.....................................................................................................................................................................43
E-Banking in Saudi Arabia...........................................................................................................................................44
Conclusion.....................................................................................................................................................................46

IV
CHAPTER III: CAPITAL MARKET 48
Overview.........................................................................................................................................................................49
Capital Market Development and Vision 2030........................................................................................................49
The Stock Market: A Brief History..............................................................................................................................50
Market Indices.........................................................................................................................................................51
Performance of the Stock Market.......................................................................................................................53
A Leader in the Region...........................................................................................................................................55
CMA Strategic Plan: Financial Leadership Program (2019-2021).......................................................................56
Ṣukūk: A Global Market Overview..............................................................................................................................57
Ṣukūk Issuance in Saudi Arabia...........................................................................................................................58
The First Sovereign Ṣukūk of Saudi Arabia........................................................................................................58
Pushing the Market to A New Level....................................................................................................................59
Ṣukūk Structure in KSA..........................................................................................................................................59
Saudi Arabia is the Second Largest Ṣukūk Issuer Globally............................................................................60
Capital Market Authority’s Initiatives to Develop Ṣukūk Market..........................................................................61
Islamic Funds................................................................................................................................................................62
Exchange-Traded Funds (ETFs).................................................................................................................................64
Real Estate Investment Traded Funds (REITs).......................................................................................................65
Conclusion.....................................................................................................................................................................66

CHAPTER IV: TAKĀFUL (INSURANCE) MARKET 70

Overview.........................................................................................................................................................................71
Outlook of Global Insurance Market.........................................................................................................................71
Takāful is an Essential Element of Islamic Financial Ecosystem........................................................................73
Overview and Structure of Saudi Arabia Market.....................................................................................................73
Gross Written Premiums.......................................................................................................................................75
Insurance Market Penetration..............................................................................................................................76
Insurance Density...................................................................................................................................................77
Net Written Premium.............................................................................................................................................78
Retention Ratios......................................................................................................................................................79
Insurance Assets....................................................................................................................................................79
The Regulatory Environment and Recent Developments.....................................................................................80
The Cooperative Insurance Companies Control Law......................................................................................81
Cooperative Health Insurance (CCHI).................................................................................................................82
Conclusion.....................................................................................................................................................................82

V
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER V: SOCIAL AND DEVELOPMENT FINANCE 84

Overview.........................................................................................................................................................................85
National Laws and Regulations Affecting Social Finance in Saudi Arabia........................................................85
Setting Up Regulatory Body for the Waqf Sector...................................................................................................87
Initiatives by General Authority for Awqāf..........................................................................................................87
Waqf Investment Funds........................................................................................................................................88
Role of Islamic Development Bank (IsDB) in Awqāf Sector in KSA....................................................................88
Operationalization of Awqāf Support within IsDB............................................................................................89
Outlook on Development Finance in KSA................................................................................................................97
Establishment of the National Development Fund................................................................................................98
Conclusion.....................................................................................................................................................................98

CHAPTER VI: ENTREPRENEURSHIP AND INNOVATION 104

Overview...................................................................................................................................................................... 105
The Role of Entrepreneurship in Realizing 2030 Vision..................................................................................... 105
Entrepreneurial Ecosystem in KSA......................................................................................................................... 106
Domains for Efficient Entrepreneurship Ecosystem..................................................................................... 108
Saudi Arabia Entrepreneurship Ecosystem Performance........................................................................... 111
Saudi Arabia Ecosystem valuation Vs 54 Economies Selected by the GEM........................................... 111
Impact of Ecosystem Facilities on Doing Business...................................................................................... 113
Saudi Arabia Competitiveness................................................................................................................................ 115
Innovation Policies and Incentives in KSA...................................................................................................... 116
Incubators and Startups........................................................................................................................................... 120
Venture Capital and Private Equity in Saudi Arabia............................................................................................. 125
Venture Capital Vs Private Equity and their Role in Financing Startups and SMEs................................ 126
Conclusion.................................................................................................................................................................. 127

VI
 CHAPTER VII: FINTECH 128
Overview...................................................................................................................................................................... 129
Fintech and Financial Industry................................................................................................................................ 129
What Makes Fintech Succeed and Flourish?................................................................................................. 130
History of Fintech in Saudi Arabia.................................................................................................................... 130
Understanding the Current Saudi Fintech Market......................................................................................... 131
Major Trends in the Swarming Saudi Financial Sector & Major Reforms...................................................... 132
Social Impact of Fintech in Saudi Arabia.............................................................................................................. 134
Saudi Banking and Payments Market.............................................................................................................. 134
Mobile and Internet Penetration............................................................................................................................. 137
Case Study............................................................................................................................................................ 138
Lessons Learnt..................................................................................................................................................... 140
Saudi market is expected to continue............................................................................................................. 140
Being ahead of the tide (innovation)................................................................................................................ 140
Second mover advantage in disruptive innovation....................................................................................... 140
Conclusion.................................................................................................................................................................. 140

CHAPTER VIII: KSA LEADING THE WAY 144

Major Hub.................................................................................................................................................................... 145
Comparative Advantages......................................................................................................................................... 146
Fintech......................................................................................................................................................................... 146
The Way Forward....................................................................................................................................................... 147

LIST OF CONTRIBUTORS.......................................................................................................................................... 150

ENDNOTES.................................................................................................................................................................... 154

VII
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

EXCLUSIVE INTERVIEWS
Dr. Ahmed Abdulkarim Al-Kholifey
Governor of Saudi Arabian Monetary Agency (SAMA)

Mr. Ammar A. Shata

Founder and Executive Director, Al Khabeer Capital

Mr. Emad bin Saleh Al-Kharashi

Governor of Saudi Arabia General Authority for Awqaf (GAA)

Mr. Stephen Groff

Governor of the National Development Fund, Saudi Arabia

Ms. Muna Abu Sulayman

A Leader on Entrepreneurship and Humanitarian Development in KSA

Ms. Nejoud Al-Mulaik

Director, Saudi Fintech

VIII
 Dr. Bandar M.H. Hajjar
President,
Islamic Development Bank Group
LETTER OF TRANSMITTAL
The Kingdom of Saudi Arabia Islamic Finance Coun-
try Report is part of a series designed to provide
key insights and analysis on the development of
emerging or frontier Islamic finance markets. The
Report’s objectives are to provide insightful analysis
and to promote transparency and access to infor-
mation on the broader Islamic Economy.
Saudi Arabia is unquestionably a major hub of the
Islamic financial industry not only in the Middle East,
but also worldwide. With Vision 2030, and with an
energetic and innovative youth population, Saudi
Arabia has a great potential to lead the industry in
the 21st century. Not surprisingly, Islamic finance
is one of the key pillars of the Financial Sector De-
velopment Program set out by the Government of
Saudi Arabia.
The Kingdom of Saudi Arabia Islamic Finance Coun-
try Report under the theme “Islamic Finance in Sau-
di Arabia: Leading the Way to Vision 2030” is a ma-
nifestation of potential leadership of Saudi Arabia of
Islamic finance.
By the end of 2018, in total, Islamic finance assets in
Saudi Arabia reached a remarkable US$ 879.2 billi-
on (SAR 3,297 billion), which makes Saudi Arabia the
largest Islamic finance market globally. Furthermore,
the return on assets of Islamic banks in Saudi Arabia
consistently outperforms their peers in the G20, na-
mely Indonesia and Turkey, as well as Malaysia.
The Kingdom is also taking the digital transforma-
tion very seriously, evidenced by the formation of
IX
“Fintech Saudi” to act as a catalyst to develop the
Fintech ecosystem alongside with vibrant regula-
tory sandbox set out by the Kingdom’s monetary
authority.
The Report also sheds some light on the Kingdom’s
swift response to combat Covid-19 pandemic which
has adversely affected the global communities.
The rich and diverse coverage of the Report will
hopefully be beneficial for readers and relevant sta-
keholders in enhancing their understanding about
the immense potential of the Islamic finance indus-
try in the kingdom.
It is, therefore, with immense pleasure that I present
the Kingdom of Saudi Arabia Islamic Finance Coun-
try Report.
I hope the Report avails readers with the necessary
information to appreciate the potential leadership of
Saudi Arabia in the global Islamic finance industry.
We are grateful for the valuable support and coo-
peration of the various authorities in the Kingdom.
Our colleagues at the Islamic Research and Training
Institute (IRTI) did their best to collect, synthesize,
and analyze a large number of data sets and reports
on the Saudi economy. They also worked hard to in-
tegrate all the comments and suggestions received
from external experts and reviewers. Nonetheless,
we invite our readers to provide constructive re-
marks and feedback on the Report.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Dr. Sami Al-Suwailem
Acting Director General,
Islamic Research and Training Institute
FOREWORD
The Islamic Research and Training Institute (IRTI)
continues its pioneering role as a knowledge hub
of Islamic economics and finance. The Islamic Fi-
nance Country Report, a flagship publication of the
Institute, offers extensive analysis of Islamic finan-
ce in selected Member Countries of the Islamic De-
velopment Bank (IsDB). The present Report studies
the Islamic finance sector in the Kingdom of Saudi
Arabia, the largest economy in the Middle East and a
major shareholder of the IsDB. Endowed with a uni-
que set of advantages, the Kingdom has the poten-
tial to lead the Islamic finance industry on a global
scale.
Analyzing the region’s largest Islamic finance indus-
try in such a large and dynamic economy is not a
trivial matter. The team behind the Report has been
tirelessly working for over 21 months. Countless
hours were devoted for digging up data, analyzing
graphs, inspecting reports, contacting stakeholders,
etc. Although we did our best to check each and
X
every number and statement in this Report, we ac-
knowledge our fallible human nature and make no
claim for perfection.
The Covid-19 crisis added another layer of complexi-
ty that was not in our plans. The team though thinks
that the Saudi economy will be able to weather this
crisis resiliently, and thus we do not expect the main
results of the analysis to change much once the
storm has passed. Long-term consequences of the
crisis are still a highly speculative subject, but one
thing seems certain: digitization of the Saudi eco-
nomy will probably progress at even a faster pace.
This most likely will strengthen the results of the
analysis.
We at IRTI are proud to serve our Member Coun-
tries, and we are honored to produce this knowledge
product. Other knowledge products are in the pipe-
line, and we look forward to meeting you in another
opportunity soon.
ACKNOWLEDGEMENT
We owe a huge debt of appreciation to many people
whose encouragement and unfailing support have
instilled a positive energy throughout the production
of the report.
A dedicated IRTI team, composed of Dr. Sami
Al-Suwailem, Dr. Hylmun Izhar, Dr. Turkhan Ali Abdul
Manap, Mr. Aziz Gulomov and Mr. Salah Al-Sherbi-
ni, undertook the drafting of the report. Dr. Abdul
Qayoom Al-Hendi of Islamic University in Madinah
contributed to chapter five, Dr. Slim Mseddi of Imam
Muhammad Ibn Saud Islamic University contributed
to chapter six, and Mr. Abdulelah Al-Sayegh, Fintech
Director at UniGulf, contributed to chapter seven.
IRTI’s former interns, Ms. Mariam Al-Naghi and Mr.
Wala Sumait, contributed to the initial draft of the
report.
Our appreciation goes to our interviewees: Mr. Step-
hen Groff, Governor of the National Development
Fund of Saudi Arabia; Mr. Ammar A. Shata, Founder
and Executive Director of Alkhabeer Capital; Ms. Ne-
joud Al-Mulaik, Fintech Director KSA; and Ms. Muna
Abu Sulayman, who have provided insights on the
progress and challenges and shed some lights on
XI
various issues in economic development and Isla-
mic finance in the Kingdom of Saudi Arabia.
We thank Dr. Khalid Khalafalla of the Islamic Deve-
lopment Bank for his valuable comments and sug-
gestions.
The Report would surely not have seen the light of
the day without the valuable comments and sugge-
stions from the experts at the Ministry of Finance of
Saudi Arabia and the Saudi Arabian Monetary Au-
thority, for which we are extremely grateful. Nonet-
heless, these two respectable institutions shall not
be held responsible for the analysis and findings ar-
ticulated in the Report.
To our Diamond Sponsor, the Saudi British Bank
(SABB), we would like to extend our gratitude for ha-
ving confidence and trust in IRTI in producing this
report.
Sincerely,
KSA IFCR Team
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
EXECUTIVE SUMMARY
As the largest economy in the Middle East and the
leading Islamic finance industry worldwide, the
Kingdom of Saudi Arabia has the potential to beco-
me a prominent leader in the global Islamic finance
landscape.
The analysis presented in this report reveals various
multifaceted endeavors of the Kingdom to realize
Vision 2030, taking into account the spirit of entre-
preneurship and innovation combined with the ad-
vanced application of technology. Islamic finance
as a paradigm promotes entrepreneurship, innovati-
on and social responsibility and therefore could be-
come a major catalyst in the Kingdom’s endeavors
to achieve the objectives of Vision 2030.
Chapter 1 highlights the distinctive features of Saudi
Arabia’s economy and its financial landscape. The
Kingdom is the largest economy in the Middle East,
and also the largest country in terms of land mass. It
possesses one of the largest proven reserves of oil
and natural gas and has the largest mineral deposits
in the Middle East. On the financial landscape, the
aggregated Islamic finance assets in Saudi Arabia
by the end of 2018 exceeded US$ 800 billion, which
makes Saudi Arabia the largest Islamic finance mar-
ket globally in dual-system economies. The King-
dom has embarked on several reform programs, in-
cluding the Financial Sector Development Program,
to enhance and strengthen its leading position in the
region and worldwide.
Chapter 2 charts the resilience and encouraging
performance of the banking sector in the Kingdom.
The return on assets and NPL Coverage for Islamic
banks in Saudi Arabia consistently outperform their
peers in the G20 countries, namely Indonesia and
Turkey, as well as Malaysia. The resilience of the Is-
lamic banking sector in the Kingdom also surpasses
these peers for the most part of the period 2014-
2018. Overall, the analysis shows that the Islamic
banking sector in the Kingdom is well established
and solidly competitive, which paves the way for re-
gional and global leadership of the industry.
XII
Chapter 3 highlights the recent developments and
performance of the capital market in the Kingdom.
As the largest market in the GCC region, the Saudi
capital market is undergoing rapid changes bolste-
red by the development of advanced infrastructure,
new markets, and new products and services. The
market has been promoted to emerging market sta-
tus by FTSE, Russell and MSCI. Ṣukūk market in the
Kingdom is developing relatively fast and is current-
ly the second largest ṣukūk issuer globally, next only
to Malaysia.
One of the key pillars of Vision 2030 is to develop
the Saudi capital markets to enable the economy to
achieve sustainable and diversified growth. The pri-
mary objective of diversification is to reduce depen-
dence on hydrocarbons by increasing investments
in the financial, construction, real estate, tourism
and social infrastructure (healthcare, education,
and innovation) sectors. The comprehensive de-
velopment of capital markets will not only aid the
KSA economy in meeting its huge financing require-
ments but also help it emerge as a regional financial
hub in the coming years.
Chapter 4 illustrates the well-regulated Saudi coo-
perative insurance market. Although the insurance
penetration and density are relatively modest, Saudi
Arabia is the second-largest insurance market after
UAE in the MENA region, and it accounted for 20.3%
of the region’s Gross Written Premiums (GWPs) in
2018. Saudi Arabia, Malaysia, and the UAE are the
major Islamic insurance markets, accounting for
more than 87% of total contributions in 2017. Inspi-
red by Vision 2030, there will be abundant oppor-
tunities for the insurance sector to flourish if the
economic reforms take place in a coherent and
measured manner.
Chapter 5 depicts the huge potential of awqāf
sector in the Kingdom, in addition to a number of
breakthrough initiatives in further bolstering the so-
cial finance sector. Moreover, with the successive
amendments and the incremental openness of the
Kingdom to foreign investment, it is expected that
it will increase the size of endowments in the King-
dom. Another insight provided in this chapter is the
role of specialized credit institutions in helping to
achieve the goals of Vision 2030 by contributing to
the Kingdom’s economic and social transformation.
Chapter 6 investigates entrepreneurial and innova-
tion ecosystem in the Kingdom. Entrepreneurial ac-
tivities in the Kingdom are growing rapidly, with an
increase in deals, funding, number of investors and
government initiatives. This chapter compares the
ecosystem of the Kingdom with other comparable
countries and offers specific recommendations to
enhance the ecosystem of innovation in the country.
Chapter 7 elucidates many encouraging findings
that Saudi Arabia is blessed with the right recipe to
make it a global hub for Fintech in Islamic finance,
having a tech savvy society with high internet pene-
tration and majority of the population being under
the age of 35. This made embracing new techno-
logies considerably faster and easier than in many
other parts of the world. Saudi Arabia also establis-
hed “Fintech Saudi” to act as a catalyst to develop
the Fintech ecosystem alongside a vibrant regula-
tory sandbox to cope with the fast-paced Fintech
industry. It is evident that Saudi Arabia is taking di-
gital transformation very seriously.
XIII
Chapter 8 articulates the notion that Saudi Arabia,
given its gigantic potentials coupled with its unique
set of comparative advantages, could become a
global leader in Islamic financial services industry,
particularly if it can capitalize its distinctiveness in
two areas:
• Awqāf: As a spiritual destination for Muslims
worldwide who seek to visit the two Holy Mos-
ques every year, the Kingdom offers favorable
incentives and can benefit from sizeable oppor-
tunities in terms of investment and spending.
Awqāf can surely be an ideal channel for invest-
ment as awqāf require sustainable income gene-
ration.
• Small and Medium Enterprises (SMEs): The
SMEs sector can be an ideal investment chan-
nel for awqāf. Mobilizing resources for the SMEs
through ṣukūk, equity, crowdfunding, venture
capital, inter alia, would provide Islamic finance
industry an edge in innovation, diversity and eco-
nomic impact. Since SMEs are the engine of job
creation, investing in the SMEs sector is essenti-
al for sustainable economic growth.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

XIV
XV
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER I:
ECONOMIC
AND
FINANCIAL
LANDSCAPE
2

Overview
According to the International Monetary Fund (IMF),
the Kingdom of Saudi Arabia maintained its 18th
place among the biggest countries in the world in
terms of the nominal GDP amounting to US$ 786.5
billion (SAR 2.95 trillion) by the end of 20181. The
strength of the Kingdom’s economy is reflected
by per capita Gross Domestic Product (GDP) of
US$ 55,730 equivalent to SAR 208,987 (per capita
purchasing power). Moreover, the Kingdom of Saudi
Arabia ranked 39th out of 140 countries around the
world in the most competitive countries list, as per a
report issued by the World Economic Forum2.
The Kingdom of Saudi Arabia is considered a spe-
cial place by many, especially in the Muslim world.
This is due to Saudi Arabia being the land of the Two
Holy Mosques which undeniably positions the King-
dom in the heart of the Arab and the Muslim world.
The strategic geographic location of Saudi Arabia
has also enabled the country to interconnect three
continents: Africa, Asia and Europe; which has beco-
me the intrinsic niche strength of the Kingdom. This
has further been underscored by the fact that the
Kingdom is endowed with the largest reserves of oil,
natural gas and mineral deposits in the Middle East3
and arguably in the world.
3
Chapter I: Economic And Financial Landscape
Such richness in natural resources became the pri-
mary engine for the economic progress of the coun-
try for many decades, which started to alter with the
launch of Saudi Arabia Vision 2030 in 2016. Saudi
Vision 2030 is a grand plan to reduce the country’s
dependence on oil, diversify its economy, and deve-
lop public service sectors such as health, education,
infrastructure, recreation and tourism. Goals inclu-
de reinforcing economic and investment activities,
increasing non-oil industry trade between countries
through goods and consumer products, and incre-
asing government spending on the military, manu-
facturing equipment and ammunition.
Vision 2030 was built on three pillars, namely a) a
vibrant society, b) a thriving economy, and c) an am-
bitious nation.
This chapter analyses the macro and micro dimen-
sions of the Kingdom’s economy that is geared to-
wards the alignment with 2030 Vision, under which
Financial Sector Development Program was set up
to build a diversified and robust financial services
sector that can effectively contribute to the develop-
ment of the national economy.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Economic Performance
Over the past decade, Saudi Arabia’s GDP was gro- growth in 2011. In 2017, the GDP witnessed a ne-
wing at an average annual rate of 3.5%. Growth, ho- gative growth of -0.74% before picking up in 2018
wever, has shown fluctuations with a peak of 10% to 2.43%4.

Figure 1.1: GDP Growth in KSA (%)

9.99

6.25
5.41
5.04
4.10
3.65
2.70
2.22
1.85 1.67

2009 2017
2007 2008 2010 2011 2012 2013 2014 2015 2016 2018
-0.86

-1.95

Source: SAMA

In light of Vision 2030, the government intends to
raise the share of non-oil exports in non-oil GDP
from 16% to 50% by 20305. In doing so, the private
sector’s contribution is expected to increase from
40% to 65% of GDP by 20306. The boost is likely to
continue through various programs, such as the Fi-
nancial Sector Development Program, National In-
cal content. The construction sector, for instance, is
set out to be revived through the Public Investments
Fund’s (PIF) giga-projects. Accompanied by a larger
public spending and value-added tax (VAT) reform,
the economy is likely to be heading up and catching
up on its growth.

dustrial Development and Logistics Program, Public
Investment Fund Program, Privatization Program,
Strategic Program, and many other programs set
out in Vision 2030. The objective is none other than
to transform the Kingdom into a leading industrial
powerhouse and a global logistics hub in promising
growth sectors (with a focus on Industry 4.0) , which
is expected to generate ample job opportunities for
Saudis, enhance the trade balance and maximize lo-
Inflation
Inflation in KSA is generally manageable. Inflation,
as measured by the Consumer Price Index (CPI),
has recorded a negative growth on a yearly basis by
around 1.2% in 2019. However, it started to recover
in the second half of the year by around 0.5% com-
pared to the first half of 2019.

4
 Chapter I: Economic And Financial Landscape

Figure 1.2: Inflation in KSA

3.78 3.76
3.51
2.86

2.24
2.05

1.22 3.00
2017

2010 2011 2012 2013 2014 2015 2016 2018

-0.83
Source: SAMA

Monetary and Fiscal Policy

Saudi Arabia’s fiscal position has remarkably im-
proved over the past years. The increase of 40%
in oil revenues during 2018 added to the positive
change, simultaneously reflecting the increase in
pricing and production8. Parts of the Fiscal Balance
Program included the rationalization of expenditu-
res and subsidies, which is in contrast to the expen-
diture-driven policy before 2016.
In an effort to stabilize the Saudi Riyal and preserve
its value internally and externally, the Saudi Arabian
Monetary Authority (SAMA) is targeting the exchan-
ge rate. Since 1986, the exchange rate parity has
remained at 3.75 Riyals per US Dollar. The stability
of the exchange rate incentivizes investment and
is convenient as international transactions and re-
ceipts are carried out predominantly in US dollars.
The current account recorded a significant improve-
ment by the end of 2018. Estimated data suggests
that there could be a surplus of SAR 264.7 billion,
which is around 10.06% of the nominal GDP. The
improvements in the current account in 2018 are
primarily driven by a higher oil price and increased
production.
The intervention of the Public Investment Fund
(PIF), the largest sovereign fund globally, through
debt inflows caused the Balance of Payments (BoP)
dynamics to stabilize. The outflows of investment
the PIF is undertaking are expected to yield greater
inflows to the current account, making sure it stays
in surplus. As for the fiscal account, its situation is
expected to improve as investors run to better op-
portunities to invest domestically, further shrinking
outflows.

Figure 1.3: Current Account of KSA (SAR Billion)

594.5 617.9

496.2 507.9

371.0 350.0
250.3 276.6 264.8

78.6
39.2
2015 2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2017 2018

-89.4

-212.7
Source: SAMA
5
 Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Openness of the Saudi Economy
Trade openness is a measure of economic policies
that either restrict or invite trade between countries.
Generally, openness is defined as the sum of im-
ports and exports normalized by GDP9. Empirical
results on the links between trade openness and
economic growth often suggest that, in the long
run, more outward‐oriented countries register better
economic growth10.
Figure 1.4: Trade Openness (Exports plus Imports as percentage of GDP)
100
80
60
40
20
0
2000 2002 2004 2006
On the aspect of FDI, despite a descending trend,
due to some domestic factors and lower oil prices,
some new projects outside the oil and gas sector
have helped bolster the FDI rate to recover. Accor-
ding to UNCTAD’s World Investment Report 2020,
inflows of FDI flows have increased by 7% between
2018 and 2019, reaching US$ 4.6 billion (SAR 17.25
billion), more than three times the level recorded in
2017. This is mainly due by the fact that the country
removed the ownership limits for foreign strategic
investors. Similarly, the stock of FDI rose in 2019
and reached US$ 236 billion (SAR 885 billion) in
2019, by far the highest number among Arab coun-
tries11. Figure 1.5 depicts the trend of FDI from 2010
to 2018.
Figure 1.4 demonstrates how the Kingdom’s level of
openness has surprisingly outperformed Indonesia
and Turkey, its peers in the G20, over the past two
decades indicating the government’s commitment
to increasing economic development and sustaina-
ble growth in the Kingdom.
Saudi Arabia
Turkey
Indonesia
2008 2010 2012 2014 2016 2018
Source: TheGlobalEconomy.com, World Bank
Foreign investment in Saudi Arabia increased by
14% year-on-year (YoY) to around SAR 1.78 trillion
in 2019, compared to SAR 1.56 trillion a year earlier,
based on the latest official data issued by the Saudi
Arabian Monetary Authority (SAMA).
According to the World Bank, net portfolio invest-
ments, covering transactions in equity securities
and debt securities, fluctuated notably during 2010-
2019. As we shall see later, however, the Kingdom
is improving the competitiveness of the Saudi eco-
nomy and is expected to be able to attract foreign
investments in a sustainable manner in the coming
years.
6
 Chapter I: Economic And Financial Landscape

The Kingdom’s level of openness

has surprisingly outperformed Indonesia and Turkey,
its peers in the G20, over the past two decades
indicating the government’s commitment
to increasing economic development and
sustainable growth in the Kingdom.

Figure 1.5: Foreign Direct Investment, Net inflows (% of GDP)

5.53

2.43 0.54
0.21
1.66
1.19 1.06 1.16
1.24

2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: World Bank

Figure 1.6: Portfolio Investment, net (SAR, billions)

11.94

60.17 100.43
56.82
14.30
40.39
24.77 2017

2010 2011 2012 2013 2014 2015 2016 2018 2019

-9.85

-42.80
-47.53

Source: World Bank

7
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

In 2018, the export of non-oil produce grew by
21.7%. A full chain production is incorporated in the
phosphate industry, helping the government achie-
ve the goal of diversification as well as achieve lar-
ge-scale upgrades to the national railway and the
port of Ras Al-Khair. Spatial diversification emphasi-
zes the inauguration and expansion of industrial and
business zones. On the road to becoming a more
open economy and a trans-shipment hub, the go-
vernment is pouring funds into new industrial cities.
Saudi Arabia is one of the world’s fastest growing
countries in the manufacturing sector, contributing
about 11.87% to the nation’s GDP in 2019, a modest
decline of 12.1% from the previous year12.

Competitiveness of the Saudi Economy

Not only is KSA working up the economic develop-
ment ladder, but it is also unequivocally directing its
resources towards human development. The King-
dom’s Human Development Index (HDI) for 2019
amounts to 0.857, which puts the country in the very
high human development category, positioning it at
36 out of 189 countries.13 The top three nations on
this list is Norway with a score of 0.953, Switzerland
with a score of 0.944 and Australia with a score of
0.939.
The Kingdom scored 70 by the Global Competitive-
ness Index 2019, where Singapore has the top score
of 100. It was ranked as the 36th economy out of 141
countries, compared to the 39 in 2018.

Figure 1.7: Saudi Arabia’s Competitiveness Index

GLOBAL COMPETITIVENESS INDEX 4.0 2019 edition Rank in 2018 edition: 39th/140

Performance Overview Previous edition High-income group average Middle East and North Africa average
2019
Overall
Score Enabling Environment Human Capital Markets Innovation Ecosystem

Best SGP FIN SGP KOR 100 (4) CHE HKG SGP HKG CHN USA DEU
100

90 82
78 75 76
80
70 69 71
70 63 65
57
60 53 51
50

40

30

20

10

Score
ICT macro- product labour financial market business innovation
overall institutions infrastructure adoption economic health skills market market system size dynamism capability
stability
Rank/141 36th 37th 34th 38th 1st 58th 25th 19th 89th 38th 17th 109th 36th

Source: World Economic Forum

8
 Chapter I: Economic And Financial Landscape

A comparable ranking is indicated by the IMD World ceding year. Saudi Arabia compares reasonably well
Competitiveness Ranking 2020 of 63 countries, with OIC G20 members, namely Indonesia and Tur-
which places Saudi Arabia in a respectable 24th key. Table 1.1 summarizes the ranking of IMD and
ranking, climbing up from the 26th ranking in the pre- WEF for the three OIC G20 members.

Table 1.1: Global Competitiveness Ranking of G20 OIC Members

IMD Ranking 2020 (63 countries) WEF Ranking 2019 (141 countries)
Saudi Arabia 24 36

Indonesia 40 50

Turkey 46 61

Source: IMD Competitiveness Center and World Economic Forum

Oil Production
Saudi Arabia has 18% of confirmed worldwide re-
serves of petroleum. For decades, the economy has
mainly depended on oil export revenues to finance
the yearly budget. Oil exports of Saudi Arabia valued
at SAR 868.4 billion in 2018, with an increase of 36%
over the previous year, and accounted for 78.7% of
total exports.

Table 1.2: Saudi Arabia’s Oil Exports

Oil Exports

Year Value (Million Riyals) Annual Change (%) Share in Total Exports (%)

2009 611,490 42.0 ▾ 84.8

2010 807,176 32.0 ▴ 85.7

2011 1,191,052 47.6 ▴ 87.1

2012 1,265,551 6.3 ▴ 86.9

2013 1,207,080 4.6 ▾ 85.6

2014 1,067,092 11.6 ▾ 83.1

2015 573,412 46.3 ▾ 75.1

2016 510,729 10.9 ▾ 74.2

2017 638,402 25.0 ▴ 76.7

2018 868,442 36.0 ▴ 78.7

Source: The General Authority for Statistics (www.stats.gov.sa)

9
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Alignment of Vision 2030 with
Sustainable Development Goals
As alluded to in the earlier section of this chapter,
Saudi Arabia adopted Vision 2030 as a roadmap for
economic growth and national development. Vision
2030, comprising of 96 strategic objectives, outlines
the Kingdom’s general objectives, goals, and targets
to become a world-class model of successful and
pioneering nation. In order to achieve such strategic
objectives, the Council of Economic and Develop-
ment Affairs (CEDA) established 13 Vision Realizati-
on Programs (VRPs). Each VRP comprises a series
of initiatives and delivery plans, guided by pre-defin-
ed objectives and KPIs tied to 5-year milestones.
The changes the Saudi government is undertaking
are set out to expand beyond financial and econo-
mic growth to cultural and human capital invest-
ments. With the growing trend of the United Nations’
Sustainable Development Goals (SDGs), the Saudi
Government, primarily the Ministry of Economy and
Planning (MEP), is working to align both the SDGs
and Vision 2030 to realize development throughout
the next decade.
The Sustainable Development Goals constitute the
guidelines to achieve a better and more sustainable
future for all. They address the global challenges the
world faces, including those related to poverty, ine-
quality, climate change, environmental degradation,
peace and justice. The 17 SDGs are all interconnec-
ted, and in order to leave no one behind, it is aspired
that all goals are achieved by 2030.
According to Voluntary National Review of Saudi
Arabia, the Kingdom is close to achieving several
goals as shown in Figure 1.6. However, we will focus
on SDGs 8 and 9.
SDG 8 promotes economic growth and decent work
for all, which is in harmony with the government’s la-
bor market demands for the realization of the vision.
The gap between education output and labor force
10
productivity is narrowing, fueling economic speciali-
zation and making use of comparative advantage in
different sectors. The goal is to concurrently equip
new labor market entrants with readiness to enter
the market through equitable educational oppor-
tunities, developing the brightest minds in priority
fields and enabling integration of the disabled into
the work force.
In 2020, the target participation rate of the disabled
is set at 25%. For the short-term labor market dy-
namics, efforts to lower unemployment have been
showing significant results for youth. Moving for-
ward, raising women’s participation to reach 25%
in 2020 is a priority. By 2030, unemployment is ex-
pected to go down to 7%. To realize this economic
aspiration, the PIF is expected to invest $56 billion in
new fields, which will create 11,000 jobs. SDG 8 also
targets increased economic productivity, entrepre-
neurship, creativity and innovation to which the Sau-
di government is helping achieve by supporting and
encouraging small and medium enterprises (SMEs).
Similar to SDG 8, SDG 9 pushes building resilient
infrastructure, promoting inclusive and sustaina-
ble industrialization and fostering innovation. The
budget for transport network and roads connecting
and reaching all parts of the Kingdom amounts to
US$ 106 billion. The 2018 budget for transport de-
velopment was estimated at US$ 14.4 billion. The
National Transformation Program also includes a
segment for digital transformation. As of 2016, ex-
penditure on R&D, technology transfer, advanced
strategic technologies, support of inventors and
projects relating to Science and Technology amoun-
ted to US$ 173 million.
To sum up, the Kingdom is undergoing a broad pro-
gram of reforms. The main objective of these re-
forms is to enable the private sector to play a larger
role in the economy and for innovative global busi-
 Chapter I: Economic And Financial Landscape

Figure 1.8: SDGs Realization in KSA

Partnerships
for the goals Peace, justice and
No poverty 100% strong institutions
Zero hunger

Good health 90% Life on land

and well-being
80%
Life below water
70%

60%
Quality Education
50% Climate action
40%
30%
20%
10%
Gender Equality
0%
Responsible
consumptions
and production

Clean water
and sanitation

Sustainable cities
and communities
Affordable and
clean energy
Reduced Inequalities
Decent work and
economic growth Industry, innovation
and infrastructure

Source: KSA First Voluntary National Review14

nesses and entrepreneurs to come to Saudi Arabia
and drive greater productivity and job creation.
As elucidated by the International Monetary Fund
(IMF), the economic reforms in Saudi Arabia have
started to yield positive results. Some of the pro-
mising results include the rise of non-oil growth,
increased female labor force participation and
employment, the successful introduction of the va-
lue-added tax that has underpinned an increase in
non-oil fiscal revenues, and energy price reforms
that have helped reduce per capita consumption of
gasoline and electricity. The government has the-
refore continued to pursue reforms in order to en-
hance the investment environment in a number of
different areas.

11
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Financial Industry Structure
and Landscape
The current financial system in the Kingdom of Saudi
Arabia comprises:
• Saudi Arabia Monetary Authority (SAMA), which is
Saudi Arabia’s central bank
• Commercial and investment banks, domestic and
foreign
• Specialized credit institutions (SCIs), including the
Saudi Agricultural Bank, the Saudi Credit Bank, the
State Development Fund, the Industrial Develop-
ment Fund and the Saudi Development Fund
• Non-banking financial institutions, including insu-
rance and investment companies
• Autonomous government institutions, like the Pu-
blic Investment Fund
• The capital market which includes equity and
debt (bond and Ṣukūk) markets
• The Capital Market Authority of Saudi Arabia
(CMA), which is the financial regulatory authority
responsible for capital markets
• The Saudi Stock Exchange (Tadawul), which is
the only authorized entity to carry out the trading
of securities in the Kingdom of Saudi Arabia
Financial Institutions Play a Key Role
in Saudi Arabia
The financial sector plays an important role in the
context of economic development. Financial institu-
tions have been directly supporting Saudi Arabia’s
economic development and serving the needs of its
rapidly expanding population, which increased by
22% to 33.55 million in 2018 from 27.45 million in
2010. The requirement for efficient financial inter-
mediaries in Saudi Arabia was and remains vital.
The over-reliance on oil revenues made Saudi Ara-
bia’s economic growth subject to an excessive ex-
posure to unstable global energy markets, thus it is
of great importance for the government to diversify
its economic activities away from the hydrocarbon
industry. The government’s policy of vigorously di-
12
• Other institutions offering services of rating such
as SIMAH.
In 2003, the Saudi government issued the Capital
Market Law, which resulted in the creation of the
Capital Market Authority (CMA), the regulator for
the capital market. SAMA and CMA fulfill comple-
mentary mandates to create a robust regulatory
framework and ensure the soundness of Saudi Ara-
bian financial system. The Saudi Arabian financial
system also has a fully functional credit bureau
(SIMAH) that is licensed by SAMA and owned by
the Saudi banks. The credit bureau collects data on
retail and corporate customers and provides credit
information to members for a fee. SIMAH also hou-
ses a national data pool where it collects informati-
on on the corporate sector to feed into a Probability
of Default model, whose output is available to all
member banks for use as benchmarking informati-
on for their own internal credit risk models.
versifying has been an important driver of the deve-
lopment of its banking and financial sector.
Over the years, with continuous improvement and
expansion, Saudi Arabia built a highly developed fi-
nancial system. Especially in the 1990s, along with
the financial liberalization, Saudi Arabia greatly im-
proved the financial services industry through finan-
cial reforms, the introduction of advanced technolo-
gies and management systems. The Saudi financial
institutions not only improved efficiency but also
enriched their financial products, thus providing
customers with faster and more diversified financial
services.
 Chapter I: Economic And Financial Landscape

The financial services sector is the fourth largest
sector in KSA in terms of its share of GDP. It con-
tributed SAR 358 billion in 2018 or 12.1% of total
GDP at current prices, growing from SAR 195 billion
in 2011. GDP share of finance, insurance, and real
estate activities grew at a CAGR of 9.07 % between
2011 and 2018. The year-to-year growth peaked in
2012 (19.17%) and 2013 (16.08%), before decelera-
ting to 4.53% in 2018.

Figure 1.9: Financial Services Contribution to Saudi’s GDP (2013-2018)

358,194
342,668
324,848
310,412
292,991
269,805
13.42% 13.27%
12.65%
12.14%

10.33%
9.64%

2013 2014 2015 2016 2017 2018

GDP from Financial and Insurance Activities (SAR million)

Contribution to Total GDP (% of GDP)
Source: SAMA and IRTI staff calculation

The Architecture of Saudi Financial

System
The Saudi financial system consists primarily of two
parts: one being overseen by SAMA and the other
under the supervision of CMA. By the end of 2018,
the overall assets of the financial system were va-
lued at SAR 4.75 trillion. The banking sector is va-
lued at SAR 2.36 trillion, out of which Islamic banks
and windows account for 65% and the conventional
banks make up the remaining 35%.15

Table 1.3: Financial Assets Distribution in Saudi Arabia 2018

Total Financial Assets Islamic Financial Assets

Assets SAR (Billion) US$ (Billion) Percentage SAR (Billion) US$ (Billion)
Banking Assets 2,363.4 630.2 64.9% 1,533.8 409.0
Equity Market 1,858.8 495.7 67.2% 1,248.8 333.0
Ṣukūk Outstanding 369.8 98.6 100.0% 369.8 98.6
Assets Under
111.9 29.8 80.0% 71.6 19.1
Management
Insurance 58.5 15.6 100.0% 58.5 15.6
Finance Companies 14.4 3.8 100.0% 14.4 3.8
Total 4,776.8 1,273.8 3,297.0 879.2

Sources: SAMA, IFSB, Tadawul and Individual Fund Managers Reports

13
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

By the end of 2018, the total stock market capitaliza-
tion reached SAR 1,858.95 billion. As per the Sharīʿah
screening of Al Rajhi Capital, out of the 199 listed
stocks, 29 stocks are not Sharīʿah complaint (valued
at SAR 610.2 billion by the end of 2018). Thus, the
total market capitalization of Sharīʿah-compliant
stocks by the end of 2018 is SAR 1,248.8 billion (US$
333 billion). The cooperative insurance sector is
assumed to be Sharīʿah-compliant, estimated at SAR
58.5 billion (US$ 15.6 billion)16. Another important
component is ṣukūk which stands at SAR 369. 8
billion (US$ 98.6 billion)17.
Meanwhile, the total number of investment funds
managed by investment companies in Saudi Arabia is
249 in 2018, worth at SAR 111.9 billion.18 Based on
the analysis of individual funds, 47, or about 80%, of
the 249 funds are classified as non-Sharīʿah com-
pliant. This means that Sharīʿah-compliant funds
are valued at 89.5 billion (US$ 23.8 billion) by the end
of 2018.
In sum, the total Islamic financial assets in Saudi
Arabia by the end of 2018 is SAR 3,297 billion (US$
879.2 billion), as depicted in Table 1.3.

Figure 1.10: Islamic Financial System Assets Distribution By Sector in Saudi Arabia 2018 (SAR Billion)

1533.8
Banking Sector
46.5%

1248.8
Equity Market
37.9%

Sukuk Outstanding 369.8

11.2%

Assets Under Management 71.6

2.2%

58.5
Insurance
1.8%

14.4
Finance Companies
0.4%

Source: SAMA Annual Report 2019, Tadawul, IIFM, IFSB, and IRTI staff calculations19

14

Overview of Islamic Finance in KSA
For the past few decades, Saudi Arabia has been at
the forefront of the development of the Islamic fi-
nancial Services Industry (IFSI). In the early 1970s,
Saudi Arabia was a key participant in a series of aca-
demic and professional conferences aimed at libe-
ralizing the regional financial sector and developing
Sharīʿah-compliant products and services, which
until that point had been largely marginal in the Gulf
region. It was in fact the first International Confe-
rence on Islamic Economics, held in Makkah Al-Mu-
karramah in 1976, that marked the renaissance of
Islamic economics as a modern scientific discipli-
ne. Indeed, the Jeddah-based Islamic Development
Bank (IsDB) is one of the largest Sharīʿah-compliant
financial institutions in the world which was foun-
ded by finance ministers of the Organization of the
Islamic Conference (now known as the Organization
of Islamic Cooperation, OIC) in 1973. These events
encouraged many countries across the region to
consider and permit the creation and growth of the
Islamic financial services industry. Despite the fact
that IFSI is treated neutrally by regulators, it saw tre-
mendous growth and became an important compo-
nent of Saudi Arabia’s financial system.
Saudi Arabia, home to more than a quarter of the
GCC’s Islamic financial assets, is currently among
the top IFSI in the world. Saudi Arabia’s reputation
as a regional and, indeed, a global center for the IFSI
is poised to grow for the foreseeable future. The res-
ilience of IFSI against the 2008 global financial crisis
proved that the sector is more likely to continue its
growth through the 21st century.
The Saudi Arabia banking sector is home to four
full-fledged Islamic banks and eight Islamic win-
dows in all conventional banks. In 2018, the top four
Sharīʿah-compliant banks accounted for over 40% of
total Islamic banking assets. Saudi Arabia also has
the largest Islamic banking industry in the GCC in
terms of assets size (US$ 409 billion). Our calculati-
15
Chapter I: Economic And Financial Landscape
on shows that by the end of 2018, in total, Islamic fi-
nance assets in Saudi Arabia mark a staggering US$
563 billion, which makes Saudi Arabia the largest
Islamic finance market globally. One of the key suc-
cess factors of a thriving financial services sector is
its ability to serve a broad set of economic players.
In 2016, 74% of adults had a bank account in Sau-
di Arabia, while developed markets registered over
90% inclusion. More specifically, financial inclusion
among female adults and residents in rural areas is
low at 61% and 72%, respectively, in 2016.20
Vision 2030 has become a compass in providing a
sense of direction in tapping the enormous potential
of Islamic finance in the country underpinned by the
strong economic fundamentals, huge unbanked po-
pulation21 as well as the ongoing and yet ambitious
government infrastructure spending, particularly in
the area of ṣukūk and awqāf. However, in terms of
regulation, the Saudi Arabian Monetary Authority
(SAMA) provides equal and unified management
and supervision of Islamic and conventional banks.
Although both groups provide deposit and financing
business, there are fundamental differences in con-
ducting the banking activities.
Meanwhile, ṣukūk and Sharīʿah-compliant insurance
sector in Saudi have become key economic contri-
butors in recent years. Since the first quarter of 2012
Saudi Arabia overtook the UAE to become the single
largest ṣukūk issuer in the GCC and the second in
the world behind Malaysia. As a matter of fact, the
Kingdom’s local ṣukūk market has been primarily
driven by the issuance of government ṣukūk. Additi-
onally, given Saudi Arabia’s status as the birthplace
and home of Islam, it has the potential to become a
global hub for Islamic finance. With these develop-
ments in mind, most local IFSI players are broadly
optimistic about the future. Saudi Arabia is home
to a variety of Islamic banks, insurance companies
and other entities.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
The Financial Sector Development
Program (FSDP)
Back in May 2016, a document entitled KSA Vision
2030, Strategic Objectives and Vision Realization
Programs, was published. Vision 2030 is the blue-
print for Saudi Arabia’s future. It is built on three pil-
lars:
1. Saudi Arabia’s historic position as the heart of
the Arab and Islamic worlds;
2. The determination to become a global invest-
ment powerhouse; and
3. Leveraging the geographic location to become a
hub connecting three continents.
The Vision elaborated on three key themes, namely:
• A vibrant society – one that enjoys a good life
in a beautiful environment with social protection
while keeping its religious and cultural heritage
• A thriving economy – that creates opportunities
for all, by building an education system aligned
with market needs
• An ambitious nation – this would be achieved
through effective, responsible, transparent, ena-
bling, and high performing government at all le-
vels.
In April 2017, as part of the ongoing implementa-
tion and planning towards Vision 2030, the Finan-
cial Sector Development Program (FSDP) was lau-
nched. The FSDP is one of 12 executive programs
launched by the Council of Economic and Develop-
ment Affairs to achieve the objectives outlined in
Vision 2030 (See Figure 1.11).
It aims to build a diversified and robust financial ser-
vices sector that can effectively contribute to the de-
velopment of the national economy by encouraging
savings among individuals, attracting investments
and strengthening Saudi Arabia’s financial sector
institutions. The Program will effectively transform
the financial market in Saudi Arabia into an advan-
ced market that provides innovative financial soluti-
ons for all segments of Saudi society.
16
The program is underpinned by three main pillars:
1) Ensure the formation of an advanced capital
market
2) Enable financial institutions to support private
sector growth
3) Promote and enable financial planning (retire-
ment, savings, etc.).
These pillars are aligned with the ambitious strate-
gic objectives of Saudi Vison 2030 of diversifying
the economy, growing investments to new sectors,
supporting emerging sectors and attracting foreign
investment.
The first pillar includes a number of Vision 2030-re-
lated initiatives, such as enabling new types of
players to enter the market, incentivizing the finan-
cial sector to finance SMEs, and driving towards a
cashless society. These initiatives involve a number
of measures, including revising and enhancing exi-
sting laws and regulations, incentivizing merchants
and citizens to adopt e-payment solutions, ensuring
enforcement of mandatory vehicle and health in-
surance, and facilitating mergers and acquisitions
within the insurance sector to increase its scale and
solvency.
The second pillar aims to render the Saudi financi-
al market more attractive to local and international
investors through a number of initiatives that will
see more diversified investment products and deve-
loped legislations. The program will also encourage
the privatization of some state-owned services and
entities, thus further deepening the equity market
and increasing market capitalization, while at the
same time improving service quality and spending
efficiency. The program’s initiatives also involve the
development of several regulatory aspects related to
the debt facilities market to deepen the debt market.
 Chapter I: Economic And Financial Landscape

Figure 1.11: Financial Sector Development Program’s 2020 Commitments

VISION 2030

Vibrant society A thriving economy An ambitious nation

Growth and diversify Enable social

the economy responsibility

FINANCIAL SECTOR DEVELOPMENT PROGRAM (FSDP)

Ensure the formation Enable financial institutions

of an advanced to support private sector Promote & enable
capital market growth financial planning

2020 COMMITMENTS 2030 ASPIRATIONS

Increase the total size of financial assets

to GDP ratio to reach 201% by 2020 Achieve a sufficient level of financial
from 192% in 2016 assets relative to GDP ratio

Diversification through transformational

Increase share of capital markets change and emerging players (i.e. FinTech)
assets from 41% in 2016 to 45% by 2020 are expected to stimulate innovation
and competition

Increase the share of SMA financing at Improved inclusive structure through

banks from the 2% to 5% & share of higher bank account penetration and
mortgages financing from 7% to 16% SME/mortgage lending
by 2020

Number of adults with bank acount Envision a digitized infrastructure that

from 74% to 80% by 2020 moves toward a cashless society
Increase the share of non-cash Ensure long-term sustainability
transactions from 18% in 2016 to 28% and continued health of the financial
by 2020 services sector

Insure the overall financial stability

through compliance with international
standards

Source: Financial Sector Development Program Charter Delivery Plan 2020

17
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

The third pillar aligns with the vision of the National
Savings Strategy to increase Saudi household sa-
vings from 6% to 10% by 2030. This entails the crea-
tion of incentives to offer a variety of affordable and
safe saving products and, at the same time, raise
awareness and promote financial literacy and plan-
ning. This, in turn, is expected to encourage banks to
diversify their savings offerings to reach a broader
customer base. Increasing financial literacy is also
one of the objectives where Islamic finance is given
particular attention, aimed at developing and diver-
sifying Islamic financial offerings in Saudi Arabia.

Financial Regulatory System

Saudi Arabian Monetary
A well-functioning financial system is vital to the
economy, businesses and consumers. Financial
regulation is part of ensuring the safety and sound-
ness of the financial system and protection of con-
Authority (SAMA)
sumers. Financial regulation refers to the rules and
The Banking Control Law, enacted in 1966, has
laws operating in the financial industry, such as
vested SAMA with broad supervisory powers. It re-
banks, credit unions, insurance companies, financial
quires SAMA to conduct on-site and off-site supervi-
brokers and asset managers. However, financial re-
sion and require banks to have stringent provisions
gulation is more than just having rules in place – it is
for capital adequacy, liquidity and reserve require-
also about the ongoing oversight and enforcement
ments, loan concentration, etc. The law also provi-
of such rules.
des for banks to submit regular financial and sta-
tistical statements to SAMA and for SAMA to carry
There are three laws and also a set of regulations
out on-site and off-site banking supervision. SAMA
that regulate ṣukūk, cooperative insurance and Is-
is chaired by board of directors composed of a go-
lamic financial derivatives side by side with conven-
vernor appointed by the King, deputy governors and
tional commercial banks in Saudi Arabia. The issu-
non-government officials. It is an independent and
ance of ṣukūk in Saudi Arabia is regulated under the
autonomous government authority. SAMA’s primary
Offers of Securities Regulations and the Listing Ru-
functions are as follows:
les. Islamic banking is regulated under the Banking
Control Law (BCL) of 1966. While cooperative insu-
• Dealing with the banking affairs of the Govern-
rance is regulated under the Law of Supervision of
ment;
Cooperative Insurance Companies, supplemented
• Minting and printing the national currency (the
with regulations for its implementation. The existing
Saudi Riyal), strengthening the Saudi currency
law of the BCL of 1966 is still applicable and has not
and stabilizing its external and internal value, in
been repealed or amended in order to cover a wider
addition to strengthening the currency’s cover;
range of financial investment instruments, such as
• Managing the Kingdom’s foreign exchange re-
Islamic financial products and ṣukūk22. With regard
serves;
to supervisory authorities, Islamic insurance and
• Managing the monetary policy for maintaining
Islamic banking are supervised by SAMA, whereas
the stability of prices and exchange rate;
ṣukūk are supervised by CMA.

18
 Chapter I: Economic And Financial Landscape

Saudi Capital Market

• Promoting the growth of the financial system
and ensuring its soundness;
• Supervising commercial banks and exchange
dealers;
Authority (CMA)
• Supervising cooperative insurance companies
According to the Capital Market Authority (CMA),
and the self-employment professions relating to
Saudi joint-stock companies started their business
the insurance activity;
in the mid-1930s. By 1975, there were 14 joint-stock
• Supervising finance companies; and
companies. The market remained unofficial until
• Supervising credit information companies.
1984 when the Saudi Arabian Monetary Agency
(SAMA) was entrusted with the task of regulating
SAMA has always considered a strong liquidity ade-
the market on a daily basis. In 1984, the Saudi Sha-
quacy framework to be the cornerstone of a sound
re Registration Company (SSRC) was founded by
banking system. This important principle was em-
commercial banks. This company helps joint-stock
bedded in the Banking Control Law, which provided
companies in central registration. It also settles and
for a liquidity ratio for Saudi banks as far back as
clears all stock operations. The electronic settle-
1966. Over the years, SAMA has undertaken sever-
ment and clearing system was introduced in 1989.
al noteworthy initiatives designed to strengthen the
In 1990, the Electronic Securities Information Sys-
prudential framework relating to bank capital. SAMA
tem (ESIS) was developed and operated by SAMA.
introduced the Basel I Capital Adequacy Accord in
Tadawul, which is the new system for trading, clea-
1992, and the Basel II Framework in 2008. It also
ring and settling securities, went into operation as of
issued the final rule on Basel III risk-based capital
October 2001.
in December 2012 to implement the first phase. A
number of new rules and policies were also put in
SAMA continued to play the role until CMA was esta-
place in October and December 2012, particularly
blished in 2003 after the Capital Market Law (CML)
on capital requirements for bank exposures to cen-
was passed by Royal Decree No. (M/30) in July that
tral counterparties (CCPs) and Pillar 3 of Basel III,
year, which made the CMA the sole regulatory and
respectively.
supervisory body that is responsible of organizing
and developing the capital market in Saudi Arabia.
The first phase of Basel III was implemented on 1
This is done by issuing the necessary rules, regula-
January 2013 in accordance with the Basel-agreed
tions, and instructions to ensure trust, fairness, and
timelines. Furthermore, SAMA introduced the Liqui-
efficiency in issuing securities as well as justice and
dity Coverage Ratio (LCR) as a binding minimum
full disclosure of joint-stock companies listed on the
requirement in 2015 in accordance with the Ba-
exchange. It is an official capital market regulatory
sel-agreed timeline and introducing the Net Stable
authority which operates under full financial, legal,
Funding Ratio (NSFR) standard as a binding mini-
and administrative independence.
mum requirement in 2016, two years ahead of the
Basel III implementation date. The KSA NSFR re-
Other tasks of the CMA include:
gulation is applicable to all 12 locally incorporated
• to develop measures to reduce the risks pertai-
banks on a consolidated basis. As of 30 June 2018,
ning to securities transactions;
the NSFR regulation in the KSA is compliant with the
• to develop, regulate and monitor the issuance
Basel III NSFR standard. Saudi banks already meet
and trading in securities;
the Basel III capital, liquidity and leverage standards
• to regulate and monitor full disclosure of infor-
that international banks are expected to meet by
mation for transparency and accountability rela-
2019.
ted to securities and their issuers; and
• to regulate proxy and purchase requests and pu-
blic share offerings.

19
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
One of the many initiatives that follow the establish-
ment of CMA was a requirement that all Saudi finan-
cial institutions hive off their asset management,
brokerage and investment banking units into sepa-
rate entities. Since then, the CMA has issued new
licenses both for established players and new ones.
The CMA Listing Rules of 22/12/1426 H (22 January
2006) and the CMA Regulations of 1718/1429 (18
August 2008) are among the key regulations that
govern the issuance of capital market instruments
by Saudi Arabian companies, including ṣukūk.
Conclusion
This chapter shows that Saudi Arabia’s financial
system has been changing at a remarkable pace.
Saudi Arabia is the largest Islamic finance market
globally in economies with dual financial systems
(i.e. comprising both conventional and Islamic fi-
nancial sectors). Saudi Arabia therefore plays a key
role in shaping the development of the Islamic finan-
ce services sector worldwide.
The contribution of the capital market to the growth
of the Saudi economy has been no less significant.
The Saudi Arabia stock market is one of the most
active markets in the Middle East region and is the
largest market in the Arab world in terms of market
capitalization.
20
Capital Market Law in Saudi Arabia is broad enough
to accommodate the issuance of Islamic capital
market (ICM) instruments and activities without
necessarily stating explicitly their specificities. For
instance, under the Capital Market Law, CMA does
not possess Sharīʿah supervisory responsibilities.
Nevertheless, the law allows CMA to adapt and im-
pose regulatory standards introduced by internati-
onal standard-setting body such as Islamic Finan-
cial Services Board (IFSB). Moreover, Capital Law
of Saudi Arabia provides for the establishment and
role of the ‘Committee for Settlement of Securities
Disputes’ as dispute resolution mechanism.
To achieve the objectives outlined in the Vision
2030, the Financial Sector Development Program
aims to increase the financial sector’s size relative
to the GDP by 280% by developing the financial sec-
tor and enhancing its effectiveness. The program
also aims to create a deep, diversified, digitized and
stable financial sector capable of attracting financi-
al technology companies and focusing on financial
literacy to bring the savings rates in line with leading
international rates. It is expected that the more di-
versified and effective financial services sector will
better support the development of the Saudi econo-
my, diversify its sources of income, and stimulate
savings, finance, and investment.
 Chapter I: Economic And Financial Landscape

Saudi Arabia is the largest

Islamic finance market globally in
economies with dual financial systems
(i.e. comprising both conventional
and Islamic financial sectors).

21
BOX 1.1
COVID-19 AND SAUDI ARABIA’S RESPONSE
The world has undeniably changed drastically in
recent months due to the global spread of the co-
ronavirus disease (Covid-19) that shows no sign of
abating. The Covid-19 pandemic is inflicting high
and rising human costs across the globe. Protec-
ting lives and allowing health care systems to cope
have required isolation, lockdowns, and widespread
closures to slow the spread of the virus. The health
crisis is therefore having a severe impact on econo-
mic activity. As a result of the pandemic, the global
economy is projected to contract sharply by minus
3% in 2020, much worse than during the 2008–09
financial crisis.23
With the unprecedented global spread of Covid-19,
from East to West, all GCC countries swiftly enac-
ted a range of measures to control the spread of
the disease. Saudi Arabia, among several countries
around the world, has measurably taken several
precautionary steps to curb the outbreak. These
measurements24 are tough but necessary to safe-
guard the lives of people in the Kingdom.
At the same time the government announced eco-
nomic band-aids to quickly mend impacts from the
temporary break to non-essential trade and servi-
ces. The government announced several financial
incentives to soften immediate impacts both for in-
dividuals and businesses alike from these precau-
tionary measures. On 20 March 2020, the govern-
ment announced a SAR 120 billion (US$32 billion)
emergency fund to address the economic effects
of Covid-19.25 The package includes a SAR70 billion
(US$18.66 billion) set of initiatives which exempt
and postpone government dues, and a SAR50 billi-
on (US$13.33 billion) package by the SAMA to sup-
port the banking sector, other financial institutes,
and SMEs. A further SAR12 billion (US$3.2 billion)
package was announced by the Saudi Social De-
velopment Bank to support owners of small and
emerging enterprises in priority sectors, in addition
to low-income families.
22
More specifically,
1. The SAR 70 billion ($18.66 billion) set of initiati-
ves aim for
• Extension of Iqamas (residency permits) for
expats whose permits have expired until 20
June 2020. These residents will be exempted
from paying an expat levy.
• Employers may refund the fees of work visas
which were issued during the travel ban on
entry and exit or extend them for a period of
three months without charge.
• Employers may extend exit and re-entry visas
which were not used during the travel ban for
three months without charge.
• Business owners may postpone the payment
of value-added tax, income tax, excise tax,
and the submission of zakat declarations
and payment obligations due therefrom, for
a period of three months. The initiative fu-
rther allows zakat certificates to be granted
without restrictions for the 2019 fiscal year
while also accepting installment requests to
the General Authority of Zakat and Income
Tax without applying the condition of advan-
ce payment.
• Postponing the collection of customs duties
on imports for a period of 30 days against
the submission of a bank guarantee2, for the
next three months and setting the necessary
criteria for extending the postponement peri-
od for the most affected activities as needed.
• Postponing the payment of some govern-
ment services fees and municipal fees due on
private sector, for a period of three months.
• Lending approval and other forms of finan-
cing to be authorized by the Minister of Finan-
ce, in addition to an exemption from payment
of fees and returns on loans granted until the
end of 2020.
2. The SAR50 billion (US$13.33 billion) package
will focus heavily on providing financial support
for SMEs impacted by the epidemic.
• Up to SAR30 billion (US$8 billion) will be ear-
marked for banks and financial institutions
for deferred loan payments by SMEs for six
months.
• Up to SAR13.2 billion (US $3.5 billion) to
SMEs will also be granted concessional from
banks and financial institutions to maintain
operations, contribute to economic growth
and maintain employment rates.
• Banks and financial institutions will further
use a fund of SAR6 billion to (US$1.6 billion)
exempt SMEs from the costs of loan guaran-
tee programs.
• SAR800 million (US$213.33 million) will be
used to cover payment fees for all private
sector stores and facilities registered in the
national system for a period of three months.
3. The remaining SAR12 billion (US$3.2 billion)
fund allocated by the Saudi Social Development
Bank, with support of the National Development
Fund, includes five tracks designed to mitigate
the expected financial impact of Covid-19:
• The first track consists of $1.06 billion (SR4
billion) to support low income families in
2020.
• The second track consists of $533 million
(SR2 billion) to support 6,000 entrepreneurs
launch their development projects within mi-
cro and small enterprises.
• The third track consists of $533 million (SR2
billion) to support 1,000 small and medium
health facilities.
• The fourth track consists of $533 million
(SR2 billion) to contribute to the financing of
50,000 small local facilities.
• The fifth track extends the deadline for all
entrepreneur projects which were financed in
2019 and 2020 by six months, and will alloca-
te $533 million (SR2 billion) for all deferred
payments.
23
Saudi’s economic growth will be surely affected by
the Covid-19 outbreak. But it is too hard to predict
the level of the impact of this virus outbreak on the
Kingdom’s economic growth moving forward.
The good part is that many sectors of the economy
continue their daily routine works by taking full ad-
vantage of teleconferencing technology. This also
indicates that increased technology adoption is ne-
cessary in case a prolonged or a repeated outbreak
occurs.
However, if the second wave of the outbreak is ever
to take place, then the situation may become com-
plicated. Given the scale of this pandemic, there
have been significant impacts on social mobility
and in turn there will be far-reaching impacts on
global and regional economic growth. For a coun-
try like Saudi Arabia that heavily depends on the oil
sector, this global decline of economic growth has
a significant implication. The declining demand of
oil and decrease of oil price due to global economic
slowdown will reduce Saudi revenue and hence its
fiscal strength in stimulating the economy.
It is worth noting that while Europe and America
still struggled with the coronavirus outbreak into
the third quarter of 2020, China has somewhat suc-
cessfully controlled the spread of the coronavirus.
China, the world’s second largest economy and the
‘global factory’ for the world is resuming their busi-
ness. China is also Saudi’s largest destination of
exports and largest origin of imports. China's ex-
perience so far has shown that the right policies
make a difference in fighting the Covid-19 pande-
mic and mitigating its impact, though some of the-
se policies come with difficult economic tradeoffs.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Q 1. How do you want the global community to
recognize the Islamic financial industry in KSA?
What do you think is the most distinct feature of
Islamic financial services industry in KSA?
Saudi Arabian Monetary Authority (SAMA) believes
that Saudi Arabia is an influencing actor of the Glo-
bal Financial System considering the strength of its
financial sector. Islamic Finance is an integral part
of the local financial sector. We believe that impor-
tant aspects characterize the Saudi Islamic Finan-
cing:
• Islamic Finance in the Kingdom of Saudi Arabia
(KSA) contributes to meeting the economic and
social needs of the national economy, which af-
fects positively sustainable value creation.
• It plays its part in reaching the economic and fi-
nancial aspirations of the Financial Sector Deve-
lopment Program (FSDP) in terms of attractive-
ness and competitiveness of the Saudi financial
sector.
• It is a growing area of finance that uses the
best international business practices in the field
to provide the most adapted solutions to their
clients and protect their rights.
• Eminent Saudi scholars who contributed to the
development and regulation of the industry and
its most popular products, services, and practi-
ces produced most of the financial literature on
fiqh transactions.
The most salient feature of Islamic finance is dual:
• First: It contributes substantially to the stability,
resilience and development of the financial sec-
tor.
• Second: It is aligned with the government econo-
mic agenda, as reflected by Vision 2030.
24
An Interview with
Dr. Al-Kholifey –
Saudi Arabian Monetary
Authority (SAMA)26
Q 2. From the perspective of regulator, how would
you describe the role of SAMA in making Islamic
finance supportive of sustainable economic deve-
lopment and job creation?
SAMA plays an important role in incentivizing the
contribution of the Islamic finance segment to sus-
tainable economic development and job creation.
The following reasons supports this argument:
• In fulfilling its mandate, SAMA provides the Saudi
ecosystem with the proper market enablers that
are favorable for the development and growth of
the Islamic finance.
• SAMA prioritizes the innovation and use of finan-
cial technology to enable individuals and com-
panies to have easy access to financial services,
which tends to improve financial inclusion at the
national level.
• SAMA pays particular attention to the promoti-
on of the growth of the (Micro, Small and Me-
dium Enterprises (MSME) sector. This dynamic
sector can create jobs, contribute increasingly to
GDP, and enhance the diversity of the Saudi eco-
nomy’s resources. In collaboration with several
stakeholders (Capital Markets Authority (CMA),
Small and Medium Enterprise Authority (SMEA),
among others), SAMA plays an important role
in terms of establishing and implementing the
regulatory framework of Islamic banking opera-
tions to maintain the financial stability of the sec-
tor and promoting sustainable economic growth
of Islamic finance.
 Chapter I: Economic And Financial Landscape

Q 3. How would the “Sandbox regulatory environ-

ment” contribute to innovation in Islamic financial Dr. Al-Kholifey’s short biography
services industry in the Kingdom?
He has been the chairman of SAMA sin-
SAMA aims to move toward a cashless society by ce May 2016. He has been the Governor of
promoting electronic transactions. Some of SAMA’s SAMA since May 7, 2016. Dr. Al-Kholifey has
achievements in this regard are as follows: also served as the deputy governor of SA-
• Employing NFC technology to make contactless MA’s Research and International Affairs.
payments using MADA cards or smart phones
(the service is known as “MADA atheer”); Prior to his 15 years of experience in different
• Enabling payment through QR codes; and departments at SAMA, he worked as a legal
• Launching the “Esal” platform for B2B e-invoi- specialist at the Ministry of Petroleum and
cing and payments as well as “MADA Online” Mineral Resources. He joined SAMA as an
services. economist in 1995. Dr. Al-Kholifey obtained
The impact of these new technologies in the Sau- a law degree from King Saud University, an
di financial service market will be observed and MBA and a Ph.D. in Economics from Colora-
assessed, through the sandbox, which encoura- do State University, U.S.
ges the transformation of the Saudi market into
a smart financial center. The regulatory sandbox
welcomes local and international firms that are
willing to test new digital solutions in a ‘real’ en-
vironment with a view to deploying such soluti-
ons in Saudi Arabia in the future.
• For example, through the sandbox designed for
testing innovative financial products and servi-
ces, online account opening for retail customers
and online updating of Know Your Customer
(KYC) details have been introduced, with the par-
ticipation of 11 banks operating in Saudi Arabia.
• In addition, SAMA has licensed 21 companies
to operate within the sandbox and offer various
services in the field of digital payments.

Q 4. SAMA is leading initiatives in the application

of blockchain to the banking sector. What are the
main outcomes of these initiatives? What are the
expected benefits to the economy?

Regarding blockchain technology, SAMA works

with companies specialized in the field to establish
a digital platform. With this platform, many entities,
especially banks, will be able to make payments.
As for digital assets, SAMA is working with CMA on
studying and defining those assets.

25
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER II:
BANKING SECTOR

26
 Chapter II: Banking Sector

Overview
Saudi Arabia’s banking system consists of com-
mercial banks, 12 domestic and 13 foreign. Four
of the 12 domestic banks are fully-fledged Islamic
banks and the rest of them provide Islamic banking
services through Islamic windows. Some domestic
banks have international branches operating outsi-
de the Kingdom.
This chapter delves into the banking sector of Saudi
Arabia which has become the backbone of the King-
dom’s financial sector. It also examines the steady
growth, robustness, sound performance and con-
stant dominance of the banking sector in the overall
financial system of the Kingdom, even when com-
pared to its peers in the G20. The promising role of
the Islamic banking sector in the Kingdom cannot go
unnoticed. The banking sector, especially the Islamic
banking sector, has a vital role in the process of the
implementation of Vision 2030 to achieve sustaina-
ble development and a flourishing economy.

Figure 2.1: Top 4 Commercial Banks by Assets in 2018

CONVENTIONAL BANKS ISLAMIC BANKS

National SAR 453,390 million SAR 365,004 million
Commercial Bank (US$ 120,904 million) Al Rajhi Bank (US$ 97,334 million)

Year of establishment: 1953 Year of establishment: 1957

Number of branches: 401 Number of branches: 551
Number of ATMs: 3729 Number of ATMs: 5006

SAMBA SAR 229,938 million SAR 121,333 million

Financial Group (US$ 61,317 million) Alinma Bank (US$ 32,356 million)

Year of establishment: 1980 Year of establishment: 2006

Number of branches: 72 Number of branches: 90
Number of ATMs: 520 Number of ATMs: 1488

SAR 229,899 million SAR 73,636 million

Riyad Bank (US$ 61,306 million) Bank Al-Bilad (US$ 19,636 million)

Year of establishment: 1957 Year of establishment: 2004

Number of branches: 321 Number of branches: 111
Number of ATMs: 2588 Number of ATMs: 863

SAR 174,564 million SAR 73,003 million

SABB (US$ 46,550 million) Bank Aljazira (US$ 19,468 million)

Year of establishment: 1978 Year of establishment: 1975

Number of branches: 75 Number of branches: 79
Number of ATMs: 925 Number of ATMs: 618

Source: Banks’s Annual Reports

27
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Sector Size and Growth

The decline in oil prices in 2014 has led to slower
economic growth in Saudi Arabia. The plunge in oil
price started in the mid of 2014 and then started to
get stabilized in early 2017 (Figure 2.2).
Within this specific time period, it can be observed
that year-on-year growth of the banking sector in
Saudi Arabia declined from 12.6% in 2014 to 3.6% in
2015. It continued witnessing low growth rates and
only in 2018 did this indicator start improving slight-
ly (Figure 2.3).

Figure 2.2: Crude Oil Price Per Barrel (US) for 2010-2019
$120.88
Feb ’12
$112.57
Dec ’11 $118.31
$130.22 Aug ’13
Apr ’11 $113.59
$108.8
Jun ’14
Jan ’13 $65.18
May ’15

$75.63 $61.06
$107.1 Jun ’18 Dec ’19
Dec ’10 $89.73 $67.13
Sept ’11 $52.54 Jan ’18
$95.16 May ’16
Jun ’12 $101,44
May ’13

$53.06
Jan ’14 $48.3 $46.45
$36.48 Jun ’17 Jan ’18
Feb ’16

Dec ’10 Dec ’11 Dec ’12 Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17 Dec ’18 Dec ’19

Source: Macro Trend

Figure 2.3: Total Assets of Commercial Banks (SAR Billion), (YoY %) KSA 2010-2018

12.3% 12.6% 2,256 2,306 2,363

2,209
1,893
9.1% 2,133
1,734
1,415
1,544 9.2%
1.734

2.2% 2.2% 2.5%

3.6%

2010 2011 2012 2013 2014 2015 2016 2017 2018

Total Banking Sector Assets Growth Rate

Source: Estimated by IRTI based on SAMA 51st and 55th Annual Reports

28
 Chapter II: Banking Sector

The banking penetration, measured as a ratio of
banking assets to GDP, grew faster than the GDP
growth rate between 2013 and 2018, indicating a
further development of the banking sector in the
country. Figure 2.4 clearly shows that banking pe-
netration was primarily driven by Islamic banking
assets, outpacing the conventional banks. Despite
various economic challenges during these years, a
continued increase in banking penetration remained
unhalted.
Table 2.1 shows the banking assets as a percenta-
ge of GDP from 2013 to 2018 for GCC countries. It
shows that Saudi Arabia is the lowest among the
GCC countries, which indicates the high potential of
the growth of banking penetration in the Kingdom.

Figure 2.4: Banking Penetration in KSA (% of GDP) 2013-2018

56.59% 58.32%
54.85%
52.29%
50.77%
45.03% 45.70%

36.78%
35.33%
32.34% 33.18% 31.50%

2013 2014 2015 2016 2017 2018

Islamic Conventional
Sources: SAMA and IFSB

Table 2.1: GCC Banking Assets as % of GDP 2013- 2018

Country 2013 2014 2015 2016 2017 2018

Bahrain 670% 633% 621% 587% 588% 510%

UAE 192% 202% 209% 215% 166% 165%

Qatar 126% 134% 143% 158% NA 197%

Kuwait 130% 139% 144% 145% 175% 186%

Oman 91% 100% 112% 108% 109% 108%

Saudi Arabia 90.73% 87.55% 87.62% 87.19% 89.77% 89.83%

Note: NA: Not Available

Source: SAMA Annual Reports and Other GCC Country Central Banks Annual Reports

29
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Given the relatively low banking assets to GDP ratio
in Saudi Arabia compared to other GCC countries,
there is still some room to push up the banking pene-
tration ratio in the future. The ambitious Vision 2030,
which was unveiled in 2016, has three themes: a Vi-
brant Society, a Thriving Economy and an Ambitious
Nation. The Vision 2030, which focuses on further
revitalizing the financial sector by fostering private
sector growth, creating an advanced capital market,
and nurturing financial responsibility among its peo-
ple, will contribute greatly towards the development
of the financial and banking sectors. The banking
penetration is expected to continue increasing in the
short term and medium term as the banking sector
has to play a vital role in the process of the imple-
mentation of Vision 2030 to achieve sustainable de-
velopment and a flourishing economy.

Saudi Banks are Highly Concentrated

The banking sector is led by 3 largest banks in terms of total assets. Of these, Al Rajhi Bank is the only
of asset size, namely the National Commercial fully-fledged Islamic bank.27
Bank, Al Rajhi Bank, and SABB accounting for 47.8%

Figure 2.5: Market Share of Total Banking Assets, KSA, 2018

Others: 12.00% NCB: 19.18%

Alinma: 5.13%

ANB: 7.54%
Al Rajhi: 15.44%

Saudi Fransi: 8.05%

SAMBA: 9.73%
SABB: 13.20%
Riyad: 9.73%

Source: SAMA Annual Report 2019 & Banks’ Financial Statement.

30
 Chapter II: Banking Sector

In addition to the fully-fledged Islamic banks,

all other conventional banks offer
Sharīʿah compliant products and services
through Islamic windows or branches.

The Development of Islamic Banks

The institutionalization of Islamic financial services
industry (IFSI) in Saudi Arabia commenced with the
establishment of Al Rajhi Banking and Investment
Corporation in 1989, renamed later to Al Rajhi Bank.
Being a fully-fledged Islamic bank, Al Rajhi is the se-
cond largest bank in Saudi Arabia in terms of assets
and the largest Islamic bank in the world by assets
and market capitalization. The bank accounted for
15.44% of total assets and 17.7% of total deposits
among banks in Saudi Arabia as of end-2018. The
bank’s market capitalization as of 31 December
2018 was SAR 142.2 billion. The bank’s total assets
of SAR 365 billion in 2018 was a substantial rise
from SAR 185 billion at the end of 2010. This repre-
sents 57.7% of Saudi Arabia’s total Islamic banking
assets of SAR 633 billion in 2018 and 23.8% of the
total Islamic assets of Islamic banking and Islamic
window assets of SAR 1,535 billion in 2018.28
The other three full-fledged Islamic banks are Alin-
ma Bank, Bank Albilad and Bank Al Jazira. Alinma
Bank is the second-largest Islamic bank with assets
of SAR 121.33 billion in 2018. With sound financi-
al performance, rapid growth in business activities,
and the ability to grow revenues compared to other
Saudi banks, the bank has grown substantially over
the past years and became the second-largest Isla-
mic bank since 2012.
Bank Al Bilad was established in 2004 as one of the
late entrants to the sector with a paid-up capital of
SAR 3 billion. Since then Al Bilad was able to expand
substantially through deposits, financing and remit-
tances resulting in its elevated growth rate, which is
however not commensurate with its market share.
Bank Al Bilad is the third-largest Islamic bank with
an asset of SAR 73.64 billion at the end of 2018.
The fourth-largest Islamic bank, Bank Al Jazira, was
founded in 1975 and became fully Sharīʿah compli-
ant in 2007, with assets of SAR 73 billion in 2018.
In March 2011, the bank successfully issued ṣukūk
worth of US $267 million, which was one of the lar-
gest in 2010 and 2011.
In addition to the fully-fledged Islamic banks, all other
conventional banks offer Sharīʿah compliant products
and services through Islamic windows or branches.

Figure 2.6: Assets Size of Islamic Banks in KSA for 2010 and 2018 (SAR Billion).
365

182
121

73 74
33 26
21

Bank Aljazira Bank Albilad Alinma Bank Al Rajhi Bank

2010 2018
Source: Banks’ Annual Reports
31
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Islamic Banking Assets are On the Rise

After seeing double-digit growth rates of 16.8% in
2014, the growth of Islamic banking assets (inclu-
ding windows) dwindled in 2015. The growth rate
even dropped to 2.4% in 2017 before it bounced
back to 5.6% in 2018. However, conventional banks’
assets shrank by 0.6% in 2015 and further plumme-
ted by 6% in 2016 followed by 1.8% growth in 2017.
Besides, the year 2018 witnessed another contrac-
tion of 2.7%. In spite of the economic challenges,
it is evident that Saudi Arabia is embracing Islamic
finance value propositions, indicated by the incre-
asing trend of Islamic banking assets.
The share of overall Sharīʿah-compliant banking as-
sets has increased steadily over the past five years,
growing by 9% from 56% in 2013 to 65% in 2018.
The growth in entire banking assets during this peri-
od was primarily driven by strong growth in the Isla-
mic banking sector. Islamic banking assets grew at
a CAGR of 7.7% between 2013 and 2018 while the
an increasing demand for Sharīʿah-compliant finan-
cial instruments.

Figure 2.7 Year on Year (YoY) Growth by Type of Banking, KSA 2014-2018

16.8%

7.3% 7.7%
6.6%
5.6%

2.4%
1.8%

2014 2015 2016 2017 2018

-0.6%

-2.7%
Islamic Banks & Windows Assets
Conventional Banks Assets -6.0%

Source: Estimated by IRTI based on IFSB and SAMA’s 51st and 55th Annual Reports

32
 Chapter II: Banking Sector

Figure 2.8: KSA Market Share by Type of Banking, (%) 2013-2018

44% 42% 40% 37% 37% 35%

63% 63% 65%

58% 60%
56%

2013 2014 2015 2016 2017 2018

Share of Islamic Banks & Windows Assets Share of Conventional Banks Assets

Source: Estimated by IRTI based on IFSB and SAMA’s 51st and 55th Annual Reports

Figure 2.9: KSA Banking Sector Assets by Types of Banking (SAR Billion), 2013-2018

2,363
2,256 2,306
2,209
2,133

1,893

1,535
1,419 1,454
1,318
1,237
1,058
896 891 852
835 837 829

2013 2014 2015 2016 2017 2018

Islamic Banks & Windows Assets Conventional Banks Assets Total Banking Sector Assets

Source: Estimated by IRTI based on IFSB and SAMA’s 51st and 55th Annual Reports

33
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 2.10: Saudi Arabia’s Banking Sector Growth (CAGR) by Type of Banking For 2013-2018, (%)

7.7%

4.5%

Conventional
Banks Assets
Islamic Banks & Total Banking
Windows Assets -0.1% Sector Assets

Source: Estimated by IRTI based on SAMA and IFSB reports.

The Lion’s Share of Banking Assets

The lion’s share of the banking assets is made up
of claims to the private sector, followed by claims
on the public sector and foreign assets. The other
assets grew by a CAGR of 22% between 2013 and
2018. This growth increased the share of other
banks’ assets from 9% in 2012 to 20% in 2018. In
the meantime, the claims to the private sector’s
share increased from 59% to 61%. The increase in
private sector claims is in line with the market ex-
pectations as government stimulus packages start
to unfold and are expected to further unfold in 2019
and 2020.
The details composition of banks’ assets and liabili-
ties are presented in Figure 2.11 and 2.12

Figure 2.11: Breakdown of Commercial Banks’ Assets (SAR Billion) in KSA for 2013-2018

135.75
156.45 126.59
246.02
310.48
262.09
1,434.89
1,405.47 1,393.70
1,371.93
1,256.21
1,123.65

124.98 227.43 301.14 352.06

93.76 98.95
225.84 242.36
210.69 251.61 316.71 221.09

200.37 146.24 236.70 239.37 218.57

213.07

2013 2014 2015 2016 2017 2018

Bank reserves Claims on the private sector
Foreign Assets Other assets
Claims on the public sector Claims on non-monetary Fin.Inst.
Source: SAMA

34
 Chapter II: Banking Sector

Figure 2.12: Breakdown of Commercial Banks’ Liabilities (SAR Billion) In KSA for 2013-2018

254.60
219.93 230.92
199.18
176.45 43.68 48.35
42.68 40.36
155.35 40.16 317.60 303.89
298.90
248.11 270.96
35.69 95.48
80.13 94.50
225.86 92.28 91.17
74.41

1,661.08
1,617.01 1,619.06
1,401.98 1,575.58 1,604.77

2013 2014 2015 2016 2017 2018

Bank deposits Profits

Foreign liabilities Other liabilities
Capital and reserves
Source: SAMA

Sharīʿah-Compliant Banking Maintains Strong

Position in Operational Efficiency
The overall banking sector in Saudi Arabia has seen
a slight decline in operating efficiency between 2014
and 2018, as indicated by the cost-to-income ratio
which gradually increased from 51.7% in 2014 to
54.8% in 2018. The cost-to-income ratio for Islamic
banks, on the other hand, is relatively lower compa-
red to their conventional counterparts.

Figure 2.13: Cost to Income Ratio for Saudi Arabian Banks (%) for 2014-2018

54.3% 54.8%
54.4%
53.4%
52.6%
51.7% 51.3% 51.5%
50.2%

46.3%

2014 2015 2016 2017 2018

Islamic banks Overall banking sector

Source: Banks’ Reports and IFSB Reports29.

35
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Over the years, the Islamic banking system experien-
ced a higher average return on assets (ROA) compa-
red to the whole banking system. This is consistent
with previous analysis on efficiency. It also shows
that Islamic banks in Saudi Arabia outperform their
peers in other OIC Member Countries such as In-
donesia and Turkey of the G20, as well as Malay-
sia, the leading country in Islamic finance industry
development. This fact applies to return on equity
(ROE) too. The ROEs for Islamic banks in Saudi are
always better than their G20 peers and Malaysia,
except Turkey in 2018 which scored 18%. In Saudi
Arabia, the profitability of the Islamic banking sector
has always been appealing for bankers, shown by
ROA that consistently stood at above 2%, contrary
to conventional banks’ ROA which was below 2 %
for the period of 2013-2018.

Figure 2.14: ROA of Islamic Banks and Windows Vs Conventional Banks Vs

Total Commercial Banks in KSA, (%) 2014-2018

2.3% 2.3% 2.2% 2.3%

2.1%
2.0%
1.9% 1.9% 1.9%
1.8%

1.6%
1.4% 1.4% 1.4%

1.2%

2014 2015 2016 2017 2018

Islamic Banks & Windows Total Commercial Banks Conventional Banks

Source: IRTI’s Calculation based on SAMA and IFSB Reports

Figure 2.15: Return on Average Assets (ROA) of Islamic Banks Across G20 Peers and Malaysia (%)

2.5
2.4
2.0 1.9 2.1 2.0
1.7
1.5
1.4 1.4 1.4
1.2 1.1 1.1 1.1
1.0 1.0 1.0
0.7 0.7
0.5 0.4 0.5 0.6

2013 2014 2015 2016 2017 2018

KSA Indonesia Turkey Malaysia

Source: IFSB PSIFI Reports by Country

36
 Chapter II: Banking Sector

Figure 2.16: Return on Equity (ROE) of Islamic Banks Across G20 And Malaysia (%) 2013-2018

18.3 18.3
17.3 17.6
16.6 16.1 16.5
16.0
15.3 15.1
13.9 14.2 14.3
13.5 13.0 13.4
12.5 12.2

7.0 6.5 6.6

5.8 5.4
4.2

2013 2014 2015 2016 2017 2018

KSA Indonesia Turkey Malaysia

Source: IFSB PSIFI Reports by Country

Profit (Y-o-Y) rates of total banking sector in Saudi
Arabia witnessed stable growth for 2013-2018. Total
sector’s profit grew from SAR 35.69 billion in 2013
to SAR 48.35 billion in 2018. However, both Islamic
banking (including windows) and conventional ban-
king profits declined in 2016. While the y-o-y growth
rate of the total sector for 2016 dropped to -5.4%
from 6.3% in 2015, Islamic banking profit dropped to
-0.5%. At the same time, conventional banks profit
rate declined to -16.8% in 2016 compared to 6.6% in
the previous year. The situation improved in 2017.
The total sector year-on-year growth rate improved
from -5.4% in 2016 to 8.2% in 2017, whereas Islamic
banks and windows improved from -0.5% in 2016
to 6.6% in 2017 and for conventional banks, from
-16.8% in 2016 to 12.7% in 2017. The drop in pro-
fits of Saudi Arabia’s banking sector for 2016 can be
explained by lower oil price which immediately cau-
sed a decrease in state oil revenues and spending,
which affected banks’ profitability indicators.

Figure 2.17: Profit by Type of Banking (SAR Million), 2013-2018

48,349
42,683 43,677
40,159 40,363
35,692 34,710
29,644 31,597
28,074 29,796
26,735

12,085 12,887 13,639

10,719 12,080
8,957

2013 2014 2015 2016 2017 2018

Conventional Banks Islamic Banks & Windows Total Sector

Source: IRTI’s Calculation based on SAMA and IFSB Reports

37
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Figure 2.18: Profit Growth Rate (YoY %) By Type of Banking, KSA 2014-2018
34.9%
12.5%
6.3% 6.1% 6.6%
5.0%
2014 2015
-5.4%
Total Sector
Stable Capital Adequacy Ratio
Banks in Saudi Arabia have been required to comply
with Basel III capital adequacy requirements sin-
ce 2014. Their aggregate Tier 1 Capital Adequacy
Ratio (CAR), the proportion of Tier 1 capital to total
risk-weighted assets remained stable at a healthy le-
vel above 10.5% of SAMA’s requirement. In general,
Islamic banks and windows, as well as total banking
sector of KSA, continued to maintain a strong capi-
talization profile of capital adequacy ratios for 2018.
The fact that banks in Saudi Arabia exceeded the
required level of Tier 1 capital is an indication that
liquidity in the banking sector remains strong, despi-
te the strain of lower deposit growth. Islamic banks
maintained a CAR slightly above their conventional
counterparts during this period. Islamic banks were
better capitalized as compared to conventional
banks, though the gap was reduced in 2018 due to a
slight decrease in Islamic banks’ CAR from 21.9% in
2017 to 20.8% in 2018. Such a decrease is driven by
major industrywide factors, namely the adoption of
12.7% 12.9%
10.7% 9.9%
8.2%
6.6%
2016
2017 2018
-0.5%
-16.8%
Conventional Banks Islamic Banks & Windows
Source: IRTI’s Calculation based on SAMA and IFSB Reports
IFRS 9, reflecting the retained earnings and reserves
decline as at 1 January 2018 via creating tremen-
dously additional expected credit loss allowance.
The results above indicate that the eligible capital
of both Islamic and overall banking grew faster than
their risk weighted assets. However, the pace of this
growth was higher for the Islamic banks in compari-
son to the overall banking sector.
The ratio of non-performing loans (NPLs) to total
loans increased from 1.0% in 2014 to 2% at the end
of 2018. NPL ratios for Islamic banks, in contrast,
are lower and remained stable during the same pe-
riod. Overall, Islamic banks’ non-performing loans
(or financing) accounted for 1.1% of total financing
in 2014, marginally increased to 1.2% in 2018. Such
a quantitative profile is a demonstration that Saudi
Arabia banks are among the best in comparison to
its G20 peers and Malaysia.
38
 Chapter II: Banking Sector

Figure 2.19: CAR, Islamic Vs Overall Banking Sector (%), 2014-2018

21.9%
21.1%
20,8%
20.1%
19.7%

20.4% 20.3%
19.5%

18.1%
17.9%
2014 2015 2016 2017 2018

Islamic Banks Total Banking Sector

Source: IFSB Data by Country & SAMA 55th Annual Report

Figure 2.20: NPL Ratio of Islamic Banks Vs Total Banking Sector (%) For 2014-2018
1.7%
1.5%
1.3% 1.3%
1.1% 1.1% 1.1% 1.2% 1.2%
0.9%

2014 2015 2016 2017 2018

Islamic banks Total banking sector

Source: Multiple Sources 30

Figure 2.21: NPL Ratio (%) of Islamic Banks Across G20 Peers and Malaysia, 2013-2018

4.99 5.14
4.84 4.76
4.34 4.41

3.66 3.86

3.21 3.26
3.05
2.71

1.42 1.42 1.30 1.27

1.13 1.20 1.21 1.15 1.24 1.18 1.30
0.89

2013 2014 2015 2016 2017 2018

KSA Indonesia Turkey Malaysia

Source: IFSB Report

39
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 2.22: NPL Coverage Ratio (%) of Islamic Banks Across G20 Peers and Malaysia, 2013-2018

262
249

212
192
175
152

63 62 62 71 63
59
51 46
34 40 38
33 29 32 27
26 24 25

2013 2014 2015 2016 2017 2018

KSA Indonesia Turkey Malaysia

Figure 2.23: NPL Coverage Ratio of Islamic Banks Vs Total Banking Sector (%) for 2014-2018

249% 262%
212%
192% 183% 175% 172% 178%
162% 167%

2014 2015 2016 2017 2018

Islamic banks Total banking sector

Source: Multiple Sources31

The above trend indicates that Saudi banks better
managed their credit risk during this period. This
can be attributed to improved prudence measures
in lending activities, in addition to improved ma-
nagement of asset quality by banks with the im-
plementation of Basel III requirements in 2013. For
instance, Al Rajhi, being the largest Islamic bank in
the world, had the lowest NPL ratio of 0.95%. In the
same period, the NPL coverage ratio is much better
than the overall banking sector. The coverage ratio
indicates provisions for non-performing financing
(NPF); a higher coverage ratio indicates a better abi-
lity to mitigate the credit risk of the bank. Noticeably,
Alinma bank’s NPF coverage ratio improved to 200%
from 159%; whereas, overall banking’s NPL cover-
age ratio decreased by 16 percentage points from
183% in 2014 to 167% at the end of 2018.

40

Saudi Islamic Asset
is leading in the GCC Region
The GCC region is the largest region in terms of
market share for global Islamic banking assets. It
is considered as one of the main drivers for the glo-
bal growth of Islamic banking industry. In the region,
the overall Islamic banking assets maintained con-
tinuous growth at CAGR of 7.9% over the last five
years (2013-2018). The combined total worth of Is-
lamic bank’s assets recorded US$ 835 billion at the
end of 2018 compared to US$ 799 billion in 2017.
In terms of top jurisdictions for Islamic banking as-
sets, Saudi Arabia is the market leader in the region
which accounts for almost 50% of the total regional
Islamic banking industry assets for six consecutive
years from 2013-2018. The CAGR for Islamic ban-
king assets in Saudi Arabia stood at 7.7%, which is
almost the same as CAGR for the total regional Isla-
mic banking industry.
Such steady growth of Islamic banking assets is dri-
ven by:
1) Strong demand for Sharīʿah complaint products
in Saudi Arabia;
Figure 2.24: GCC’s Islamic Banks Assets’ Compound Annual Growth Rate (CAGR) by Country (%)
2013-2018
39.7%
7.7%
4.1% 4.8%
KSA Bahrain Kuwait Oman
41
Chapter II: Banking Sector
2) Advanced digitalization of services provided by
banks;
3) SAMA’s effective regulatory and supervisory role
over the banking system with the aim of enhan-
cing its resiliency and stability; and
4) Macroeconomic stability.
While Saudi Arabia is leading Islamic banking in
terms of assets size, in the aspects of growth,
Oman outpaced the GCC member countries with a
CAGR of 39.6%. The assets’ growth increased more
than five times from US$ 2.11 billion in 2013 to US$
11.20 billion in 2018. Such a remarkable growth can
be attributed to 1) young age of the industry; 2) ro-
bust regulatory framework; 3) resilience of Islamic
banks; and 4) strong demand for Islamic financial
services. Looking at the capital structure of Islamic
banks and windows on the country level in Oman, it
can be observed that the main sources of assets’
increase come from liability rather than equity.
9.9% 9.9%
7.9%
UAE Qatar Total
Region
Source: IRTI’s Calculation Based on IFSB Reports
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 2.25: Market Share of GCC Islamic Banking and Windows Assets by Country, (%) 2014-2018

1% 1% 1% 1% 1%
8% 8% 7% 7% 7%
11% 12% 12% 12% 12%

13% 12% 12% 12% 12%

17% 18% 18% 19% 19%

50% 50% 50% 49% 49%

2014 2015 2016 2017 2018

Saudi Arabia UAE Kuwait Qatar Bahrain Oman

Source: IRTI’s Calculation Based on IFSB Reports.

Figure 2.26: GCC Islamic Banking and Windows Assets by Country, (US$ Billion) 2013-2018

835
799
757
709
655
572

409
388
378
351
330
282

150

159
138
126
110

101
97

96
88

96
99

88

87

84

89
72
80

59

59
56
60

55
53

10

11
48

8
6
2

2013 2014 2015 2016 2017 2018

KSA Bahrain Kuwait Oman UAE Qatar Total Region

Source: IRTI’s Calculation Based on IFSB Reports

42
 Chapter II: Banking Sector

Liquidity
Saudi Arabia’s Islamic banks’ liquid assets ratio
slightly improved from 24% in 2015 to 25% in 2018.
The Liquidity Coverage Ratio (LCR), an indicator of
the ability of the bank to cover net cash outflows
over the next 30 calendar days by high quality liquid
assets, continued to remain stable for Saudi Ara-
bia’s Islamic banks. Though it dropped slightly from
163% in 2015 to 162% in 2018, these rates are still
well above the average. Saudi Islamic banks per-
formed well by maintaining a stable LCR over the
years.

Figure 2.27: Liquid Assets Ratio of Islamic Banks Across GCC and G20 Peers, (%) 2015-2018

54%
53%
49%

44%

35%
34%

33%
32%

30%

29%
28%
29%
26%

25%
24%

20%
18%

17%
17%

16%
16%

16%
15%
16%

13%
14%

14%
14%

12%

12%
12%
11%

11%

1%
8%

2015 2016 2017 2018

KSA Indonesia Turkey Malaysia

Bahrain Kuwait UAE Oman Qatar
Source: IFSB Report

Figure 2.28: Liquidity Coverage Ratio (LCR) of Islamic Banks Across GCC and G20 Peers, (%) 2015-2018

222% 213%
212%
203% 196%
185%
177%
163% 167% 167%
162% 155%
154%
144% 142% 148% 146%

2015 2016 2017 2018

KSA Turkey Kuwait Oman Qatar

Source: IFSB Report; data for Kuwait on 2016 and 2017 is not available from IFSB.

43
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Another liquidity metric for banks is the net stable
funding ratio (NSFR) which measures the ability of
banks to cover the duration of their long-term as-
sets by having enough stable funding. According
to Basel III requirement, the minimum NSFR must
be 100%. For Saudi Arabian Islamic banks, the cal-
culation is based on individual Islamic banks’ data.
As for Qatari and Omani Islamic banks, data was
Figure 2.29: Net Stable Funding Ratio (NSFR) of Islamic Banks by Country, (%) 2017-2018
122% 127%
91%
Saudi Arabia
2017
E-Banking in Saudi Arabia
In a country with over 21 million citizens and 10.4
million expats, banks in Saudi Arabia have expanded
the way business was done and have invested more
in alternative delivery channels. With the supervi-
sion of SAMA, and the support of the government
through its National Plan for Telecommunication
and IT approved in 200734 and the National Trans-
formation Program under Vision 2030, Saudi banks
have been able to transform their transactions to
make banking seamless and convenient for millions
of people in their everyday lives.
All banks in Saudi Arabia have already adopted di-
gital banking solutions as a core strategy to cater
to constantly changing consumer behavior. With the
wide use of internet over the years, customers are
driving banks in Saudi Arabia to invest more in their
online presence and increase the range of services
offered on the internet. This is why investing in and
expanding services is of strategic importance, and
at the same time all this fits in nicely with the gover-
nment’s initiatives to promote e-commerce in Saudi
Arabia.
collected from IFSB report32. Across all countries,
NSFR showed a positive trend for the last two years
2017-2018. NSFR for Saudi Arabian Islamic banks
was maintained well above Basel III requirement by
standing at 122% in 2017 and 127% in 2018. This
ratio indicates that the Islamic banking system in
Saudi Arabia has ample sources of stable funding
to meet their obligations.
103%
90%
79%
Qatar Oman
2018
Source: Islamic Banks’ Reports and IFSB reports33
Considering the internet channel as a customer
retention tool and a medium to acquire additional
clients, all banks have enhanced their electronic ser-
vices through a customer-centric and multi-channel
approach with more than half of the bank’s bran-
ches on digital circuits. All banks recognized the im-
portance of streamlining procedures and incremen-
tally making it easier for their customers.
As the central bank, SAMA has been proactive in the
implementation of e-banking in Saudi Arabia over
the last decade. Beginning with the first ATM that
was installed in 1980, SAMA enabled the industry
to endorse the e-banking solutions since the mid-
1980s.
In April 1990, the Saudi Payments Network (SPAN),
a national ATMs network developed and operated by
SAMA went live. SPAN processes financial transac-
tions by card users to the card issuers. The network
connects all automated teller machines (ATMs) and
point-of-sale (POS) terminals throughout the coun-
try to a central payment switch that in turn re-rou-
44

tes the financial transactions between a merchant’s
bank and the card issuer bank. SPAN also provides
services outside Saudi Arabia via networks such as
GCC Net Member Switches. The Saudi banks are
obliged to issue ATM cards compatible to the net-
work, and these cards are issued free of cost to the
customers. The purpose of this has been to encou-
rage the customers to use the system. This techno-
logy has eased the banks dependence on notes as
means of transactions.
On 15 May 1997, the Saudi Arabian System for Fast
Money Transfers (SARIE) started to operate. SARIE
is one of the most sophisticated systems in terms of
credit clearing. The system concludes two decades
of major achievements in the country with regard to
the banking business. This system has been desig-
ned in accordance with the concept of total simul-
taneous clearing and is considered a revolutionary
invention in e-banking and commercial transactions
in the country. It constitutes the infrastructure for
several advanced systems of payment and credit
clearance. These systems include automatic clea-
rance houses (ACH), systems for automatic clea-
rance of cheques, and Saudi Network for Payments
(SPAN) which links all cash machines and transfers
money electronically at the sale centers (EFTPOS).
The technological step, coupled with the modern
banking service associated with SARIE in relation to
the banking sector in Saudi Arabia, is considered as
a landmark achievement in the history of payment
systems in the country.
SAMA continues its regulatory role through e-Trust
Center, performing electronic banking examinations,
and issuing specific guidelines regarding e-banking
such as Disaster Recovery Planning Guidelines, In-
ternet Banking Security Guidelines, and SARIE Ope-
rating Rules and Regulations (CPSS 2003). Internet
Banking Security Guidelines, for instance, manda-
te the approval of any internet banking product or
service prior to its launch (SAMA 2001). Although
SAMA makes all possible efforts for developing
e-banking products and services, there is a crucial
need for a legal framework that oversees not only
e-banking transactions, but also all other e-business
transactions.
45
Chapter II: Banking Sector
Considering bank customers spend millions of hours
at the bank branches every year to pay their bills,
making it a heavy burden on both banks and custo-
mers, SAMA launched the SADAD payment system
on 3 October 2004 whereby bills and payments due
can be paid electronically through this new system,
which saves time and effort for customers and re-
lieves the pressure on banks. SADAD has managed
to shift consumers’ behavior by moving them from
physical channels (branches) to electronic channels
(ATM, Phone Banking, and Online Banking).
With the advancement of technology, MADA ser-
vice for banking services started operating in 2014.
MADA is the new identity of SPAN that represents
the innovative generation of electronic payments in
Saudi Arabia and is intended to boost ATMs and POS
growth with unprecedented dimensions of flexibili-
ty, speed, security, and acceptance. It is worth men-
tioning that 2015 witnessed an enormous growth
in the number of installed POS terminals by more
than 86,000 devices in that year alone. By the end of
2018, there were 18,685 ATMs, 351,645 POS termi-
nals connected to the network, and the number of
issued ATM cards reached 28.6 million. More than
2 billion financial transactions were routed through
the network, with a total value of cash withdrawals
SAR 748.3 billion (US$ 199.6 billion) with an average
monthly transaction value of SAR 62.4 billion.
Through a network of most advanced global tech-
nical payment systems, MADA connects all ATMs
and POS terminals offered by local banks throug-
hout the country to a central payment switch that
in turn re-routes the financial transactions between
a merchant’s bank and the card issuer bank. The
system also permits regional and global acceptan-
ce through connecting with other payment systems
such as GCC Net, VISA, MasterCard, and American
Express to provide MADA cardholders with a wider
acceptance locally and overseas.
More recently, in continuation of the implementa-
tion of the Saudi Payment Systems Development
Strategy, SAMA launched this new service called
“SADAD Account” with the aim of providing a secu-
re online payment option without the need of using
bank cards or cash. The service works directly be-
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

tween SADAD account and the e-commerce client
and payments are deposited to the account of mer-
chant or service provider. SADAD has now entered
a new stage wherein it provides innovative payment
solutions for e-commerce. It is all set to become the
go-to mode for facilitating online payments. The SA-
DAD account can easily be accessed via the e-ser-
vices of any member bank. SADAD account came
to become a game changer for the online world and
a great boost to the e-commerce industry in Saudi
Arabia.

Figure 2.30: Evolution of E-banking in Saudi

Evolution Arabia in Saudi Arabia
of E-banking

Estanlishment of Saudi Payment System

1990 (SPAN) to link all ATM’s nationwide
Launch of POS 1993
services through SPAN
1997 Launch of Saudi system for
fast money transfer (SARIE)
Launch of the SADAD 2004
payment system
2008 Launch of chip and PIN Smart
Debt Cards
Full compliance with
2011
ENV and PCI Standards
Launch of MADA as
2015
new identity to SPAN
Launch of MADA Naqd as
the cashback feature on POS 2015

2016
Launch of MADA Atheer as
the NFC capability on POS
Establishment of Internet payments 2018
through MADA debt cards
2018 Launch of MADA pay as the first
mobile payment solution in KSA
Launch of Apple Pay 2019

Source: Created by IRTI staff based on information available on SAMA website

Conclusion
Saudi Arabia’s overall banking sector saw positive
results in 2018 with 2.5% growth in total assets
compared to 2.2% increase both in 2016 and 2017.
The NPL ratio for the banking sector has increased,
although it remains well below other economies,
indicating lower credit risk for the banking sector.
Profitability and liquidity indicators show a highly
liquid and well-capitalized system that is resilient
to withstand external shocks. It is expected that the
banking system will continue to meet credit demand
as the economic growth continues.
In the meantime, the Islamic banking sector outper-
forms its conventional counterparts in other IsDB
46
Member Countries in many aspects. For instance,
the share of overall Sharīʿah-compliant banking as-
sets has increased steadily over the past five years,
growing by 9% from 56% in 2013 to 65% in 2018,
reflecting the wide acceptance of Islamic banking
in Saudi Arabia. As compared to its G20 peers and
Malaysia, Saudi banks outperformed well in terms
of quality of credit measured by NPL (NPF) ratio and
financing coverage ratios.
The Islamic banking sector has been rising over the
years. The share of Islamic banking assets of Sau-
di Arabia is 20.2% of global Islamic banking assets.
With SAMA’s continuous support and efforts, Saudi
 Chapter II: Banking Sector

Arabia has been establishing itself as one of the ma-
jor Islamic finance hubs and indeed has become a
key driver in its growth globally.
To differentiate themselves in a competitive market
and remain relevant, Saudi banks guided by SAMA are
showing greater support for the fintech sector, through
various initiatives such as Fintech Saudi and the Sand-
box regulatory environment. FinTech solutions have
the potential to lower barriers of entry to the financial
services market, and elevate the role of data as a key
commodity to enhance the customer experience.
With strong economic fundamentals (see Chap-
ter 1), favorable regulatory framework (Chapter 1),
easily accessible yet powerful and cheaper transfor-
mation technologies (Chapter 7 on fintech) and in
line with Vision 2030, the banking sector will play a
vital role continuously in the process of the imple-
mentation of Vision 2030 to achieve sustainable
development and a flourishing economy for the
Kingdom.

Appendix
Table 2.2: Summary Financial Statements of Domestic Saudi Commercial Banks: 2017-2018

Operating
Net profit Loan to
Customers' expenses to Total Capital
Equity Assets Net Loans Net Profit avg. assets Deposit
Deposit operating Ratio (Basel)
(%) (%)
income (%)
National 2018 65.7 453.4 265.3 318.7 10.8 2.41 34.06 83.25 20.6
Commercial
Bank 2017 64.3 444.8 249.2 308.9 10.0 2.25 35.02 80.67 20

2018 48.6 365.0 234.1 293.9 10.3 2.91 31.71 79.64 20.2
Al Rajhi Bank
2017 55.8 343.1 233.5 273.1 9.1 2.67 32.92 85.53 23.3
Samba 2018 42.3 229.9 113.7 170.2 5.5 2.42 30.31 66.82 22.7
Financial
Group 2017 44.7 227.6 117.7 168.0 5.0 2.19 32.7 70.06 21.1

2018 36.8 229.9 151.0 169.8 4.7 2.4 37.33 88.93 18.1
Riyad Bank
2017 38.6 216.3 138.8 154.4 3.9 1.82 36.61 89.94 19.6

Saudi British 2018 32.5 174.6 110.3 130.5 4.9 2.72 34.1 84.54 21.3
Bank 2017 33.5 187.6 117.0 140.2 4.0 2.12 45.47 83.43 21

Banque 2018 30.8 190.2 120.6 148.4 3.3 1.73 33.7 81.31 19.8
Saudi Fransi 2017 31.7 192.9 121.9 151.0 3.5 1.78 36.3 80.78 19.4

Arab National 2018 26.5 178.3 121.0 140.9 3.3 1.89 49.5 85.9 18.1
Bank 2017 25.1 171.7 114.5 136.0 3.0 1.78 52.9 84.19 17.6
2018 21.3 121.3 83.7 90.1 2.5 2.13 47.93 92.85 21
Alinma Bank
2017 20.3 114.8 79.1 89.1 2.0 1.83 53.8 88.77 21

Saudi Invest- 2018 13.4 96.1 59.4 63.7 1.5 1.54 50.87 93.28 19.4
ment Bank 2017 14.3 93.8 59.6 66.9 1.4 1.5 51.9 89.01 20.4
2018 13.9 82.0 57.8 64.6 1.1 1.24 35.87 89.46 20.6
Alawwal
2017 13.6 99.9 63.6 78.3 1.3 1.3 34.1 81.3 20.3

Bank Al 2018 11.2 73.0 40.9 51.8 1.0 1.42 63 78.95 27.5
Jazira 2017 8.8 68.3 39.8 50.3 0.9 1.27 67 79.14 20.9
2018 7.8 73.6 50.6 57.2 1.1 1.62 67 88.49 17.3
Bank Al Bilad
2017 7.6 63.2 43.4 47.8 0.9 1.6 68 90.93 18.5

Sources: Banks’ Annual Reports

47
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER III:
CAPITAL MARKET
48

Saudi ṣukūk market has been driven by
mainly the issuance of the government ṣukūk.
Overview
The capital market represents a significant compo-
nent of the overall financial system. Capital markets
contribute towards developing a vibrant economy
by facilitating the mobilization and channeling of
funds into productive economic activities while pro-
viding return opportunities to investors.
The Saudi capital market has recorded significant
achievements over the past years by expanding in
breadth and in depth. This can be witnessed from (i)
the range of products and services, (ii) the number
and diversity of its stakeholders, and (iii) its infra-
structure and capabilities. Figure 3.1 outlines the
key components of the Saudi capital market.
Figure 3.1: Components of Saudi Arabia Capital Market
SAUDI ARABIA CAPITAL MARKET
Equity Market Real Estate Exchange Traded
Investment Trusts Funds
(REITS)
Capital Market Development
and Vision 2030
Following a series of reforms and enhancements
by the Capital Market Authority, the largest market
in the GCC has been promoted to emerging market
status by FTSE Russell and MSCI. Among the nota-
ble reforms since 2015 are:
• Opening up the market to foreign investors
through Qualified Financial Institutions (QFIs)
• Increasing the settlement cycle from T+0 to T+2
49
Chapter III: Capital Market
Apart from the gradual reforms undertaken to un-
leash the potential of Saudi capital markets, this
chapter presents an analytical overview of the per-
formance of Saudi stock markets, funds, equity, and
ṣukūk. With the ṣukūk market, in particular, its im-
pending role as a major force in the Kingdom’s eco-
nomic development cannot be taken lightly. As the
data demonstrates, Saudi ṣukūk market is reported
to be the second largest ṣukūk in issuance globally.
It is also worth noting that the recent development
in the local ṣukūk market has been driven by mainly
the issuance of the government Ṣukūk.
Unit Trust Funds Ṣukūk / Bond
Source: Capital Market Authority
• Reclassifying sectors according to Global Indus-
try Classification Standard (GICS)
• Launching the parallel market, NUMO, with less
stringent listing requirements for companies to
go public (especially the SMEs)
• Introducing real estate investment traded funds
• Enhancing price calculation mechanisms.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Since 23 April 2017, Tadawul has extended the pe-
riod for settling to two working days instead of the
same day execution. This was an initiative aimed
at helping the market to join international equity
indexes to attract billions of dollars of fresh invest-
ment. Tadawul also introduced the short selling of
stocks and borrowing and lending of securities. Fu-
rthermore, to mitigate the risk of destabilizing the
market, Tadawul imposed strict rules governing
short selling mechanism.
These regulatory and operational improvements rai-
sed the profile of the market and set the market to
lead the next phase of resource mobilization in the
The Stock Market: A Brief History
The roots of the Saudi capital market can be traced
to the 1930s. Share trading began in 1935 when
the first joint stock company was floated. Over the
years, the number of joint stock companies incre-
ased to 14 in 1975 with a total paid-up capital of
SAR 1.66 billion. With the start of the oil boom, this
number rose to 34. In 1978, there were more than
80 unregulated brokers in Saudi Arabia providing
stock brokerage services. However, the secondary
market remained unregulated till 1984.
In 1984, a Ministerial Committee of the Ministry of
Finance and National Economy, Ministry of Com-
merce and the Saudi Arabian Monetary Authority
(SAMA) was formed to regulate and develop the
market. SAMA was charged with the responsibility
of the daily operational activities of the stock mar-
ket and the supervision and regulation of the stock
market.
Initially, share-trading intermediation was restric-
ted to commercial banks to improve the regulatory
framework. In 1984, the Saudi Share Registration
Company (SSRC) was established by the commerci-
al banks. The company provided central registration
facilities for joint stock companies and cleared and
settled all equity transactions. Automated clearing
and settlement were introduced in 1989. The Elec-
tronic Securities Information System (ESIS), develo-
50
Kingdom to achieve Vision 2030. One of the most
recent developments in the Kingdom’s capital mar-
ket was the launch of derivatives trading in 2019 by
the Capital Market Authority to enhance its capital
markets despite anxiety over slowing growth and
slumping oil prices. From an Islamic finance princi-
ples point of view, it is worth noting that aside from
the Sharīʿah non-compliance issue that can be very
concerning, derivatives can be risky instruments
which necessitates adequate regulations coupled
with an integrated system of reporting and monito-
ring to ensure the transparency.
ped and operated by SAMA, was introduced in 1990.
It marked the beginning of the ‘floorless’ market in
Saudi Arabia which enabled investors in different lo-
cations to trade in the stock market simultaneously.
Tadawul, the new securities trading, clearing and
settlement system was launched in October 2001.
Tadawul added a T + 0 (same day transaction
guarantee) and is built to handle large amounts of
electronic activity. The new system also incorpora-
ted a much more sophisticated deposit structure
and more efficient trading guidelines. In addition, it
provides listing and trading of a greater number of
different financial papers, including ṣukūk, Exchan-
ge Traded Funds (ETFs), Real Estate Traded funds
(REITs), investment enterprise units, corporate
bonds, and treasury bonds. Tadawul also enables
all listed companies to report their announcements
and their financial statements to the public banks.
On 31 July 2003, the Capital Market Law (CML) was
enacted, which is a milestone in Saudi Arabia for ca-
pital market development. This law is the umbrella
that covered multiple aspects of the capital market,
including structures, regulatory, supervisory, and
operational entities.
Shortly after the enactment of CML, the Capital Mar-
ket Authority (CMA) was established to regulate and

The Capital Market Law enacted in 2003
is a milestone for capital market development
serving multiple aspects including structures,
regulatory, supervisory, and operational entities.
supervise the capital market. Thus, SAMA is no lon-
ger responsible for regulating and monitoring capital
market activities. CMA is an autonomous govern-
mental institution that regulates the stock market
and reports directly to the Saudi government. It is the
complete authoritative institute of the Saudi capital
market and the enforcement agency of the CML.35
The Saudi stock market used to be open to Saudi
nationals only. In realization of the importance of
foreign institutional capital in boosting the ability of
Saudi capital market to finance economic growth,
foreign investors were also allowed to participate
in the Saudi stock market in 1997 through a wide
range of local mutual funds operated by the com-
mercial banks. In 2007, the market was open to GCC
nationals as an initiative toward the establishment
of a GCC common market. In August 2008, the mar-
ket allowed non-resident foreign investors, whether
individuals or institutions, to participate in share
trading through swap agreements with local autho-
rized intermediaries. This agreement enables the
Market Indices
The Tadawul All Share Index (TASI) is the primary
index of the market. The TASI is a value weighted
index which weights listed companies by their mar-
ket capitalization. Another index, introduced in 2010,
is the Dow Jones Saudi Titans 30 Index, which is
calculated in US dollar and is weighted by float-ad-
justed market capitalization for the 30 largest and
most liquid equity securities trading on the Saudi
Stock Exchange.
The Dow Jones MENA Broad Stock Market Index
measures the stock performance of actively traded
large-caps and mid-caps equity securities and is cal-
culated in US dollars. The index includes the stock
markets of Saudi Arabia, Bahrain, Egypt, Jordan,
51
Chapter III: Capital Market
transfer of the economic benefits of Saudi compa-
nies listed on Tadawul while the authorized interme-
diaries retain the legal ownership of shares under
certain conditions and requirements. In July 2014,
the CMA announced that the Stock Exchange would
be opened to qualified foreign financial institutions
from the beginning of the first half of 2015.
In Saudi Arabia, the demand for Sharīʿah-compli-
ant stocks is growing vastly than non-compliant or
conventional stocks. The Sharīʿah-compliant index
tracks all the companies that are abiding by Sharīʿah
compliance principles and should pass the litmus
test to qualify themselves as a Sharīʿah-compliant
company from the relevant authorities and Sharīʿah
scholars who screen the companies’ financial ratios
and industries. Tadawul Stock Exchange is made up
of around 80% Sharīʿah-compliant stocks which can
potentially attract investors domiciling not only in
the Kingdom, but also in the GCC whose preferen-
ces are driven by Sharīʿah principles-based invest-
ment.36
Kuwait, Lebanon, Morocco, Oman, Qatar, Tunisia, and
the United Arab Emirates. Coinciding with the ope-
ning of the Saudi Arabia equity market to foreign di-
rect investment, the MSCI Saudi Arabia Indexes were
launched effective 1 June 2015. These indexes are
designed to measure the performance of the large
and mid-cap segments of the Saudi Arabia market.
Another significant achievement is that FTSE Rus-
sell will include Saudi Arabia into the FTSE Russell
Emerging Markets (EM) index. These inclusions
represent investor confidence in the Saudi capital
market and highlights reforms achieved in tandem
with Saudi Vision 2030 and Financial Sector Deve-
lopment Program.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Table 3.1: Evolution of Saudi Arabia Capital Market

Pre-1984 Saudi Capital Market were highly informal

1984 Ministerial Committee was formed to regulate and develop the market

1990 First Electronic Share Trading system eSIS was introduced

2001 Tadawul was established to provide trading, clearing and settlement platform

2003 CMA was established to regulate and supervise the Capital Market

2006 First Sukuk issuance SaBIC

Upgraded of electronic trading platform

2007 Tadawul was re-introduced as joint stock company

2008 Market opened up to foreign investors thorough swap agreement

2010 Tadawul launched exchange-traded funds (ETF’s)

2011 Tadawulaty services was introduced

2012 Tadawul provided a breakdown of negotiated deals

2013 Tadawul set the daily fluctuation limit of new market entrants on debut at 10 percent

2014 The closing price was based on ordinary transactions only

Introduced regulations applying to companies with losses of over 50 percent of capital

2015 Tadawul offered the Independent Custody Member (ICM) service

Qualified foreign investors (QFIs) were allowed to invest directly in Tadawul-listed stocks

The equity market also launched the new X-stream INET trading platform

2016 Market trading hours were changed to begin from 10:00 am to 3:00 pm local time

Real Estate Investment Traded Funds (REITs) were launched

2017 Adoption of the IFRS accounting standard for all listed companies

The market structure was applied to include 20 sectors (Industry Groups), instead of 15 sectors

Nomu Parallel Market was launched in February

Implementation of T+2 settlement and introduction of short-selling in April 2017

Trading commissions for tradable rights and ETFs were set at 0,155 percent

2018 The Independent Custody Model (ICM) was updated to enhance QFIs access to the market

Saudi Nomu parallel market was opened to foreign investors

Government debt instruments started trading on Tadawul

The auction method for determining closing prices for Tadawul and Nomu was adopted (MT30)

2019 MSCI and Tadawul announced the launch of the tradable index, MSCI Tadawul 30 Index

The First phase of Inclusion in FTSE Russel and S&P DJI indice

Source: Compiled by IRTI staff37

52
 Chapter III: Capital Market

Performance of the Stock Market

The Saudi stock market had an unprecedented The market had another significant up movement in
growth during the early 2000s and had not experien- the middle of 2015 due to allowing foreign investors
ced a major crash until 2006 (Figure 3.2). to trade in the market.

During 2004-2006, there was a bubble in the stock
market. After reaching 20,635 points on February
25, 2006, TASI started to fall dramatically, and by the
end of 2006, TASI had lost approximately 65 percent
of its peak value.38
Another serious period of turbulence in the stock
market occurred in 2008. Although not as severe
as the adjustment in 2006, TASI still shed 49% bet-
ween June and December of 2008, ending the year
at 4800. The Saudi stock market was exposed to a
downturn in the global equity market, a global cre-
dit crunch and falling oil prices with severe negative
impacts.
Tadawul’s market capitalization rocketed to SAR
9,025 billion in 2019 from SAR 1,859 billion in 2018.
The obvious reason for such a tremendous increase
is the record-breaking initial public offering (IPO) of
Saudi Arabia’s giant oil company Aramco’s shares in
Tadawul in December 2019. The Aramco IPO led the
Saudi stock market to enter the top 10 marketpla-
ces in the world, by the value of listed companies39.
The year 2019 would be reminiscent as a milestone
year for Saudi Arabia as the stock market succes-
sfully oversaw the world’s largest IPO.

Figure 3.2: Saudi Arabia’s TASI Index Performance

17500

15000

12500

10000

7500

5000

2500

2004 2008 2012 2016 2020

Source: Tadawul

53
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 3.3: Saudi Arabia’s Equity Market Capitalization (Tadawul) 2010-2019

9,025

1,929 1,753 2,147

1,813 1,682 1,859
1,325 1,271 1,400 1,370 1,579 1,661 1,690
1,099 1,157
759 836 871 880

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Market Capitalization (SAR billion) Value of Shares Traded (SAR billion)

Source: Tadawul Statistical Reports

Figure 3.4: Saudi Arabia’s Equity Market’s Number of Transaction and Traded Shares (Tadawul)
2010-2019
83

71
66 64

53
49
42 43
36 38
33 33
29 30
26 27 28
25
20 22

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Number of Shares Traded (billion) Number of transactions (million)

Source: Tadawul Statistical Reports

Figure 3.5 Top 10 Market Capitalizations by Countries for 201940 (US$ Trillion)

37.69

8.52
6.19
4.90 4.70
2.41 2.18 2.10 1.83 1.49

United China Japan Hong Belgium Saudi India Germany Switzerland Australia
States Kong Arabia
Source: https://knoema.com/atlas/topics/Economy/Financial-Sector-Capital-markets/Market-capitalization

54
 Chapter III: Capital Market

A Leader in the Region

The Saudi Arabian market is one of the most active billion (SAR 9,025 billion), with 28 million transac-
markets in the Middle East and is the largest market tions executed during 2019. The Saudi market ac-
in the Arab world in terms of market capitalization. counts for about 80% of the Gulf Cooperation Coun-
By the end of 2019, the market value was US$ 2,407 cil (GCC) market capitalization (Figures 3.6 and 3.7).

Figure 3.6: GCC Equity Market Capitalization by Country (US$ Billion)

2,407

496
231 247
161 160 118
95 22 27 47 49

Saudi Arabia Qatar UAE Kuwait Bahrain Oman

2018 2019
Source: Stock Markets’ Reports

Figure 3.7: GCC Stock Market Performance 2018-2019

24%
20.8% 20%

11.7%
8.3% 9%
7%
5.2%
3%
1% 0.4%
Oman

Saudi Arabia Qatar Abu Dhabi Kuwait Dubai Bahrain

-8%

2018 2019
-15.2%

-24.9%

Source: Stock Markets’ Reports

55
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
CMA Strategic Plan: Financial Leader-
ship Program (2019-2021)
As per the instruction of the Council of Economic and
Development Affairs of Saudi Arabia, and in line with
CMA’s strategic plan established in 2015, the CMA
prepared and built a separate program to achieve the
Vision 2030, which emphasizes the importance of
the capital market in contributing to the growth of the
national economy and becoming a major investment
power, in addition to the responsibility to all related le-
gislative and follow-up entities in the upcoming period.
This program aims to attract national and foreign in-
vestment to the Saudi Capital Market, so it would be
an integral part of developing the economy and diver-
sifying its resources.
Through the financial leadership program, the CMA
seeks to position the Saudi capital market as the main
market in the Middle East and one of the leading finan-
cial markets in the world. The program aims to achie-
ve the objectives and initiatives of the second pillar of
the Financial Sector Development Program (FSDP) by
deepening the financial market, developing the ṣukūk
and debt instruments markets, enhancing the role of
funds in financing the national economy, supporting
the growth of asset management industry and en-
hancing institutional investment, emphasizing market
attractiveness, diversifying investment products, and
encouraging investment and facilitating it to investors.
Within this program, 4 main pillars along with 13 stra-
tegic objectives are stated as follows:
Pillar One - Facilitating Funding
Objectives:
1) Deepening the capital market and promoting its
role in raising the capital.
2) Developing sukūk and debt instrument markets.
3) Enhancing the role of funds in financing the natio-
nal economy.
Pillar Two - Encouraging Investment
Objectives:
4) Supporting the growth of asset management and
promoting institutional investment.
56
5) Increasing market attractiveness to foreign inves-
tors.
6) Diversifying investment products and mecha-
nisms available in the capital market.
Pillar Three - Promoting Confidence
Objectives:
7) Reinforcing the capital market’s regulatory struc-
ture.
8) Promoting capital market stability.
9) Raising the governance level in the capital market.
10) Raising the level of transparency and disclosure in
the capital market.
Pillar Four - Building Capabilities
Objectives:
11) Supporting the development of Authorized Per-
sons.
12) Raising awareness of CMA’s role and investment
financial literacy in the capital market.
13) Building the capabilities of capital market partici-
pants.
Furthermore, the program is to enhance the role of the
Saudi financial market in mobilizing resources, deve-
loping infrastructure, enhancing market stability, rai-
sing the level of governance and transparency in the fi-
nancial market and raising awareness and investment
culture for market participants.
To ensure qualitative implementation of the strategic
plan, the Capital Market Authority developed integra-
ted governance framework which would effectively
facilitate coordination between concerned bodies.
To follow the quality standards and take corrective
actions in a timely manner, a methodology has been
adopted to follow up periodically the implementation
of strategic initiatives through the development of
detailed plans for each initiative. Moreover, the CMA
continuously reviews the strategic plan with all its
components to identify gaps and develop initiatives to
achieve the desired objectives.
 Chapter III: Capital Market

Ṣukūk: A Global Market Overview

The emergence of ṣukūk has been among the most strument, which make them an important tool for
significant developments and became one of the fixed income financing a liquidity management. The
fast-developing components of Islamic financi- global ṣukūk market has grown tremendously from
al system. Ṣukūk42 provide investors with stable US$ 50 billion in 2007 to US$ 123 billion in 2018 with
earnings by offering partial ownership in an asset, Malaysia and the GGC region as the main hubs of
project business or investment. In practice, though, ṣukūk issuance (Figure 3.9).
ṣukūk are structured mostly to become a debt in-

Figure 3.8: Global Islamic Financial Asset Distribution 2018 (US$ Billion)

1571.3
Islamic Banking
71.7%

530.4
Outstanding Sukuk
24.2%

61.5
Islamic Fund
2.8%

27.7
Takaful
1.3% Size Percentage (%)

Source: IFSB Stability Report 2019

Figure 3.9: Ṣukūk Issuance 2006-2018 (US$ Millions)

117,330

112,565

90,152
84,489

80,570

79,069
56,574
48,877

45,938

37,648
36,182

32,998
31,210
30,904

26,730
22,992
22,127

21,880
20,269
14,002

8,684
7,023

4,248
2,210

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Domestic International
Source: IIFM Ṣukūk Database

57
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Ṣukūk Issuance in Saudi Arabia
The popularity of Saudi Arabia ṣukūk is relatively
new compared to Malaysia and UAE. Ṣukūk issu-
ance in Saudi market started with infrequent issu-
ances in the middle of the 2000s. A single ṣukūk
issuance was performed in 2004 by HANCO Rent-A-
Car. The next ṣukūk issuance took place in 2006 by
Saudi Arabian Basic Industries Corporation (SABIC).
Figure 3.10: Saudi Arabia Ṣukūk Issuance 2010-2018 (US$ Billion)
11.14
2.86
1.46
2010 2011 2012
In August 2006, with the first listing of SABIC ṣukūk,
an over-the-counter market was launched. Under
this system, trades are negotiated off the exchange
and there is no system to match buy and sell orders;
most trades were done through the treasury depart-
ments of local banks. Due to the lack of depth of the
market, lack of transparency and the lack of histori-
cal trade information, the ṣukūk was, however, very
thinly traded.
The ṣukūk market in KSA saw some turmoil in 2008
following the global financial crisis. Consequently,
ṣukūk issuance in KSA declined 67.2% YoY to US$
1.9 billion in 2008 before again increasing to US$
3.1 billion in 2009.
It was worth noticing that the majority of the ṣukūk
issuances in Saudi Arabia are denominated in Riyal.
In contrast, less than half of the ṣukūk were deno-
minated in local currency in other GCC countries
The issuance of SABIC ṣukūk generated tremen-
dous attention as it received SAR 4.3 billion in order,
overshooting the SAR 3 billion (US$ 800m) cap set
by the CMA. The second in the same year was by
Saudi Electricity Company which made headlines by
issuing ṣukūk worth SAR 5 billion (US$ 1.33 billion)
in July 2006, the largest ever by a Saudi corporation.
28.51
25.47
15.21
12.09
6.99
4.74
2013 2014 2015 2016 2017 2018
Source: Bloomberg
during the same period. UAE, leading both ṣukūk
and conventional bond issuance within GCC, repre-
sented about half of the total debt issuance in both
2007 and 2008. Saudi Arabia accounts for about
23% and 12% of the total GCC debt issuance in 2007
and 2008, respectively.
The First Sovereign
Ṣukūk of Saudi Arabia
The General Authority for Civil Aviation (GCA) in Ja-
nuary 2012 issued ṣukūk worth SAR 15 billion (US
$4 billion), which was Saudi Arabia’s first and largest
government-backed ṣukūk at that time. In the year
of 2012 alone, total ṣukūk worth US$ 11.14 billion
was issued in Saudi Arabia. Such a huge amount
of ṣukūk issuance was not intended to merely raise
money; rather it was meant to stimulate the market
58
 Chapter III: Capital Market

The year 2017 marks a significant milestone

for Saudi Arabia. It embarked on issuing
international ṣukūk worth US $9 billion
on 12 April 2017, pushing the market to a new level.

that would hopefully benefit banks endowed with a
massive amount of unused liquidity. Indeed, it was
also beneficial in restoring the market confidence
among the market players. In tandem with ṣukūk
market expansion globally, 2013 marks another
flourishing year for ṣukūk issuance in Saudi Arabia
with the total issuances of US$ 15.21 billion.
ṣukūk worth US $9 billion on 12 April 2017, pushing
the market to a new level. This issuance was not
only the first dollar-denominated ṣukūk among the
GCC member countries, but it was also the largest
debt instrument issuance in emerging markets to
date, surpassing Kuwait’s US $8 billion conventional
bond issuance in March 2017.

Ṣukūk Structure in KSA

In 2014, Saudi Arabia became the second largest
issuer of ṣukūk by issuing a total of 15 issuances
with a total value of US$ 12.1 billion. In addition, the
Saudi Capital Market Authority simplified regulatory
approvals for ṣukūk products, which also garnered
the ṣukūk market in Saudi Arabia.
Pushing the Market
Different structures have been used over the years,
with istithmār and murābaḥah being the most pro-
minent, accounting for slightly over 30% of ṣukūk
issued so far (Figure 3.12). Prior to 2011, istithmār
ṣukūk was the most popular structure among the
issuers. Although the number of corporate ṣukūk

to A New Level issued has exceeded that of sovereign ṣukūk in the

recent years, the cumulative issuance amount of
sovereign ṣukūk is greater than that of corporate
The year 2017 marks a significant milestone for ṣukūk.
Saudi Arabia. It embarked on issuing international

Figure 3.11: Saudi Arabia Ṣukūk Structure by Islamic Financial Modes in 2018

Others: 36% Istithmār: 29%

Ijarah: 1%

Wakala Al-Istithmār: 1%
Mudarabah: 3%

Musharakah: 4%

Hybird: 12% Murabaha: 14%

Source: Bloomberg

59
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 3.12: Saudi Arabia Ṣukūk Structure by Sector in 2018

Banking: 12.5% Financial Others: 10.2%

Aerospace: 9.4%

Other: 17.3% Utilities: 4.3%

Other: 5.6%

Chemicals: 7.4%

Govermental: 50.7%

Source: Bloomberg

Saudi Arabia is the Second Largest Ṣukūk Issuer

Globally
According to IFSB (2019), while Malaysia retained
its position as the overall largest issuer of ṣukūk in
terms of volume, Saudi Arabia is the second-largest
overall issuer. UAE is the third-largest issuer due to
its increase in corporate issuances, while Indonesia
is on the fourth rank. Turkey is the fifth-largest issu-
er due to the increased activity in 2018. In terms of
the type of ṣukūk, the sovereign issuances prevailed
in Saudi Arabia in 2018 as it was in previous years.

Figure 3.13: Sovereign Ṣukūk Issuance by Jurisdiction in 2018

Others: 1.36%
Malaysia: 32.82%
Bahrain: 3.36%

Oman: 4.38%

UAE: 5.31%

Turkey: 7.45%

Saudi Arabia: 31.94%

Indonesia: 13.38%

Source: IFSB Stability Report 2019

60
 Chapter III: Capital Market

Figure 3.14: Corporate Ṣukūk Issuance by Jurisdiction in 2018

Malaysia: 40.4%
Netherlands: 0.3%
Oman: 0.5%
Ireland: 1.2%
UK: 1.3%
Indonesia: 1.8%
Qatar: 3.1%

Saudi Arabia: 6.4%

UAE: 36.5%

Turkey: 8.5%

Source: IFSB Stability Report 2019

Capital Market Authority’s Initiatives to

Develop Ṣukūk Market
Recognizing the need to enhance the debt capital
market, in June 2009, CMA and Tadawul launched
a platform for ṣukūk trading to provide greater mar-
ket breadth and depth. The development of an ac-
tive ṣukūk market would be of great value to Saudi
investors. Given the typically lower risk associated
with ṣukūk, a vibrant ṣukūk market will help to im-
prove asset allocation and portfolio diversification.
The Primary Dealer Programme, established in June
2018 by appointing five financial institutions as pri-
mary dealers, was designed to increase the demand
for the debt and widen the range of investors hol-
ding it. Under this program, the appointed primary
dealers purchase ṣukūk sold at auction directly from
the government, and later place these securities in
the secondary market for final investors, acting as
market makers for government securities. The pro-
gram is expected to contribute to the expansion of
the investor base and support the liquidity of gover-
nment securities.
The potential of ṣukūk issuance out of Saudi Ara-
bia is enormous given the size of the economy, the
infrastructure projects underway and the positive
consumer appetite for Islamic finance in general,
as well as the increasing government enthusiasm
in issuing sovereign ṣukūk over the past few years.
In the concluding chapter, we offer some suggesti-
ons on how to use ṣukūk and other Islamic capital
markets to enhance the leadership of the Kingdom
in Islamic finance worldwide.

61
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Among GCC countries, Saudi Arabia was the first

to invest in the mutual fund industry,
with National Commercial Bank establishing
and managing the first fund in 1979.

Islamic Funds
A mutual fund is an investment vehicle that offers
investors the opportunity to pool their funds for in-
vesting in publicly traded instruments like stocks,
bonds, money market instruments and other traded
securities. A mutual fund is managed by a professi-
onal manager and provides a high level of diversifi-
cation across many securities, which an individual
investor finds costly by direct purchase. Moreover,
the minimum initial investment requirement for
most mutual funds is very affordable. Mutual funds
are an ideal choice for small investors seeking li-
quidity, portfolio diversification, and investment ex-
pertise. However, investors’ preference may vary in
terms of return requirements, risk tolerance, liquidity
needs, as well as religious and cultural concerns.
Among GCC countries, Saudi Arabia was the first
to invest in the mutual fund industry, with Natio-
nal Commercial Bank establishing and managing
the first fund in 1979. The success of this experi-
ment drew more Saudi banks to develop a variety of
mutual funds. The first regulations for investment
funds in Saudi Arabia were established in 1993 due
to the high demand for local and global mutual and
investment funds from investors. The regulations
empowered the Saudi banks to offer open and clo-
se-ended funds and set rules to protect all investors
through monitoring the operation and establish-
ment of mutual funds.
Although relatively new, the Saudi mutual fund mar-
ket has grown significantly over the years. By the
end of 2018, there were 248 public funds managed
in Saudi Arabia.43 The total asset value increased
from SAR 105 billion in 2007 to approximately SAR
112 billion in 2018. The number of subscribers in
the mutual fund market reached more than 332,567
by the end of 2018.
Funds are categorized based on the region that as-
sets belong to and the type of investment such as
stocks, money markets, REITs, Fund of Funds or

Figure 3.15: Open-ended Mutual Funds by Investment Type44

Others: 0.9% (14)

Money Markets: 55.8% (43)

REITs: 14.7% (16)

Fund of Funds: 2.6% (25)

Real Estate: 7.5% (10)

Equity: 18.5% (141)

Source: Capital Market Annual Report 2018

62
 Chapter III: Capital Market

bonds. Table 3.2 presents the number of public in-
vestment funds by type of investment 2007-2018,
indicating that the largest number of funds are equi-
ty funds.
Figure 3.14 summarizes the open-ended mutual
funds by the investment type which indicates that
the money markets funds sector is the largest over
the past years. For instance, in 2018, about 56% of
funds managed in Saudi Arabia is invested in the
money markets. The second-largest portion (about
19%) of funds is invested in the equity market. The
lion’s share of these funds is invested in the Saudi
equity market: Of the total equity funds of SAR 20.6
billion, SAR 15.6 billion (75%) is invested in domestic
equities.45

Table 3.2: Investment Funds by Type of Investment 2007 -2018

Equity Fund of Funds Money Markets Others Total

2007 122 33 49 29 233
2008 135 34 57 36 262
2009 151 30 61 24 266
2010 154 27 56 33 270
2011 150 43 50 33 276
2012 138 43 47 31 259
2013 141 41 46 30 258
2014 150 41 46 29 266
2015 169 30 44 27 270
2016 168 32 44 31 275
2017 161 32 44 36 273
2018 141 25 43 40 249
Source: Capital Market Annual Report 2018

Of the 249 funds, 199 funds are Shari’ah compliant
while 50 funds are conventional. Around SAR 89 bil-
lion assets under management (AuM) are Sharīʿah
compliant, which equates 76% of the total value of
the asset under management, while SAR 28.8 billion
of assets under management are conventional.
Out of these 199 Sharīʿah-based funds managed by
37 fund managers, 97 funds are globally focused
and the remaining 102 funds are locally focused.
SAR 74 billion assets under management are in lo-
cal market while SAR 15 billion assets are deployed
internationally.
Segregating further, 148 funds are invested in
stocks, representing an amount of SAR 20.6 billi-
on (18.5% of the total assets under management),
where 89 funds are invested in local stock while
80 are invested in international stocks. Twenty-one
equity funds are categorized as conventional while
108 funds are Sharīʿah compliant.
According to Zawya, assets under management in
the Arabian fund markets are highly concentrated.
Saudi Arabia is the largest market, accounting for
$26.9 billion, or 82.85%, of the overall assets under
management in the GCC region. Meanwhile, Kuwait
accounts for $3.2 billion, or 9.82%, of the overall as-
sets under management, and the UAE accounts for
US$ 1.7 billion, or 5.09 %, of the overall assets un-
der management. The other three countries—Qatar
($0.4 billion), Oman (US$ 0.3 billion), and Bahrain
(US$ 0.1 billion)— together account for 2.23 per
cent of the overall assets under management in the
Arabian fund markets46.

63
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
The Islamic funds industry represents an essential
sector of the overall Islamic finance industry. The
industry has grown significantly since its emergen-
ce in the late 1980s, both in number of funds and
assets under management. A notable increase is
recorded in the number of Islamic funds in 2018 to
1,292 funds, of which 860 are active, compared to
the 1,161 Islamic funds, of which 821 were active in
2017. The value of US$ 67.4 billion of AuM in 2018
Figure 3.16: Islamic Fund Asset by Jurisdiction
Others: 2.83%
Pakistan: 2.22%
South Africa: 2.29%
Kuwait: 2.95%
Indonesia: 4.40%
Luxembourg: 5.13%
United States: 5.01%
Ireland: 8.80%
Exchange-Traded Funds (ETFs)
Another component of Saudi capital market is Ex-
change-Traded Funds (ETFs). An ETF refers to an
investment fund that holds assets such as stocks,
bonds, commodities and funds and whose shares/
units are listed and traded on the stock exchange si-
milar to the trading of company shares. Its trading
on the stock exchange implies that its shares can be
bought and sold at any time. An Islamic ETF operates
similar to its conventional counterpart, except that it
operates in accordance with Sharīʿah. Most Islamic
ETFs are Islamic Index ETFs which track Islamic in-
dices such as the Islamic Dow Jones, Islamic MSCI
64
compares favorably to the AuM of US$ 66.7 billion
recorded in 2017. Of the 34 jurisdictions where Isla-
mic funds are domiciled, Malaysia and Saudi Arabia
remain the most prominent, collectively accounting
for about 66% of total AuM. The two key domiciles
for Islamic funds are Malaysia and Saudi Arabia,
which collectively account for about 66% of total
AuM. Saudi Arabia still remains the largest domicile,
holding 34% of the total Islamic funds AuM.
Saudi Arabia: 34.00%
Malaysia: 33.88%
Source: Bloomberg and IFSB 2019
and Islamic FTSE. As such, investors in an ETF be-
nefit from the holistic performance of the Shari ‘ah-
screened companies constituting the Islamic index
without the need to trade in their underlying stocks,
making ETFs a highly efficient and cost-effective in-
vestment tool. However, Islamic ETFs still represent
a nascent market. The first Islamic ETF was laun-
ched in February 2006, called the Dow Jones Islamic
Market Turkey ETF, that was listed and traded on the
Istanbul Stock Exchange. In January 2008, Malaysia
followed suit by launching the first Sharīʿah-compli-
ant ETF of Asia called MyETF.

Saudi Arabia’s first ETF was launched on 28 March
2010 by FALCOM Financial Services as “FALCOM
30 Fund” and listed on Tadawul. The Falcom Saudi
Equity ETF (Falcom 30) comprises the highest-ca-
pitalization Sharīʿah-compliant stocks traded on the
exchange.
At the end of 2019, there were three ETFs in Saudi
Arabia. In addition to FALCOM 30 Fund, FALCOM Fi-
nancial Services launched the “FALCOM Petroche-
micals Fund” as an effort to diversify investment op-
tions for investors. Both ETFs are Sharīʿah compliant
according to the issuer. FALCOM 30 Fund invests in
the investment universe of the Benchmark Index,
F30 Falxcom Saudi Equity Index, which consists
of 30 Sharīʿah complaint shares of big companies
in the Saudi market. The FALCOM Petrochemicals
fund invests at least 95% of its assets in equities of
Table 3.3: ETFs Statistics 2019
ETFs Volume Traded
FALCOM 30 47,516,946
FALCOM PETROCHEMICAL 240,076
HSBC MT30 179,854
Real Estate Investment Traded Funds
(REITs)
REITs are real estate funds that are traded as units
in the capital market. REITs enable all types of in-
vestors to invest in income generating real estate
assets which are developed and ready for use. Mo-
reover, REITs are required to distribute a portion of
their net income to unitholders in cash at least once
a year. REITs were introduced in the Saudi Market in
2016 and listed in the Tadawul main market. Since
then the number of listed REITs has grown to 17. As
of June 2019, the REIT market surpasses US$ 3.5
65
Chapter III: Capital Market
the petrochemical sector that are Sharīʿah compli-
ant, listed and traded on Tadawul.
The HSBC MT30 ETF is based on the MT30 index,
which is jointly operated by MSCI and Tadawul, but
the status of Sharīʿah compliance is not clearly men-
tioned.
The decision of major index providers, S&P, Dow
Jones, FTSE, Russell and MSCI, to include Saudi
stocks from the main Tadawul index across their
major emerging market indices attracted great in-
terest from international investors. It has also led to
a greater interest in launching ETFs based on the
same Saudi stocks. On 1 January 2020, the Capital
Market Authority approved the launch of the Alinma
Investment Company’s Alinma Saudi Government
Ṣukūk ETF fund on the Tadawul.
Value Trade (SAR Million) Transactions
1,593 3,405
7.19 628
6.36 603
Source: Saudi Capital Market Authority Report 2018
billion in terms of market capitalization, compared
to just over US$ 2.3 billion in Q1 2018, representing
a growth of 52%.
From a regulatory perspective, the Saudi Arabian
Capital Market Authority (CMA) has recently ap-
proved several amendments to initial regulations
governing REITs, including the increase in the mini-
mum capital requirement for new funds from SAR
100 million to SAR 500 million. A strong and evol-
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
ving regulatory framework, which has proven to be
favorable in more mature jurisdictions, will remain a
key objective in the development of the REIT market
in Saudi Arabia.
In June 2019, the inclusion of selected Saudi-based
REITs in the FTSE EPRA Nareit Emerging Market
Index was announced after all required criteria for
the inclusion were met. The reclassification of Sau-
di Arabia as an eligible market for the FTSE EPRA
Nareit series represents an important step in the de-
velopment of the REIT market in the Kingdom and
in the government’s drive to increase transparency
and visibility around real estate markets.
Conclusion
In a nutshell, the Kingdom has undergone a major
economic overhaul, with capital markets being one
of the core pillars. The objective is to diversify the
economy away from oil, bolster the private sector
and improve employment opportunities for young
people. This chapter demonstrates that despite the
promising progress of the capital market, further de-
velopment of this sector is very timely and requires
further support from the government.
66
This inclusion will raise the level of Saudi REITs and
align them with the international best practices, in-
crease the level of disclosure and accessibility to
the capital market by foreign investors, and broaden
the investors base in the Saudi capital market. This
inclusion is happening in conjunction with the re-
cent inclusion of the Saudi Stock Exchange in global
emerging market indices that will further support
the enhancements in the Saudi capital market, align
its regulatory framework with the international best
practices, a key goal of the Financial Sector Deve-
lopment Program (FSDP) Kingdom’s Vision 2030.
The upgrading of the Saudi stock market as a major
emerging market status has undoubtedly paved the
way for further development of the capital market.
Given the unwavering support by the government
over the past few years, it is perhaps worthy to con-
sider building up a full-fledged Sharīʿah ecosystem
as a benchmark for ethical investment targeting
sustainable development and inclusive prosperity.

An Interview with
Mr. Ammar A. Shata
Founder and Executive Director,
Al-Khabeer Capital
1. In your opinion, what are the prospects of the
KSA becoming the leader in Islamic finance? What
are the Kingdom’s strengths and challenges in this
regard?
Saudi Arabia is one of the most influential Islamic
finance markets globally and boasts of the world’s
largest Islamic finance market, with about $299 bil-
lion in Islamic finance assets, as of March 2019, as
per Moody’s analysis. The Kingdom is home to the
largest number of Islamic banks which operate al-
ongside conventional banks and are regulated by the
same governing body - the Saudi Arabian Monetary
Authority (SAMA). The nation’s banking industry is
currently undergoing consolidation, which is antici-
pated to further aid the Islamic finance industry by
creating larger, stronger and more efficient Islamic
banks. Moody’s anticipates the penetration of Isla-
mic finance in Saudi Arabia to increase to 80% of sys-
tem-wide loans over the next 12-18 months, up from
about 77% in 2018.
One of the major comparative strengths that Saudi
Arabia possesses over other countries is that the
Kingdom offers a conducive environment for the
development of Islamic finance. Regulatory and
government bodies such as the SAMA, the Capital
Market Authority (CMA) and the Ministry of Finan-
ce work in tandem to provide a supportive regula-
tory framework, a factor which provides significant
comfort to investors. SAMA’s move to join the Bah-
rain-based Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI) as an institu-
tional member is one of the milestones that will go
a long way in standardizing industry practices and
easing cross-border transactions. Moreover, gover-
nment-led economic transformation reforms such
as the opening up of Tadawul to foreign investors,
ṣukūk issuances denominated in both the Riyal and
the US Dollar are expected to shore up investments
into the Islamic finance market, with global investors
67
Chapter III: Capital Market
now getting easy access to the sector. Furthermore,
the government’s resolve to build a fintech ecosys-
tem will drive financial inclusion, benefitting Saudi
Arabia’s Islamic finance market.
Meanwhile, the lack of liquidity and limited range of
Sharīʿah-compliant products and services remain
key challenges for the sector on the whole, although
recent initiatives by the Kingdom to attract interna-
tional investors, along with the adoption of fintech
services may have the potential to overcome these
obstacles going forward.
2. To what extent can Asset Management compa-
nies contribute to sustainable development in KSA?
Do they offer their share in social responsibility?
The Kingdom’s capital market has witnessed unpre-
cedented reforms over the last few years, resulting in
the opening-up of the Saudi financial markets to the
world and making them more accessible to the glo-
bal investment community. Similarly, several reforms
targeting the real estate sector have been initiated
and are expected to lead to a revival of the industry,
while privatization initiatives are likely to boost invest-
ment opportunities for private equity. Currently, Saudi
Arabia has the largest number of investment funds
domiciled in the GCC region. The country’s asset ma-
nagement industry, which according to Moody’s esti-
mates accounted for almost half of the total regional
assets under management (AUM) as of December
2018, is set to play a major role in attracting more
foreign investments to the Kingdom’s shores, en-
courage private investment and expand the investor
base, as part of the government’s long-term plan to
boost the non-oil sector and increase its contribution
to economic growth.
The Kingdom remains the largest investment funds
market in the GCC, as it holds more than 80% of the
total regional AUMs according to a report by Refinitiv.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Furthermore, the improved regulatory environment
has encouraged Saudi Asset Management compa-
nies to expand their range of products from traditi-
onal asset classes to new and innovative products
in the alternative investment space, including private
equity, venture capital, real estate investment funds
and other multi-asset products. There has been a
gradual diversification of the products being offered
by Saudi Asset Managers, especially in the venture
capital sectors, buoyed by support from the CMA, the
Public Investment Fund (PIF), the Ministry of Labor &
Social Development, the Small & Medium Enterprises
General Authority of Saudi Arabia (Monshaat) and
other government-related entities. These products
and investment funds are expected to boost invest-
ment in various sectors such as healthcare, educa-
tion, real estate, among others, thereby supporting
the government’s economic transformation plan and
contributing to the Kingdom’s long-term sustainable
growth.
Saudi Asset Managers have become more aware of
the business sustainability and are gradually adop-
ting corporate social responsibility (CSR) practices
and integrating environmental concerns in their busi-
ness conduct. Endowment and charity-focused in-
vestment funds to support social welfare initiatives,
philanthropic works, charity programs and commu-
nity services have been introduced over the last few
years. The Kingdom also witnessed the launch of the
first public waqf fund in 2018 which is expected to
help in the management and distribution of endow-
ments in a more efficient manner. In fact, Al-Khabeer
Capital has recently launched an open-ended public
waqf fund to extend its support to the Kingdom’s
community development programs, in addition to the
launch of two new private equity funds in Q4 2018
focused on the education sector and which will ena-
ble us to contribute to the development of this sec-
tor in the Kingdom. It is worth mentioning that we,
at Al-Khabeer Capital, have embraced global best
practices in all its ventures and partnerships by fo-
cusing on corporate governance, proper disclosures,
fair treatment in dealing with all related parties, and
enhancing the working environment, besides our role
as experts in the financial industry.
3. Can Islamic financial industry compete in open
or global markets?
Islamic finance has some key characteristics that
make it less risky as compared to the traditional fi-
68
nance industry, including its asset-backed model and
the risk-sharing agreement between the lender and
the borrower. Moreover, regulations related to riba,
gharar and the prohibition of the sale of un-acquired
and unproduced goods, reduce the risk even further.
These factors have the potential to make this mode
of financing more appealing to investors. The resili-
ence of the Islamic financing industry can be gauged
from the limited impact on Islamic banks during the
2008 global financial meltdown as compared to the
adverse impact of the crisis on conventional banking
institutions around the globe.
Islamic finance has penetrated in various regions of
the world, from East Africa to Central Asia. Although
the market is in the nascent stage of development,
it has now become one of the fastest growing seg-
ments of the global financial industry. According to
S&P Global Ratings, the global market for Islamic
finance stood at $2.1 trillion in 2018, expanding by
about 2% versus the pace of growth of 10% that was
witnessed in 2017. Opportunities for further growth
of this market are tremendous given the demography
of the world population, which shows that 1 in 4 peo-
ple in the world are followers of Islam. The prospects
of growth have become even brighter with players in
the sector taking initiatives to broaden their horizons
to lure environmentally conscious investors by intro-
ducing new and innovative products such as green
ṣukūk. Moreover, fintech is being steadily adopted
in Islamic finance and prominent examples include
the establishment of a Sharīʿah-compliant Robo-ad-
visory firm and a Sharīʿah-compliant gold platform.
The adoption of fintech is expected to further aid the
growth of the Islamic finance sector in the future.
An area where the Islamic finance industry needs to
put in further effort is ensuring high levels of corpo-
rate governance and transparency. Products need to
be tailored such that there is full confidence about
their Sharīʿah compliance. These issues, if left un-
checked, could continue to damage investor trust
in the industry and thus hinder its growth prospects
going forward. In order to enhance governance and
transparency, the industry needs more independent
companies (unrelated/not employed by the product
issuer) that provide Sharīʿah advisory in relation to
product approval and/or Sharīʿah audit services post
development of the product. Accordingly, this will
bring more Sharīʿah scholars into the industry and
help ensure that only real Islamic products adhering
to the Sharīʿah principles and guidelines are intro-

duced in the market. A good example of such inde-
pendent companies is the Shariyah Review Bureau,
which provides Sharīʿah advisory and audit services
to clients seeking assistance on Sharīʿah-related mat-
ters.
4. How do you assess the awareness/education le-
vel of small and medium size businesses in Islamic
finance? What measures would you recommend to
develop the level of awareness?
Taking Saudi Arabia as an example, the Kingdom’s
government recognizes the importance of the Small
and Medium Enterprises (SMEs) in the transforma-
tion of the Saudi economy and aims to boost its
contribution to the GDP from 20% to 35% by 2030.
However, SMEs continue to have limited access to
Islamic financing to meet their capital needs, mostly
due to the limited number of licensed banks and high
demand for liquidity. In spite of SMEs representing
more than 90% of the total registered firms in Saudi
Arabia and comprising about 99% of the Kingdom’s
private sector as per the Saudi National Entrepre-
neurship Initiative, these businesses continue to face
serious challenges while seeking funding. One of the
major obstacles for these SMEs is the limited liquidity
in the market as both the government and the private
sector are vying for the same funding from financing
institutions. Another critical challenge facing SMEs
that seek funding from Islamic institutions is the high
cost of financing. Despite these factors, there is a
large opportunity to promote Islamic finance among
SMEs as it is more widely accepted when compared
to conventional finance, due to its Islamic principles
and unique products such as mushārakah (partner-
ships), muḍārabah (profit sharing), among others.
The government and the Small & Medium Enterpri-
ses General Authority of Saudi Arabia (Monshaat)
need to take concrete measures to increase the level
of awareness about Islamic financing among SMEs
to help promote their growth.
Monshaat has introduced a support center model for
SMEs, which is a positive step in increasing aware-
ness and is expected to provide training and advisory
services to these SMEs. Further, research and educa-
tion institutes will need to develop and offer programs
providing insights into the Islamic finance sector to
increase awareness. Technology is expected to cre-
ate a disruption in the market and provide much-nee-
69
Chapter III: Capital Market
ded impetus for the growth of Islamic financing in
the SME sector in the coming years by speeding up
processes and in turn reducing operational costs.
Platforms such as Big Data, Artificial Intelligence (AI),
Machine Learning, and Blockchain technology are all
expected to bring a major revolution in SME finan-
cing. Additionally, the creation of a common platform
for exchanging views between different stakeholders
will help in raising awareness among SMEs regarding
Islamic finance.
The adoption of fintech will help stimulate the Isla-
mic finance industry and expand its reach to tap
customers that are currently not under the ambit of
the traditional banking system. Fintech will also help
in increasing the efficiency of the Islamic finance in-
dustry and enable it to serve larger number of clients,
provide better service, increase the number of Isla-
mic products offered in the market, and also help re-
duce operational costs.
Biography of Mr. Ammar A. Shata
Mr. Ammar A. Shata is the Founder and the
Executive Director of Al-Khabeer Capital, a
company that has evolved since 2004 to a ful-
ly licensed investment company in 2008 under
the aegis of the Capital Markets Authority with
a paid-up capital of SAR 894 million and As-
sets Under Management of SAR 5.6 billion (as
end of 2018).
Ammar has been a pioneer in developing Isla-
mic strategic securities and financial products
in the region such as the first asset-backed se-
curities investment fund in Saudi Arabia, the
first multi-million real-estate development, the
first income investment funds; and the first Is-
lamic credit card. Ammar’s leading and unique
efforts have earned him several prestigious
awards, including “Man of the Year” from Wor-
ld Finance in 2012. He also appears in the
Global Finance’s list of Who’s Who in Middle
Eastern Finance 2016.
Ammar earned a bachelor’s degree of Science
in Electrical Engineering and a Master’s De-
gree in Economic Planning from the University
of Southern California, USA. He is a CFA® char-
ter holder, and an approved Arbitrator by the
Saudi Ministry of Justice.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER IV:
TAKĀFUL
(INSURANCE)
MARKET
70

Overview
Saudi Arabia is the second-largest insurance market
in the GCC region and has expanded at a faster rate
than other GCC markets.47 Following the enactment
of the Law on Supervision of Cooperative Insurance
Companies in 2003, all insurance companies have
to be based on the principles of cooperative, and
thus Sharīʿah compliant business model.
This chapter examines the standing of the Saudi in-
surance market in comparison to its GCC neighbors,
Outlook of Global Insurance Market
Insurance has inevitably become an integral part
of modern life. American, European and Asian mar-
kets are leading the insurance markets by having a
share of 28.3%, 30% and 32%, respectively, of the
total global insurance market in 2018. China’s sha-
re of the global insurance market is 11% in 2018
up from 0% in 1980. Swiss Re (2019) shows that,
globally, the growth in premiums for life insurance
was weak, but there was a solid performance in
non-life insurance premiums. In advanced markets,
non-life premium growth continues to closely track
the macroeconomic growth trajectory, while in the
emerging markets, insurance premiums continue to
outperform economic growth overall. For instance,
life and non-life insurance penetration in Malaysia
is still below two percent, even though the insuran-
ce premiums posted a solid growth of 4.6 percent
in 2018. The Turkish market is dominated by the
non-life sector which accounts for more than 87
percent of premiums. The takāful premiums grew
by 54% in 2019 compared to 2018 after the Partici-
pation Insurance Regulation entered into effect on
20 December 2017 in Turkey.
71
Chapter IV: Takāful (Insurance) Market
MENA, and G20 Peers (Turkey and Indonesia). The
insurance industry in Saudi Arabia has seen a signi-
ficant growth in the last few years owing to strong
economic growth, favorable demographics, and an
encouraging regulatory environment. While the in-
surance market is well-regulated, insurance pene-
tration and density in the country are still relatively
low. This means that the insurance industry is yet to
realize its potential.
The insurance industry in the Middle East and North
Africa (MENA) countries is still in its infancy, compa-
red to other developed economies as characterized
by low penetration,48 and density,49 and relatively
weak legal regulations. The growth in the Middle
East and Africa (MENA) premiums remained weak
in 2018, amidst challenging economic conditions
and a competitive environment. In the Middle East,
weak economic growth and declining expatriate po-
pulations led to slower premium growth. Non-life
premiums contracted by 1.3% in 2018, reflecting the
weak economic environment in many markets. The
two largest markets in the Middle East (Saudi Arabia
and the UAE) contracted in 2018. Health insurance
still contributes positively, but increased competi-
tion and liberalization of motor rates have led to a
decrease in overall premiums.50
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Saudi Arabia is the second-largest

insurance market after UAE in MENA.
In 2018, it accounted for 20.3% of the region’s GWPs,
while UAE accounts for 26.8%.

Table 4.1: Insurance Market– Gross Written Premiums (GWP) (US$ Billion)

2014 2015 2016 2017 2018 CAGR % (2014-2018)

United Arab Emirates 9.106 10.093 10.237 13.521 12.461 8.2%

Saudi Arabia 8.128 9.732 9.828 9.734 9.337 3.5%

Qatar 2.183 2.833 2.935 0.000 3.038 8.6%

Kuwait 1.007 1.048 1.115 0.821 1.307 6.7%

Oman 1.035 1.124 1.196 1.214 1.116 1.9%

Bahrain na 0.746 na 0.762 0.724 na

MENA 39.019 43.226 43.816 45.023 46.513 4.5%

Turkey 11.595 11.140 13.085 12.054 10.452 -2.6%

Malaysia 15.864 14.351 13.930 15.405 16.634 1.2%

Indonesia 15.307 14.930 20.038 23.960 20.383 7.4%

Source: Swiss Re 2019 and The Saudi Insurance Market Report 2018, SAMA.

Table 4.2: Insurance Market - Insurance Penetration (% of GDP)

2014 2015 2016 2017 2018

United Arab Emirates 2.2 2.35 2.87 3.65 2.92

Saud Arabia 1.08 1.49 1.54 1.42 1.19

Qatar 1 1.54 2 1.6

Kuwait 0.6 0.9 0.89 0.71 1

Oman 1.3 1.57 1.83 1.74 1.47

Bahrain 2.45 2.22 1.83

Turkey 1.4 1.55 1.55 1.42 1.33

Malaysia 4.8 5.05 4.77 4.77 4.77

Indonesia 1.7 1.73 2.15 2.36 2.77

Source: Swiss Re 2019 and The Saudi Insurance Market Report 2018, SAMA.

72

Takāful is an Essential Element
of Islamic Financial Ecosystem
Islamic insurance or takāful has been established
and considered a legitimate alternative to con-
ventional insurance. Takāful refers to a system of
Sharīʿah-compliant cooperative insurance where
members contribute a sum of money to support
each other in the case of loss, damage or theft. The
objective of takāful is to cooperate, live in harmony
with the community and protect one another from
unforeseen accidents. Takāful policyholders contri-
bute regularly on monetary basis overseen and ma-
naged by the takāful management company.
Takāful forms an essential element of the Islamic
financial ecosystem, although takāful markets have
not grown in tandem with the ṣukūk and Islamic
banking markets. According to the Islamic Finan-
ce Stability Report 2019 (IFSB), there are approxi-
mately 306 takāful institutions, including retakāful
and takāful windows, offering takāful products in at
least 45 countries globally, mostly in the GCC, Mid-
dle East and North Africa (MENA) and South-East
Asia. The majority of the jurisdictions have deve-
loped specific takāful sector regulations. The total
contributions of takāful markets grew on average
by 4.3% and the global takāful industry reached $26
billion in 2017. Similar to 2016, GCC remains the lar-
gest global takāful market with a contribution worth
Overview and Structure
of Saudi Arabia Market
Saudi Arabia is the second-largest insurance mar-
ket after UAE in MENA. In 2018, it accounted for
20.3% of the region’s GWPs, while UAE accounts for
26.8%.51The Saudi Arabia insurance industry inclu-
des 33 licensed insurance and reinsurance compa-
nies operating at the end of 2018. There are also 88
licensed insurance brokers and 70 insurance agents
as well as 33 independent contractors.52
73
Chapter IV: Takāful (Insurance) Market
about $ 11.71 billion, equivalent to 45% of the total
global takāful contributions. At just 1.3% at the end
of 2017, it remains the smallest contributor to the
Islamic finance services industry (IFSI) in terms of
assets, which indicates tremendous potential for
the sector to grow. Malaysia, Saudi Arabia and the
UAE are the major Islamic insurance markets, ac-
counting in total for more than 87% of total contri-
butions in 2017 (IFSB, 2019).
Muslims now make up one-fifth of the global popu-
lation and this proportion is expected to continue to
grow in the future. Another key driver of the market
is that, compared to Western countries, the majori-
ty of the world’s Muslim population, about 60%, is
under the age of 25. Recognized by rising levels of
prosperity, this large young Muslim population has
the potential to represent a long-term customer
base of the insurance market if attracted them early.
The penetration of conventional insurance is rela-
tively low in affluent Muslim regions like the GCC
(world penetration ratio is 6% vs around 2% in GCC
countries). Hence, there are huge opportunities for
increasing awareness of the need for cooperative
risk-sharing on one hand, and for innovative pro-
ducts and services on the other.
The insurance services are classified into three
branches: (1) general insurance, (2) preventive and
savings insurance and (3) health insurance. The
general insurance sector includes vehicles, marine,
aviation, energy, engineering, general accidents and
premises insurance. In 2018, the three largest insu-
rance companies acquired 55.3% of GWPs in the
Kingdom, and the largest 8 insurance companies
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
acquired 74% of GWPs. Motor and health business
lines contribute to more than 85% of the total non-li-
fe insurance GWP and more than 80% to the overall
sector GWP. The insurance sector grew tremen-
dously as measured by GWPs, from SAR 5.15 billi-
on in 2005 to SAR 37.17 billion in 2016, at a CAGR
of 19.7% from 2005-2016, driven mainly by growth
in compulsory insurance lines, especially medical
and motors. Saudi Arabia is one of the fast-growing
countries in terms of GWPs compared to its G20
peers such as Turkey over the period of 2014 to
2018 but lower than Indonesia (Table 4.2).
According to Article 2 of the Law on Supervision
of Cooperative Insurance Companies, SAMA was
assigned all powers necessary to ensure the imple-
mentation of the Regulations. The law was designed
to provide clarity on Sharīʿah issues and increase
Figure 4.1: Insurance Gross Premiums in KSA, 2005-2018 (SAR Billion)
21.27
18.50
16.39
14.61
10.92
8.58
6.94
5.15
2005 2006 2007 2008 2009 2010 2011 2012
74
market regulation where the legislative framework
provided SAMA the responsibility for regulating the
insurance sector.
Under the law, insurance contracts must adhere to a
cooperative model that provides a Sharīʿah-compli-
ant structure in which up to 10% of the insurer’s net
surplus is returned to policyholders annually (either
directly or in the form of a reduction in premiums for
the following year). However, the law does not have
clauses requiring individual companies to have their
Sharīʿah boards and Sharīʿah audit, and insurance
companies are not limited to investing in Sharīʿah
compliant financial instruments. All insurance com-
panies in Saudi Arabia are listed in Tadawul, and the
CMA ensures that all insurance companies comply
with Saudi capital market laws.
36,.50 36.86 36.50
35.01
30.48
25.24
2013 2014 2015 2016 2017 2018
Source: The Saudi Insurance Market Report 2018, SAMA.
 Chapter IV: Takāful (Insurance) Market

Gross Written Premiums

The year 2018 marked another significant slow-
down of insurance premiums in Saudi Arabia. The
overall insurance GWPs decreased to SAR 35 billi-
on in 2018, compared to SAR 36.5 billion in 2017, a
reduction of 4.1%. Despite the contraction over the
past two years, the CAGR of total premiums bet-
ween 2005 and 2016 is about 19.7%.
Health insurance remained the biggest line of
business since 2014. Its contribution to total GWP
slightly increased from 52.1% in 2017 to 56.8% in
2018, while General insurance’s contribution to to-
tal business volume decreased to 40% in 2018 from
44.7% in the previous year.
The share of protection and savings insurance con-
tinued to remain a miniscule part of the total GWP
in 2017 and 2018, which represents just around 3%
of overall GWP. The low market share for the protec-
tion and savings insurance is attributed to several
factors, including the reliance on social protection
of family and community, poor savings culture, and
religious concerns over the acceptability of life in-
surance.

Table 4.3: Gross Written Premiums in Saudi Arabia (SAR Million)

Line of Business 2014 2015 2016 2017 2018 CAGR % (2014-2018)

Health Insurance 15,721 18,967 18,630 19,036 19,883 6.05%

General Insurance 13,857 16,494 17,174 16,327 14,028 0.31%

Protection and Saving 904 1,035 1,051 1,140 1,103 5.10%

Total 30,482 36,496 36,855 36,503 35,015 3.53%

Source: The Saudi Insurance Market Report 2018, SAMA.

Table 4.4: Distribution of the Gross Premiums Written in the Main Insurance Sector

Line of Business 2014 2015 2016 2017 2018

Health Insurance 51.6% 52.0% 50.5% 52.1% 56.8%

General Insurance 45.5% 45.2% 46.6% 44.7% 40.1%

Protection and Saving 3.0% 2.8% 2.9% 3.1% 3.1%

Total 100% 100% 100% 100% 100%

Source: The Saudi Insurance Market Report 2018, SAMA.

75
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Insurance Market Penetration

During the five-year period from 2014-2018, insu-
rance penetration increased at a CAGR of 2.5%. In
2018, insurance penetration further decreased to
1.19%, down from 1.42% in 2017. Non-oil insurance
penetration is defined as Gross Written Premiums
divided by the total non-oil GDP. In 2018, insurance
penetration of non-oil GDP decreased to 1.8%, down
from 2.0% in 2017.
Due to low levels of awareness and cultural conside-
rations, insurance penetration in Saudi Arabia is lo-
wer than in most of the GCC countries. However, as a
result of government initiatives to implement certain
insurance products, there has been some growth in
recent years in insurance penetration rates but still
much below the regional and global averages (Figu-
re 4.2). As shown in Table 4.2, the insurance penetra-
tion rate of Saudi Arabia is also lower than Malaysia
(4.77%), Turkey (1.33%) and Indonesia (2.77%).

Table 4.5: Insurance Penetration in Saudi Arabia

Line of Business 2014 2015 2016 2017 2018

General Insurance 0.49% 0.67% 0.72% 0.64% 0.48%

Health Insurance 0.56% 0.77% 0.78% 0.74% 0.68%

Protection and Saving 0.03% 0.04% 0.04% 0.04% 0.04%

Total 1.08% 1.49% 1.54% 1.42% 1.19%

Source: The Saudi Insurance Market Report 2018, SAMA.

Figure 4.2: Insurance Penetration Ratio 2018

Global Average: 6.1%

4.8%

Emerging Market Average: 3.2%

2.9%

1.9% 2.0%
GCC Average: 1.7% 1.6%
1.4% 1.3%
1.2%
0.9%

Kuwait Saudi Arabia Oman Qatar Bahrain UAE Indonesia Turkey Malaysia

Source: Swiss Re, IMF and The Saudi Insurance Market Report 2018, SAMA

76
 Chapter IV: Takāful (Insurance) Market

Insurance Density
Insurance density is defined as average expendi-
ture by an individual on insurance products (Gross
Written Premiums per Capita). Insurance density
decreased from SAR 1,121 per capita in 2017 to
SAR 1,048 per capita in 2018, which represents a
6.6% decrease. Expenditures per capita on insu-
rance products have slightly increased at a CAGR
of 1.4% between 2014 and 2018. The density of
Protection and Savings insurance remained low in
absolute terms, and relative to General and Health
insurance, at SAR 33 per capita in 2018. Figure 4.3
shows that insurance density in Saudi Arabia stood
at SAR 1,048 (US$294) in 2018 which is lower than
Malaysia (US$518) but much higher than Turkey
(US$127) and Indonesia (US$76). It also shows that
Saudi Arabia’s insurance density of US$294 is lower
than GCC average of US$497 in 2018.

Table 4.6: Insurance Density in Saudi Arabia (SAR)

Line of Business 2014 2015 2016 2017 2018 CAGR (2014-2018)

Health Insurance 450 536 540 502 420 -1.74%

General Insurance 510 616 586 585 595 3.93%

Protection and Saving 29 34 33 35 33 2.94%

Total 990 1186 1159 1121 1048 1.44%

Source: The Saudi Insurance Market Report 2018, SAMA.

Figure 4.3: Insurance Density 2018 (US$)

1305

1135

Global Average: US$ 682

520 518
GCC Average: US$ 497

Emerging 315 294

Market 234
Average:
US$ 170 127
76

Kuwait Saudi Arabia Oman Qatar Bahrain UAE Indonesia Turkey Malaysia

Source: Swiss Re, IMF and The Saudi Insurance Market Report 2018, SAMA

77
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Net Written Premium

Net Written Premium (NWP) is defined as the pre-
miums retained by the insurance company, after
the subtraction of the premiums ceded to local or
international reinsurers from GWP by line of busi-
ness. Total premiums ceded to local and internati-
onal reinsurers amounted to SAR 4.9 billion in 2018
or 16.3% of NWP. Around 94% of total NWP was
generated by Motor and Health insurance. Health
insurance remained the largest line of business ac-
counting for 64.3% of total NWP. Motor insurance’s
share of total NWP remained in second place, which
accounted for 29.4% of NWP in 2018.

Figure 4.4: Retention Ratio by Line of Business

Weighted average excluding Weighted average including

Motor and Health Insurance all line of business
32% 85.5%

3% 2016
Energy 2%
2017
1%
2018
6%
Aviation 4%
4%

22%
Engineering 18%
17%

15%
Property / Fire 19%
18%

30%
Marine 28%
29%

50%
A&L and Other 48%
47%

88%
Motor 93%
94%

97%
Health 97%
97%

Source: The Saudi Insurance Market Report 2018

78

Retention Ratios
The retention ratio is a measure of risks in written
premiums retained by an insurance company as
there is a correlation between the retention ratio and
risks. The retention ratio measures the written pre-
miums retained by the insurance company. It is cal-
culated by dividing the NWP by the GWP. According
to Saudi Insurance Market Report 2018, the overall
retention ratio of insurance companies in the Saudi
market increased to 86% in 2018 from 80% in 2014.
This ratio is largely skewed due to the high retention
ratio of Motor and Health insurance which collecti-
vely accounted for around 83.7% of the total GWP
in 2018. In 2013, the retention ratios for Motor and
Health insurance were 94% and 97.2%, respectively.
The weighted average retention ratio of other Gene-
ral insurance lines of business (i.e., excluding Mo-
tor and Health insurance) remained unchanged at
Figure 4.5: Top Countries in Takaful Assets (US$ Billion)
15.6
13
Saudi Arabia Iran Malaysia
Source: The Saudi Insurance Market Report 2018 and ICD Refinitiv Islamic Finance Development Indicator (IFDI), 2019
Chapter IV: Takāful (Insurance) Market
32.0% in 2018. The retention ratios are high because
of the requirement for licensed insurance compa-
nies to adhere to a minimum retention ratio of 30%.
The increase in retention ratio is an indication that
insurance companies in the Kingdom are maturing
and shifting from relying mainly on reinsurance to
retention of the largest portion of insurance premi-
ums and investing them to pay off claims.
Insurance Assets
Total Insurance assets amounted to SR 58.5 billion
(US$15.6 billion) in 2018 compared to SR 59.1 billi-
on (US$ 15.8 billion) in 2017. However, Saudi Arabia
is the largest Takaful market (with 38% of global Ta-
kaful contributions), followed by Iran (34%), Malay-
sia (7%) and the UAE (6%). (Figure 4.3).
3 3
1 1
Indonesia UAE Qatar Turkey
79
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
The Regulatory Environment
and Recent Developments
The year 2003 marked a significant turning point for
the insurance industry in Saudi Arabia as the gover-
nment introduced a new set of rules in the Law on
Supervision of Cooperative Insurance Companies.
The implementing Regulation for this Law was is-
sued in the following year, which allowed the incor-
poration of companies that had a local activity or the
licensed branches of foreign companies to practice
cooperative insurance work in Saudi Arabia. Accor-
ding to Article 2 of the Law on Supervision of Coo-
perative Insurance Companies, SAMA was assigned
all powers necessary to ensure the implementation
of the Regulations. SAMA was appointed to act as
the regulator and overseer of the insurance industry
in the Kingdom.
SAMA’s key functions and responsibilities as the re-
gulator of the insurance industry include:
· Providing and establishing appropriate stan-
dards for provision of insurance services;
· Promoting stability in the insurance market;
· Protecting the rights of insured parties and in-
vestors;
· Encouraging fair and effective competition and
providing better insurance services at competi-
tive prices and coverage;
· Regulating the relationship between insurers/
reinsurers and service providers to ensure com-
pliance with the laws and regulations governing
the market; and
· Training and localizing manpower (Saudization).
The Insurance Regulations had great impact on
the entire insurance industry in Saudi Arabia which
requires restructuration and reform. In December
2004, Tawuniya, the first cooperative insurance
company obtained its license from SAMA and sub-
sequently floated 60% of its equity to the public.
The promulgation of the new law signified a new
chapter in the history of Saudi Arabia’s insurance
80
sector, elevating the concept of insurance from a
distasteful business necessity to a useful and in-
creasingly popular financial instrument. It did so
by clearing away the numerous unlicensed pro-
viders – which had set up offices in a previously
loosely regulated environment – and establishing a
Sharīʿah-compliant framework under which all insu-
rance in the country is offered.
With consolidation and change in the industry un-
derway, the government opened up the insurance
market to foreigners (initially limited to 60% equity
in insurance businesses, now reduced to 49%) with
the accession of Saudi Arabia to the World Trade
Organization on 11 December 2005. Foreign inves-
tors began seeking joint stock companies ready for
IPOs.
In 2006, SAMA imposed compulsory health insuran-
ce for non-Saudis provided new incentives for the
insurance sector in the Kingdom. In 2010, SAMA re-
vealed plans to prevent all foreign insurance compa-
nies operating in the Kingdom through local agents
from issuing and renewing insurance policies un-
less they obtain licenses from SAMA.
In December 2011, SAMA issued a specific regu-
lation for insurance activities over the internet and
stipulated that all companies shall use local coope-
rative model, which entitles the policyholder to get
10% of the net surplus (losses shall not be turned to
policyholder).
In June 2014, SAMA issued a draft of corporate
governance regulation for insurance companies in
order to develop a unified high-level framework for
the governance of companies operating in the insu-
rance sector in accordance with the best practices
recognized worldwide.
 Chapter IV: Takāful (Insurance) Market

The year 2003 marked a significant

turning point for the insurance industry
in Saudi Arabia as the government introduced
a new set of rules in the Law on Supervision
of Cooperative Insurance Companies.

On 21 October 2015, SAMA issued the Corporate
Governance Regulations for insurance companies.
The Regulations stipulated that the insurance com-
panies shall establish specialized Board commit-
tees to extend its oversight into particular areas of
the Company’s activities, such as nomination and
remuneration, audit, risk management, investment,
regulatory compliance, disclosure, governance, hu-
man resource, strategic development, etc., and de-
legate the necessary powers to its committees and
monitor their performance.
The Saudi insurance market has been developing
over the years. Numerous local and international
companies have established their presence in the
market and have been providing innovative pro-
ducts specially designed to meet domestic demand,
taking into account cultural and religious factors for
consumers. The large number of insurance com-
panies licensed in the Kingdom has been a central
element for innovation and wide diversification of
products and competitive prices.
Subsequently, Implementing Regulations were issued
by Ministerial Decree No (1/596) dated 1/3/1425 H
(20/4/2004) to regulate the insurance business in
Saudi Arabia. Some of the salient features of Coope-
rative Insurance Companies Control Law and its Im-
plementing Regulations are as follows:
• Insurance activities within Saudi Arabia shall be
carried out by insurance companies established
and registered in the Kingdom and operated in a
“Cooperative” manner consistent with the princi-
ples of Islamic Law and Jurisprudence
• Applicant insurer/reinsurer must be a joint stock
company, established primarily to engage in in-
surance and/or reinsurance activities with direct
insurers having a minimum capital of SAR 100
million and reinsurers having a minimum capital
of SAR 200 million.
• Gross premiums written should not exceed 10
times the paid capital and reserves of the com-
pany.
• Direct insurers to retain at least 30% of total
gross written premium and reinsure a minimum
of 30% of total gross written premium within the

The Cooperative
Kingdom of Saudi Arabia.
• 10% of the net surplus shall be distributed to the

Insurance Companies policyholders directly, or in the form of reducti-

Control Law
The Cooperative Insurance Companies Control Law
was approved by Royal Decree number (M/32) da-
ted 2/6/1424 H (31 July 2003) which set the stage
for the legal framework and supervision of the in-
surance sector. SAMA was appointed to act as the
regulator and responsible body for the supervision
of the insurance sector.
on in premiums for the next year. The remaining
90% of the net surplus shall be transferred to the
shareholders’ income statement.
• Solvency requirement: using premium as well as
loss ratios parameters necessitating adjustment
of the shareholders equity wherever necessary
for the protection of the policyholders.
• Investment policy guidelines were introduced to
ensure the security of the operators’ assets.

81
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Cooperative Health Insurance (CCHI)
Saudi Arabia has a separate law to regulate health
insurance. The Cooperative Health Insurance Law
passed in 1999 ensured that health insurance was
made mandatory not only for the local population
but also for expatriates and their families. According
to the law, Council of Cooperative Health Insurance
(CCHI) is the independent authority for regulating
health insurance in Saudi Arabia. The main role of
this Council is to introduce, regulate and supervise
a health insurance strategy for the Saudi health care
market.
Conclusion
Saudi insurance market is well regulated and has
expanded at a faster rate than other GCC markets.
Despite the regulator’s efforts to issue new products
such as in life or savings insurance, compared with
markets worldwide, G20 peers (such as Turkey and
Indonesia), Malaysia as well as the GCC, insurance
penetration and density in Saudi Arabia is relatively
low.
In the meantime, health insurance is a rapidly gro-
wing sector driven by the trend towards obligatory
health insurance. Life insurance penetration, at pre-
sent, also lags far behind general and health insu-
rance. However, if the insurance companies can
develop innovative and Sharīʿah-compliant family
takāful products, it is reasonable to assume that life
takāful could grow even more substantially.
Saudi insurance sector is still in a nascent stage and
thus there is a great growth potential being untap-
ped. Although the recent performance of insuran-
ce firms has been rather tame, the sector presents
long-term investment opportunities. Lastly, there is
a shortage of re-takāful capacity, which might ex-
plain as to why the takāful sector has not grown to
the level one would initially hope for.
82
CCHI has the overall authority over the regulation
of health insurance companies and health insuran-
ce products of general insurance companies in the
country. CCHI is also made a self-financing entity
as it is vested with powers to collect 1% of the total
gross premiums received by the health insurance
firms. CCHI comes under the Ministry of Health but
it includes representatives from various other minis-
tries including interior, social affairs, finance, etc.
However, strong demand for insurance of vehicles,
property, health and other insurances across Saudi
Arabia is driving the revenues of insurance compa-
nies in the country. Growing life expectancy, tax in-
centives on insurance products, favorable savings
associated with insurance are further encouraging
the customers across insurance segments. Econo-
mic growth, rising government spending, techno-
logical innovations and increased consumer awa-
reness about insurance products are key market
drivers in Saudi Arabia. The government’s policy of
insuring the uninsured has progressively pushed the
insurance penetration in Saudi Arabia and the proli-
feration of insurance schemes.
The increasing number of digital distribution chan-
nels is favoring the insurers to easily obtain insuran-
ce policies. Insurtech, messaging platforms, and
online sales channels are contributing to the insu-
rance landscape in the country. Through different
distribution channels, insurance companies in Sau-
di Arabia are providing a wide variety of products
with varying levels of complexity that are designed
for different groups of businesses, individuals and
other organizations. This will provide ways to meet
the emerging demands of every end-use customer
and propel net sales.
 Chapter IV: Takāful (Insurance) Market

83
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER V:
SOCIAL
AND DEVELOPMENT
FINANCE

84

Overview
The alignment of vision 2030 with the UN-endorsed
Sustainable Development Goals (SDGs) has indeed
shaped up considerably the concerted efforts un-
dertaken by various stakeholders in the Kingdom of
Saudi Arabia.
The aim of Vision 2030 is to position the economy
on a sustainable and inclusive growth trajectory.
This is expected to be done through diversification
of the economy by unraveling the economic poten-
tial of non-oil sectors through a private sector led
development process.
In view of this, the Saudi government has introdu-
ced two breakthrough initiatives:
1) Extensive revamp of the social finance sector (in-
cluding zakāh, awqāf and philanthropies) by revi-
sing Saudi philanthropic law as part of a broader
program of socio-economic policy reform that
aims not only to shift the economy away from its
heavy dependence on oil, but also to create job
opportunities for Saudi youth.
In 2015, the Ministry of Social Affairs (MoSA) and
the Ministry of Labor launched the joint “From
Guardianship to Sustainable Development” cam-
paign, which promoted the idea that non-profit
organizations (NPOs) should not limit their work
to aid and charity but should also focus on sus-
tainable development, mainly by helping benefi-
ciaries become financially independent.
National Laws and Regulations Affecting
Social Finance in Saudi Arabia
In 2016, with an objective of broadening the scope
and streamlining the government’s works in the
area of social finance, the Ministry of Social Affairs
(MoSA) and the Ministry of Labor and Social Deve-
lopment were merged into the Ministry for Labor
and Social Development (MoLASD). The new minis-
85
Chapter V: Social and Development Finance
2) The formation of the National Development
Fund (NDF), which aims to raise the level of per-
formance of the funds and development banks
in the Kingdom and to enhance the sustainability
of these funds to achieve the desired objectives.
The NDF supervises six national development
finance institutions, namely the Social Develop-
ment Bank (SDB), the Saudi Fund for Develop-
ment (SFD), the Saudi Industrial Development
Fund (SIDF), the Real Estate Development Fund
(REDF), the Human Resources Development
Fund (HRDF) and the Agricultural Development
Fund (ADF).
These two initiatives are expected to position social
and development finance in Saudi Arabia in a more
profound role in the Kingdom’s economic progress
and development.
This chapter discusses the enabling environment for
the social finance sector, followed by a section that
describes the chronological events leading to the
formation of the General Authority for Awqāf (GAA).
The subsequent section deliberates upon some key
initiatives in social finance sector. The progress and
recent initiatives in the area of development finance
are presented in the last section coupled with some
interviews from prominent figures in the field.
ter of MoLASD has emphasized policies geared to-
wards realizing the 2030 Vision’s plan for social de-
velopment. In the year preceding this merger, waqf
authority was established to monitor and promote
waqf donations. Family Fund Rules, which provide
for the establishment of an Associations Aid Fund,
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

“
The waqf activity in Saudi Arabia
is a deeply rooted societal practice,
which has played a pivotal role in serving
the community and catering for its needs
in various fields.

and a Non-profit Companies (NPC) Draft Regulation,
which allows for the registration of social enterpri-
ses, was issued in 2016.54
In November 2017, MoLASD launched Makeen web-
site, which aims to monitor the transparency and go-
vernance of the Saudi Arabian philanthropic sector.
The website seeks to promote transparency, accoun-
tability, and awareness by providing external audi-
tors, members of associations’ general assemblies,
and workers at philanthropic associations, among
others, with comprehensive and user-friendly access
to the regulations and requirements affecting them.55
The following table depicts a list of selected regula-
tions, bylaws, and standard documents that shape
the registration and day-to-day work of NPOs in
Saudi Arabia.56

Table 5.1: List of Selected Regulations, Bylaws, and Standard Documents

Regulation Title Description Year of Enactment

Executive Bylaw for the Collection of zakāh, issued pursuant to Ministe- Transposes zakāh into a binding 1950
rial Resolution No. 393, Dated 6.8.1370 H, equivalent to May 13, 1950 regulation

Social Insurance Regulation, issued pursuant to Royal Decree No. Imposes on NPOs and other entities 1969
M/22, Dated 6.9.1389 H, equivalent to November 15, 1969, and Its the obligation to pay social insurance
Bylaw subscriptions for employee annuities
and accidents or vocational illnesses

Basic Law of Governance, issued pursuant to Royal Order No. (A/90), Serves as the Saudi constitution or bill 1992
Dated 27.8.1412 H, Corresponding to March 1, 1992 of rights

Bylaw on the Collection of Donations, issued pursuant to Ministerial Applies to the collection of donations 1996
Resolution No. 547, Dated March 30, 1996

Regulation on the Acquisition and Temporary Possession of Real Applies to NPOs that meet public 2003
Estate for Public Benefit, issued pursuant to Royal Decree No. (M/15), benefit criteria and sets out rules and
Dated 11.3.1424 H, equivalent to May 13, 2003 requirements for acquiring land

Income Tax Regulation, issued pursuant to Royal Decree No. (M/1), Exempts donations from the tax base 2004
Dated 15.1.1435 H, equivalent to March 6, 2004

Zakāh and Income Tax Circular No. (9/2574), Dated 14.5.1426 H, equi- Transposes zakāh into a binding 2005
valent to June 21, 2005 regulation

Social Development Centers Bylaw, issued by Council Of Ministers Regulates government-run social de- 2007
Resolution No. (161), Dated 11.5.1428 H, equivalent to May 28, 2007 velopment centers, which are similar
to foundations and associations

Regulation on The Charitable Social Fund, Issued Pursuant to Council Regulates the Charitable Social Fund, 2010
of Ministers Resolution No. (85), Dated 22.3.1431 H, equivalent to May which is expected to support NPOs
8, 2010 financially

General Authority for Waqf Regulation, issued pursuant to Royal Decree Sets out rules for endowments and 2015
No. (M/11), Dated 26.2.437h, equivalent to November 24, 2015 awqāf as well as the new waqf Autho-
rity, which has yet to be activated

First Draft of the Nonprofit Corporate Regulation (Supplemented With Regulates nonprofit companies 2016
Explanatory Notes), Issued by the Saudi Ministry of Commerce and (NPCs), including waqf NPCs
Industry on April 11, 2016

86

Setting Up Regulatory Body
for the Waqf Sector
The waqf activity in Saudi Arabia is a deeply rooted
societal practice. Waqf has played an undeniable
role in serving the community and catering for its
needs in various fields. Over the years, the sector
went through several changes that culminated, in
1437H, 2015 G, in the establishment of the Gene-
ral Authority for Awqāf, to oversee the awqāf sector
in the Kingdom. The Authority aims at organizing,
maintaining, developing and promoting awqāf in
order to fulfill the conditions of its founders and en-
hance its role in economic and social development
and social solidarity, in accordance with the objecti-
ves of Sharīʿah and regulations.
The General Authority for Awqāf has established
“Awqāf Company” as an investing arm directly linked
to the Authority’s Governor. Awqāf Co. is working to
develop investment mechanisms for endowments
managed by the Authority, diversify the investment
portfolio, and develop an investment strategy to en-
sure acceptable investment returns.
Initiatives by General
Authority for Awqāf
As part of its development efforts, the Authority is
undertaking a number of initiatives that can be hig-
hlighted as follows:
a) Establishing a Waqf Fund aimed at reducing
the large operating financial expenses incurred
by the State for services provided to pilgrims
and replacing them with revenues and services
provided by the Awqāf; to sponsor and finance
a number of initiatives, programs and projects
allocated to pilgrims.
b) Establishing a network of donors interested in the
service of pilgrims to coordinate efforts among
its members to finance projects and services to
serve pilgrims and to achieve the goals in this re-
gard and the objectives of donor institutions.
87
Chapter V: Social and Development Finance
c) Awqāf Properties Inventory Project: It is one of
the important initiatives and strategic projects
that will have a great impact on the different
areas of work of the Authority. The project is im-
plemented in three stages, where the output of
the project resulting from surveying information,
geographical data and ownership data are sto-
red in an integrated electronic database, in order
to preserve the endowments, control and pre-
vent infringement on waqf assets, as well as to
expedite good utilization of waqf asset in a way
that meets the conditions of the founders and
the needs of beneficiaries.
d) Launching an online platform for collecting cash
and in-kind donations online in a crowdfunding
way to facilitate the financing of projects and
programs. It also contributes to the sustainabi-
lity of the non-profit sector and its programs and
projects by creating additional sources of inco-
me that contribute to the enhancement of its de-
velopment role.
e) Enhancing the role of awqāf in the development
of the non-profit sector: The General Authority of
Awqāf is currently working on a study to develop
a framework and vision for the endowments of
non-profit organizations. It also aims to:
a. reformulate related relevant laws (awqāf and
non-profit sector laws),
b. design of incentives to stimulate the non-pro-
fit sector to establish endowments in order to
increase their financial revenues, and
c. the establishment of innovative awqāf pro-
ducts, where mechanisms can be put in place
to take advantage of these awqāf as funding
opportunities to support the social projects
and serve public needs.
f) Establishing the National Center for Awqāf Stu-
dies and Research: A center specialized in the
field of studies and researches, organizing even-
ts and developing the capacities and skills of
workers in the non-profit sector, and working in
accordance with the latest methodologies used
in these areas.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Waqf Investment Funds
In collaboration with the General Authority of Awqāf,
the Capital Market Authority authorized in Novem-
ber 2018 the launch of the first waqf investment
fund in the Kingdom: Alinma Wareef Endowment
Fund. This was preceded by the license issuance by
GAA in June 2018 with an objective to maintain the
financial sustainability of waqf entities and non-pro-
fit organizations as well as enhancing the contribu-
tion of the waqf sector in addressing the develop-
ment requirements.
Following this development, the Alinma Bank an-
nounced the launch of four waqf funds as open-
ended public funds for investing the fund assets
and growing the waqf capital (see Table 5.2). Hence,
a portion of the returns is distributed annually and
continuously on specific waqf channels.
Another promising development took place in the
last quarter of 2019, during which Al-Khabeer Capi-
Table 5.2: Statistics of Waqf Funds
No Fund Date of AuM
Establishment (SAR Million)
1 Alinma Wareef Endowment Fund 1 November 2018
2 Alinma Orphan Care Endowment 21 July 2019
Fund
3 Alinma Enayah Endowment Fund 15 September
2019
4 Alinma Endowment Fund for 1 September 2019
Mosques
Role of Islamic Development Bank
(IsDB) in Awqāf Sector in KSA
At the level of the Islamic Development Bank (IsDB)
Group, there was a realization as to the essential
role of waqf in supporting sustainable development
of Member Countries. In addition to its initiatives in
supporting waqf activities across the globe, the Is-
lamic Development Bank has embarked on establis-
hing the World Waqf Center of Excellence (WWCE)
88
tal, a prominent asset management company spe-
cializing in alternative investments, announced the
offering of Alkhabeer Waqf Fund I units commen-
cing on October 1.
Alkhabeer Waqf Fund I is an open-ended publicly li-
sted Waqf investment fund approved by the Capital
Market Authority and the General Authority for Aw-
qāf. It intends to distribute a dividend income of at
least 75 percent to fund the programs of the Majid
bin Abdul Aziz Society for Development and Social
Services.
The fund provides a sustainable source of income to
financially support many of Majid Society’s programs
and initiatives, in collaboration and partnership with
various stakeholders. It also aims to empower indi-
viduals and households with particular emphasis on
youths and entrepreneurs, to help develop their com-
petencies and nurture their enterprises.
Beneficiary Utilization
54.5 King Faisal Specialist Hospi- Healthcare
tal Foundation
(Wareef Charity)
10.3 EKHAA Charitable Foundati- Orphan care
on for Orphan Care
10 Charitable Health Society for Healthcare
Patients Care (Enayah)
10 Road Mosques Care Society Road mosques
Source: Adapted from www.alinmainvestment.com57
in Madinah, which seeks to build a global umbrella
for the waqf sector, linking and coordinating all re-
levant stakeholders in this sector. The WWCE shall
use the latest technology to provide information and
facilitate its access and exchange to develop ideas
in the waqf sector.

The Islamic Development Bank has embarked on establishing
the World Waqf Center of Excellence (WWCE) in Madinah,
which seeks to build a global umbrella for the waqf sector,
linking and coordinating all relevant stakeholders in this sector.
WWCE’s business model is based on a multi-linking
and coordination between awqāf institutions and
beneficiaries from all countries, which will contri-
bute to creating a broad network of development
practitioners in line with the IsDB’s new approach to
transforming from a “development bank” to a “bank
for development and developmentalists”.
WWCE will carry out a number of innovative projects
aimed at marketing awqāf institutions, including the
World Waqf Forum. WWCE will also launch an Aw-
qāf Digital Platform based on the latest technology
to collect all awqāf information scattered in other in-
formation vessels and make them available through
a single database to provide the decision makers in
waqf field with the correct and accurate information
on various aspects of the waqf (research, studies,
marketing awqāf projects, and mobilizing financial
resources).
Operationalization of Awqāf
Support within IsDB58
Through its unique Awqāf Properties Development
Fund (APIF), IsDB is seeking to promote and support
the role of awqāf in development. With its mandate
to finance the establishment and/or development
of Islamic real estate endowments, APIF is a unique
fund among MDBs with a strong focus on long-term
social financial sustainability.
APIF operates by financing (via Sharīʿah-compliant
modes of finance) the construction or purchase of
physical real estate assets that would generate re-
turns. These returns will then be used to make re-
payments to the fund, with residual amounts used
to support the activities of the beneficiary during the
repayment period. After this period, the asset is re-
gistered as a waqf and all income generated accrues
to the beneficiary, helping to provide a sustainable
source of income for the beneficiary’s socially desi-
rable activities.
89
Chapter V: Social and Development Finance
With a total paid-up capital of US$79.92 million
supplemented by a line of financing from IsDB of
US$100 million, APIF’s portfolio includes 55 projects
in 29 Member Countries and Non-Member Countries
of IsDB worth a total of US$ 1.1 Billion.59
As far as the contribution in the paid-up capital is
concerned, three prominent Saudi-based institutions
make up the big chunk of contributions, namely Isla-
mic Development Bank which contributes US$ 29.50
million, equivalent to 36.91% of the total capital;
OIC-Islamic Solidarity Fund with US$15.51 million
(19.41%); and the General Authority for Awqāf which
contributes US$ 7.50 million representing 8.99% of
the paid-up capital of the fund. Currently, APIF is
engaged in five multiple projects in the Kingdom of
Saudi Arabia, namely Madinah Research Center, WA-
MY-Makkah Project, Construction of a Commercial
& Furnished Apartments Complex (IUMS Project),
Jeddah, Purchase of a Residential and Commercial
Complex in Riyadh to be used as waqf, Construction
of Zamzam Health Waqf in Makkah Al-Mukaramah,
and Construction of a Hotel in the Central Region of
Al Madinah Al Munawarah, Saudi Arabia.60
Very recently at APIF, a new fund dedicated to the
development of awqāf in Saudi Arabia was establis-
hed with an authorized capital of SAR one billion,
including seed capital from IsDB, worth SAR 100
million. Indeed, this is a commendable develop-
ment which may pave the way for the sector to be
the mainstream sector in the Kingdom’s economy.
Coincidentally, such an undertaking fits perfectly
well with the KSA’s Vision 2030 and the KSA National
Transformation Program 2020 which include expan-
ding the scope and impact of the third sector (civil
society institutions) by supporting non-governmen-
tal institutions and associations and encouraging
endowments to enable this sector to obtain sustai-
nable financial resources so that the non-profit sec-
tor has greater effectiveness in sectors like health,
education, housing, research, social programs and
cultural events.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
BOX 5.1
SOCIAL SAFETY NET AMIDST
COVID-19 PANDEMIC
The social finance sector has re-emerged as the
unparalleled source of social safety net to curb the
adverse impact of the pandemic. The following are
some of the initiatives made in KSA in response to
the Covid-19 crisis:
1. The Health Endowment Fund, established in Fe-
bruary 2008,61 has been able to mobilize sizable
financial resources to combat Corona from va-
rious donors, including:
• Aramco (SAR 200 million)62, Bupa Arab Com-
pany (SAR 20 million)63, Sheikh Suleiman Al
Rajhi Charitable Foundation (SAR 9 million) 64,
Southern Region Cement Company (SAR 2.5
million)65, and Mediterranean Insurance Com-
pany (SAR 3 million)66.
• Saudi banks also contributed sizable
amounts to the Fund. The National Commer-
cial Bank came in first with a donation of SAR
33 million, followed by Al-Rajhi Bank with SAR
25 million, the Riyadh Bank with SAR 17 mil-
lion, Saudi Arabian British Bank put forward
SAR17 million, Samba Bank donated SAR
16.5 million, Arab National Bank SAR 12 milli-
on, Banque Saudi Fransi SAR 12 million, Sau-
di Investment Bank SAR 6.5 million, al-Jazira
Bank with SAR 5.6 million, Al Bilad Bank SAR
5.6 million, and Gulf International Bank gave
SAR 2 million 67.
90
2. The Saudi Ministry of Human Resources and So-
cial Development has also launched the “Com-
munity Fund” to activate endowments and the
non-profit sector to counter the effects of Co-
ronavirus. The capital of the Fund is SAR 500 mil-
lion, including SAR 100 million from the General
Authority for Awqaf; SAR 50 million from the Mi-
nistry of Human Resources and Social Develop-
ment, and SAR 50 million from the endowment
and civil institutions and some companies.68
3. The allocation of equipped hotels and residential
buildings for those whose condition required to
be placed under surveillance either as a perma-
nent or temporary stay, which are recovered by
the owners after the end of the crisis, which re-
present significant financial values69.
4. Support to the families whose daily or weekly
income has been affected by the lockdown/cur-
few.
5. The charitable sector allocates grants and subsi-
dies to families whose salaries have been greatly
affected by the suspension of work.
Swift Response of Islamic Development
Bank Group during Covid-19 Outbreak
The IsDB Group has launched a US$2.3 billion aid
package for Member Countries and Muslim com-
munities in non-Member Countries. This includes
three tracks: a) addressing the pandemic, b) recove-
ring from it, and c) resuming normal life, with aid
covering the immediate short, medium, and long
terms.
In order to support its member countries in this time
of need, IsDB Group is setting-up a special ‘Strate-
gic Preparedness and Response Facility’ (SPRF) of
US$730 million to mitigate the negative health and
socio-economic impact of the Covid -19 pandemic.
This will include US$280 million from the Bank and
Islamic Solidarity Fund for Development for sover-
eign projects and programs, US$300 million from
the International Islamic Trade finance Corporation
(ITFC) for trade finance and US$150 million from
ICIEC for insurance coverage. The facility will extend
financing to both the public and private sectors in
minimizing the spread and impact of the pandemic
in IsDB member countries and to build their resilien-
ce. Financing will be extended in the form of grants,
concessional resources, trade finance, private sec-
tor lending and political and risk insurance cover-
age. The IsDB Group will deploy all the available fi-
nancing instruments to channel the funds in a fast
track manner to support its member countries.
The SPRF funding will target interventions that fo-
cus on emergency preparedness and response to
curb and contain the spread of the Covid-19, mini-
mize socio-economic impact of the pandemic espe-
cially on the poor, and to build resilience of member
countries in responding to outbreaks and pande-
mics. The facility will support strengthening of the
health systems, funding of national epidemic prepa-
redness and response plans, community awareness
91
and education, disease surveillance, data collection
and analysis, sustained provision of essential social
services, provision of social safety nets, and sup-
port private sector activity.
As part of the Islamic Development Bank’s eager-
ness to support its member countries in addressing
the challenges of the Covid-19 pandemic, recently
the IsDB Group President held virtual meetings with
member countries to discuss their needs to con-
front the pandemic and its implications, in addition
to providing them with the necessary assistance to
support their efforts to contain Covid-19 pandemic.
Some commitment that were made include: 1) US$
11 million funding for Kyrgyzstan to contain the
pandemic, noting that the IsDB Group Corporations
are discussing how to provide more assistance to
achieve food security and support small enterpri-
ses in the country; 2) US$ 279 million for Tunisia to
face the crisis; 3) US$ 143 million for Uzbekistan to
support its efforts to face the pandemic; 3) US$ 35
million to assist Sudan in overcoming the pandemic;
4) US$ 162 million to help Senegal to overcome the
pandemic; and 5) US$ 33 million for Mauritania to
curb the repercussions of the pandemic crisis and
to provide medical and economical needs of Mauri-
tania to fight the disease.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
1. How can the endowment sector optimally con-
tribute to economic development?
The topic is no doubt broad and might not be ful-
ly covered within the available space in this report.
I will, therefore, skip talking about basic of waqf
fiqh and also its social impact. Regardless of the
precise difference between the two terms of (de-
velopment) and (growth), based on practical and
realistic experiences from the history of our coun-
try and other Muslim countries, waqf was the main
factor in economic development. This was proven
by evidence and figures. However, many factors
today have crippled waqf and led to its failure. The
evidence that waqf was carrying out economic de-
velopment is obvious in the Islamic civilization as
many awqāf were allocated for academic research
and innovative works. People today are fascinated
by contemporary endowment institutions such as
Harvard University, Nobel Prize, Ford Foundation
and al-Furqan Foundation, etc. These indeed reflect
a limited range if compared to Islamic waqf, which
was achieving sustainable development in a com-
prehensive manner.
However, the contemporary time has witnessed a
decline and regression of institutional awqāf, cau-
sing many people to stop performing the ritual of
waqf. Therefore, in order for the institutional en-
dowment to be able to support economic develop-
ment and contribute effectively in the gross national
product of the Kingdom, it is important to address
shortcomings, and return waqf to its previous sta-
tus. This is one of the roles entrusted to the General
Authority for Awqāf (GAA) to perform upon its esta-
blishment under the Royal Decree No. (M / 11) da-
ted 2/26/1437 AH. It aims to organize, maintain and
develop endowments in a manner that achieves the
92
An Interview with
the General Authority
for Awqaf70
conditions of waqf donors, and enhances endow-
ments role in socio-economic development and so-
cial solidarity in accordance with the principles of
Islamic Sharīʿah and regulations in accordance with
Article (3) of the Authority’s statute.
The strategy of the GAA aims to achieve a chain of
economic added values for endowments in terms
of organizational aspect and reform of regulations
that stimulate waqf sector and highlight the opera-
tional role in the management and development of
public endowments. This would lead to addressing
problems that hindering endowments from playing
their role in the economic development, taking into
account, what is stipulated in many articles of the
statute, the importance of the stipulations of waqf
donor (waqif) regarding its income, expenditure,
waqf manager (nazir), and recipients.
The restoration of the role of institutional endow-
ment charitable work in economic development re-
presented in the development of resources of chari-
table and waqf intuitions mean resection of a major
role of institutional charitable work to serve the Isla-
mic civilization and serve and develop the society.
2. What is the role of the Awqāf sector in the King-
dom of Saudi Arabia in achieving the Kingdom’s
2030 vision?
The Kingdom of Saudi Arabia is distinguished by ad-
hering to the religious and social values that Saudi
society was brought up with. Among the most im-
portant of these values are charity giving, genero-
sity, support, assistance and relief individually and
collectively through the endowment and charitable
institutions of civil society since a long time ago
when waqf existed. Prophet Ibrahim “PBUH” esta-

blished the oldest and most honorable endowment,
the great house of God, which is the Qibla of all be-
lievers, and the destination of all Muslim pilgrims.
The Sharīʿah of Islam received this method with
acceptance from our prophet Muhammad “PBUH”.
Endowments continued with caliphs and kings, in-
cluding the founder King Abdul Aziz Al Saud (may
God have mercy on him) and his sons who excee-
ded their predecessors in abundance of goodness
and public endowments.
The Kingdom has paid great attention to the
non-profit sector. The Seventh Development Plan
stipulated: “The necessity of establishing voluntary
services; strengthening its concept and importance
among individuals to actively contribute to voluntary
and charitable endowments in the development are-
as of social, health and educational. The ninth de-
velopment plan stipulated the main implementation
mechanism which stated: “Giving importance to
the social dimension (Social Responsibility Invest-
ment-SRI) of the development process; promotion
of community-based social participation in the de-
velopment process, attention to youth groups; and
empowerment of women and people with speci-
al needs. Article (10 / a) of the statute of the GAA
stipulated that: “one of the tasks of the Authority is
to advocate for facilitating the endowment and its
procedures; and to provide information, advice and
possible support to waqf donors”. Article (10 / c)
stated: “Contribution to the establishment of endow-
ment projects; academic and research activities in a
manner that enhances the development of society;
and fulfills the conditions of waqf donors; the purpo-
ses of waqf, in coordination with governmental and
non-governmental agencies”.
This social impact includes sustainable invest-
ment, continuity and the perpetuation of charitable
endowment work for future generations. The King-
dom’s 2030 vision emphasized on the effective role
of community in local and regional endowment cha-
ritable work in institutional framework by focusing
on maximizing results. The number of charitable
institutions and associations is still in the range of
1,000 organizations. For development and advance-
ment of endowment sector particularly, necessary
regulations need to be developed to encourage vo-
93
Chapter V: Social and Development Finance
lunteers to work in this sector; provide sustainable
sources of funding, encourage endowments, review
the relevant regulations. A taskforce from the GAA
currently works on reviewing the regulations, especi-
ally the systems that allow the authority to grant the
necessary licenses to establish modern developed
endowment products by taking advantage of Wes-
tern experiences and other international experien-
ces that do not contradict the special nature of the
institutional Islamic endowment. These regulations
give an international dimension to the Saudi institu-
tional endowment that works to establish Leading
large endowment companies and entities owned by
the riches; activate their role in social responsibility;
expand the non-profit sector; enable charitable and
endowment institutions and societies to attract best
talents capable of transferring international know-
ledge and applying best professional, investment
and administrative practices; and management of
endowment family wealth (Endowment Wealthy
Management-EWM), which contributes to creating
a specialized endowment financial industry and pro-
viding an innovative endowment financial market in
cooperation with the relevant authorities.
Article (7/1) appears to allow the Board of Directors
of the GAA, in the limits of provisions of the statute,
to propose regulations related to awqāf activities
and submit them to the concerned authorities for
approval in accordance with the procedures. The
statute also stipulated that it is the responsibility of
the Authority to set, review, evaluate, develop and
modernize strategies, plans and policies related to
endowment activity. The Authority is currently wor-
king on this in accordance with the Kingdom’s stra-
tegy:
1. Cohesive society preserving its identity;
2. Competitive knowledge economy.
3. Sustainable environment and integrated infra-
structure;
4. Distinguished global position.
By improving financial and administrative efficiency
and raising revenues, the stereotype of the awqāf
sector should be changed. The stakeholders in the
sector need to be aware of the GAA role through
raising awareness of the importance of the endow-
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
ment sector in sustainable socio-economic deve-
lopment as one of the important sectors contribu-
ting to meeting development needs and priorities in
the short, medium and long term. The importance
of the sector’s role will become clear by directing
banks to high-impact programs. GAA will work to
identify and define development needs and priori-
ties in coordination with the relevant authorities, to
expand spending channels to include programs that
meet the needs of Saudi society according to the
Kingdom’s 2030 vision, and to implement policies,
controls and standards that take into account con-
ditions of waqf donors and encourage them, and to
build development partnerships with various sec-
tors to enhance this role. Given the importance of
non-profit organizations in the endowment charita-
ble institutional work, the GAA will strive to achieve
the financial sustainability of non-profits by suppor-
ting the process of transferring nonprofit entities
from traditional investment trends to investment
in developmental projects and income-generating
assets, in addition to developing the capabilities of
workers in this field and issuing guidelines and stan-
dards in these areas.
3. With the Kingdom of Saudi Arabia encouraging
foreign investment, will this increase the size of
endowments in the Kingdom?
Regulations of foreign investment and other rele-
vant regulations related to investment issued by the
Kingdom of Saudi Arabia seek to expand investment
fields for private sector, in addition to encouraging
foreign direct investment. The foreign investment
regulation issued by Royal Decree No. M / 1 dated
5/1/1421 AH, and its subsequent amendments, gi-
ves foreigners complete right of ownership of 100%
in most sectors. Previously, the maximum foreign
ownership was not exceeding 49%. It also gives the
right to enjoy all the advantages, benefits and incen-
tives, including the right to obtain credit loans. The
regulation previously required participation of Saudi
capital in the investment projects with no less than
25% of the capital of the project in order to enjoy
these advantages. The new regulation approved the
establishment of the General Investment Authori-
ty, which has branches in the eastern and western
provinces, representative offices in many Saudi em-
94
bassies and reception offices in Saudi airports that
provide all the necessary information to investors
and provide support to overcome obstacles they
may encounter. New Capital Market Act (CMA) was
approved in mid-2003 to enhance the effectiveness
of the operations and management of the equity
market funds. Tax regulation for 2004 reduced the
income tax imposed on foreign companies from
45% to 20% and the government eliminated the re-
quirement for the minimum invested capital requi-
red on foreign investors in 2005. The government
procurement regulation was also approved, which
made it possible for companies wholly owned by
foreigners to compete with local companies for go-
vernment contracts. Moreover, a new act for the Ca-
pital Market Authority was approved in mid of 2003
to enhance the effectiveness of the operations and
management of the equity market funds. The tax
system for 2004 reduced the income tax imposed
on foreign companies from 45% to 20%. The go-
vernment eliminated the requirement for the mini-
mum invested capital required on foreign investors
in 2005. The government procurement regulations
were also approved, by which companies wholly
owned by foreigners can compete with local com-
panies on government contracts.
The government has also recently granted a num-
ber of licenses to foreign and Gulf banks alike to
conduct business in the Kingdom. Most of these
international financial and banking institutions own
endowment companies that provide charitable
work in their home countries, such as Lloyds Bank,
which owns the Lloyds Trust Charity; and Barclays
Bank and JP Morgan, which owns a company that
operates in the Saudi market. Most of these institu-
tions can transfer their administrative and technical
experience to benefit from local banks in the endow-
ment professional field. This applies also to foreign
information technology companies, food and soft
drinks industrial companies, and other companies
that have international experiences in the field of
charitable giving such as Amazon and e-commerce
companies.
In general, the foreign investment regulation and
its successive amendments and the openness
of the Kingdom of Saudi Arabia to foreign invest-

ment will increase the size of endowments in the
Kingdom, but neither this regulation nor other in-
vestment regulations are sufficient to increase the
size of endowments in the Kingdom. It is required
that endowment regulation keep pace with invest-
ment regulations by developing frameworks of en-
dowment legislation in the country to keep pace
with international legislations and laws in the field
of charitable and humanitarian endowment. Most
of the international endowments are innovative
investment monetary endowment, specialized in
technology, medical and scientific research, digital
knowledge technology, community service and in-
dustry. The GAA seeks under its mandate to keep
pace with international regulations and laws in the
field of institutional charitable endowment that re-
presents a global human heritage in whole from a
purely technical, legal and regulatory point of view,
which is related to the purposes of this activity, whi-
le its justifications are not against the principles of
Islamic Sharīʿah. The wisdom is the lost property of
the believer, so wherever he finds it, then he is most
worthy of it. It can also benefit in this field from the
Singaporean, Malaysian, South African, and other
relevant international experiences.
4. The Kingdom has great potentials; how in your
opinion can it become an international center for
Awqāf?
The Kingdom of Saudi Arabia is blessed with enor-
mous economic potentials and resources. It is the
qibla of all Muslims and has the two holy mosques.
KSA is the biggest supporter of charitable and en-
dowment work in the Islamic world and the whole
world. It is the headquarters of many Islamic in-
ternational organizations such as the Organization
of Islamic Cooperation. It has the largest Islamic
bank in the world, i.e. the Islamic Development Bank
(IsDB) in Jeddah. IsDB has Islamic waqf funds, such
as the Islamic Solidarity Fund, which is one of its
most important activities. IsDB is the owner of the
initiative of establishing the World Waqf Authority.
95
Chapter V: Social and Development Finance
• Globalization of Awqāf (Sadaqa Global)
The establishment of an international endow-
ment center encourages the so-called global
Waqf, which is the result of collective endow-
ments and culmination of all types of endow-
ments in all fields. The global Waqf is the culmi-
nation and outcome of endowment work of all
types and various fields. It is considered specifi-
cally one of the aspects and forms of the collec-
tive endowment. It is rather the most prestigious
and greatest of these aspects and images, due
to of broad scope of participation, the greatness
of benefits and a large number of returns. It also
has a major role in preserving the strength of the
Islamic nation and preserving its sanctity, immu-
nity, identity and development of resources, eco-
nomies, and resilience to the challenges and ris-
ks necessitated by various global developments,
such as globalization, informatics, biological re-
volution, and weakness of ethics and values.
The global waqf is where donors are global and
multiple, meaning that this endowment is sha-
red by several countries, group of international or
regional organizations from different countries,
to confine the money they own, with terms and
conditions of endowment considered, taking into
consideration the quality of international stan-
dards and its requirements. The word “global”
attributed to the endowment is a characteristic
that indicates a clear and specific meaning and
distinguished from others. It is a sign of the do-
nors being multiple global parties, and the waqf
is as well. This endowment is distinguished from
the collective endowment with the element of
universality that exceeds the group’s element by
geographical extension and breadth of dealing,
multiple benefits and returns. It should establish
for endowment performance on international
institutional legal and cooperative work and any
major global characteristic of global endowment
charity work. These can be done under the um-
brella of the International Awqāf Center.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
• Justifications for the establishment of an Inter-
national Awqāf Center in the Kingdom of Saudi
Arabia:
The emergence of globalization and the wide-
ning circle of its economic, political, cultural and
social influence; are perhaps the most promi-
nent related to the International Awqāf Center
in terms of the internationalization of financial
and economic business at the level of financing,
support and assistance; the level of technical
and digital application; the level of legalization,
legislation and internationalization; and at the
level of contractual employment and instituti-
onal investment. This calls for the endowment
work to be marked with the same global nature,
in order to face globalization in its financial and
developmental aspect in particular and taking
advantage of the tremendous and rapid develop-
ment in the field of communication technologies
and the information system. This would help a
lot in facilitating endowment work at the global
level through the International Awqāf Center, by
accelerating, intensifying and maximization of
its roles and impacts.
This International Awqāf Center may pave the
way for the remarkable emergence of private
institutions of a global nature. Our current era
has witnessed a growing interest in such kind of
entities in many places located in many Islamic
and international countries. This interest, even if
it did not reach to the desired level, constitutes a
necessary prelude and a basis for the successful
implementation and perpetuation of the project
of the International Awqāf Center.
96
Mr. Emad bin Saleh Al-Kharashi’s
short biography
Mr. Emad bin Saleh Al-Kharashi obtained his
Bachelor’s degree in Law in 1992 from King
Saud University. He went on to work in se-
veral financial and legal sectors, and founded
the Mohammed Al-Zamil and Emad Al-Kha-
rashi law firm. He served in various commit-
tees and boards including: Membership of
the Advisory Committee in the Capital Mar-
ket Authority, and membership of the Board
of Directors of Jabal Omar Development
Company. He held many positions in Riyadh
Chamber, including: Director of the Arbitrati-
on and Settlement Center, Vice Chairman of
the Family Companies Committee, Legal Ad-
viser in the Chamber, and a member of the
team from the Awqāf Committee to review
and submit proposals on the projects of a
number of agencies.
In 2017, he was appointed as Deputy Chair-
man and Governor of the General Authority
of Awqāf, Kingdom of Saudi Arabia.

Outlook on Development Finance in KSA
With the aim of supporting and promoting econo-
mic development, the Saudi government establis-
hed several Specialized Credit institutions (SCIs) to
facilitate the expansion of the private sector’s role in
the national economy. SCIs are essentially non-de-
posit taking specialized credit institutions that are
owned by the state to facilitate the development of
specific domestic sectors by extending interest-free
credit to viable projects in these sectors.
There are four government-owned specialized cre-
dit institutions that play a significant role in the fi-
nancial sector.
a) Agriculture Development Fund (ADF) establis-
hed in 1962 to provide short- and medium-term
credit to support agricultural investments and
related projects;
b) Social Development Bank (SDB) established in
1971 to provide interest-free loans to low-inco-
me Saudi nationals to meet various personal ex-
penses in respect of marriages, and maintenan-
ce of houses;
c) Saudi Industrial Development Fund (SIDF) esta-
blished in 1974 to provide loans to Saudi busi-
ness entities to establish industrial projects; and
Figure 5.1: SCIs Loan and Investment (SAR Billion)
179.7
162.6
126.3 136.7
46.2
11.2 11.9
2010 2011 2012 2013
Chapter V: Social and Development Finance
d) Real Estate Development Fund (REDF) formed in
1974 to finance real estate projects undertaken
by individuals for personal housing or for com-
mercial purposes.
Specialized Credit Institution assets have been
continually expanding, supporting the growth of
the non-oil private sector. SCIs continue to provide
loans that contribute to the achievement of the de-
velopment objectives in Saudi Arabia. Actual loans
disbursed by SCIs in 2018 totaled SAR 15.2 billion,
decreasing by 17.5 percent compared to SAR 18.4
billion in the preceding year. Total loan repayments
amounted to SAR 20.7 billion, decreasing by 2.3 per-
cent from the preceding year. The balance of out-
standing loans went down by 2.6 percent at the end
of 2018 to SAR 230.7 billion compared to the end of
the preceding year.
The SCIs represent a significantly large supplier of
credit to Saudi Arabia’s private sector and quasi-go-
vernment companies compared to Saudi Arabia’s
commercial banks. However, the influence of the
SCIs is starting to wane in several important res-
pects, due mainly to the increasing role of the pri-
vate sector, and the increasing size of the economy.
239.7 236.9
233.4 230.7
206.0
38.3
28.7
9.9 10.1 15.4
9.3
2014 2015 2016 2017 2018
Loan Investment
Source: SAMA 55th Annual Report
97
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
NDF, which plays a quasi-fiscal role
since it sits between the State and the market,
is a perfect match for GAA in unleashing the untapped potential
of social and development finance sector.
Establishment of
the National Development Fund
In 2017, the government of Saudi Arabia establis-
hed the National Development Fund (NDF) with an
objective to help achieve the goals of Vision 2030 by
contributing to the Kingdom’s economic and social
transformation. NDF currently supervises six funds
(collectively, the Funds):
1. The Social Development Bank (SDB),
2. The Saudi Fund for Development (SFD),
3. The Saudi Industrial Development Fund (SIDF),
4. The Real Estate Development Fund (REDF),
5. The Human Resources Development Fund
(HRDF) and
6. The Agricultural Development Fund (ADF).
These funds, which are owned by the government,
are financially independent and are significant play-
Conclusion
Job creation, inclusive growth and private sector de-
velopment have recently been the most-cited policy
goals for governments around the world, Saudi Ara-
bia is no exception. Climate change, poverty reducti-
on, and access to finance have also been considered
as no less important than the goals aforementioned.
And in the spirit of diminishing a heavy reliance on oil,
social and development finance are becoming incre-
asingly important to play a prominent role in intercon-
necting the private sector and policy makers.
For Saudi Arabia, given its economic and more im-
portantly being one of the largest economies in the
world, the gigantic potential of its social and deve-
lopment finance cannot surely be taken lightly. In
this regard, therefore, NDF which plays a quasi-fiscal
role since it sits between the State—which seeks to
maximize social benefits—and the market—which is
98
ers in their respective sectors. They had been set
up in a fiscal surplus environment to support social
transfers (HRDF), external funding (SDF), and invest
in different sectors to earn positive returns.
Like other development finance institutions (DFIs) in
G-20 countries, NDF is positioned to provide long-
term financing, advocate critical changes to policy
and regulatory environment, and provide knowledge
to improve efficiency and impact of projects. In clo-
se coordination with the Public Investment Fund
(PIF), which focuses mainly on the private sector,
NDF and PIF are expected to complement each
other and create synergy between their respective
activities, thus yielding benefits greater than their
individual contributions.72
geared towards profit motive—is a perfect match for
GAA in unleashing the untapped potential of social
and development finance sector.
In the synergy between the two sectors, three key
components shall not be overlooked; a) sustainability
path: which aims to meet the developmental needs
of the community, through the launch of a number
of products and the creation of sustainable financi-
al resources to achieve more than SAR 12 billion for
the non-profit sector through several products; b)
empowerment path: aims to enable the non-profit
sector to achieve a deeper impact by developing the
capabilities of non-profit entities and their person-
nel in various fields; and c) integration path: aims at
strengthening partnerships with relevant authorities
in order to guide efforts towards development needs
and priorities.

Interview with
Mr. Stephen Groff
Governor, National Development Fund
1. What is your view on the state of development
finance institutions in KSA? Is the current ecosys-
tem in KSA adequate enough to garner its potential
to play its strategic role in bolstering the economic
development in KSA?
Saudi Arabia is a high-income country with a per ca-
pita income of about US$ 22,500 in current dollars
(equivalent to about US$ 56,800 PPP). But heavy
dependence on oil makes its growth path far from
sustainable. This is evident from the slowdown in
growth to about 1.8% since 2015 due to the sof-
tening of oil prices. The large fiscal surpluses the
Government had enjoyed during 2000-2014 have
subsequently deteriorated to a deficit of about 7%
of GDP during 2015-2018. The prevalence of unem-
ployment among the growing educated young
population is also a major challenge the Kingdom
faces. KSA thus must urgently address these moun-
ting challenges by mobilizing necessary resources
to promote sustained and inclusive growth in the
country.
The aim of Vision 2030 is to put the economy on
a sustainable and inclusive growth path. This is ex-
pected to be done through diversification of the eco-
nomy by unlocking the economic potential of non-
oil sectors through a private sector led development
process.
For this, the Vision envisages several thematic pri-
orities such as building an appropriate education
system to develop the human capital of the country,
promoting entrepreneurship and SMEs, and impro-
ving the business environment to create adequa-
te and appropriate job opportunities for the Saudi
youth. The Vision also underscores the importance
99
Chapter V: Social and Development Finance
of environmental sustainability and waste manage-
ment. It is recognized however that private financi-
al markets alone are unlikely to provide sufficient
long-term resources to undertake these activities
on a scale necessary to achieve rapid progress and
hence the critical role of development finance insti-
tutions in the country.
The efficiency levels in non-oil sectors—particularly
agriculture, construction, energy activities and servi-
ces—appear to be low due to their high dependence
on public subsidies. Successful and sustainable di-
versification in such subsidized sectors require sig-
nificant policy and regulatory reforms to enhance
productivity.
The transformation envisaged by Vision 2030 thus
requires implementation of measures to increase
total factor productivity in the economy, reform the
financial sector to improve its efficiency, enhance
access to long-term finance, and improve public re-
source management to create fiscal space for the
government to invest more in infrastructure and hu-
man resource development. The aggregate invest-
ment requirement is much higher (of at least 35%
of GDP) than the current levels of 28% of GDP which
needs to be contributed by both public and private
sectors.
NDF was established to help achieve the goals of
Vision 2030 by contributing to the Kingdom’s econo-
mic and social transformation. Like other develop-
ment finance institutions (DFIs) in G-20 countries,
we are planning to position NDF to provide long-
term financing, advocate critical changes to policy
and regulatory environment, and provide knowledge
to improve efficiency and the impact of projects.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Acting in tandem with the Public Investment Fund
(PIF), which focuses mainly on the private sector,
these two institutions could complement and cre-
ate synergy between their respective activities, thus
yielding benefits greater than their individual contri-
butions.
NDF currently supervises six funds: the Social De-
velopment Bank (SDB), the Saudi Fund for Develop-
ment (SFD), the Saudi Industrial Development Fund
(SIDF), the Real Estate Development Fund (REDF),
the Human Resources Development Fund (HRDF)
and the Agricultural Development Fund (ADF) (col-
lectively, the Funds). These funds, which are owned
by the Government, are financially independent and
are significant players in their respective sectors.
They had been set up in a fiscal surplus environment
to support social transfers (HRDF), external funding
(SDF), and invest in different sectors to earn positive
returns. As noted earlier, the fiscal situation of the
country has now changed. In a fiscally constrained
economy, they need to focus more on development
effectiveness of their operations and their own fi-
nancial sustainably. The immediate focus of NDF is
to address this challenge.
2. The creation of the National Development Fund
(NDF) is a landmark step towards Vision 2030.
What are the top three objectives that NDF plans
to achieve within the coming three years?
The NDF aims to be an effective institution to help
accomplish the Kingdom’s goals of Vision 2030.
To do so, it will focus primarily on the institutional
strengthening of the Funds it supervises and buil-
ding its own internal capacity and processes over
the next three years.
First, the immediate challenge is to restore the fi-
nancial health of the six Funds under its supervision
and enhance the development impacts of their ope-
rations. This requires (i) resolving impaired assets
in collaboration with the Ministry of Finance, and (ii)
taking steps to build-up a better performing asset
base by introducing greater financial and operatio-
nal discipline, including more rigorous investment
criteria, better risk management, and catalyzing
procedural and cultural changes within the Funds.
100
Second, the NDF will consolidate the financial posi-
tion of the funds by restoring their profitability. It will
also introduce a shared services model for the NDF
Family of Funds to reduce cost, enable greater over-
all productivity and allow the Funds to focus fully on
their core businesses.
Third, the NDF together with the Funds, will consider
appropriate structures to (i) provide long-term finan-
ce to infrastructure, (ii) become a major source of
support to SMEs and start-ups, (iii) encourage the
development of new sectors, (iv) support the deve-
lopment of competitive industries, (v) provide coun-
ter-cyclical support, (vii) develop human capital and
new technologies, (viii) contribute to strengthening
and deepening the capital market, and (ix) comple-
ment PIF’s equity support to crowd-in private invest-
ments.
3.How could NDF play its role in the synergy be-
tween social finance and commercial finance in
achieving the development objectives in the King-
dom of Saudi Arabia?
Institutions like the NDF play a quasi-fiscal role as
their mandate sits between that of the State—which
seeks to maximize social benefits—and the mar-
ket—which is driven by considerations of profit. ND-
F’s developmental role requires it to subsidize some
operations on its own or through Government sup-
port. NDF’s mandate also requires it to take on more
risk than other commercial institutions. But in doing
so, it will have to rigorously adhere to core principles
of financial viability and sustainability.
As instruments to fulfill a country’s development as-
pirations, institutions such as the NDF have to con-
sider investments in (i) activities with high risk and
potentially high private and social returns such as
(a) start-ups, (b) new technologies and innovative
approaches, and (c) sunrise industries with uncer-
tain future but large potential benefits; (ii) strategic
projects with the uncertainty of returns due to lum-
py size and long gestation lags; and (iii) infrastruc-
ture projects with substantial economy wide spill-
over benefits and low direct returns. For example,
the German Development Bank, KfW, funded most
of the initial investments (during 2007-2009) in the

solar power sector which helped to crowd-in sub-
stantial private investment in subsequent years.
KfW was thus instrumental in raising the share of
renewables in Germany’s total energy production by
3.7 times in 15 years to 41% by 2015.
4.What sort of strategic role could the NDF play to
nurture entrepreneurship and innovation in KSA?
Though the Kingdom has a number of institutions to
finance SMEs, enterprises still face serious challen-
ges including limited access to bank credits (SMEs
currently get only 6% of total bank credit). Access to
venture capital is also very limited. Banks place high
collateral requirements and charge significant risk
premiums thus raising the effective cost of capital
for SMEs.
Promoting SMEs and entrepreneurship are comple-
mentary activities. All the NDF funds play a direct or
indirect role in supporting SME development. ADF,
SDB and SIDF all provide loans that directly sup-
port SMEs, HRDF facilitates training and employee
support, and REDF and SFD can indirectly support
SME growth through procurement-related activity.
SME promotion and entrepreneurship are globally
recognized as key to economic growth and are thus
high priority areas for most DFIs around the world
including those in China, Germany, Japan, Korea
and India.
At KfW, for example, financial inclusion, through its
support for start-ups, SMEs and related areas of
entrepreneurship development, innovation and skill
development, have been of high priority. Its current
strategy aims to allocate more than 40 percent of its
resources to support SMEs and start-ups.
Like most other DFIs, KfW supports SMEs and start-
ups indirectly through commercial banks and priva-
te equity firms. Largely due to KfW’s efforts since
its inception, SMEs form the backbone of the Ger-
man economy and are responsible for much of the
country’s reputation for innovation. Mexico’s Nacio-
nal Financiera’s (NAFIN) support to SMEs is another
successful example. NAFIN supports SMEs indi-
rectly through commercial banks, allocating 65% of
101
Chapter V: Social and Development Finance
its resources to guarantee the SME loan portfolio of
commercial banks.
NDF intends to emulate the successful practices
followed by other DFIs to support SMEs and start-
ups. It aims to significantly enhance access of SMEs
and start-ups to appropriate and adequate finances
which is one of the key priorities of Vision 2030.
5. Does fintech (including blockchain and internet
of things technologies) play a role in development
finance?
The application of information technology in the fi-
nancial sector provides a wide range of avenues to
strengthen financial development, sector efficiency
and financial inclusion to expand access to oppor-
tunities and fight poverty. However, it needs to be
recognized that technology also brings new risks
to consumers and investors and, more broadly, to
financial stability and integrity. Accordingly, in 2018,
the IMF and the World Bank developed a frame-
work—the so-called Bali Agenda—to guide deve-
lopment bankers and national governments to help
shape their policies and approaches to deal with
Fintech development and related issues.
The agenda has 12 elements: (i) embrace the promi-
se of Fintech; (ii) enable new technologies to enhan-
ce financial service provision; (iii) reinforce competi-
tion and commitment to open, free, and contestable
markets; (iv) foster Fintech to promote financial
inclusion and develop financial markets: (v) moni-
tor developments closely to deepen understanding
of evolving financial systems: (vi) adapt regulatory
frameworks and supervisory practices for orderly
development and stability of the financial system;
(vii) safeguard the integrity of financial systems; (vii)
modernize the legal frameworks to provide an ena-
bling legal landscape; (ix) ensure the stability of do-
mestic monetary and financial systems; (x) develop
robust financial and data infrastructure to sustain
fintech benefits; (xi) encourage international coo-
peration and information-sharing; and (xii) enhance
collective surveillance of the international monetary
and financial system.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
These elements will guide NDF in its approach to the
application of Fintech. An area where Fintech could
find immediate application in development banking
is in its capability to enhancing access to credit to
SMEs and start-ups. Traditionally commercial banks
have been hesitant to provide credit to SMEs due to
the difficulties in accessing information, cost of ad-
ministering a large number of small loans, and the
inability of SMEs to provide collaterals acceptable to
banks. The new technologies (including distributed
ledger technology, cloud computing, and automa-
tion enabled by artificial intelligence) provide fast,
efficient and cost-effective solutions to overcome
some of the challenges commercial banks face in
extending greater support to SMEs. Thus, Fintech
could alleviate two major impediments in suppor-
ting SMEs—information asymmetry and high trans-
action costs.
6. How do you see the prospect of development fi-
nance in the era of technological disruption? What
are the key lessons for the continued progress?
Disruptive technologies (i) cause sharp changes in
the cost or access to products or services, and (ii)
dramatically change how information is gathered,
products are made, and services are provided. They
have expanded the access to global markets and
changed business models. They also created enor-
mous productivity gains and have enhanced access
to basic services.
On the flip side, however, these technologies can
also be a major source of inequality as they reshape
the nature of work, abruptly shift the demand for la-
bor/skills, favor those who have access to new tech-
nology and have acquired new skills. If the enabling
environment does not allow firms to adapt quickly,
they cannot pursue new opportunities giving the
first movers a major advantage. These technologies
also disrupt workplace dynamics and challenge the
role of governments as an intermediary.
DFIs could help countries reap the significant bene-
fits of disruptive technologies but also manage the
associated risks by helping them to:
102
i. develop the digital and physical infrastructure
and regulatory frame-work for sustainable, and
inclusive technology-enabled economies
ii. get easy access to knowledge, on how they
could better respond to tech-enabled disrupti-
ons. Access to new skills will allow Individuals to
tap new opportunities. Firms can adapt to new
market opportunities by improving their capabi-
lities to absorb disruptive technologies. Govern-
ments can take advantage of these technologies
to improve speed, reach and quality of public ser-
vices.
iii. adapt and apply emerging technologies across
sectors to enhance access to financial services,
health and education services etc. to ensure that
the poor also benefit from the disruptive techno-
logies.
7.What is the relationship between NDF and regi-
onal or multilateral development institutions, like
the World Bank, Asian Development Bank, and the
Islamic Development Bank? How to capitalize on
these institutions to achieve your objectives?
Currently the relationship with the multilateral deve-
lopment institutions (MDIs) is rather limited as NDF
has only recently started its operations. This said
SFD has a long-standing relationship with many
MDIs and has worked closely with major institutions
on development projects around the world.
While NDF’s overall engagement is still in the early
stages, it could benefit immensely by collaborating
with MDIs by learning from their successes and
the challenges they have faced. As a start, the re-
lationship could focus on three areas (i) knowledge
sharing, (ii) institutional development and (iii) lever-
aging and risk sharing through co-financing of large
projects.
NDF could tap into the extensive expertise and
knowledge base of MDIs in areas of mutual interest.
Some such areas could include: (i) financial sector
reforms, (ii) capital markets development, (iii) rene-

wable energy and climate change related areas, and
(iv) sector thematic knowledge in other areas of mu-
tual interest such as human resource development,
regulatory environment to promote the private sec-
tor, etc.
Institutional capacity of NDF could be enhanced
through (i) secondment of staff to and from the
MDIs, (ii) participating in/collaboratively conducting
training programs on various aspects of develop-
ment banking, and (iii) learning from the best prac-
tices followed in MDIs in the areas of risk manage-
ment, project appraisal and implementation, good
governance in procurement, management of social
and environmental safeguards, and post evaluation
of projects.
NDF could also explore leveraging its resources and
sharing risks with MDIs by co-financing large priva-
te sector projects including complex infrastructure
projects in the private sector. Such collaboration
would also benefit NDF by exposing NDF staff to the
best practices in project appraisal and implementa-
tion followed by MDIs.
103
Chapter V: Social and Development Finance
Mr. Stephen Groff’s biographical sketch-up
Groff was appointed as Governor of the Na-
tional Development Fund (NDF) in February
2019. NDF is tasked with enhancing econo-
mic diversification and increasing the sus-
tainability of development financing across
Saudi Arabia. NDF supports public sector
spending by maximizing impact and so-
cio-economic development.
He was previously ranking vice-president
of the Asian Development Bank. Groff also
served as Deputy Director for Development
Cooperation at the Paris-based Organization
for Economic Cooperation and Development
and as Deputy Vice-President for Operations
at the Washington-based Millennium Chal-
lenge Corporation. He has also worked for
the U.S. Agency for International Develop-
ment, the U.S. Refugee Program and as a
U.S. Peace Corps volunteer.
Groff serves on a number of advisory boards,
including the Millennium Challenge Corpora-
tion, World Learning, Bretton Woods Com-
mittee, Marine Stewardship Council, Institute
for Sustainable Communities, and the Global
Footprint Network. He also writes regularly
on a variety of climate change and develop-
ment-related issues, including for Project
Syndicate, The Wall Street Journal, The Guar-
dian, and The Huffington Post. Groff is a
graduate of Yale University and the Kennedy
School at Harvard University.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER VI:
ENTREPRENEURSHIP
AND
INNOVATION
104

Overview
Islamic finance embraces risk sharing and value
creation. This makes entrepreneurship a key ena-
bler for realizing the objectives of Islamic finance.
With its large young population and vast natural
resources, Saudi Arabia has a great potential to be
a leader in minting creative entrepreneurs that can
enable the Saudi economy to achieve the 2030 Vi-
sion.
This chapter provides an overview of the entrepre-
The Role of Entrepreneurship
in Realizing 2030 Vision
The Vision2030, launched in 2016, involves an eco-
nomic plan for national long-term economic growth
that encourage entrepreneurship and private sec-
tor to take a leading role in economic development
through job creation and competitiveness. The main
targets of Vision 2030 are shown in Figure 6.1.
According to the General Authority for Statistics
(2018 Q4), there were 970,229 Saudi job seekers, of
Figure 6.1 Vision 2030 Targets73
Reduce Unemployment
from 11.6% to 7%
Raise proportion of non-oil exports
to a minimum of 50% of non-oil GDP
Raise private sector
GDP share to 65%
Increase value of Public Investment Fund
assets to over USD 1.8 trillion (SAR 7 trillion)
Source: Towards Saudi Arabia’s Sustainable Tomorrow, 1st Voluntary National Review 2018 - 1439
105
Chapter VI: Entrepreneurship and Innovation
neurial ecosystem in the Kingdom, and how it can
contribute to the realization of Vision 2030. The
chapter also describes the main organizational and
financial supports that contribute to the framework
of the entrepreneurial ecosystem in KSA. In addition
to depicting some innovation policies and incenti-
ves in the Kingdom, this chapter explicates the con-
tribution of incubators to promote startups as well
as the main roles of venture capital (VC) and private
equity (PE) in KSA in providing financing to startups.
which 536,579 hold a bachelor’s degree (composed
of 57,394 males and 479,185 females). These sta-
tistics show that despite the efforts exerted by the
government and the private sector to recruit univer-
sity graduates, it is difficult to employ them entirely.
As part of its strategic objectives, the Saudi Vision
2030 set out to control the growing unemployment
rate in Saudi society by reducing the unemployment
rate from 11.6% to 7%.
VISION
2030
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
To achieve higher levels of employment, Saudi Ara-
bia needs more entrepreneurs. Entrepreneurship
is a powerful driver of economic growth and job
creation.74 According to Small Medium Enterprises
in Saudi Arabia Report (2016)75, SMEs account for
90 percent (according to data from the Small and
Medium Enterprises General Authority “Monsha’at”,
around 481 thousand SMEs) of the total number of
commercial and investment enterprises. The con-
tribution of SMEs to GDP stands at 20%, and they
comprise nearly 25% of Saudi Arabia’s labor force.
Under Saudi Vision 2030, the Kingdom plans to rai-
se the contribution of SMEs from the current 20 % of
GDP to 35 % by facilitating their access to funding.
Entrepreneurial Ecosystem in KSA
Saudi Arabia’s economic growth and jobs depend
on its ability to support the growth of enterprises.
Saudi Arabia is facing a big transformation led by
the ambitious plan Vision 2030. This plan aims to
foster entrepreneurship over the long term. In order
to contribute to the realization of Vision 2030, en-
trepreneurs need a robust ecosystem and respond
quickly to their expectations. The Saudi government
began with stimulus plan and pledged in late 2017,
to inject a total of SAR 72 billion (US$ 19.2 billion)
to implement the private sector stimulus plan from
2018 to 2020. The majority of the budget will be allo-
cated as follows: SAR 10 billion for Projects Support
Fund (PSF), SAR 11.5 billion for SMEs, SAR 7 billion
government fees reimbursement and 1 billion riyals
for distressed companies.
In September 2018, the Ministry of Labor and Social
Development in Saudi Arabia announced the launch
of 68 initiatives that stimulate the private sector to
expand localization and raise the national labor for-
ce participation rates in the labor market, targeting
individuals, small and medium enterprises, and lar-
ge and mega enterprises. On the other hand, Saudi
Arabia’s Public Investment Fund (PIF) created “Fund
of Funds” and allocated SAR 4 billion (US$1.07 billi-
on) to support the growth of small and medium-si-
zed enterprises (SMEs). The special fund will aim to
106
The problem of employment of university graduates
is not only specific to Saudi Arabia but common
worldwide. All countries in the world have establis-
hed an ecosystem to facilitate entrepreneurship and
encourage innovation, which is considered one of
the most relevant factors for creating value-added.
The Saudi Vision 2030 is built on three pillars: (1) a
vibrant society, (2) a thriving economy, and (3) an
ambitious nation. Entrepreneurship and innovation
are increasingly important in all areas of business
supporting a thriving economy. The vision 2030
considers SMEs as important agents of economic
growth that create jobs, support innovation, and
boost exports.
enhance SMEs’ access to capital by investing in ven-
ture capital and private equity funds, according to a
PIF statement. The PIF expects the investments to
create 2,600 jobs and contribute SAR 400 million to
GDP by the end of 2020. Moreover, the PIF expected
to rise to 58,000 jobs and SAR 8.6 billion to GDP by
the end of 202776.
The Wamda Research Lab (WRL) report (2017) on
KSA ecosystem, shows that support organizations
are located in Saudi Arabia’s in four major cities:
Riyadh (54%), Jeddah (29%), Eastern province (10%)
and Makkah and Thuwal (8%).
In 2018, the Executive Committee for Improving the
Performance of Private Sector Businesses (Tay-
seer), launched a number of initiatives and reforms
that aim to improve its business environment and
enhance its competitiveness for the private sector.
Tayseer committee collaborates with more than 40
government agencies as well as the private sector,
represented by the Council of Saudi Chambers. Tay-
seer committee has implemented Meras program
as part of Saudi Vision 2030, which provides all go-
vernment and private sector services that is needed
to set up a business in one day through an online
and physical One-Stop-Shop centers77.

Established in 2016, the Small and Medium Enterpri-
ses General Authority “Monsha’at” focuses on sup-
porting, developing and sponsoring the SME sector
in accordance with international best practices. The
principal aim of Monsha’at is to raise the productivity
of SMEs and increase their contribution to GDP from
20% to 35% by 2030. Monsha’at has implemented
and supported programs and projects to promote
entrepreneurship, innovation, and diversification of
the sources of financial support for enterprises78.
Figure 6.2: A Model of Saudi Arabia Ecosystem
107
Chapter V: Social and Development Finance
All previous funds and institutions (private, public
and third sectors) reflect the desire of government
to make profound change in Saudi Arabia economy
by implementing developed entrepreneurship eco-
system. The following graphic exhibits the main in-
stitutions and stakeholders contributing to efficient
Saudi Arabia ecosystem.
Source: Ashri, O, 201979
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Domains for Efficient Entrepreneurship Ecosystem

The Isenberg framework (2011)80, suggests that the
entrepreneurship ecosystem should include six do-
mains:
• policy (leadership, government);
• finance (financial capital);
• culture (success stories, societal norms);
• support (infrastructure, support professions);
• human capital (labor, educational institutions);
• markets (early customers, networks).
The Isenberg approach places entrepreneurship at
the center of the framework, recognizing the impor-
tance that entrepreneurship plays as a key factor
and distinguishing the main elements that are es-
sential for the success of the entrepreneurial eco-
system.
This framework of the entrepreneurial ecosystem
is an effective way to identify various stakeholder
contributions such as government, private sector,
investors, banks, entrepreneurs, universities, rese-
arch centers, students, accountants and lawyers.
KSA’s entrepreneurship ecosystem is relatively new,
and most ecosystem support institutions were cre-
ated between 2011 and 2015 (the number of en-
trepreneurship support institutions increased from
4 during the period 2001-2005 to 36 during 2011-
2015)81. The following table (see Table 6.1) shows

Figure 6.3: Isenberg’s Model of An Entrepreneurship Ecosystem

Early customers
· Early adopters for proof of concept
· Expertise in productizing
· Reference customer
· First reviewers
· Distribution channels
Networks
· Entrepreneur’s networks
· Diaspora networks
· Multinational corporations
Leadership
· Unequivocal support
· Social legitimacy
· Open door for advocate
· Entrepreneurship strategy
· Urgency, crisis and challenge
POLICY
MARKETS FINANCE
Government
· Institutions e.g. investment and support
· Financial support e.g. for R&D, jump start funds
· Regulatory framework incentives e.g. tax benefits
· Research institutes
· Venture-friendly legislation, contract enforcement,
property rights and labor
Financial Capital
· Micro-loans
· Angel investors, friends, family,
· Zero-stage venture capital
· Venture capital funds
· Private equity
· Public Capital markets
· Debt

Labor Societal Norms

· Skilled and Unskilled · Visible successes
· Serial entrepreneurs HUMAN · Wealth for funders
· Later generation family CAPITAL CULTURE · International Reputation
· General degrees · Tolerance of risk, mistakes, failure
(professional and academic) · Innovation, creativity, experimentation
· Specific entrepreneurship trainings · Social status of entrepreneur
· Wealth creation
SUPPORTS · Ambition, drive, hunger
Infrastructure
· Telecommunications
· Transportation & logistics
· Energy
· Zones, incubators, co-working, clusters

Support professions
· Legal
· Accounting
· Investment Bankers
· Technical experts, advisors,

Non-Governmental Institutions
· Entrepreneurship promotion in non-profits
· Business plan contests
· Conferences
· Entrepreneur-friendly associations
Source: Regh, Für, & GmbH, 2018

108
 Chapter VI: Entrepreneurship and Innovation

the major contributors to the Saudi Arabia’s Entre- system. The following table describes the major
preneurial Ecosystem. KSA ecosystem (not exhaustive).

Many researchers and experts have tried to recount
entrepreneurship support institutions in KSA and
proposed a framework for the ecosystem that can
help entrepreneurs to make business. Ashri (2012),
Aloulou and Al-Othman (2019)82 propose a classifi-
cation of the different contributors in the KSA eco-
As mentioned in the table below, the government
of Saudi Arabia recently established an ecosystem
where all institutions needed to support entrepre-
neurship exist. But what about the impact and effec-
tiveness of the ecosystem and the comparison of
KSA with MENA countries and the rest of the world?

Table 6.1: Domains and Stakeholders of Entrepreneurship Ecosystem

Policy Government

Leadership

Markets Professional
Networks

Professional and
trade associa-
tions

Forums

Initiatives

Platforms

Associations

Human Capital Workforce

Entrepreneurship
education and
training
Higher education
entrepreneurship
ecosystem

Institutional & Institutional

infrastructure Support
Support

109
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Incubators &
accelerators

Science and
technology cities
and valleys

Entrepreneurship
centers & institu-
tes at universities

Co-working
spaces: (not
exhaustive 26)

Private sector

Culture Media

Entrepreneurship
Celebration

Forums

Finance Banks

Funds

Macro-loans

Private Equity/
Seed/ Venture
capital

Business Angels

Crowdfunding

110

Saudi Arabia
Entrepreneurship
Ecosystem Performance
Using key indicators provided by (1) the Global En-
trepreneurship Monitor Reports (GEM (2017-2018)
and (2018-2019), (2) the World Bank’s Ease of Doing
Business Index (2018), and (3) the World Economic
Forum’s Global Competitiveness Index (2018-2019),
the following we may be able to capture the attracti-
veness of Saudi Arabia’s entrepreneurial ecosystem.
Saudi Arabia Ecosystem
Valuation Vs 54
Economies Selected by
the GEM
On several occasions, the Saudi Arabia government
has expressed its strong commitment to the suc-
cess of entrepreneurship as one of the key options
for creating jobs and solving part of the unemploy-
ment problem. Using annual reports of 2017 and
2018, the GEM ranked the performance of entrepre-
neurship ecosystem of Saudi Arabia and compared
it with the most important economies in the world.
111
Chapter VI: Entrepreneurship and Innovation
The GEM reports compare five continents contai-
ning 54 economies:
• Africa (4 economies),
• Asia and Oceania (17),
• Latin America and Caribbean (11),
• Europe (20), and
• North America (2).
Figures 6.4 and 6.5 show 12 main entrepreneurial
framework conditions and compare Saudi Arabia
with the sample of 54 economies selected by the
GEM. In 2017, all framework conditions are below
the average, but in 2018, three factors recorded a
marked improvement. Using a scale out of 9 points
(from 1, that means very inadequate insufficient sta-
tus to 9 that means very adequate sufficient status),
the ranks conditions of cultural and social norms,
physical infrastructure and government policies for
support and relevance have progressed to 16 (from
24), 34 (from 46), and 25 (from 33), respectively.
The entrepreneurial finance and internal market
dynamics saw a decline during the year 2018 due
to the increase of interest rate and the low growth
rates in wholesale and retail sector (according to
Jadwa investment (2019), Wholesale and retail sec-
tor grew by 0.8% in 2018 and 0.6% in 2017, after a
decline of 1.6 percent in 2016)83. The other seven
criteria remained unchanged and below the overall
average in 54 economies, particularly with respect
to the transfer of R & D, commercial and professi-
onal infrastructure, taxes and regulations, and ma-
nagement training.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 6.4: 2017 Expert Ratings of the National Entrepreneurial Framework of KSA

Entrepreneurial Finance
4.69 I 3.86 I 38/54
Government Policies:
Cultural and Social Norms 9 Support and Relevance
5.277 I 4.97 I 24/54
4.66 I 3.88 I 33/54
7

Government Policies:
Physical Infrastructures 5 Taxes and Bureaucracy
6.57 I 5.72 I 46/54
4.05 I 3.56 I 32/54
3

Internal Market Burdens Government

or Entry Regulation 1 Entrepreneurship Programs
4.25 I 3.79 I 44/54 4.25 I 3.79 I 37/54

Entrepreneurial Education
Internal Market Dynamics
at School Stage
5.95 I 5.47 I 16/54 3.49 I 2.08 I 51/54

Commercial and Legal Entrepreneurial Education

Infrastructure at Post School Stage
4.65 I 3.24 I 53/54 R&D Transfer 4.61 I 3.53 I 53/54
3.99 I 2.93 I 49/54

GEM Saudi Arabia

EFCs scale: 1 = very inadequate insufficient status, 9 = very adequate sufficient status
Rank out of 54 recorded in brackets

Source: GEM Global Report 2017/18 84

Figure 6.5: 2018 Expert Ratings of the National Entrepreneurial Framework of KSA

Entrepreneurial Finance
3.21 I 45/54
Government Policies:
Cultural and Social Norms Support and Relevance
5.4 I 16/54 9
4.44 I 25/54
7

Government Policies:
Physical Infrastructures 5 Taxes and Bureaucracy
6.2 I 34/54 3.63 I 32/54
3

Internal Market Burdens Government

or Entry Regulation 1 Entrepreneurship Programs
3.65 I 43/54 3.99 I 35/54

Internal Market Dynamics Entrepreneurial Education

4.96 I 29/54 at School Stage
1.75 I 54/54

Commercial and Legal Entrepreneurial Education

Infrastructure at Post School Stage
3.78 I 50/54 R&D Transfer 3.11 I 53/54
2.78 I 49/54

GEM Saudi Arabia

EFCs scale: 1 = very inadequate insufficient status, 9 = very adequate sufficient status
Rank out of 54 recorded in brackets
Source: GEM Global Report 2018/19 85

112

Impact of Ecosystem Facilities on Doing Business
he Ease of Doing Business is an index published by
the World Bank. The Doing Business project is an
aggregate score that provides quantitative measu-
res of business regulations and their enforcement
across 190 economies. For each of the factors that
form a part of the measurement ‘Ease of Doing
Business,’ a distance to frontier score is computed
and all the scores are aggregated. Using reports of
the World Bank’s Ease of Doing Business Index for
the years 201886 and 201987, they compare business
regulation for domestic firms in 190 economies.
The ease of doing business score captures the gap
between an economy’s performance and a measure
of best practice across the entire sample of 41 indi-
cators for 10 Doing Business topics88.
Saudi Arabia has competitive advantages in three of
the 41 indicators:
• The first indicator concerns the cost of regis-
tering property. The cost, measured by % of
property value, is the lowest (equal to zero) com-
pared to other economies.
• The second indicator concerns minority investor
protection. Saudi Arabia ranked seventh (over a
scale from 0 (the worst) to 10 (the best)) in the
global rankings of minority investor protection,
and also earned a full score of 10 on the Cor-
porate Transparency Index (with other 6 econo-
mies).
• The third indicator concerns paying taxes
measured by the number of payments per year.
The score of KSA is the lowest in the world.
As mentioned in report of the World Bank’s Ease
of Doing Business Index (2019), Saudi Arabia has
made four important reforms during the period
2017-2018:
(1) Facilities to get electricity: Saudi Arabia improved
the quality of electricity supply by imposing a
new compensation system to motivate the uti-
lity companies to improve service quality. Saudi
Arabia scored 6 out of 8 on the Electricity Sup-
ply Dependency and Tariff Transparency Index,
higher than the GCC average of 4.2.
113
Chapter VI: Entrepreneurship and Innovation
(2) Protecting minority investors: It supported mino-
rity investor protections by providing clear rules
for the liability of directors and increasing share-
holders’ role in key decisions.
(3) Trading across borders: Saudi Arabia reduced
the time required to export and import procedu-
res by launching a new electronic single window
and extending the hours of operation of customs
at the Jeddah port. As a result, documentation
processing time was reduced by 21 hours for ex-
ports and 32 hours for imports, and the time re-
quired to comply with customs regulations and
procedures for export was reduced by 19 hours.
(4) Enforcing contracts: Saudi Arabia made enfor-
cing contracts easier through the introduction of
an electronic system that allows complainants
to file the initial complaint automatically and
amending the civil procedure rules to introduce
time standards for key court events.
Comparing Saudi Arabia with MENA Region econo-
mies, and Figure 6.6, Saudi Arabia conserved the
same rank of 92 among 190 economies for the re-
cent two years 2018 and 2019. In 2019, Saudi Ara-
bia narrowed the gap with the top performers by
improving its ease of doing business to 63.5 points
(from 62.5 in 2018 and 59.5 in 2017). Specifically,
the Kingdom came close to achieving seven of the
ten key indicators of doing business (ascending or-
der of improvement indicators from 2018 to 2019):
protecting minority investors (+5 points), trading
across borders (+4.72), enforcing contracts (+4.63),
registering property (+0.42), dealing with constructi-
on permits (+0.19), starting a business (+0.03), and
getting electricity (+0.01). Contrariwise, the score
of getting credit has decreased 5 points and the
rank has passed to 112 from 90. The two indicators
paying taxes and resolving insolvency remain un-
changed (see figures 6.8 and 6.9). Note that a new
bankruptcy law came into force in August 2018. Ho-
wever, the Saudi Arabia has not received any valua-
tion in 2019 and is ranked 168th with zero score on
the resolving insolvency indicator.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 6.6: Ranking on Ease of Doing Business of Saudi Arabia in 2019 and
Compared with Other Economies

DB 2019 Ease of Doing Business Score

0 100

81.28
58.30
Regional Average (Middle East & North Africa) United Arab Emirates
58.56
Egypt, Arab Rep.
60.98 67.19
Jordan Oman
63.50
Saudi Arabia

Source: Doing Business 2019

Figure 6.7: Ranking on Doing Business Topics in 2018 and 201990

Rank =1 is the best

168 168
161 158

138 141

112

90
83
76 78
64 59
59

38 36
24 24
10 7

Starting Dealing with Getting Registering Getting Protecting Paying Trading Enforcing Resolving
a Business Construction Electricity Property Credit Minority Taxes across Contracts Insolvency
Permits Investors Borders
2018 2019

114
 Chapter VI: Entrepreneurship and Innovation

Saudi Arabia Competitiveness

The Global Competitiveness Index - measures nati-
onal competitiveness - defined as the set of institu-
tions, policies and factors that determine the level of
productivity. The report covers 140 economies and
from a score of 100. In the 2018 Global Competiti-
veness Report of the World Bank, Saudi Arabia ran-
ked overall 39th out of 140 countries involved (United
Arab Emirates: 27th, Qatar: 30th, Kuwait: 54th, Egypt:
94th).
Table 6.2 shows the classification of the five first
economies and MENA countries. The KSA ranks
overall 39th (in 2017, the KSA ranked 30th among 137
countries) with a score of 67.5 and can count on
a favorable macroeconomic environment that has
withstood the upheavals of recent years, characte-
rized by low oil prices. It has a modern infrastruc-
ture (75.5 and 40th) and the 17th largest market in
the MENA region. The ambitious set of reforms in-
corporated in its Vision 2030 will enhance the pri-
vate sector’s dynamism and capacity for innovation
in the country, which is currently one of its relative
weaknesses.91
Research institutes and formal education will need
to improve to boost the country’s level of innovation.
Saudi Arabia should improve the quality of its edu-
cational programs with the needs of the economy to
ensure that graduates have the skills they need. In-
solvency frameworks are currently penalizing busi-
ness dynamism (51.2, 114th), the KSA labor market
ranks 102nd, and the effectiveness is affected by a
number of constraints and regulations that reduce
the overall level of efficiency and use of talent.

Table 6.2. Global Competitiviness Ranking of Five First Economies and MENA Region, 2018

Diff. from 20172

Diff. from 20172

Rank Economy Score1 Rank Score Rank Economy Score1 Rank Score

United States 85.6 - +0.8 50 Bahrain 63.6 -4 -0.2

1

Singapore 83.5 - +0.5 54 Kuwait 62.1 +2 +0.5

2

Germany 82.8 - +0.2 73 Jordan 59.3 -2 +0.1

3

Switzerland 82.6 - +0.2 75 Morocco 58.5 +2 +0.8

4

Japan 82.5 +3 +0.9 80 Lebanon 57.7 -5 -0.1

5

Israel 76.6 - +0.4 87 Tunisia 55.6 -1 +1

20

United Arab Emirates 73.4 - +1.1 89 Iran, Islamic Rep. 54.9 -1 +0.4
27

Qatar 71.0 +2 +0.6 92 Algeria 53.8 - +0.3

30

Saudi Arabia 67.5 +2 +1.6 94 Egypt 53.6 - +0.4

39

Oman 64.4 +14 +3.4 139 Yemen 36.4 -4 +0.9

47

East Asia and the Pacific Middle East and North Africa Europe and North America

Source: Extract from the Global Competitiveness Index 2018 Rankings

115
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Innovation Policies and Incentives in KSA
Saudi Vision 2030 is a plan to reduce Saudi Arabia’s
dependence on oil and diversify its economy. Sci-
ence, technology and innovation are offering more
solutions than ever to modern developmental chal-
lenges. The innovation policies concern three major
indicators:
1) planning for science, technology and innovation
in the Kingdom,
2) coordination between research and scientific in-
stitutes in the Kingdom, and
3) evaluation of scientific research and innovation
outputs.
The goal of Saudi Arabia to diversify its economy
depends greatly on innovation and entrepreneur-
ship. Educational institutions play a key role of buil-
ding a culture of innovation and entrepreneurship.
Various institutions (not exhaustive) supporting
creativity and innovation in Saudi Arabia include:
KAUST (King Abdullah University of Science and
Technology), KACST (King Abdulaziz City for Scien-
ce and Technology), Misk 500, Islamic Development
Figure 6.8: The 8 Targets of King Abdul Aziz City for Science and Technology
350
experts (cumulative) qualified through
technical leaders’ preparation program
13
enterprises (cumulative) required
TECHNOLOGY
for content development TRANSFER AND
LOCALIZATION
125
technologies (cumulative) to be developed
and localized in targeted strategic sectors
20,000
annual research papers issued
by scientific institutions in the Kingdom
Bank, i2- the Institute for Imagination and Ingenuity,
Hayy: Creative Hub, Ithra, Accelerate Makkah, and
Art Jameel.
The implementation of the first five-year plan for
science, technology and innovation was launched
under the Eighth Development Plan (2005-09)92.
During the period 2005-2009, Saudi Arabia has wit-
nessed significant progress in science, technology
and innovation. The Ninth Development Plan (2010-
14)93 “aims at indigenization and development of ad-
vanced strategic technologies in all productive and
service sectors, as well as in all components of the
science, technology and innovation system, with the
aim of raising productivity and enhancing competi-
tiveness”.
The King Abdulaziz City for Science and Technology
set 8 targets (see Figure 6.8) in line with the Nati-
onal Transformation Program (NTP) 2020: Support
of research (2 targets), localization of technology (3
targets), and innovation (3 targets).
3,600
jobs (cumulative) to be generated in stratup
companies emerging from the incubator
and business acceletator program
800
stratup technology companies (cumulative)
INNOVATION
that will be set up and supported through
the innovative research support program
200
RESEARCH service (cumulative) to be provided
SUPPORT to government and private sector bodies
5,000
patents (cumulative) issued in the Kingdom
Source: Towards Saudi Arabia’s Sustainable Tomorrow 94
116

The following chart (Figure 6.9) shows the total
expenditure on scientific research, innovation and
technology, in 2016. The R&D Support Program at
universities was launched in 2017 as part of the
National Transformation Program and was tasked
with overseeing its implementation and monitoring
its progress to the Research and Development Offi-
ce at the Ministry of Education. A budget of 6 billion
riyals has been allocated to the program until 2020.
Recognizing the key role that innovation plays as a
driver of economic development, it will be necessary
for policymakers to have the capacity to measure
and evaluate results. They will need innovation in-
dicators to measure this capacity, that go beyond
traditional input measures, such as the level of R&D
funding. Indicators need to be available to support
policy development as an ongoing process. The
Global Innovation Index (GII) is a well-recognized
composite index developed jointly by Cornell Uni-
versity, the European Institute of Business Adminis-
tration (INSEAD) and the World Intellectual Property
Organization (WIPO). This indicator uses quantita-
Figure 6.9: Expenditure on Scientific Research, Innovation and Technology, in 2016
Scientific research expenditure
USD 45.71 million (SAR 171,428,559)
Support of inventors
USD 7.47 million (SAR 28,000,000)
Science technology and community
USD 13.27 (SAR 47,777,600)
Science technology and innovative systems
USD 379.11 thousands (SAR 1,421,679)
Diversification, development and strengthening of support
sources for activities: USD 5.68 million (SAR 21,291,284)
117
Chapter VI: Entrepreneurship and Innovation
tive data, such as enrollment rates and the use of
the Internet, and self-data are extracted from sur-
veys of business leaders, government leaders and
executives. It considers the GII as it relates to GDP
per capita (UNCTAD, 2014).
The GII measures the innovative performance of
126 countries representing the largest proportion
of global GDP. This year, the index bears the slogan
“Revitalizing the World with Innovation,” focusing on
innovation in the energy sector around the world.
The GII index includes 80 sub-indicators to provide a
comprehensive view on various areas of innovation.
The index is based on detailed metrics in two main
axes, including innovation inputs: (1) Institutions, (2)
Human capital and research, (3) Infrastructure, (4)
Market sophistication, and (5) Business sophisti-
cation and innovation outputs: (6) Knowledge and
technology outputs and (7) Creative outputs. Figure
6.11 presents the framework used by the Global In-
novation Index.
Institutional structures of science, technology and
innovation USD 8.18 million (SAR 30,668,773)
Science and technology human resources
USD 13.64 million (SAR 51,146,223)
Advanced Strategic technologies
USD 31.73 million (SAR 119,201,715)
Redearch and development capabilities
USD 23.00 million (SAR 86,277,807)
Technology transfer and development
USD 24.62 million (SAR 92,316,281)
Source: Towards Saudi Arabia’s Sustainable Tomorrow
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Framework
Figure of Framework
6.10: the Global Innovation
of The Index 2020
Global Innovation Index 2019

INSTITUTIONS
Political environment
Regulatory environment
Business environment

KNOWLEDGE AND
HUMAN CAPITAL AND RESEARCH
TECHNOLOGY OUTPUTS
Education
Tertiary education Knowledge creation
Research and development (R&D) Knowledge impact
Knowledge diffusion

INFRASTRUCTURE Innovation Innovation

Input Output
ICTs Sub-Index Sub-Index
General infrastructure
Ecological sustainability

MARKET SOPHISITCATION CREATIVE OUTPUTS

Credit Intangible assets
Investment Creative goods and services
Trade, competition, & market scale Online creativity

GLOBAL
INNOVATION
BUSINESS SOPHISITICATION INDEX

Knowledge workers
Innovation linkages
Knowledge absorption

Source: GII, 2019 95

The following Table 6.3 shows the progression of
the GII for Saudi Arabia during the period 2017-
2019. Saudi Arabia ranked 68th by the GII in 2019,
despite falling seven places from last year, it ranked
61st in the 2018 index (55th in the 2017 index). The
score also fell by 3.27 or 9% over a period of 2 years.
Saudi Arabia is more innovative in inputs, it is ranked
49 in 2019, and less innovative in outputs with score
19.46 and ranked 85 among 129 countries.
All indicators (except business sophistication indi-
cator) have declined during the last 3 years and Sau-
di Arabia should take steps to improve its position
globally.

Table 6.3: Global Innovation Index – Saudi Arabia (2017-2019)

Year (Number of Country) 2017 (126 Countries) 2018 (127 Countries) 2019 (129 Countries)

Score (0-100)/Rank (The best ranked 1) Score Rank Score Rank Score Rank

GII Index 36.2 55 34.43 61 32.93 68

Innovation Inputs 47.3 46 46.73 46 46.4 49

Institutions 52.4 88 51.9 94 51.3 104

Human capital and research 46.5 31 47.7 24 45.5 29

Infrastructure 53.3 40 49.4 51 48.9 55

Market sophistication 49.4 51 51.7 41 51.9 47

Business sophistication 35 54 33 52 34.3 48

Innovation Outputs 25 66 21.81 78 19.46 85

Knowledge and technology outputs 21.6 62 20.2 73 17 87

Creative outputs 28.4 74 23.4 83 21.9 86

Source: GII Reports

118

An Interview with
Ms. Muna Abu Sulayman
A Leader on Entrepreneurship and
Humanitarian Development in KSA
1) Under the Kingdom’s Vision 2030, entrepre-
neurship licenses were introduced in 2017 to
bolster the SMEs sector. How do you see this
breakthrough move in nurturing a new breed of
entrepreneurs in the Kingdom?
The license is part of the initiatives that still require
a huge uptake, which remains to be seen. However,
recently, we saw a mandate as well as the ecosys-
tem creation to increase local content and award
small and medium businesses 30% of government
contracts, that could encourage more local entre-
preneurs to invest in more sectors (other than food
and beverage). Tourism and entertainment sectors
have also been a boon to the small and medium en-
terprise sectors as they have created new opportu-
nities.
2) How aligned is the entrepreneurship strategy
with Vision 2030? What is meant by entrepreneur-
ship strategy?
An alignment of the strategy and Vision 2030 may
take some time to take place. Nevertheless, a lot of
efforts have been made, such as creation of rele-
vant entities that would hopefully nurture the poten-
tial of the entrepreneurship.
3) As a prominent businesswoman, what additio-
nal policies would you suggest promoting women
entrepreneurs?
Within the allocation of opportunities, we have to re-
serve some for female entrepreneurs. We also have
to increase educational resources to them, as many
start a small business and are unable to grow it to a
medium business due to the lack of access to finan-
cing, from formal and informal sources.
119
Chapter VI: Entrepreneurship and Innovation
Biography of Muna Abu Sulayman
Muna Abu Sulayman has had immense ex-
perience in the field of development, women
empowerment, and poverty alleviation. She
was appointed by the UNDP as the first Saudi
Arabian woman to become a Goodwill Am-
bassador, as well as UNICEF’s Goodwill Am-
bassador. She also served as a Regional Ex-
pert for the UN World Humanitarian Summit.
In addition, Muna built the Alwaleed Bin Talal
Foundation and served as the Secretary Ge-
neral and Executive Director. She focused on
four areas: promoting East/West dialogue,
women empowerment, poverty alleviation,
and disaster relief.
Muna has been recently named one of the
“100 Most Powerful Arabs” by Gulf Business
Magazine for her work on Entrepreneurship
and Humanitarian Development. She is only
the second Saudi woman to be included on
this list, alongside 24 other Arab and Arab
Diaspora women. In addition, Muna’s role as
co-host of the Arab world’s #1 talk show has
served as a public platform to discuss social
issues. She has partnered on several socially
driven establishments, such as Niya, 3S, and
Arab Digital Reform Institute.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Incubators and Startups
Startups and incubators are often lumped together,
meaning confusion surrounds what differentiates
them. However, there are some important differen-
ces that are vital to know. A startup is a company
or project initiated by an entrepreneur to seek, ef-
fectively develop, and validate a scalable business
model96. Entrepreneurship refers to all new busi-
nesses, including self-employment and businesses
that never intend to grow big or become registered,
while startups refer to new businesses that intend
to grow beyond the solo founder, have employees,
and intend to grow large97. The key purpose of an
incubator is to support startups at a very early sta-
ge to develop. Incubators are various programs
which help individuals solve difficulties associated
with launching a startup. Incubators offer material
resources, personalized support or the connecti-
on with other entrepreneurs, investors or potential
customers. These structures provide a workspace,
seed funding, mentoring, training and other bene-
fits for creators, scientists or engineers, wanting to
turn their “innovative” project into a real company.
The incubator approach is focused on intellectual
property and product development, while an acce-
lerator is more pragmatic. Incubators tend to allow
startups to physically base themselves within the
120
incubator for a longer support periods – months or
even years. They are also more likely to be launched
by non-profit organizations like universities, govern-
ments or charities.
Accelerators operate on the same principle as in-
cubators, but they serve to accelerate the develop-
ment of a company, and therefore propose a shor-
ter support period (from 3 to 6 months). The work is
more focused on the technical part and the growth
of the company. The income model is also different
because unlike a rent for an incubator, the accelera-
tor takes shares in the start-up and therefore plays
the role of investor.
Saudi Arabia has 16 incubators and 4 accelerators
distributed in 4 regions: central region (8 incubators
and 1 accelerator), East region (3 incubators), West
region (3 incubators and 3 accelerators), and South
region (2 incubators).
The size and maturity of the startup ecosystem is
where a startup is launched and where it develops
to have an effect on the volume and success of the
startups. Figure 6.11 provides the framework of
startup ecosystem:
 Chapter VI: Entrepreneurship and Innovation

Figure 6.11: Framework of Startup Ecosystem98

BIG
COMPANIES

SUPPORT UNIVERSITIES
ORGANIZATIONS

STARTUP ECOSYSTEM
ꞏ Ideas inventions and research
ꞏ Startups at various stages
ꞏ Entrepreneurs
ꞏ Startup team members
ꞏ Investors
ꞏ Mentors
ꞏ Advisors
ꞏ Other entrepreneurial people
ꞏ People from related organizations

FUNDING
RESEARCH
ORGANIZATIONS
ORGANIZATIONS

SERVICE
PROVIDES

Fundraising is an essential element during the star-
ting and development phases. The startup needs
starting funds to build the company’s infrastructure.
As the business grows, the startup needs to inject
additional funds for the expansion of the business.
Depending on the age and position of your compa-
ny in the market, different financing possibilities are
available. The following figure shows how startup
funding works in different stages of startup finan-
cial cycle.

121
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 6.12: How Startup Funding Works99

Source: Anna Vital, 2005

122
 Chapter VI: Entrepreneurship and Innovation

The startup funding landscape in Saudi Arabia has
faster over the past years. Figure 6.13, the first half
of 2019 saw US$ 40 million invested in Saudi-based
startups and number of deals (26) in the Kingdom100.
Figure 6.13 shows the total funding increased by
82% from the same period H1 2018 and H1 2019,
indicating increased desire from local and interna-
tional investors in Saudi-based startups, in addition
to startups that progress to later stages of deve-
lopment. The number of deals in Saudi Arabia in-
creased by 44% from H1 2018 to H1 2019. Saudi
Arabia expects that 2019 will surpass 2018 in terms
of number of deals and total funding.
According to Saudi Arabia Venture Capital, the
Kingdom ranks among the top three MENA coun-
tries with US$ 40 million of total funding (after UAE:
US$ 311 million, and Egypt: US$ 53 million), and
the fourth with 26 deals in H1 2019 (UAE: 68 deals,
Egypt: 49, and Lebanon: 30). The e-commerce, de-
livery & transport, data analytics, food & beverage
and agriculture make the top 5 by total funding and/
or number of deals in Saudi Arabia.

Figure 6.13: Yearly Funding Evolution in KSA (US$ Million)

Yearly funding evolution in M$ in the Saudi Arabia

34

40M
41M 30
40M
35M 26
25
30M
32M
20
19
Funding in Million

25M
Number of Deals

20

16
20M
15
19M
15M

10
10M

5M
7M 8M 5
7M
1M
0M 0M
2015 2016 2017 2018 H1 2019

Disclosed KSA Funding MAGNiTT Undisclosed Funding Estimate (M) No. of Deals

123
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

The top 5 funding rounds are completed by (1)
Noon Academy, the Riyadh-based EdTech star-
tup, (2) Nana Direct, a grocery delivery startup; (3)
Foodics, a POS system start-up that offers food
order management solutions; (4) Red Sea Farms,
the AgriTech startup that spun out of KAUST and
develops saltwater-tolerant crops and greenhouses;
and (5) GetMuv, a fitness education and facilitation
app. Figure 6.16 shows the various venture capital
contributors for funding startup.

Figure 6.14: Highest Disclosed Funding Rounds in Saudi Arabia in H1 2019

Source: Saudi Arabia Venture Capital

According to the report published by Saudi Arabia

Venture Capital (2019), twenty startups has recei-
ved funding from Venture Capital.

Figure 6.15. Saudi Arabia’s Top 5 Industries by Number of Deals in H1 2019

Source: Saudi Arabia Venture Capital Snapshot

124
 Chapter VI: Entrepreneurship and Innovation

Figure 6.16. Saudi Arabia’s Top 5 Industries by Total Funding in H1 2019

Source: Saudi Arabia Venture Capital Snapshot

Venture Capital and Private Equity

in Saudi Arabia
The Council of Ministers of Saudi Arabia during its The following section discusses the difference and
session on 1 August 2016 licensed the Public In- the relationship between venture capital and the pri-
vestment Fund and Ministry of Commerce and the vate equity, the reality and experience of venture ca-
Industry to establish a holding fund called “Fund pital investments in Saudi Arabia, the infrastructure
of Funds” with a capital of SAR 4 billion. The esta- that should be available to ensure the success of
blishment of the fund comes within the framework venture capital funds, and the role of investment in
of Vision 2030 by activating the role of the private non-listed companies in supporting investment and
sector and increasing its contribution to GDP by creating value in the Saudi economy.
stimulating investments related to venture capi-
tal and private equity in non-listed companies. The
fund’s main objective is to support and stimulate Figure 6.17: Targets of “Fund of Funds” 101
investment opportunities for startups and SMEs. It
is expected that the achievements of the Fund will
be reflected in the contribution of GDP to about 400
million riyals by the end of 2020 and the creation of
more than 2,600 jobs. It is also expected that the
contribution to the GDP will reach about 8.6 billion
riyals and create approximately 58 thousand jobs
by the end of 2027. Figure 6.17 exhibits the targets
fixed by the “Fund of Funds”.

125
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Venture Capital Vs Private Equity and their Role in
Financing Startups and SMEs
Private equity and venture capital prefer different
types and sizes of companies, invest different
amounts of money, and claim different percentages
of equity in the companies in which they invest. Ven-
ture capital is a type of investment in private equity
for non-traded companies with the aim of advancing
early stages companies, startup companies and
small businesses that are seen as having the poten-
tial to break out. The investment doesn’t have to be
just financial but can also be offered via technical or
managerial expertise. The venture capital is taking a
risk that the newer company delivers and does not
deteriorate. These companies are typically opera-
ting in non-traditional sectors or new technologies
or developing innovative products with very high
risk and high profit opportunities. These types of
companies are difficult to be financed by traditional
financial institutions, especially commercial banks,
whose main objective is to preserve the capital of
depositors and make profits by providing a range of
financial services to small, medium and large com-
panies operating in traditional low-risk areas and
generate cash flows capable of repaying financing
with adequate guarantees to the Bank. Commerci-
al banks cannot be blamed for these shortcomings
because they are not eligible to evaluate companies
and principally innovative products. Hence, the im-
portance of venture capital funds to support the
emergence of these companies in the early stages
and then to achieve the Vision 2030, which focused
on the role of entrepreneurship.
Private equity firms mostly buy mature companies
that have already been established. Companies may
be deteriorating or not making profits that should
be due to inefficiency. Private equity firms purcha-
se these companies and streamline operations to
increase revenue. Venture capital companies, on
the other hand, mostly invest in startups with high
126
growth potential102. Private Equity firms will buy
100% of the company and thus have total control.
Partners in private equity companies are generally
classified into two categories: (1) Investors, called
limited partners, representing financially full-fledged
institutions and individuals who pay for that return
upon exit. (2) General Partners: Representing the
management, usually their role is to seize the op-
portunities of acquisition and then help the manage-
ment of the target company to improve the way it
works and provide the necessary expertise and pre-
pare the company to reach the highest market value
possible at the exit.
Due to its non-disclosure nature, it is not possible
to establish accurate statistics on the operations
completed by private equity companies in the Saudi
market, but most sources and reports of research
role in the GCC market indicate that the annual num-
ber of operations is very limited compared to what
happens in mature or developed markets. In 2018,
only Jadwa investment had achieved four bolt-on
acquisitions for three of its private equity portfolio
companies in 2018. All four transactions were in
the healthcare sector, spanning medical supplies,
dental services, and IVF fertility services, with an ag-
gregate value less than SAR 400 million. According
to Preqin data, the amount of funds raised by ME-
NA-focused funds dropped by 65% in 2018103.
The Saudi Council of Ministers has created the
Saudi Arabia Venture Capital and Private Equity As-
sociation, mandated to develop the private equity
and venture capital sector. The association aims to
foster closer collaboration between innovative, high
growth businesses and venture capital and private
equity companies.
 Chapter VI: Entrepreneurship and Innovation

Islamic finance can become an immense enabler

for the expansion of venture capital and
private equity Sharīʿah compliant investment in the Kingdom.

Figure 6.18: MENA-Focused Private Equity Funding104

Middle East & North Africa-Focused Private Equity Fundrausing

9
1.200

Aggregate Capital Raised ($mn)

8

7 1.000
No. of Funds Closed

6
800
5
600
4

3 400

2
200
1

2010 2011 2012 2013 2014 2015 2016 2017 2018

No. of Funds Closed

Aggregate Capital Raised ($mn)

Conclusion
There is no doubt that Saudi Arabia has done a lot
and continues to offer entrepreneurship and innova-
tion initiatives to achieve the Vision 2030. The KSA’s
entrepreneurship ecosystem is relatively new, and
most ecosystem support institutions were created
between 2011 and 2015.
Therefore, in addition to the government’s strong
commitment to support entrepreneurship, there are
aspects that need to follow before innovative en-
trepreneurial activity can have a strong economic
impact on the country. Three major international in-
dicators should be improved in the coming period.
In 2018, the first indicator is the World Bank Ease of
Doing Business Rating, Saudi Arabia saw a score of
63.50/100 and Ranked 92/190. The second indica-
tor is the World Bank Starting a Business Rating that
saw a score of 80.07/100 and ranked141/190. And
finally, the World Economic Forum Global Competi-
tiveness ranked Saudi Arabia 39 among 140.
127
Having said this, it is very likely that Islamic finance
can become an immense enabler for the expansion
of venture capital and private equity Sharīʿah compli-
ant investment in the Kingdom. As understood, the
core of Islamic finance focuses on the sharing of
profit and loss (risk sharing) from Islamic financing
or investment structure. Furthermore, venture capi-
tal structure, in principle, can nurture entrepreneurs’
creativity and innovative ideas to be put into practi-
ce; which fits well with the growing number of young
entrepreneurs in the Kingdom.
We therefore believe that Saudi Arabia is moving
towards achieving Vision 2030 goals and we are
convinced that the entrepreneurial environment has
made clear progress over a relatively short period.
The Kingdom however has a great potential which
can be realized through continuous efforts and de-
dication to lead the region in entrepreneurship and
innovation.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER VII:
FINTECH
128

Islamic Finance has a foundation of trust,
therefore it is not difficult to see why and how FinTech
can be of great value to Islamic Finance.
Overview
Financial technology, or FinTech, is crucial for effi-
cient, transparent, and reliable financial transacti-
ons. Given the role of FinTech and blockchain tech-
nologies in transparency and verifiability of data,
they are often described as “Trust Machines”. Isla-
mic Finance has a foundation of trust, therefore it is
not difficult to see why and how FinTech can be of
great value to Islamic Finance.
FinTech and Financial Industry
Financial Technology (in short FinTech) emerged as
a concept around a decade ago, even though it exi-
sted long ago in other forms, and became a major
force in modern business and Finance. The broad
definition of FinTech is utilizing technology to create
better, more affordable, and more efficient financi-
al services. It includes companies operating in the
payment industry, insurance, wealth management
and financial advisors, remittances, and all other
verticals of the financial industry. To make financial
services more efficient and cost-effective, FinTech
companies utilize a wide range of new technologies,
including for example:
• Blockchain
• Artificial Intelligence (AI)
• Machine Learning (ML)
• Robo-Advising
• Big Data
• Internet of Things (IoT)
• Data Analytics
• Biometrics
FinTech companies are disrupting the financial in-
dustry because they showed great success in im-
proving customer experience, taking advantage of
economies of scale, and reducing costs of financial
129
Chapter VII: FinTech
This chapter provides an overview of FinTech in Sau-
di Arabia. In addition to discussing the current Saudi
FinTech market, the chapter also describes the so-
cial impact of FinTech in the Kingdom and how the
transient phase of reforms across various facets in
the economy will pave the way for the promising pro-
gress of FinTech ecosystem in Saudi Arabia.
services and time required to execute a transaction
especially in the payments and lending space.
We can imagine a range of opportunities for FinTech
to make quantum leaps in the financial industry. For
example, biometrics can be used to give consumers
the ability to pay using facial recognition. We may
also use image quick response codes (QR) and near
field communication (NFC) to make payments faster
and easier. Or probably having a robo-advisor to help
consumers allocate resources in optimal investment
decisions putting consideration pre-set constrains
like the level of risk, family situation, and career pro-
gression. Also, using rapid underwriting and ongoing
monitoring of vehicles and properties in the insuran-
ce industry. It displays how FinTech is going to dis-
rupt many verticals in the financial industry like:
• Payments
• Wealth Management (InvesTech)
• Insurance (InsurTech)
• Lending and Financing
• Risk management
• Regulations and compliance (RegTech)
• Remittance and Transfer
• Banking technology infrastructure, and much
more
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Regulators and incumbent financial institutions first
viewed those new FinTech disruptors as a threat
rather than an opportunity. Then they began to re-
alize that the growth of this industry is inevitable
and that, in many cases, FinTech companies pro-
vide great solutions for persisting problems. Banks
and venture capital funds started investing in new
FinTech startups, and regulators started realizing
the need to cope with this fast-paced industry, and
many countries started competing in an attempt to
become the FinTech Hub in its region by developing
ecosystems that would attract FinTech startups
and help them succeed and flourish.
What Makes FinTech
Succeed and Flourish?
The success of FinTech in general depends mainly
on six key factors:
• Market size
• Regulations
• Talents
• Funding and financing
• Entrepreneurial ecosystem
• Tech savvy end-users
This explains why when entering a new market,
FinTech companies first look for economic, demo-
graphic, and technology data for that specific regi-
on. Hence, later in this chapter, Saudi market data,
demographics, technology, and internet penetration
data, along with other useful information will be dis-
cussed to examine to what extent “FinTech” could
be the new Saudi “crude oil”. The chapter will end
with a real-life market case-study and recommen-
dations to the way forward.
130
History of FinTech in
Saudi Arabia
If we agree that the abstract definition of FinTech
is the use of technology to execute financial trans-
actions, then the birth of FinTech in Saudi Arabia
was in 1990, when Saudi banks introduced the first
automated teller machines (ATMs) to serve custo-
mers during out of office hours. Since then, the use
of technology in financial services has been incre-
asing. In 1990, SAMA introduced the Saudi Payment
Network (SPAN) to encourage the use of electronic
means of payments within the financial system. In
1997 SAMA introduced the interbank transfer sys-
tem to help digitize the remittance process between
local banks electronically. In 2004, another milesto-
ne was achieved by launching the Saudi payment
market (SADAD Billing System). In 2007, the Saudi
Stock Market Exchange Platforms was launched to
implement live electronic transactions in the stock
market. Moreover, a major milestone took place in
2015 when SPAN was rebranded to (MADA) and
became the Saudi local switch. Soon afterward,
in 2018 QR payment digital wallets, crowdfunding
platforms, and MADA contactless mobile payments
were all introduced. It is believed that the launch of
MADA as a local switch and establishing the Sau-
di Payments Company is a sign that SAMA is pa-
ving the way for huge digital transformation that is
expected to change the face of the Saudi financial
market in the years to come.
 Chapter VII: FinTech

Figure 7.1 Evolution of Fintech

1990 Introduction of ATMs

Introduction of SPAN network 1990

(POS machines)

Introduction of the Saudi Interbank Express

1997
Electronic Transfer system (SARIE)

Introduction of 2004
SADAD billing system

2007 Introduction of Tadawul platform

Introduction of 2015
MADA local switch

Introduction of digital wallets

2018 and QR payments

Introduction of
2018
crowdfunding platforms

Introduction of MADA
2018 mobile payments

Understanding the Current Saudi FinTech Market

We can describe the Saudi FinTech ecosystem (ex-
cluding banks and other financial institutions) by
breaking it down into five main categories, as follows:
• Banking electronic services and infrastructure
companies: This category includes companies
that offer cash management services, ATM ma-
chines, and banking security services.
• Digital payment companies: This includes pay-
ment gateways, point of sale service providers,
remittance, and the newly licensed digital wallets
• Equity/Crowdfunding companies: This includes
a few crowd-funding platforms recently regula-
ted by the Capital Market Authority (CMA)’s Fin-
Tech Lab.
• Business tools: This includes aggregators and
financial information providers.
• Others: This category includes companies that
provide electronic financial services or support
services for FinTech companies. e.g. healthcare
financing, individual and corporate credit reports,
identity verification services and KYC (Know
Your Customer) services.

131
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Major Trends in the Swarming Saudi
Financial Sector & Major Reforms
Saudi Arabia is witnessing a major transformation
and is moving steadily towards achieving the ambi-
tious 2030 Vision. Below are highlights of some of
these achievements:
• The launch of FinTech Lab: In December 2017,
the Capital Market Authority (CMA) launched
FinTech Lab, a new initiative aimed at supporting
innovation and the development of new products
in the financial technology (FinTech ) sector. The
Lab aims to create a regulatory framework de-
signed to enhance and support innovation in the
financial market, the regulator said in a state-
ment. Participants can use the FinTech Lab to
run a trial of their products and services in an en-
vironment with more lenient regulations.105 As of
end-2018, the CMA granted the FinTech permits
to total 8 applicants to create equity crowdfun-
ding as well as robo-advisory platforms.106
• The launch of the regulatory sandbox: In Febru-
ary 2019, SAMA announced that it had designed
and implemented a sandbox regulatory environ-
ment to understand and evaluate the impact of
new technologies in the financial services mar-
ket in the Kingdom. This step aims at achieving
a several of strategic objectives of linking the
sandbox environment with the Kingdom’s vision
2030 that aims at promoting economic growth
and boosting investment activities by moving
into a cashless society and by promoting the
principle of financial inclusion. SAMA granted
permission to work in the sandbox environment
to 11 local and international banks to open and
update accounts without the need to visit the
branches, as well as the permission to 7 com-
panies to provide various services in the field of
digital payments. Services and products being
tested currently include E-wallet services, P2P
transfers and purchases through QR Codes as
well as direct international transfers through fi-
nancial technology companies in addition to the
132
aggregators of Point of sale (POS) devices, SA-
DAD bills, SADAD account and MADA online.107
• The launch of “ABER”: Central banks of Saudi
Arabia and the United Arab Emirates announced
the successful launch of cross-border settle-
ments between the two countries over a block-
chain network using a jointly developed digital
currency called (ABER).108
• Enhancing Financial Inclusion: SAMA issued in
March 2019 the rules regulating “Agent Banking”.
The regulation aims to expand the scope of ban-
king services and products; enhance financial
inclusion for the unbanked or underbanked po-
pulation while maintaining the soundness and
stability of the banking sector; encourage banks
to contract with agents when offering banking
services to reduce the cost of banking servi-
ces.109
• Issuing the e-Commerce Law: In October 2019,
the Ministry of Commerce and Investment in-
troduced a new Electronic Commerce Law (the
“E-Commerce Law”), as part of the Saudi Vision
2030 to achieve the Kingdom’s digital transfor-
mation journey. The Law applies to all those pro-
viding goods or services via an electronic store
within the KSA or any electronic platform or store
that can be accessed by consumers in the KSA.
The E-Commerce Law allows service providers,
whether having a commercial registration in KSA
or not, to sell their goods and services to con-
sumers online. By opening up the E-Commerce
sector in this manner, the E-Commerce Law
aims to stimulate and develop E-Commerce ac-
tivity whilst regulating the relationship between
all types of service providers and consumers. as
well to improve overall consumer confidence in
e-commerce transactions. It includes provisions
intended to protect consumers against fraud, de-
ception and misrepresentation of information.110

• Launching “FinTech Saudi”: In May 2018, SAMA
initiated “FinTech Saudi” as a catalyst to deve-
lop the FinTech ecosystem as part of the Saudi
Financial Sector Development Program 2020.111
The initiative aims to promote the Kingdom as
a FinTech Hub embracing a thriving, responsi-
ble ecosystem of banks, investors, companies,
colleges, and state institutions, thereby contri-
buting to the support of financial inclusion and
the rise of digital transactions. Subsequently, in
April 2019, SAMA and the CMA signed a memo-
randum of understanding (MoU) to establish the
FinTech Saudi Center in partnership with King
Abdullah Financial Center.112
• Establishing the Saudi Federation for Cyber Se-
curity: Established in 2017, the Saudi Federation
for Cyber Security and Programming (SAFCSP)
is a national institution under the umbrella of the
Saudi Arabian Olympic Committee, which seeks
to build national and professional capabilities in
the fields of cybersecurity and programming in
line with the established and internationally re-
cognized practices and standards, to expedite
the ascent of the Kingdom of Saudi Arabia to the
ranks of developed countries in the domain of
technology innovation.113
• Establishing the Saudi Authority for Data and Ar-
tificial Intelligence: The Authority will contribute
to the realization of Vision 2030 and enhancing
the efficiency of performance of the public and
private sectors through utilizing the application
of Artificial Intelligence (AI) and Big Data.114
• Launch of instant real-time payment: In April
2019, Saudi Payments, a fully owned subsidiary
of SAMA, has teamed up with Mastercard com-
pany, Vocalink, intending to upgrade the coun-
try’s payments infrastructure and boost the digi-
tal economy. The partnership will enable instant
payments between financial institutions, busi-
133
Chapter VII: FinTech
nesses and consumers, with instant credit trans-
fers, e-invoicing and billing, real-time payment
acknowledgement, remittances, bulk payments
and peer-to-peer money transfers. According to
Saudi Payments, transforming the Kingdom into
a cashless society is at the heart of the compa-
ny’s strategy and in line with the Kingdom’s Visi-
on 2030.115
• Saudi Payments has other FinTech initiatives in-
cluding:
o Naqdi, an app that allows person-to-person
transactions in real-time using mobile phones
only.
o Esal, a national electronic platform for e-invoi-
cing for government entities and businesses
in the Kingdom.116
o The Company also is working on unifying
the technical and commercial standards for
payments based on QR codes technology.
A move that is intended to develop existing
services and to facilitate the implementation
of the technology via a platform that will be
serving all stakeholders in the most efficient
manner, i.e. e-wallet providers, merchants,
and consumers.117
• Updating the requirements to open a bank ac-
count by making it possible in any Saudi bank
online and without the need to visit a branch for
ID authentication. Authentication is done by inte-
grating with the Ministry of Interior system (AB-
SHER).
All this shows that the Kingdom is committed to de-
velop the financial sector and to build an ecosystem
to make Saudi Arabia a FinTech friendly business
environment to attract FinTech companies from
around the world and also to help local FinTech to
grow. For those who believe in the butterfly effect,
the aftermath of all these changes is going to be
huge. The Saudi financial market is moving towards
an exceptionally new era.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Social Impact of FinTech in Saudi Arabia

Saudi Banking and
Some of the main goals of FinTech is to make fi-
nancial services faster, cheaper, easier, more effi-
cient, and to make financial services accessible to
underserved segments. Soon after the adoption of
Payments Market
FinTech in Saudi Arabia, Saudis started witnessing
Saudi banking sector consists of 12 licensed local
an impact on a social level. Thanks to the integrati-
banks and 13 foreign banks 4 of which are licensed
on with the Ministry of Interior’s database “ABSHER”,
but not in operation yet. With SAMA as the regula-
Saudis can now open a bank account without the
ting body which is one of the most firm and strict
need to travel to a branch to authenticate identity.
central banks in the region, recently became one of
This resulted in many Saudis opening new bank ac-
the most agile and willing to embrace new financial
counts and get included in the financial system. All
technologies, while maintaining the same reputable
they need is a smartphone and a valid Saudi ID. This
image. As well as MADA acting as the payment arm
will result in higher financial inclusion rates in the
and local switch that works on all ATM machines,
future and an increase in the percentage of Saudi
POS, payment gateways. And SADAD as a national
banks.
electronic billing & payment system which is unique
Another example of FinTech’s social impact that
to Saudi Arabia.
became the talk of the Saudi society is the smart
utilization of Crowdfunding technology by the Mi-
According to the 55th annual report of SAMA, MADA
nistry of Interior to launch “Furijat” Crowd-donation
card penetration in the Saudi society reached almost
platform in Ramadhan 2019.118 This platform lists
88% with 28.5 million MADA cards issued which can
amounts due for individuals jailed for financial char-
be used both as a debit card for online purchases
ges, and gives the public the chance to make do-
within the borders and as a credit card beyond.
nations to pay their indebtedness . This resulted in
many prisoners –with financial charges only- to be
Also, Saudi Arabia is considered to have one of the
released and achieving community solidarity.
largest if not the largest rates of outflow remittan-

Table 7.1: Saudi Arabia ATM Debit Cards

Year # ATMs Debit Cards Bank Branches

2013 13,883 17,810,653 1,749

2014 15,516 20,550,274 1,912

2015 17,223 22,459,275 1,989

2016 17,887 26,537,349 2,038

2017 18,333 28,402,914 2,079

2018 18,685 28,559,828 2,083

Source: SAMA 55th Annual Report

134
 Chapter VII: FinTech

ces due to the large number of foreign expats wor-
king in the Kingdom (38% of the population) with
outflow remittances volume of 132 billion Saudi Ri-
yals in 2017 with an average of 11% of the private
sector’s GDP. And a huge number of money trans-
fers within the system of 103 million transactions in
2017 with an astonishing volume of 62 trillion Saudi
Riyals ($16.5 trillion)
Despite the FinTech revolution taking place as part
of the Saudi Financial Sector Development Program
(FSDP) that should shift Saudi Arabia to a cashless
society. Cash circulation outside banks have been
increasing for the past few years from 2014-2018,
and have reached more than 180 billion riyals in
2018, as follows:

Table 7.2: Expatriates’ Outflow Remittance

Year SAR Million Private Sector GDP (millions) % of GDP

2013 127,768 1,050,987 12.2%

2014 134,995 1,149,636 11.7%

2015 141,785 1,213,542 11.7%

2016 138,745 1,227,534 11.3%

2017 132,518 1,247,459 10.6%

2018 122,629 1,294,671 9.5%

Source: SAMA 55th Annual Report

Figure 7.2: Cash Circulation Outside Banks

180,132

172,046
170,323
168,492

153,750

2014 2015 2016 2017 2018

Source: SAMA Annual Statistics, 2018

135
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Despite the consecutive increase in volume of cash banks in 2015 was 9.6%, whereas in 2016 and 2017
circulation, the growth rates of cash circulating out- was 1% only. This clearly shows a shift in the gene-
side banks have been decreasing dramatically. For ral Saudi behavior and a tendency to move towards
example, the growth rate of cash circulation outside digital means of payments.

Figure 7.3 Cash Circulation Growth

10%

7%

7.70%

1% 1.02%

2014 2015 2016 2017 2018

Source: SAMA 55th Annual Report

Speaking about the low growth rates of cash circu-
lating outside banks in Saudi Arabia, it is worthwhi-
le reviewing the growth rates of digital payments
especially through POS machines. Central bank’s
data suggest that POS payments have grown dra-
matically over the past five years. The number of
POS terminals in the Kingdom was approximate-
ly 139 thousand in 2014, during which 327 million
payments were made with sales volume of 160 bil-
lion riyals. In 2018 on the other hand, the number
of POS devices more than doubled to 351 million
POS machines and the number of transactions tri-
pled to about one billion POS transactions, and the
volume of sales increased to 232 billion riyals. The
significant increase in the number of payment trans-
actions is due to the change in payment behavior
towards POS machines, especially after the launch
of Atheer service and MADA-Pay/Apple pay e-wal-
lets through which contactless payments are done
on POS machines using NFC technology without
the need for a PIN code for purchases below 100
Riyals. This has encouraged MADA cardholders
and users of these applications to use digital pay-
ment methods instead of cash, which translated as
shown below to a large increase in the number of
transactions but a slight increase in sales volume.

Table 7.3: Volume of Transactions via POS Terminals

Year Sales (Million SAR) No. of transaction (Million) No. of POS terminals
2014 159,970 327 138,779

2015 172,835 395 225,372

2016 182,749 525 267,827

2017 200,468 708 303,646

2018 232,306 1,032 351,645

Source: SAMA 55th Annual Report

136
 Chapter VII: FinTech

Mobile and Internet Penetration

Data from the Saudi Communication & Information
Technology Commission (CITC) revealed that the
Saudi population have 125% mobile subscription
rate and that almost 90% of the population have
mobile internet access by the end of 2017. Further-
more, a study conducted by the General Commissi-
on for Audiovisual Media revealed very interesting
result that around 73% of Saudis are active users of
social media platforms. The study shows that more
than 24 million Saudis are active WhatsApp users
and more than 23.5 watch materials on YouTube.
This is very important to give an impression of the
readiness of the Saudi society to embrace new tech-
nologies like FinTech.
In addition, other than mobile internet access, sta-
tistics from CITC shows that broadband internet
penetration of Saudi households reached 33.6% in
2017, which could offer internet access to those
without mobile internet subscription. This only con-
firms the high internet usage rates in the Kingdom,
which is an essential success factor for any FinTech
solution.

Table 7.4: Mobile Connections Penetration in 2018

Population Mobile Connections Prepaid Postpaid

33,413,660 41,399,00 123.9% 28,482,512 68.8% 12,916,488 31.2%

Source: Saudi Communication & Information Technology Commission (CITC)

Table 7.5: Smartphone Penetration in 2017

Population Mobile Connections Prepaid Postpaid

33,413,660 29,700,000 88.9% 26,000,000 78% 2,500,000 33.6%

Source: Saudi Communication & Information Technology Commission (CITC)

137
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Case Study
In 2015, UniGulf119 realized that there is a great poten-
tial to launch a digital wallet that uses both dynamic
and static QR code as an alternative method of pay-
ment to the local switch (MADA). The main goal was
to take advantage of the high smartphone/internet
penetration along with the Saudi government intenti-
on to move towards the digital economy by providing
a convenient payment solution by smartphone that is
accessible to all kinds of people regardless of age or
geographic location. And also, to contribute in boos-
ting financial inclusion in the Kingdom by “banking the
unbanked” and making financial services accessible
to underserved resident of rural areas, young Saudis,
even Low-income citizens who may not trigger the
appetite of financial institutions. A team was formed
consisting of top Saudi entrepreneurs, experts in re-
tail banking technology, experts in compliance, and
a team of top tier software developers, and decided
to call it (TAHSEEL) which means in Arabic (fund col-
lection).
Unlike many startups around the world, establishing
a legal entity and securing enough funding is not a
problem in Saudi Arabia. Thanks to the seamless pro-
cess by the Ministry of Commerce and Investment
that made establishing a company in Saudi Arabia as
easy as possible, with its famous slogan.120
Nevertheless, at the time banks and regulators were
the main obstacles. Banks were a bit suspicious
about the new concept of FinTech whether it is a
threat or a success catalyst. Banks were reluctant
that they made it very hard to open a bank account.
Other banks that approved opening a bank account
for “TAHSEEL” during 2015-2018 continuously refu-
sed to offer services or potential collaboration due to
3 main reasons:
• Absence of physical location for the virtual busi-
ness (store).
• Absence of license from the regulator to practice
this specific business model
• Difficulty understanding the business model and
the legal entity type that best fits the case.121
For both merchants and customers “TAHSEEL” was
a digital wallet that facilitates payments. Only banks
138
and regulators understood the fact that behind the
scene; a system aggregates all funds into a single
account run by “TAHSEEL” and all funds are then set-
tled to merchant IBANs overnight. Which was a risky
task with an obvious chance of a human error occur-
ring along the manual process, especially that banks
also refused to offer APIs that would help TAHSEEL
automate this whole process. In addition to that, ag-
gregating funds into a single account was a risky
operation in the eyes of the regulator specially when
dealing with a (limited liability company) that could
possibly misuse those huge amounts of aggregated
funds which belongs to other merchants. Regulators
around the world were overwhelmed by the challen-
ges they have to deal with and had to act quickly to
embrace the inevitable new FinTech tide.
It was important at that time to approach Saudi Ara-
bia Monetary Authority (SAMA) to regulate those new
FinTech activities. But SAMA, like many other central
banks, had to be very cautious regulating any new fi-
nancial activity, studying both benefits to the econo-
my and risks associated with it.
TAHSEEL team realized that at the best scenario re-
gulating FinTech activities in Saudi Arabia will take at
least 18 months, which means that bringing the digi-
tal wallet to Saudi Arabia as soon as possible will not
be an easy task.
In mid-2017, the team decided to approach other
neighboring GCC countries hoping that central banks
there would be a little more flexible and willing to
consider regulating FinTech faster than Saudi Ara-
bia. “TAHSEEL” team went to Kuwait, Bahrain, and the
UAE (both Dubai International Financial Center & Abu
Dhabi Global Market) and realized that the chance in
Kuwait to launch the business would be easier due
to the lenient approach adopted by the Central Bank
of Kuwait (CBK) towards disruptive technologies and
the fact that Kuwaiti market is not as congested as
other GCC markets. The team started developing and
testing the solution in a closed environment prepa-
ring for a soft launch. The goal was not to operate
in Kuwait, but rather to have a successful proof of
concept (POC) and then go back to the Saudi central

bank hoping that it would then regulate it. It is impor-
tant to note that for most successful GCC entrepre-
neurs, it always a dream to scale up in Saudi Arabia
because of the huge market.
Around that time, SAMA realized the need to esta-
blish the regulatory sandbox and accepted 3 digital
wallet companies with the same QR pay business
model but (fortunately and unfortunately) “TAHSEEL”
was not among them. SAMA promised “TAHSEEL” to
be accepted in the second cohort of the sandbox, or
to comply with the regulatory framework for QRPay
digital wallets which will be drafted after completing
the testing process of those 3 new companies.
“TAHSEEL” team realized that the chance to take a
first mover advantage in Saudi Arabia is almost im-
possible under current circumstances. Hence, they
decided to look for other untapped chances within
the digital payments market while continuing the tes-
ting and development in Kuwait, and closely obser-
ving the results of the official launch of the 3 digital
wallets in Saudi Arabia for possible market share.
“TAHSEEL” team started immediately diversifying
their portfolio –in case things go wrong with digital
wallets- by adding three other digital payment soluti-
ons to the portfolio. The first is an e-Commerce mobi-
le payment solution targeting SMEs. The second was
a digital payment platform that aggregates SADAD
bills for school tuition fees. The third was a digital
payment platform targeting social media influencers.
By the 3rd quarter of 2018, the launch of digital wal-
lets was on the headlines. Staring by a digital wallet
by a leading Saudi telecom company and two other
digital wallets developed by Saudi startups. Saudis
were so excited for this new payment method, but
soon those three startups faced a great challenge
to onboard customers, and to work on striking deals
with local shops to provide their payment solution in
their outlets to gain visibility and spread.
Around that time, (MADA) -which at the time was
owned and operated by the Saudi central bank- was
preparing to launch its e-Wallet (MADAPay). Even
though MADA pay e-Wallet had a different business
model which acts as a virtual debit card uploaded to
the MADAPay application and uses NFC technology
to execute payments on point of sale machines. It
139
Chapter VII: FinTech
was a trusted alternative method of payment speci-
ally that it is known to be a state-backed local switch.
Soon MADA started taking all the lights especially
that it is accepted on all point of sale machines in al-
most every shop in Saudi Arabia. Obviously, people
choose options that solves the problem better and
easier.
When comparing e-Wallets to digital wallets in Sau-
di Arabia, we notice an challenge that digital wallets
face in the absence of open banking APIs. Using di-
gital wallets with QR payment requires topping up
the digital wallet using debit or credit cards, or direct
bank transfer to the wallet before the user can start
scanning QR codes to make payments, which is an
unnecessary extra step that favors e-Wallets (like
MADAPay) which deducts money directly from users
bank account. Topping up the digital wallet is a pure-
ly e-Commerce transaction that has to go through a
payment gateway, which will charge a fee to make
the transaction. This puts digital wallet companies
against a tough choice. Either to take the burden of
paying those fees for a better user experience hoping
to be able to compete with eWallets. Or to charge the
payment gateway fees on users and risk losing custo-
mers who will obviously see no reason for paying a
fee to enjoy the service; especially when MADA -the
trusted brand- offers a “FREE” alternative that is also
accepted in all shopping outlets all over the Kingdom.
Digital wallets have a great chance to bridge the fi-
nancial inclusion gap in Saudi Arabia and offer a
good digital payment alternative. Saudi Payments
company in conjunction with SAMA are currently
working on the unified QR standard and a new inter-
bank payment system that would make the user ex-
perience of digital wallets more seamless. But only
the introduction of open banking APIs will remove the
unnecessary “top-up” step for a truly seamless expe-
rience and better competition between e-Wallets and
digital wallets as a payment method.
“TAHSEEL” was fortunate to be delayed to the second
cohort to be able to observe the market, maintain
the company image and to enjoy the benefit of the
“second mover advantage” which will be discussed
later in this study. And to focus on other more profi-
table segments in the “young” promising Saudi Fin-
Tech market.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
Saudi Arabia is blessed with
the right recipe to make it a global FinTech Hub.
Lessons Learnt
Regulations
Technology is like time, it is unstoppable. It develops
quickly and crosses geographical boundaries inde-
finitely that regulators oftentimes cannot cope. On
the other hand, Central Banks as regulating bodies
responsible for protecting the financial system have
to thoroughly study and understand the new techno-
logy before it can approve it. It is the dream of any
entrepreneur to deal with a dynamic regulator who is
willing to embrace change. SAMA’s sandbox is built
to serve that purpose and to keep up with entrepre-
neurs before they lose their spark.
Saudi market is expected
to continue
Many entrepreneurs carefully observe the Saudi
FinTech market thinking that it has already reached
its peak after the official launch of few FinTech so-
lutions not knowing that this is only the beginning.
The Saudi market is big enough to absorb many
other FinTech companies even those with similar
solutions. Also, many supporting services that can
be successfully built around existing FinTech s have
not yet emerged. Another promising aspect that will
bring FinTech in Saudi Arabia to a new level is the
regulation of open banking, which have not yet taken
place and will definitely bring FinTech solutions to a
new level and open the opportunity to new FinTech s
to be built around it.
Being ahead of the tide
(innovation)
The world is becoming a small village and it is es-
sential to observe the world’s FinTech market to
anticipate where the market is heading in order to
build a unique solution that solves a current or future
problem. The world is saturated with copies of solu-
140
tions that solve the same problem in similar ways.
But only innovative ideas that are uniquely built to
solve an existing problem in a totally different, easy,
and smart way will stand out.
Second mover advantage
in disruptive innovation
Startups fight for a first-mover advantage in any mar-
ket to increase the chance of dominating the biggest
share in the market. In new technologies, second
mover advantage is often as good as the first mover
if not better. The Second mover advantage can also
guarantee some market share and the advantage of
testing real customer impression about the solution
with a chance to modify the offering without dama-
ging the brand, while first-mover continues to pave
the way for followers. In some scenarios, when first
movers could not absorb the market shock, second
and third movers will be lucky to quickly adjust and
penetrate or exit with minimum loss.
Conclusion
When studying the data discussed in this report al-
together, we realize that Saudi Arabia is blessed with
the right recipe to make it a global FinTech Hub. Sau-
di Arabia is considered a high-income country with
a huge economy, solid financial system, with high
internet and mobile penetration rates. Entrepreneurs
in the Middle East often look for scaling up in Sau-
di Arabia after making some local success becau-
se Saudi Arabia is one of the largest economies in
the world and the largest economies in the region.
Furthermore, being a tech savvy society with ma-
jority of the population under the age of 35 makes
embracing new technologies faster and easier than
many other parts of the world. It is evident that Sau-
di Arabia is taking digital transformation seriously,
and from the data above there are definitely many
promising opportunities awaiting innovative FinTech
disruption.

An Interview with
Ms. Nejoud Al-Mulaik,
Director, Saudi FinTech
1. What has been the greatest achievement of Fin-
Tech in Saudi as a key part of the Financial Sector
Development Program sponsored by SAMA?
The industry has been active as a whole ecosystem
over the last 18 months and it will take several years
of continuous efforts to keep the momentum. Fin-
Tech Saudi developed more than 55 partnerships
with stakeholders and launched the spreading of
knowledge programs such as FinTech tour which is
the largest cluster of events across the Middle East.
Moreover, as we move forward FinTech Saudi will
launch its physical hub by Q3 to support FinTech
start-ups and industry acceleration.
However, there have been a number of notable con-
tributions from FinTech to FSDP. These include:
o The development of several FinTech compa-
nies that are supporting entrepreneurship and
job creation in financial services.
o Development of innovative FinTech soluti-
ons particularly supporting SMEs and other
groups that are underbanked.
o Development of innovative solutions contribu-
ting to the development of a cashless society
2. How has the evolution of FinTech in KSA been
over the last 2 years? Please consider the variety
of platforms and products.
We have seen significant growth in FinTech activity
in Saudi Arabia over the last two years. When we
started FinTech Saudi we identified 14 FinTech s
operating in the Kingdom. Currently, we have 42 Fin-
Tech s operating a number of other entrepreneurs
at pre-commercial and idea stage.
The Regulatory testing environments setup by SAMA
and CMA have contributed to the acceleration in Fin-
Tech activity as they have allowed FinTech s to ope-
rate in Saudi Arabia under a testing license. This has
supported the development of innovative FinTech
solutions in areas such as crowdfunding e-wallets /
e-payments and robo-advisory and lending platforms
141
Chapter VII: FinTech
Over the last 2 years, we have also focused on
spreading FinTech awareness which is now driving
interest in FinTech, particularly from students. We,
therefore, expect this awareness building to result in
more entrepreneurs starting FinTech companies in
the future.
3. How can young people be developed into pro-
ductive entrepreneurs?
o Providing them with Start-Up Experience: We
have initiatives that provide young people with
work experience and internships in FinTech com-
panies. As young people gain experience working
in a FinTech startup environment, some of these
may look to start their own FinTech companies in
the future
o Guidance and Mentorship: Young people can be
supported as entrepreneurs through guidance
and mentorship. We have developed a frame-
work for anyone with an idea on how to deve-
lop it into a FinTech startup. We then provide
FinTech startups with support at every stage of
their development
o Accepting Failure: There is a culture change re-
quired to help young people develop into produc-
tive entrepreneurs and that is accepting failure.
Failure should not be considered a bad thing in in-
novation. It is an opportunity to learn and to grow.
4. How instrumental are educational institutions in
nurturing talent and entrepreneurship skills?
o Educational institutions are important in nurtu-
ring talent and entrepreneurship skills. They are
the first point of call in supporting young peop-
le in making choices. It is important for them to
collaborate with the private sector to provide stu-
dents the right balance between education and
experience.
o We work closely with a number of university
partners to support them with collaborating with
FinTech companies, spreading FinTech aware-
ness and inspiring students to consider careers
in FinTech or start FinTech companies.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
o It is also important for educational institutions
to support the development of skills required
by the FinTech Industry such as data analytics,
software development, coding etc.
5. What are the top three priorities to develop Fin-
Tech in KSA forward?
o Physical Hub: We are currently in the process of
developing a physical hub that will become the
home for FinTech development. We have seen
in other markets that a physical presence dedi-
cated to FinTech will support the progression in
innovation in financial services
o Innovation Programs: We are looking to develop
innovation programs such as competitions and
accelerator programs that support the develop-
ment of FinTech entrepreneurship
o FinTech Adoption: We are developing initiati-
ves to support the growth of FinTech adoption
amongst consumers. This is to support FinTech
s in Saudi to scale quickly
6. Do you think FinTech in KSA is different from
other countries? What value proposition sets itself
apart from the rest
o Every country has different characteristics and
is developing FinTech for different reasons. It is
therefore difficult to compare what we are doing
with other countries.
o Our focus is to develop FinTech activity from
grassroots level. We have a very focused long-
term roadmap that we are currently executing.
This has started with a strong focus on FinTech
awareness over the last 18 months to ensure
everyone has the opportunity to start a FinTech
company / career in FinTech. Going forward we
will be developing initiatives to focus more on
FinTech entrepreneurship.
o It is too early to tell what our value proposition in
Saudi Arabia will be. As we develop the FinTech
ecosystem, we expect specialisms and focus
areas to emerge which we will then support.
o Investments, as for Saudi & MENA region most
of FinTech s VC/investments are at seed/series
A stages and that would indicate an opportuni-
ty for FinTech industry to thrive as it caters to
specific areas in demand for each local market
in the region including Islamic focused solution.
142
7. What are the major drivers and challenges for
growth of startup companies in KSA?
Drivers:
• Strong government support and initiatives for
start-up development.
• Demographics that support start-up companies
(large population, young tech savvy population
etc.)
• Lots of opportunities created by limited competi-
tion and social and cultural changes.
Challenges
• Stigma attached to failure.
• A pool of talent with the skills required by start-
up companies.
• Active role models / mentors / angel investors to
support and guide FinTech companies.
Biography of Ms. Nejoud Al-Mulaik
Nejoud has worked for 10 years at JPMor-
gan Chase Bank in the corporate investment
banking space. She has vast experience in
building client relationships and portfolios
across Finance, industry, and the public sec-
tor, managing corporate sales portfolio for
large corporates in Saudi Arabia. She has
also played vital roles in logistics, office ma-
nagement, human resource development,
and event management, as well as business
management and core banking services In
early 2018, Al-Mulaik joined Small & Medium
Size Enterprises General Authority (SMEA/
Monshaat) as International Strategic Part-
nership Director where she managed inter-
national relationships for SMEs including
startups and entrepreneurs to attract and
design the desired partnerships, as well as to
achieve growth and economic contribution
across industries.
In October 2018, she was appointed as Direc-
tor of FinTech Saudi, a government initiative
to serve as a catalyst for the development of
the financial service technology industry in
Saudi Arabia.
Banks have gained increasing importance over the years until they became a measure for
economic progress of any country. Whenever banks’ capabilities and financial activities
increased, this would reflect on the economic growth of the country. Hence countries are
striving for monitoring their financial institutions by placing policies and regulations which
guarantee their protection so that, the overall banking system will not be affected.

Due to high demand for Islamic Banking in the Islamic World, banks are competing to pro-
vide such services to their customers, to meet their expectations and aspirations for their
financial transactions and commercial activities in compliance with Sharīʿah principles.

Among the banks which offer these services is the Saudi British Bank (SABB). In 2001,
SABB opened a new department to provide services and products compatible with Sharīʿah
standards under the supervision of independent Sharīʿah Board.

All SABB branches provide Islamic financial services. For retail and corporate customers,
as well as treasury services.

At a retail customer’s level:

• Tawarruq Product.
• Home Finance.
• Islamic Credit cards.
• Muḍārabah saving accounts.

At a retail and corporate level:

• Islamic current accounts.
• Murābaḥah Commodity Investment Account.

At a corporate level:
• Islamic cash line (over draft).
• Tawarruq.
• Trade and receivable finance solutions.
• Ijārah.
• Mushārakah Finance.

Treasury Products Include:

• Islamic Rate Hedging against fluctuation of finance / currency cost.
• Promise as alternative of options

All Islamic products are approved by Sharīʿah Board. IFS department arrange submissions
to seek Sharīʿah approval. IFS also monitor and supervise the practical application of pro-
ducts. By conducting periodic review on marketing and Islamic financial products, to ensure
compliance with the decisions and Sharīʿah guidelines. After that, reports are submitted to
SB periodically to review application of the Sharīʿah products and obtain directions regarding
the reported issues.

143
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER VIII:
KSA
LEADING THE WAY

144

Being the largest economy in the Middle East
and a member of the G20, Saudi Arabia has a great potential
to lead Islamic Finance in the 21st century.
Major Hub
The global Islamic Finance Industry has evidently
been in an upward trajectory, as demonstrated by
its assets’ steady double-digit compound annual
growth rate.
Being the largest economy in the Middle East and a
member of the G20, Saudi Arabia has a great poten-
tial to lead Islamic Finance in the 21st century. Our
calculation shows that by the end of 2018, in total,
Islamic Finance assets in Saudi Arabia mark a stag-
gering US$ 879.2 billion, which makes the country
the largest Islamic Finance market globally. This
serves the economic and financial aspirations of Vi-
sion 2030 that will allow the Kingdom to diversify its
economy and enhance the non-oil GDP.
Comparative Advantages
Saudi Arabia enjoys a unique set of advantages that,
collectively, allow the country to become a global
hub of Islamic Finance. These include:
• It is the guardian of the Two Holy Mosques, the
spiritual destination of 1.8 billion Muslims world-
wide;
• It has the largest market for Islamic Finance in
the world;122
• It hosts the largest Sharīʿah-compliant develop-
ment bank in the world, and the only AAA-rated
Islamic bank, namely the Islamic Development
Bank.
145
Chapter VIII: KSA Leading The Way
By becoming a major hub for Islamic Finance, Saudi
Arabia will be able to attract foreign capital to invest
in the multitude of opportunities of the country. The
mega-projects such as Neom, The Red Sea Project,
Qiddiya entertainment city, among others, can be
funded through various modes of Islamic Finance.
For example, they can be funded through equity ca-
pital, ṣukūk, istiṣnāʿ, murābaḥah, among others. The
Islamic Finance Industry can offer sophisticated
solutions to Finance such mega-projects with the
best, fair outcomes in terms of societal contribution
to the Saudi economy.
• It is the largest economy in the Middle East, and
also the largest country in terms of area.
• It possesses one of the largest proven reserves
of oil and natural gas.
• It has the largest mineral deposits in the Middle
East;123
• About 38% of the population are youth (age 24 or
less);124
• It scores High on e-Government Development
Index;125
• About 60 percent of the Saudi population is online
today.126
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Saudi Arabia is taking digital transformation seriously

and that there are definitely many
untapped digitization opportunities awaiting
innovative FinTech contribution.

Collectively, these advantages enable Saudi Ara-
bia to lead the Islamic financial industry on several
fronts. In particular, the Kingdom can lead in two
major areas:
• Awqāf- As a spiritual destination for Muslims
worldwide who seek to visit the Holy Mosques
every year, there are favorable incentives for
them not only to spend but also to invest in the
Kingdom in the form of waqf.127 Attracting global
capital into the Kingdom, however, requires the
availability of sustainable investment channels
that can generate acceptable returns to inves-
tors and avoid creating bubbles. This takes us to
the second front:
• Small and Medium Enterprises (SMEs)- Given
the large proportion of youth in the country and
given the high level of education and digital liter-
acy, there is a great potential for entrepreneuri-
al activities. Among 137 nations, Saudi Arabia
ranks 40 on the Global Entrepreneurship Index.128
The SME sector can be an ideal investment
channel for awqāf. Mobilizing resources for the
SMEs through, e.g., ṣukūk, equity, crowdfunding,
venture capital, inter alia, would provide Islamic
Finance industry an edge in innovation, diversity,
and economic impact. Since SMEs are the engi-
ne of job creation, investing in the SME sector is
essential for sustainable economic growth.
Taking these two fronts together, both the non-pro-
fit and the for-profit domains of the economy may
prosper in tandem. This can be particularly rewar-
ding if innovative financial technologies (FinTech)
are taken into consideration.

FinTech
In the area of FinTech, we realize that Saudi Arabia
is endowed with the right recipe to make it a global
FinTech hub. Saudi Arabia is considered a high-in-
come country with a huge economy, solid financial
system, with high internet and mobile penetration
rates. Entrepreneurs in the Middle East often look
for scaling up in Saudi Arabia after making some
local success because it is one of the largest eco-
nomies in the world and the largest economy in the
region. Furthermore, being a tech-savvy society with
majority of the population under the age of 35 ma-
kes embracing new technologies faster and easier
than many other parts of the world. Saudi Arabia
also established “FinTech Saudi” to act as a catalyst
to develop the FinTech ecosystem alongside with
vibrant regulatory sandbox team in SAMA.129 It is
evident that Saudi Arabia is taking digital transfor-
mation seriously and that there are definitely many
untapped digitization opportunities awaiting innova-
tive FinTech contribution.

146

FinTech fits perfectly the Islamic Finance sector:
• It provides an ideal environment for transpa-
rency, which is essential for Islamic financial
instruments, particularly participatory financing.
Participatory financing is suitable for small en-
terprises much more than debt-based financing.
But it requires a higher level of transparency and
good governance. Blockchain technology provi-
des a perfect environment to achieve these ob-
jectives.
• It enhances the governance of Islamic financial
institutions and provides a conducive environ-
ment for proper Sharīʿah audit and control to pro-
tect the reputation and credibility of the industry.
The Way Forward
Without a doubt, the future of Islamic Finance in
Saudi Arabia is promising, especially considering
the country’s position in the global Islamic financi-
al landscape. With its vast natural resources, large
young and creative population, the Two Holy Mos-
ques, an advanced and resilient financial system,
147
Chapter VIII: KSA Leading The Way
• Artificial intelligence can be used to quantify “re-
putation capital” or “reputation equity” necessary
to discipline enterprises and align incentives bet-
ween the SMEs and investors.
• FinTech can be used to design peer-to-peer insu-
rance, which is in line with Islamic principles of
cooperative or mutual insurance. P2P insurance
in turn can be used to offer additional protection
to investors (and awqāf contributors) to invest in
the SME sector.
With the joint combination of FinTech with entrepre-
neurial SMEs and Islamic Finance, the Kingdom can
become a game-changer for the Islamic Finance
industry.
and a visionary leadership, the Kingdom has all the
necessary ingredients to tap into the immense value
that Islamic finance can bring to economic progress
and social prosperity. This is not to say that it will
be an easy journey. But it is a journey that is worth
travelling.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

148
 Chapter VII: FinTech

149
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

LIST OF CONTRIBUTORS
IRTI TEAM
Sami Al-Suwailem, PhD
Dr. Sami Al-Suwailem is one of the influential thought leaders in Islamic economics and
finance. He currently serves as the Acting Director General of the Islamic Research and
Training Institute (IRTI), IsDB Group, Jeddah, Saudi Arabia. Before joining IRTI in 2004, Dr.
Al-Suwailem managed the Research and Development Center at Al-Rajhi Bank, Riyadh,
Saudi Arabia. He has contributed to numerous professional committees, including the
Technical Committee of the IFSB; Economic Committee of Awqaf at the Ministry of Is-
lamic Affairs in Riyadh; and Academic Committee in Islamic Fiqh Academy of Muslim
World League. Dr. Al-Suwailem obtained his M.A. from Southern Illinois University and
Ph.D. from Washington University, St. Louis, Missouri, USA.

Hylmun Izhar, PhD

Dr. Hylmun Izhar is a Senior Economist at IRTI. He was a lecturer at the Markfield Institute
of Higher Education (MIHE), Leicester, UK, following a research fellowship at the Oxford
Centre for Islamic Studies (OXCIS), Oxford, United Kingdom. He has been honored with the
‘2017 Upcoming Personality in Global Islamic Finance’ during the annual Global Islamic
Finance Awards. He is the co-author of “I for Impact: Blending Islamic Finance and Impact
Investing for the Global Goals” (UNDP - IsDB), and textbook titled ‘Islamic Capital Markets:
Principles and Practices’, published by ISRA and Securities Commission Malaysia.

Dr. Turkhan Ali Abdul Manap

Dr. Turkhan Ali Abdul Manap is a Senior Economist at IRTI. Prior to joining IRTI, he was an
Associate Professor of Economics at the International Islamic University Malaysia (IIUM),
where he taught courses at bachelor’s, master’s and PhD levels. He obtained his PhD in
Economics from IIUM in 2007, MBA in Finance from National University Malaysia in 1999,
and Bachelor’s degree (Engineering) from Dalian University of Technology, China in 1993.
His research interests include macroeconomics, Islamic capital market, financial stability
and stress-testing for Islamic financial institutions.

Mr. Aziz Gulomov

Mr. Aziz Gulomov is a Financial Analyst at IRTI. He holds a Master of Business Administra-
tion from Waseda University, Tokyo, Japan. Prior to joining IRTI in June 2017, he worked
as Senior Financial Analyst at Central Asia Trans Gas (CATG), Tashkent, Uzbekistan, and
Assistant Finance Manager at Al Ghurair Foods, Dubai, UAE. He was a visiting scholar at
Goizueta Business School, Emory University, Atlanta, USA. His expertise is in financial
analysis, business valuation models and database building on Islamic banks.

Mr. Salah Al-Sherbini

Mr. Salah Al-Sherbini is a Business Development Specialist at IRTI. He holds a Bachelor of
Arts in Law from King Saud University, Riyadh, Kingdom of Saudi Arabia. Prior to joining
IRTI in 2016, he worked as Technical Assistant in charge of the Front Office of the Presi-
dent’s Office at the Islamic Development Bank.

150
EXTERNAL CONTRIBUTORS

Dr. Slim Mseddi

Dr. Slim Mseddi is Assistant Professor in Finance, Finance and Investment Department,
College of Economics and Administrative Sciences, Imam Muhammad Ibn Saud Islamic
University (IMSIU), Saudi Arabia. He is a former Sahabat Alimam incubator consultant.
He holds a PhD in Finance from University of Cergy-Pontoise, Paris, France. He is certified
Balanced Scorecard from the George Washington University. He won the award for excel-
lence in world publishing. He is a reviewer for different chairs and journals.

Mr. Abdulelah Al-Sayegh

Mr. Abdulelah Al-Sayegh is a Saudi FinTech expert and entrepreneur. He also serves as
FinTech Director at UniGulf, founder of “Paylink”. He also a FinTech mentor at the General
Authority for Small & Medium Enterprises (Monshaat).

Dr. Abdul Qayoom AM Al-Hendi

Dr. Abdul Qayoom AM Al-Hendi is a researcher and lecturer in endowment economics,
philanthropy, and behavioral economics. He obtained a Doctorate in Islamic Economics.
He used to work as a part-time consultant at the General Authority of Awqāf in Saudi
Arabia, and former adviser of Awqāf in the Personal Status Court. Dr. Abdul Qayoom
currently works as an assistant professor at the Department of Islamic Economics at
the Islamic University in Medina.

151
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

152
 Chapter I: Economic And Financial Landscape

153
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
ENDNOTES
1 IMF, World Economic Outlook Database, October
2019. Saudi Riyal (SAR) is fixed at 1 U.S. Dollar =
3.75 riyals, which translates to approximately 1
Riyal = 0.266667 Dollar.
2 Global Competitiveness Index Report issued by the
World Economic Forum (2018 - 2019)
3 https://www.ic.gov.sa/en/invest-in-saudi-arabia/
natural-resources/
4 Stated in http://www.sama.gov.sa/en-US/Indices/
Pages/GrossDomesticIncome.aspx, retrieved on 4
March 2020
5 Vision 2030 Kingdom of Saudi Arabia, p. 61
6 Vision 2030 Kingdom of Saudi Arabia, p. 53.
7 In a nutshell, Industry 4.0 is the trend towards auto-
mation and data exchange in manufacturing tech-
nologies and processes which include cyber-physi-
cal systems (CPS), the internet of things (IoT),
industrial internet of things (IIOT), cloud computing,
cognitive computing and artificial intelligence.
8 Ministry of Finance Saudi Arabia, as quoted in Sam-
ba Report Series, “Saudi Arabia: Macroeconomic
Forecast 2019-2023”, 2019, p. 6.
9 Alotaibi, Abdullah R and Mishra, Anil V. “Determi-
nants of International Financial Integration of GCC
Markets”, in Emerging Markets and the Global Eco-
nomy, 2014, p. 749-771.
10 Huchet‐Bourdon, Marilyne., Le Mouël, Chantal., Vijil,
Mariana. “The Relationship Between Trade Open-
ness and Economic Growth: Some New Insights on
the Openness Measurement Issue”, The World Eco-
nomy, 2017. https://doi.org/10.1111/twec.12586
11 https://unctad.org/en/PublicationsLibrary/wir2020_
en.pdf
12 www.stats.gov.sa; the calculation is based on con-
stant prices (2010 = 100).
13 UNDP Human Development Report 2019, “Briefing
Note for Countries: Saudi Arabia”, p. 2
14 Towards Saudi Arabia’s Sustainable Tomorrow, First
Voluntary National Review 2018 -1439, Page 25.
https://www.sa.undp.org/content/saudi_arabia/en/
home/library/SDGs/VNR.html
15 SAMA 55th Annual Report, IFSB Prudential and
Structural Islamic Financial Indicators (PSIFIs)
16 SAMA Saudi Insurance Market Report 2018
17 Values of outstanding ṣukūk as stated in IIFM Annu-
al Ṣukūk Report 2019.
18 SAMA 55th Annual Report 2019
154
19 The holding of local equity was SAR15.6 billion at
the end of 2018, as per the Saudi Capital Market
Authority Annual Report (2018), which accounted
for 10% of the total Asset under Management. The
size of AUM shown in the chart (SAR 89.5 billion)
includes both local and international equity, as
well as ṣukūk. We note that there might be double
accounting concerning local equities and ṣukūk, but
its size should be relatively insiginificant.
20 Financial Sector Development Program Charter,
Delivery Plan 2020, p. 9. https://vision2030.gov.
sa/sites/default/files/attachments/170719%20
FSDP%20Program%20Book%2010%20May%20
2018%20English%20V3.pdf.
21 Bank account ownership rates among the King-
dom’s adult population are estimated at 72% and
the target is to reach 80% according to the objecti-
ves of the Financial Sector Development Program,
according to the Financial Inclusion in Saudi Report,
https://kkf.org.sa/media/ipuh5olx/2-financial-inclu-
sion-in-saudi-arabia-2018.pdf.
22 Zulkifli Hasan, ‘Regulatory Framework of Sharīʿah
Governance System in Malaysia, GCC Countries and
the UK’, Kyoto Bulletin of Islamic Area Studies (2010
3 (2) 97.
23 IMF World Economic Outlook 2020.
24 For instance, on 27 Feb. 2020, Saudi Arabia
suspended Umrah pilgrimage and visits to the
Prophet’s Mosque in Madinah over concerns of the
spread of Covid-19, two weeks before the World
Health Organization (WHO) declared the corona-
virus outbreak as a pandemic. On 16 March, the
government also suspended attendance at all
government entities’ workplaces for 16 days; 20
March, suspended all internal flights, buses, cabs
and trains. Subsequently, the government put a
24-hour lockdown on big cities to curb the spread of
the pandemic.
25 https://www.mof.gov.sa/en/MediaCenter/news/Pa-
ges/News_20032020.aspx
26 The interview questions were sent to SAMA, addres-
sed to its Governor, Dr. Ahmed Abdulkarim Alkho-
lifey. The answer to IRTI’s interview questions was
received on 11 November 2019, sent by Internatio-
nal Affairs of SAMA.
27 SABB and Al Awwal Bank merged in June 2019. The
size of the new bank is estimated based on 2018
data.
28 https://www.ifsb.org/psifi_03.php. Retrieved on 1
March 2020.
29 For overall banking sector; IRTI’s estimation is
based on banks’ reports; while for Islamic banks; it
is based on IFSB report.
30 IFSB Report, AlBilad Capital: Saudi Banking Sector
2015 & 2017, Al Jazira Capital: Saudi Banking Sec-
tor 2018.

31 IFSB Report 2019, Al Bilad Capital: Saudi Banking
Sector Reports for 2014-2017, for 2018: https://
www.maaal.com/archives/20190226/119374,
retrieval date: 15 March 2020
32 We could not do the same exercise for other
countries under consideration due to absence of
required data.
33 For Saudi Arabia, IRTI’s calculation was based on
Islamic Banks’ reports. For Qatar and Oman, IFSB
reports’ data was used.
34 The National Plan for Telecommunication and IT
was approved in 2007. According to the 9th Natio-
nal Plan 2010), the scheme aims at closing the gap
between Saudi Arabia and other states in terms of
digital technology. The scheme also incorporates
programs featuring the implementation of IT in are-
as such as e-trade, e-government, e-education etc.
The main objectives of the scheme are as follows:
(i) Improving the performance of the technology
and telecommunication sector to include all gover-
nment services, the social and health services; (ii)
Establish a reliable telecommunication and informa-
tion sector up to international standards, capable
of attracting investment; (iii) Provide a chance for
all social sectors to benefit effectively from the
telecommunication and information technology
services; (iv) Provide a trained human cadre from
both genders in all areas of information technology.
35 CMA Annual Report, 2009.
36 The number of Sharīʿah compliant shares varies
due to different screening bodies. There are five (5)
different screening bodies in Saudi Arabia (https://
www.argaam.com/en/company/shariahcompa-
nies).
37 Based on Tadawul website.
38 CMA Annual Statistical Report.
39 See figure 3.5
40 Data, as of 31 December 2019, was not available for
all top 10 markets except for Saudi Arabia. There-
fore, value as of December 12, 2019 was used for
all markets except Saudi Arabia. For Saudi Arabia,
value is as of 31 December 2019.
41 Retrieval date: 09.03.2020
42 Ṣukūk are frequently referred to as an Islamic bond,
but a more accurate translation of the Arabic word
would be “Islamic Investment Certificate”.
43 CMA Report 2018
44 Numbers of investment funds in the bracket
45 CMA Report 2018
46 https://www.zawya.com/mena/en/wealth/story/
GCC_funds_see_net_inflows_of_25bln_in_H1_Refini-
tiv_report-SNG_155415441/. Retrieved on 5 January
2020.
47 Swiss Re (2019).
48 Defined as Gross Written Premiums divided by the
total GDP.
49 Defined as average expenditure by an individual on
insurance products.
155
Chapter I: Economic And Financial Landscape
50 Swiss Re 2019.
51 Swiss Re 2019.
52 SAMA 55th Annual Report.
53 22 Sha’ban 1438, 18 May 2017 ‫التنموية‬-‫إلى‬-‫الرعوية‬-‫من‬
https://mlsd.gov.sa/ar/news/.
54 For more information, see http://mci.gov.sa/Laws-
Regulations/Projects/Pages/npc.aspx#0.
55 “Minister of Labor and Social Development Laun-
ches Makeen platform to serve the not-for-profit
sector,” Ministry of Labor and Social Development,
https://mlsd.gov.sa/node/147130.
56 An excerpt from Saudi Arabia Philanthropy Law Re-
port, by International Center for Not-for-Profit Law,
2017, p.7-13.
57 Quoted from Al-Naggar, Ahmed Hassan. “Waqf
Investment Funds in GCC Countries: A Case Study
on Saudi Arabia”, Islamic Finance News, 4 December
2019, p. 35.
58 This part is an excerpt from IsDB-APIF Report on
“The Development Impact of the Awqāf Properties
Investment Fund: A Model for Sustainable Develop-
ment”, 2019.
59 Ibid, p. 15
60 IRTI extends its appreciation to Br. Yoseph Al Sawa-
dy and Dr. Ali Chatti from Islamic Financial Sector
Development Department, IsDB for generously
providing the information about APIF’s projects in
Saudi Arabia.
61 http://www.alriyadh.com/315101.
62 Saudi Press Agency https://www.spa.gov.sa/
2053745.
63 https://www.moh.gov.sa/Ministry/MediaCenter/
News/Pages/News-2020-03-26-002.aspx.
64 https://twitter.com/rajhicf/status/
1242499034973167616?s=12.
65 https://aawsat.com/english/home/article/
2205641/saudi-banks-increase-contribution-health-
fund-amid-virus-crisis.
66 https://trading-secrets.guru.
67 https://www.maaal.com/archives/
20200402/138590.
68 http://live.saudigazette.com.sa/article/591465/SAU-
DI-ARABIA/Al-Rajhi-launches-SR500m-Communi-
ty-Fund-to-mitigate-effects-of-corona.
69 https://twitter.com/alrajhiinv/status/
1242510831075692544?s=12.
70 The interview questions were addressed to the
Governor of General Authority for Awqāf (GAA), Mr.
Emad bin Saleh Al-Kharashi. GAA’s answers were
originally in Arabic which were subsequently trans-
lated into English by IRTI.
71 See SAMA Financial Stability Report 2015, p. 29.
72 More detailed activities about NDF and what it
attempts to achieve can be read in the interview
with the Governor of NDF in the later section of this
chapter.
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030
73 Sustainable Development Goals1st Voluntary Natio-
nal Review Kingdom of Saudi Arabia UN High-Level
Political Forum 2018 “Transformation towards
sustainable and resilient societies” July 9-18, 2018
New York.
74 For the job creation potential of entrepreneurship,
see the Communication from the European Com-
mission “Towards a job-rich recovery”, 18.4.2012,
COM (2012) 173 final.
75 Small Medium Enterprises in Saudi Arabia Report
(2016) https://www.jeg.org.sa/sites/default/files/
library/files/SME-EN.pdf
76 Reuters (October 9, 2017), https://www.reuters.
com/article/saudi-fund-funds/saudi-sovereign-
fund-creates-1-07-bln-fund-of-funds-to-back-smes-
idUSL8N1MK3XH
77 Arab News (January 11, 2019), https://www.arab-
news.com/node/1434056/saudi-arabia
78 See page 3 (25,26,27 March 2019), https://fsa.
monshaat.gov.sa/finalFSAbrochureenglishupdated.
pdf
79 On the Fast Track: Saudi Arabia’s Entrepreneurship
Ecosystem https://www.entrepreneur.com/article/
336766
80 Isenberg, D.J. (2011). The Entrepreneurship Eco-
system Strategy as a New Paradigm for Economic
Policy: Principles for Cultivating Entrepreneurships,
The Babson Entrepreneurship Ecosystem Project,
1(781), pp. 1–13. DOI: 10.1093/rfs/hhr098.
81 See Wamda Research Report (June 2017), The
Kingdom of Saudi Arabia: Status of the entrepre-
neurship ecosystem, https://backend.wamda.com/
api/v1/downloads/publications/kingdom-saudi-ara-
bia-status-entrepreneurship-ecosystem
82 Aloulou, W., Al-Othman, N. (2019), “Entrepreneurship
in the Kingdom of Saudi Arabia: Challenges and
prospects”, in Dana, L-P, RaMADAni, V., Palalic, R.,
Entrepreneurship in GCC, World Scientific Publis-
hing.
83 See the report: The Saudi Arabia Economy 2019.
http://www.jadwa.com/en/researchsection/rese-
arch/economic-research/macroeconomic-reports
84 GEM Global Report 2017/18 (2018). https://www.
c4e.org.cy/reports/2018/gem-2017-2018-global-re-
port.pdf
85 GEM Global Report 2018/19 (2019). https://www.
babson.edu/media/babson/site-assets/content-as-
sets/academics/centers-and-institutes/the-art-
hur-m-blank-center-for-entrepreneurship/global-re-
search/gem-2018-2019-global-report.pdf
86 World Bank’s Ease of Doing Business Index (2018).
https://www.doingbusiness.org/ content/dam/
doingBusiness/media/Annual-Reports/English/
DB2018-Full-Report.pdf
87 World Bank’s Ease of Doing Business Index (2019).
https://www.doingbusiness.org/ content/dam/
doingBusiness/media/Annual-Reports/English/
DB2019-report_web-version.pdf
156
88 The 10 topics cover: starting a business, dealing
with construction permits, getting electricity, regis-
tering property, getting credit, protecting minority
investors, paying taxes, trading across borders,
enforcing contracts, and resolving insolvency.
89 World Bank
90 Datasets are retrieved from two reports on doing
business in 2018 and 2019.
91 The Global Competitiveness Report (2018). http://
www3.weforum.org/docs/GCR2018/05FullReport/
TheGlobalCompetitivenessReport2018.pdf p.33
92 Eighth Development plan (2005-09). https://www.
mep.gov.sa/
93 Ninth Development Plan (2010-14). https://www.
mep.gov.sa/
94 1st Voluntary National Review 2018, p. 97, https://
sustainabledevelopment.un.org/content/docu-
ments/20230SDGs_English_Report972018_FINAL.
pdf.
95 www.globalinnovationindex.org/about-gii
96 R Katila, EL Chen, H Piezunka (2012). All the right
moves: How entrepreneurial firms compete effecti-
vely. Strategic Entrepreneurship JNL. 6 (2): 116–132.
97 “The Differences between Entrepreneurs and Startup
Founders”. www.linkedin.com
98 https://www.startupcommons.org/what-is-star-
tup-ecosystem.html
99 http://paulgraham.com/startupfunding.html
100 Saudi Arabia Venture Capital (H1 2019). https://
d2p9i44hnkrmkx.cloudfront.net/files/MAGNiTT_
SVC_H1_2019_EN.pdf
101 Source: https://www.spa.gov.sa/1675372
102 For more details see Private Equity vs. Venture Ca-
pital: What’s the Difference? https://www.investope-
dia.com/ask/answers/020415/what-difference-bet-
ween-private-equity-and-venture-capital.asp
103 http://www.fundsglobalmena.com/news/mena-pri-
vate-equity-funds-face-tough-2019.
104 https://www.zawya.com/mena/en/business/
story/MENA_private_equity_set_for_another_
slow_year_despite_positive_longterm_outlook-ZA-
WYA20190121083606/
105 https://cma.org.sa/en/Market/fintech/Pages/de-
fault.aspx.
106 https://cma.org.sa/en/Market/NEWS/Pages/
CMA_N_2665.aspx.
107 http://www.sama.gov.sa/en-US/News/Pages/
news11022019.aspx.
108 http://www.sama.gov.sa/en-US/News/Pages/
news29012019.aspx.
109 http://www.sama.gov.sa/en-us/news/pages/
news05032019.aspx.
 Chapter I: Economic And Financial Landscape

110 https://www.cms-lawnow.com/ealerts/2019/10/
saudi-arabia-implements-its-new-e-commerce-law.
111 http://www.sama.gov.sa/en-US/News/Pages/
news30042018.aspx.
112 http://www.sama.gov.sa/en-US/News/Pages/
news24042019.aspx
113 https://safcsp.org.sa.
114 https://www.mcit.gov.sa/en/media-center/
news/176239.
115 https://newsroom.mastercard.com/mea/press-re-
leases/vocalink-and-saudi-payments-to-introdu-
ce-real-time-payments-to-saudi-arabia/.
116 https://www.saudipayments.com.
117 https://www.zawya.com/saudi-arabia/en/
press-releases/story/Saudi_Payments_Introdu-
ces_A_Standardized_QR_Payments_System_
Through_A_National_Platform_to_Support_Pay-
ment_Services_Providers_And_Digital_Wallets_in_
KSA-ZAWYA20190515030739/.
118 https://najiz.moj.gov.sa/Inquiry/Home/FurijatVerify.
119 UniGulf is a Saudi Fintech startup with a focus on
developing digital payment solutions.
120 Try the coffee we offer at the Ministry of Commerce
service centers and get your Commercial Certificate
before your coffee gets cold.
121 Business model in the appendix
122 See Chapter 1 of this Report.
123 https://www.ic.gov.sa/en/invest-in-saudi-arabia/
natural-resources/.
124 https://www.worldometers.info/world-population/
saudi-arabia-population/#population-pyramid.
125 UN e-Government Survey 2018. https://publicad-
ministration.un.org/en/Research/UN-e-Govern-
ment-Surveys.
126 https://www.mcit.gov.sa/en/media-center/
news/90326.
127 See Chapter 5 of this Report.
128 https://thegedi.org/global-entrepreneurship-and-de-
velopment-index/, and Chapter 6 of the Report.
129 See Chapter 7 of this Report.

157
ISLAMIC FINANCE
IN SAUDI ARABIA:
Leading the Way to Vision 2030

Published by:
Islamic Research and Training Institute
[A Member of the Islamic Development Bank Group]
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Email: irti@isdb.org · Website: www.irti.org