Economic Developments
Domestic Economy 15
Saudi policy accelerated the Kingdom's economic recovery and increased economic gains thereafter. The higher rate of inflation at the global level did not have a significant impact on prices in the Kingdom. If credit conditions tighten further, this may affect loan demand and deposit flows and increase uncertainty about the economic outlook; therefore, we can influence the cycle of interest rate hikes.2 The result will be a broader financial impact on households and businesses, which could reduce lending activity and demand for loans, leading to a further slowdown in economic activity.
The average LCR for the banking sector fell at the beginning of 2022, reaching 166.6% in the first quarter, followed by a significant increase at the end of the year at 180.3%. Higher interest rates can alleviate the pressure on the insurance sector's profitability created by the prolonged low interest rate environment and reduce the risk of investments in the sector's portfolio. This slowdown follows trends seen in the banking sector, where there is a slowdown in property lending.
However, the sector is expected to see higher contributions from real estate finance companies in the future given the recent regulatory development. However, the stock market continued to decline while other markets recovered in the last quarter of 2022 (Chart 2.4.4), which may be due to the continued decline in oil prices (Chart 2.4.5). In addition, an important player in the real estate sector and the economy is the Saudi Real Estate Refinance Company (SRC).
As part of its wider contribution to the G20, SAMA participates in the work of the G20 Sustainable Finance Working Group (SFWG) and the Framework Working Group (FWG). In the fourth quarter of 2022, SAMA released the Open Banking Framework, one of the key deliverables of the Open Banking Program. Both risks can affect the stability of the financial system in the long term.
Saudi Financial System
Insurance Sector 28
The gross written premium (GWP) of the insurance sector increased at the end of 2022 by 26.9% compared to the previous year. There was little change in the concentration of business within the insurance sector by the end of 2022, with the five largest companies accounting for a minimum of 38.2% in motor vehicles and up to 86.3% in health, compared with 40.7% and 85.3% , respectively. , in the previous year. Also, the insurance sector remained dominated by the health segment, which had a 59.7% share of the total premium volume in 2022 (Chart 2.2.3).
This can largely be attributed to the full resumption of economic activities post-Covid-19, a slight increase in the number of insured vehicles and a 22.7% increase in health insurance claims. The overall profitability of the insurance sector saw an increase, recording a net income of SAR 689 million in 2022 compared to a loss of SAR 47 million in the previous year. Rising interest rates contributed positively to income in the insurance sector, where net investment income reached DKK 1.1 billion. SAR in 2022, a slight decrease compared to 2021's 1.2 billion.
In line with recent economic conditions, domestic inflation has been contained, which bodes well for the insurance sector. Inflation and risk premiums will have a short-term negative impact on the insurance sector's portfolio — especially motor insurance due to higher costs of auto parts and maintenance, and health insurance due to higher medical costs. However, as highlighted in the domestic economy section (1.2 Domestic Economy), inflation in the Kingdom has been relatively low and is expected to remain stable, which should benefit the overall profitability of the insurance sector.
The insurance market continued to have a strong solvency position, reaching 152.8% of required margin in 2022.
Finance Companies Sector 32
The retail portfolio made up 76% of the total credit granted by the financing companies, with more than half of this portfolio represented by housing finance and private finance (Figure 2.3.3). Although the retail portfolio dominates the majority of the financing companies' exposure, it is worth noting that there were particular shifts in the composition of their exposures in 2022. This trend may be reflected in increased credit risk for financing companies in the short and medium term due to the unsecured and unsecured nature of personal loans, as well as auto financing that is secured against underlying vehicles, which typically decline in value.
Residential real estate financing accounts for 30% of total loans, showing a slight slowdown in growth during 2022 to 2.2%. Moreover, the major developments in the sector of financial companies should result in greater diversification of activities in this sector. Debt and paid-in capital are the main sources of financing in the sector, accounting for around 85%.
Financial companies have improved their resilience and witnessed a slight decline in profitability following the recovery from the Covid-19 pandemic. NPLs of financial corporations continued the downward trend that began in 2019, with the ratio improving by 230 basis points to 6.3% in 2022 (Graph 2.3.6), reflecting the improvement in the credit performance of financial corporate exposures and credit quality of newly created funds. In addition, SAMA has circulated several circulars advising financial firms to update credit policies to reflect the latest developments in the sector and to provide risk-based regulatory reports.
The leverage ratio for real estate finance companies remained stable at 2.00 times, which is below the regulatory threshold of three times capital and reserves (Graph 2.3.7).
Capital Market Sector 37
It is important to note that the minimum ratio and quality of required regulatory capital remain unchanged in the 2017 review. Counterparty credit risk and credit valuation adjustment: Changes to the CCR improved the comparability of banks' capital ratios through the use of some internal remove modeling approaches and introduce capital requirements to cover CVA, the risk of loss resulting from the deterioration of the creditworthiness of the counterparty in a derivative or securities financing (SFT) transaction. Saudi Arabia is aiming to be recognized in the FinTech space by diversifying its range of financial products leveraging technological innovations.
A coherent approach by the relevant stakeholders and the resulting effort made has paved the way for a significant increase in the overall number of FinTech companies at the end of 2022 (graph 3.1.1). To reduce the risk of fragmentation in the global financial system, SAMA has introduced initiatives in line with the G20 roadmap for improving cross-border payments. For example, the number of FinTech data aggregators at SAMA has increased in both the insurance and finance sectors.
Insurtech has grown to 24 data sharing aggregators, three of which are currently active in the insurance market (Figure 3.1.3). The framework includes a comprehensive set of regulatory guidelines, business rules and technical standards based on international best practices to enable banks and FinTechs to provide open banking services in the Kingdom. SAMA subsequently launched the Open Banking Lab in the first quarter of 2023 to accelerate the development of open banking services in the Kingdom.
SAMA is currently monitoring the development of all banks and TPPs and certifying their products and services to ensure their compliance with the Open Banking Framework and its KSA Open Banking Standards, and is also working to have them all certified and operating in the market by Q2 2023. SAMA is working with other competent authorities in the Kingdom to reflect the adopted amendments to Recommendation 24 and Recommendation 25. A dedicated team has been established from various government bodies to carry out detailed assessments of beneficial ownership to ensure greater transparency regarding beneficial owners and legal arrangements in Kingdom.
Innovation and Emerging Financial Sector Issues
Climate-Related Financial Vulnerabilities 51
In 2022, the Public Investment Fund of Saudi Arabia announced the establishment of the Regional Voluntary Carbon Market Company in partnership with Tadawul, the Saudi exchange. In recent years, SAMA has supported the government's primary role in addressing the problem, in line with its mandate. The NGFS aims to strengthen the global response needed to meet the objectives of the Paris Agreement and strengthen the role of the financial system in managing such risks.
The Open Banking program, implemented and managed by SAMA, is one of the initiatives of the FinTech strategy, which is a pillar of the FSDP under Saudi Vision 2030. The lab aims to improve the compatibility of the open banking market participants, banks and FinTechs and their compliance with the Open Banking Framework by enabling them to develop, test and certify their open banking services and products in a technical testing environment. The first release of the Open Banking Framework focused on the Account Information Service (AIS), and the second release will focus on the Payment Initiation Service (PIS).
16 According to the FATF, a virtual asset service provider is “any natural or legal person not covered elsewhere by the Recommendations, who as a business performs one or more of the following activities or operations for or on behalf of another natural or legal person: (1) exchange between virtual assets and fiat currencies, (2) exchange between one or more forms of virtual assets, (3) transfer of virtual assets, (4) custody and/or administration of virtual assets or instruments of control over virtual assets, and ( 5) participation in and provision of financial services in connection with the offering and/or sale of a virtual asset by an issuer.”. 17 In 2003, the FATF introduced the first international beneficial ownership transparency standard to prevent beneficial ownership information from legal entities from being hidden. SAMA will fulfill its mandate to maintain monetary stability, support the stability of the financial sector and promote confidence therein, and support economic growth.
SAMA believes that regulatory frameworks for climate-related financial risks should be carefully designed and aligned with financial sector stability, economic development goals and national circumstances.
