Megan Brooks
While there is a trend in the Saudi Arabian banking market to convert to full-fledged Islamic banks, not all banks in the country are Islamic. Only four of the 12 local licensed banks are considered to be pure Islamic banks. Islamic banks in Saudi Arabia must comply with Shariah principles and the country's broader financial regulations. The Saudi Central Bank (SAMA) regulates all banks in the Kingdom, and Islamic banks must follow these regulations while adhering to Islamic principles. For example, Islamic banks cannot charge interest on loans but may use alternative models such as murabaha (cost-plus financing) or ijarah (leasing). The largest Islamic bank in the world, Al Rajhi Bank, is based in Saudi Arabia.
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What You'll Learn
Saudi Arabia's largest Islamic bank
Despite the trend in the Saudi Arabian banking market to convert to full-fledged Islamic banks, only four out of 12 local licensed banks are considered pure Islamic banks. According to Ibrahim Warde, a scholar of international finance, the two largest Islamic banking groups, Dar al-Maal al-Islami and al-Baraka Bank, have been unable to obtain licenses to operate commercial banks in Saudi Arabia, despite being owned by prominent Saudis. Interestingly, Saudi Arabia does not officially recognize the concept of Islamic banking, arguing that if one bank is recognized as Islamic, then all others would be considered non-Islamic.
Al Rajhi Bank, headquartered in Saudi Arabia, is the world's largest Islamic bank. It has maintained this position for several years, according to evaluations of the top 100 Islamic banks and financial holding companies worldwide. In the financial year 2020, with a March 2021 cutoff, Al Rajhi Bank topped the ranking of the largest Islamic banks globally. The following year, with a March 2022 cutoff, it remained in the top position. For the financial year 2022, with a March 2023 cutoff, Al Rajhi Bank continued its dominance as the world's largest Islamic bank. The most recent evaluation for the financial year 2023, with a March 2024 cutoff, still places Al Rajhi Bank as the largest Islamic bank in the world.
Al Rajhi Bank's sustained position at the top is impressive, especially considering the growth and competition in the Islamic banking industry. The top 100 Islamic banks from 25 countries collectively held $1.47 trillion in assets, $941 billion in net financing, $1.04 trillion in customer deposits, and $23.2 billion in net profit in FY2023. The Middle Eastern banks hold a dominant 71.6% share of the assets of the top 100 Islamic banks, with Saudi Arabia itself holding the largest share of total assets.
While Al Rajhi Bank is the largest Islamic bank in Saudi Arabia and the world, it is important to note that it operates under certain conditions due to the country's stance on Islamic banking. In 1985, the al-Rajhi Banking and Investment Company was authorized to engage in interest-free banking but was not allowed to use the word "Islamic" in its name.
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Islamic banking groups without licenses
Despite the trend in the Saudi Arabian banking market to convert to full-fledged Islamic banks, only four out of the 12 local licensed banks are considered pure Islamic banks. Interestingly, the official stance on this matter is somewhat ambiguous. On the one hand, Saudi Arabia does not officially recognize the concept of Islamic banking, with the reasoning that if one bank is labelled Islamic, then others might be considered un-Islamic. However, on the other hand, there is also the claim that all banks operating in Saudi Arabia are inherently Islamic by definition.
This contradictory situation has resulted in challenges for prominent Islamic banking groups seeking to operate in the country. Notably, the two largest Islamic banking groups, Dar al-Maal al-Islami and al-Baraka Bank, have been unable to obtain licenses to operate as commercial banks in Saudi Arabia, despite being owned by prominent Saudis. This restriction on their operations is a significant hurdle for these Islamic banking giants, forcing them to navigate a complex regulatory environment.
The case of al-Rajhi Banking and Investment Company offers a slightly different perspective. This company was authorized to engage in interest-free banking in 1985, but with a notable condition: they were not allowed to use the word "Islamic" in their name. This compromise illustrates the delicate balance the Saudi Arabian authorities are attempting to strike between accommodating Islamic banking principles and maintaining a consistent approach to all financial institutions operating within their borders.
The situation regarding Islamic banking in Saudi Arabia is complex and nuanced. While there is a clear trend towards embracing Islamic banking practices, the official recognition and licensing of dedicated Islamic banks remain selective and limited. This has resulted in a unique landscape where some Islamic banking groups are forced to operate without explicit licenses, navigating a regulatory grey area in a country that simultaneously claims that all banks are inherently Islamic by definition. This contradictory environment highlights the challenges of integrating specialized religious banking systems into a broader financial framework.
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Shariah Governance Framework
Saudi Arabia is home to some of the world's largest Islamic financial institutions, and Sharia banking principles play a significant role in the country's financial system. The country's official line is that all banks operating within the country are, by definition, Islamic.
The Shariah Governance Framework for local banks operating in Saudi Arabia is a set of guidelines that aims to enhance compliance with Shariah principles and rules. It provides a structure for the tasks and responsibilities of various departments within a bank, including the board of directors, executive management, Shariah committee, compliance department, risk management department, and internal audit department.
To ensure compliance with the Shariah Governance Framework, banks are expected to have a reasonable understanding of Shariah principles and their broad application in Islamic finance. The framework also emphasises the role of the Shariah committee, which should have sufficient knowledge of financial and banking aspects, particularly Islamic finance. This committee is responsible for constantly enhancing its knowledge of Shariah and financial matters and laws, attending relevant training programs, and ensuring the quality and consistency of Shariah decisions.
The Shariah committee is formed and its members appointed by the board, based on the recommendation of the nomination and remuneration committee, and with the written non-objection of SAMA (Saudi Central Bank). The committee develops structured procedures for making Shariah-compliant decisions, which are documented, approved, and maintained to ensure credibility and protect against undue influences.
The Saudi Central Bank (SAMA) plays a crucial role in overseeing the implementation of the Shariah Governance Framework. SAMA ensures that banks comply with both Islamic and conventional financial regulations and conducts regular audits, issues guidelines, and provides oversight. Through this process, SAMA helps maintain the integrity of the Islamic banking system, ensuring it remains aligned with Shariah principles while meeting modern financial needs.
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Shariah-compliant alternatives to derivatives
While there is a trend in the Saudi Arabian banking market to convert to full-fledged Islamic Banks, only four of the 12 local licensed banks are considered "pure Islamic banks". The official line is that all banks operating in Saudi Arabia are, by definition, Islamic. However, Saudi Arabia does not officially recognize the concept of Islamic banking, arguing that if one bank is recognized as an Islamic institution, then all others would be considered un-Islamic.
Islamic finance seeks to structure derivatives in a way that aligns with Shariah principles, ensuring transactions are based on tangible underlying assets and real economic activities, thereby avoiding excessive uncertainty and speculation. By meeting these requirements, Islamic financial instruments can offer Shariah-compliant alternatives to conventional derivatives, promoting transparency, fairness, and stability in financial markets.
- Ba'i Salam, Istisna, Istijrar, and Joa'la contracts
- IPRS and waád-based currency futures and options contracts
- Islamic FX Forward and FX Waád Option
- Islamic forwards and options
- Commodity murabaha
- Double Wa'd
- Down-payment sale or urbun
The Islamic Derivative Master Agreement (IDMA), issued by Malaysia's central bank in 2007, is a standard used to facilitate the Islamic Profit Rate Swap. Wa'd, literally meaning "promise", is a principle that underpins or structures Shariah-compliant hedging instruments or derivatives that provide substitutes for conventional hedging products such as forward currency contracts and currency swaps.
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Islamic banks and profit
Saudi Arabia is one of several countries with an established Islamic banking system, including Malaysia, the United Arab Emirates, Indonesia, Iran, Bahrain, Qatar, and Kuwait. Despite the trend in the Saudi Arabian banking market to convert to full-fledged Islamic banks, only four of the 12 local licensed banks are considered to be pure Islamic banks. Saudi Arabia does not officially recognize the concept of Islamic banking, with the official line being that all banks operating in the country are, by definition, Islamic.
Islamic banking, or Islamic finance, is a system of banking or financing activity that complies with Sharia (Islamic) law and its practical application through Islamic economics. Sharia law prohibits riba, or usury, which is generally defined as interest paid on all loans of money. However, some Muslims dispute whether there is a consensus that interest is equivalent to riba. The concept of profit in Islam is one of equal sharing of profits, losses, and risks. This is known as the concept of Mudarabah, where shared profit on investment replaces interest.
Islamic banks do not make a profit from lending like conventional banks. Instead, they profit from other financing activities, such as Islamic mortgages, car financing through lease-like arrangements, and providing capital to businesses through equity or profit-sharing. In these transactions, there is some asset or equity that can be shared to avoid riba and make the transaction permissible. For example, in the case of car financing, the bank purchases the vehicle and sells it to the customer at a higher price, with the customer repaying the bank in installments. In this way, the profit is baked into the rental charge.
Islamic banks can also make a profit by investing in businesses or individuals. If the business does well and grows, the bank will get a share of the profits as a part-owner of the company. This is similar to the role of venture capitalists.
The global Islamic banking and finance market is worth $8.94 billion as of 2025 and is expected to grow by 11.6% to reach $13.89 billion by 2029. The increasing demand for Sharia-compliant financial services from a younger and growing Muslim population is driving the industry's growth. However, Islamic banking has also faced criticism for failing to develop profit and loss-sharing or more ethical modes of investment, instead merely selling banking products that comply with the formal requirements of Islamic law.
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Frequently asked questions
No, not all banks in Saudi Arabia are Islamic. Despite a trend in the Saudi Arabian banking market to convert to full-fledged Islamic banks, only four out of the 12 local licensed banks are considered to be pure Islamic banks.
Islamic banks in Saudi Arabia must comply with Shariah principles in addition to the country's broader financial regulations. For example, Islamic banks cannot charge interest on loans and must instead use alternative models such as murabaha (cost-plus financing) or ijarah (leasing).
Islamic banks in Saudi Arabia can use profit-sharing (mudarabah) or joint venture (musharakah) contracts, where the bank and the customer share profits and losses, ensuring a fair distribution of risk and reward.
