Dubai: Saudi Arabia’s financial sector remains sound and resilient to economic shocks, Dr Fahad Al Shathri, Deputy Governor for Supervision at the Saudi Arabia Monetary Authority (Sama), said in Dubai on Wednesday.
Delivering a keynote address at the Corporate Restructuring Summit 2018, Al Shathri said the kingdom’s banking and financial sector stood on sound footing despite the macro economic headwinds faced by the country.
“In October 2017, the IMF [International Monetary Fund] undertook the Financial Sector Assessment Programme (FSAP) and we were pleased to see that the financial sector in Saudi Arabia remains sound and resilient to economic shocks,” said Al Shathri.
Banks constitute the core of the Saudi financial system, with total assets of approximately $595 billion (Dh2.18 trillion) and they are the key credit providers. The banking sector also enjoys a strong capital ratio of 21 per cent, a sound liquidity coverage ratio (LCR) of 197 per cent and robust net stable funding Ratio (NSFR) of 125 per cent, as at June 2018.
Saudi Arabia has been at the forefront of early adoption of Basel Standards. The Basel Committee selected Saudi Arabia as the first country in the world for Regulatory Consistency Assessment Process (RCAP) assessment of large exposure and net stable funding ratio regulations. The assessment results have been satisfactory and will soon be published.
Credit growth
Al Shathri said due to strong macro-fiscal linkages, credit growth in Saudi Arabia was flat last year. Some of the policy reform measures taken to support credit recovery include the easing of capital market restrictions on foreign investors, improvements to the ecosystem for the SME sector, and measures to support the increase of home ownership.
In addition, Sama increased the loan-to-value (LTV3) ratio for first time home-buyers two times to 85 and 90 per cent and reduced risk-weighted assets of mortgages to 50 per cent.
“With improving oil prices since the start of 2018, overall GDP growth in the kingdom has improved, which will have a positive impact in terms of improving credit growth and reinstating confidence and support faster recovery,” said Al Shathri.
The Sama official said Saudi Arabia achieved a smooth transition to International Financial Reporting Standard (IFRS) 9 that brought about a paradigm shift in financial reporting — from the historical application of impairment reviews for determining allowances to a forward-looking approach (expected credit loss, or ECL) reflecting the decision-making process of the companies.
“Sama has played a proactive role by engaging with the banking industry as early as 2015 and issuing detailed guidelines for the consistent implementation of IFRS 9, supported by harmonised disclosures. This approach has helped our banking sector to effectively implement this standard on time from January 1, 2018,” he said.
The implementation of IFRS 9 had a minimal impact on the capital adequacy ratio (CAR) of the Saudi banking sector — an around 50-60 basis point reduction in CAR spread over 5 years while the non-performing loans (NPL) ratio has slightly increased from 1.5 per cent to 1.6 per cent in June 2018.
As the standard has introduced a new category for additional Stage 2 provisions, the debt coverage ratio rose from 162 per cent to around 192 per cent in June 2018.
“Keeping in view the stability and strength of capital and liquidity positions, we did not foresee any difficulty for our banking sector to absorb [the] initial impact and volatility of [an] impairment charge in future,” Al Shathri said.
“We also hope that the role of external auditors will become more prominent under new auditing standard ISA 540 (International Standard on Auditing) that is designed to cover audit techniques needed by auditors for verification of IFRS 9 in future.”
