operating context

Global economic growth is projected to hold steady at 3.2% in 2024 and 2025, with inflation in most countries falling close to central bank targets. According to the International Monetary Fund’s (IMF) World Economic Outlook published in October 2024, the United States will be a central driver of global economic growth, offsetting downgrades forecast to other advanced economies, especially across Europe. The United States Federal Reserve pivoted to cutting interest rates in September 2024, starting with a 50 basis-point drop followed by two 25 basis-point rate cuts by end of 2024. However, the latest five-year forecast by the IMF remains at around 3.1%, below the historical (2000-19) pre-pandemic average of 3.8%.

Global operating environment

The IMF sees resilience in key markets including India, Brazil and Southeast Asia, despite geopolitical, trade and other risks, including the possibility of significant tariff hikes and retaliatory actions. Global headline inflation is expected to fall from an annual average of 6.7% in 2023 to 5.8% in 2024, and further to 4.3% in 2025, with advanced economies returning to their inflation targets sooner than emerging markets and developing economies. The global economy has remained unusually resilient throughout the disinflationary process, avoiding a global recession, despite the sharp and synchronised tightening of monetary policy around the world. Following a period of stagnation in 2023, global trade is also expected to continue to grow in line with GDP, reaching an average of 3.25% growth annually in 2024 and 2025, despite an increase in cross-border restrictions affecting trade between geopolitically distant blocs.

The need for structural reforms, however, remains urgent as ever. In 2024, half of the world’s population across nearly 70 countries elected new governments, leading to exceptional policy uncertainty. The Report thus highlights the need for economic growth to come from ambitious domestic reforms that boost technology and innovation, improve competition and resource allocation, further economic integration, and stimulate productive private investment.

Among the key risks identified by the IMF in terms of its economic outlook, is the intensifying Sovereign debt stress in emerging markets and developing economies. Many of these countries have stretched the ability to service their debt with borrowing costs and sovereign spreads still at elevated levels. Sovereign debts are also constraints on the implementation of essential funding of ESG initiatives; with cost of debt hitting a 20-year high in 2023 according to the World Bank’s latest International Debt Report, interest payments have been squeezing national budgets of vulnerable nations from critical areas such as health, education and climate change adaptation. Such market-based constraints of international financing might be overcome by easing monetary policy, and by the incorporation of ESG performance into financing schemes for sustainable development.

At the UN Climate Change Conference (COP29) held in November 2024, nearly 200 countries came together and reached a breakthrough agreement that will triple finance developing countries, from the previous goal of USD 100 Bn. annually, to USD 300 Bn. annually by 2035. This new agreement aims to protect people and economies against climate disasters, and share in the vast benefits of clean energy.The International Energy Agency expects global clean energy investment to exceed USD 2 Tn. for the first time in 2024. COP29 also reached agreement on carbon markets, helping countries deliver their climate plans more quickly and cheaply, and make faster progress in halving global emissions this decade, as required by science.

Advancements in artificial intelligence (AI) – especially Generative AI – continued to unfold at a rapid pace during the year in review. In financial markets across the world, various emerging technologies including AI continue to improve price discovery, deepening markets, and often dampening volatility in times of stress. Legislators, regulators and standard setters around the world are starting to develop frameworks to maximize AI’s benefits to society while mitigating its risks. With greater use of emerging technologies such as AI, and the accelerated pace of digitalisation, the risk of cyber incidents and cyber threats have also continued to increase, posing serious concerns not only for data safety and security, but also financial stability at a global scale. The financial sector remains uniquely exposed to cyber risk, with the sensitivity and scale of financial data.

Indeed, more firms are focusing on the ESG standards when it comes to addressing risks rising from AI, or concerns with data privacy and security. This way, the organisations committed to ethical AI and clear datasets are likely to build trust within the stakeholders as more of them realise the societal impacts of technologies utilisation.

Given the above snapshot of the global operating environment during the year in review, and for the immediate and foreseeable future, the outlook for financial institutions is being shaped by the following global trends;

Regional operating environment

According to the World Bank’s Gulf Economic Update: Fall 2024, the GCC region is estimated to have economic growth of 1.6% in 2024, but is forecast to grow at 4.2% in 2025-2026. The region has shown remarkable resilience in the face of many challenges, as growth continues to be driven by the non-oil sector which has shown robust growth of 3.7%. This is mainly powered by the ongoing diversification efforts and ambitious reforms throughout the region. Inflation in 2024 remained low and stable at 2.1%, supported by subsidies, fuel price caps, and currency pegs. However, inflationary pressures in the housing sector persist in several countries. The fiscal sector has been impacted by rising government spending and reduced oil revenues, with significant variation across the region.

The Islamic banking sector meanwhile, continued to demonstrate notable resilience and growth amidst challenging global conditions. Islamic capital markets remained resilient and demonstrated growth, underpinned by solid fundamentals, innovation, and a growing alignment with global investment trends towards sustainability. Global ESG sukuk issuances are expected to continue rising over Q4 2024-2025, driven by diversification targets, international sustainable goals, and investor demand for ESG-based bonds and greater exposure to sustainable financing options. Among the GCC countries, ESG debt reached USD 46.3 Bn. outstanding, with 42% in sukuk as at Q3 2024.

Quite notably, the GCC is advancing gender equality and female empowerment in the workforce through national reforms and initiatives, in line with their respective Vision 2030 objectives. At the close of 2023, Qatar and the UAE recorded the highest female inclusion in the workforce with 60% and 52% respectively, well above the global average of around 47%. Saudi Arabia saw female participation across its workforce soaring to 37%, exceeding their ambitious Vision 2030 target of 30% seven years earlier than expected. (alrajhi bank’s own gender equity rate exceeds that of the KSA average, with a feminisation rate of 34% at the close of the year). This important and commendable progress made by GCC member countries towards the Sustainable Development Goal 5 on gender equality was highlighted by the United Nations Secretary General in 2024, especially through legislative reforms in many areas including labour laws, taking great strides towards the empowerment of women.

Local trends

Powered by its bold economic diversification agenda of Vision 2030 to reduce its dependence on oil, Saudi Arabia’s non-oil activities have contributed towards the Kingdom’s expected real GDP growth of 1.3% in 2024, following its 0.8% contraction in 2023. Non-oil activities have recorded a robust growth of 4.3%, which partially offset the expected 4.5% contraction in oil GDP, resulting from extended voluntary oil production cuts until the end of 2024. Growth is expected to accelerate to an average of 3% to 4% in 2025-2026 as oil production increases.

The non-oil sector, which is critical to Saudi Arabia’s economic diversification agenda, is expected to stay steady at an estimated 4.5% in 2025-2026, spurred by domestic demand. The Saudi Arabia Purchasing Managers’ Index (PMI) reached 58.4 in December 2024. This robust expansion, marked by accelerated output and demand, reflects the increasing capacity of non-oil sectors to contribute to Saudi Arabia’s economic activity independently of oil price fluctuations. Non-oil growth across sectors such as tourism, entertainment and technology in KSA aligns with Vision 2030 objectives to be a low-carbon economy. This strategic shift continues to change the financial structure of the Kingdom, and opens new opportunities for banks and financial institutions to finance fledgling industries with future promise.

Diversification has been driven by improvements in the regulatory and business environment in Saudi Arabia. As a result of a new set of laws to promote entrepreneurship, protect investors’ rights, and reduce the costs of doing business, new investment deals continued to flow in during the year in review. The number of investment licenses surged by 73.7% in Q3 2024, as per the Kingdom’s Ministry of Investment. Such regulatory improvements also support KSA’s intent to adopt good corporate governance principles, high transparency standards, and sound business ethics, seamlessly integrating ESG considerations across the business sector. In addition, the Saudi Investment Fund (PIF) is gradually shifting from overseas investments to home-based projects in a bid to boost the domestic economy. This shift offers financial institutions the chance to participate in financing and advisory services for large-scale national projects. PIF expanded its green project investment plan to over USD 19.4 Bn. in nearly 100 eligible projects focused on strategic and sustainable development areas in line with ESG standards. These focus areas range from renewable energy and green infrastructure projects to clean transportation and pollution prevention.

Consumer spending in Saudi Arabia increased by nearly 11% in December 2024 compared to the same month last year; this was fuelled by a remarkable performance by the digital payments vertical, with a 9% YoY growth in point-of-sale (POS) Sales, a 26% YoY increase in e-commerce sales through ‘Mada’ cards, and a 1% YoY increase in ATM cash withdrawals. This continued increase in consumer spending is driven by Saudi Arabia’s advancement in adopting multiple digital payment methods, to complement the ESG agenda for economic growth by enhancing financial inclusion, increasing access to credit, and improving environmental management by enhancing the use of digital banking to effect transactions that do not require use of physical structure.

Saudi Arabia’s real estate market is experiencing continued its upward trajectory in 2024, spurred by declining interest rates and proactive government initiatives. The drop in borrowing costs, coupled with a strong pipeline of construction projects moving into the execution phase, is driving optimism and energising activity throughout the Kingdom’s real estate sector. With the introduction of 18 new legislations, including updated real estate systems and regulatory frameworks, the Kingdom now ranks second among the most improved markets globally in terms of real estate transparency. Saudi Arabia’s Vision 2030 strategic framework supports sustainable city growth and housing affordability, with future policies and projects underpinning green construction and smart land utilisation to strengthen the position of real estate industry.

The Saudi banking sector

The operating environment for banks in the Kingdom remains favourable in 2024, driven by high oil prices, a solid non-oil GDP growth, and by government spending, supporting the country’s giga projects for Vision 2030. Saudi Arabia scored an operating environment rating of ‘bbb+’ by Fitch Ratings, the highest across the GCC’s banking sectors.

Saudi banks recorded strong gains on securities and trading, increasing non-interest income to reach a combined profit of SAR 80 Bn. in FY 2024, The improvement was underpinned by the interest rate cut by SAMA in the second half of 2024 in line with the US Fed, leading to a positive revaluation of some securities. Focus on non-interest income and improved cost efficiencies will remain crucial for Saudi banks going forward.

The sector’s financing book grew 14.4% in 2024, while the growth of customer deposits was significantly weaker due to the increased reliance of banks on external liabilities, diversifying their funding sources into international debt capital markets – including sustainable products – due to an increased demand by corporate customers involved in the execution of giga projects.

The total bank credit granted to the public and private sectors by Saudi Arabia’s banks reached its highest peak at over SAR 2.95 Tn. at the end of December 2024, an annual growth rate of 14.4% YoY. This bank credit spanned over 17 economic activities in both the public and private sectors, further supporting the Kingdom’s comprehensive and sustainable economic growth and contributing to the objectives of Saudi Vision 2030.

Asset quality across banks remained largely healthy, and financing and risk-weighted assets expansion was greater than internal capital generation. The sector average T1 Capital ratio (end-4Q24: 18.3%) has been viewed as healthy in light of Saudi banks’ risk profiles and asset quality metrics through the cycle.

Despite the challenges in the global economy, SAMA has been proactive in addressing various risks in order to maintain stability and resilience in the Saudi banking sector, highlighting the strong commitment to good governance and robust regulatory framework for a stable economy, while gaining investors’ trust. Further, SAMA continued its support of technological innovation and digital solutions to meet evolving needs of households and corporations, while ensuring a resilient framework is properly in place. These digital advancements are fundamental to financial inclusion efforts, making banking services more accessible and efficient, while supporting the social pillar of ESG. From a regulatory perspective, the implementation of Basel III Reforms were completed ahead of the stated deadline, and the banking system’s prudential ratios continue to be maintained well above the regulatory requirements.

The Financial Sector Development Programme plays an important role in driving the Kingdom’s economic growth while also acting as an active vehicle towards achieving the Saudi Vision 2030 goals. SAMA is actively engaged with the Programme to promote technological innovation and digital solutions, thereby offering a wide-range of products and services across the sector. Refining laws and regulations to meet benchmark international standards also remains a crucial component of the Programme’s attempt to modernise Saudi Arabia’s financial landscape, promoting entrepreneurship and private sector growth. The Financial Sector Development Programme highlights ESG and Sustainable Financing, and the need to issue Sovereign sustainable debt instruments in the present operating environment to attract foreign investments. Through such actions, the Saudi Banking sector will increase transparency of its compliance efforts with international ESG standards.

As the fintech ecosystem in Saudi Arabia continues to expand, many banks are collaborating with local and international fintechs to create innovative solutions, as SAMA continues to support the endeavours through a highly conducive Open Banking regulatory environment. Saudi banks are partnering with fintech companies to launch services such as mobile wallets, instant loan approvals, and digital payment platforms, appealing to the country’s tech-savvy youth demographics.

KSA banking sector updates for 2024