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Table of Contents
Introduction: ........................................................................................................................................................... 2
Purpose of Islamic Banking: ................................................................................................................................... 2
Theoretical Part: ..................................................................................................................................................... 3
Murabaha financing: ........................................................................................................................................... 4
Ijara financing: .................................................................................................................................................... 4
Musharaka financing: ......................................................................................................................................... 5
Sukuk: ................................................................................................................................................................. 6
Islamic insurance (Takaful): ............................................................................................................................... 6
List of some of the top Islamic banks in the Kingdom of Saudi Arabia (KSA): ................................................ 7
Al-Rajhi Bank: ................................................................................................................................................ 8
Saudi National Bank: ...................................................................................................................................... 9
The Saudi British Bank (SABB):.................................................................................................................. 10
Conclusion: ........................................................................................................................................................... 11
References ............................................................................................................................................................ 11
Islamic Banking & Finance in KSA:
Introduction:
Islamic banking and finance refer to a financial system that operates in accordance with the
principles of Islamic law (Sharia). It is based on the concept of risk sharing, prohibits
interest-based transactions, and promotes ethical and socially responsible investing. In the
Kingdom of Saudi Arabia (KSA) and the Middle East, Islamic banking has seen rapid growth
in recent decades and has become a significant player in the financial sector. The central bank
of Saudi Arabia, the Saudi Arabian Monetary Authority (SAMA), has been instrumental in
promoting and regulating Islamic banking in the country. The government has also
established several institutions, such as the Islamic Development Bank, to promote Islamic
finance and investment globally.
Islamic banking products in the Middle East and KSA include Murabaha (cost-plus
financing), Ijara (leasing), Musharaka (joint venture), and Sukuk (Islamic bonds). These
products are designed to provide financing and investment opportunities while adhering to
the principles of Islamic law.
In recent years, there has been an increased focus on developing and promoting sustainable
and ethical finance in the Middle East and KSA, which is in line with the principles of
Islamic finance. This has led to the growth of Islamic social finance products such as Zakat
and Waqf, which aim to address social and economic challenges in the region. Overall,
Islamic banking and finance has become a significant player in the financial sector of the
Middle East and KSA and is likely to continue to grow in the future.
Purpose of Islamic Banking:
The purpose of studying Islamic banking is to gain an understanding of the principles, values,
and practices of this alternative banking system that is based on Islamic law (Sharia). Islamic
banking is a rapidly growing sector in the financial industry, and it offers a unique approach
to banking that is distinct from conventional banking.
Following are some of the key reasons for studying Islamic banking:
a) To understand the principles and values of Islamic finance: Islamic banking is based
on ethical principles such as fairness, justice, and transparency. Understanding these
principles is important for anyone interested in the financial sector.
b) To gain knowledge of Islamic financial products and services: Islamic banking offers
a range of financial products and services that are different from conventional
banking, such as mudarabah (profit and loss sharing), murabahah (cost-plus
financing), and ijara (leasing).
c) To understand the role of Islamic finance in promoting economic development:
Islamic finance has the potential to promote economic development by providing
financing for productive activities, supporting entrepreneurship, and promoting
investment in underdeveloped areas.
d) To appreciate the impact of Islamic finance on the global financial system: Islamic
finance is increasingly gaining global recognition and has become a major player in
the financial industry. Studying Islamic banking helps to understand the impact it is
having on the global financial system.
e) To prepare for a career in Islamic finance: As the demand for Islamic finance
continues to grow, studying Islamic banking can help prepare individuals for a career
in this field.
Theoretical Part:
The worldwide Islamic banking and financial sector has been making ground-breaking
advancements to position itself as a genuine competitive and viable alternative to established
institutions. In the Middle East, South East Asia, and South East Pacific, Islamic banking and
finance firms have established thriving bases. These expanding Islamic hubs have served as a
springboard for the promotion of Islamic banking in Western financial and commercial areas.
The recent success of Islamic banking and finance can be attributed to a number of key
factors, including the world's spiralling oil prices, the sustained growth of the economies of
the Middle East, product innovation and sophistication, an increasingly receptive attitude on
the part of traditional regulators, and advancements in information technology (Khan &
Bhatti, 2008).
Given all such trends, Islamic banking may be able to attract the vast majority of consumers
from the Muslim world, which accounts for over 1.3 billion people or over 24 percent of the
world's population, as well as other morally upright groups around the world in the future
(Khan & Bhatti, 2008).
Islamic banking is a growing and important sector in Saudi Arabia. It is based on the
principles of Islamic finance, which prohibits the charging or paying of interest (riba) and
emphasizes the importance of ethical and socially responsible investments. In Saudi Arabia,
Islamic banking has become increasingly popular in recent years, and many conventional
banks have established Islamic banking divisions to meet the growing demand for these
services. Islamic banking services in Saudi Arabia include:
Murabaha financing:
Murabaha financing is a commonly used financing mode in Islamic banking. It is based on
the principle of cost-plus financing, where the bank purchases a commodity for a customer
and then sells it to the customer at a marked-up price, with the payment deferred to a future
date.
Under Murabaha financing the bank identifies a customer who is in need of financing for a
specific purchase. The bank then acquires the commodity the customer wishes to purchase
and takes ownership of it. The bank then sells the commodity to the customer at a higher
price, which includes the cost of the commodity and a profit margin agreed upon by both
parties. The customer agrees to pay the marked-up price in instalments over a specified
period of time, with the payment being fully repayable at the end of the agreed term. The key
feature of murabaha financing is that it is based on a clear and transparent agreement between
the bank and the customer. The bank is responsible for acquiring the commodity and taking
on the risk associated with its ownership, while the customer is responsible for paying the
marked-up price. Murabaha financing is widely used in Islamic finance as a means of
financing various types of assets, including consumer goods, real estate, and small
businesses. It is considered to be compliant with Sharia law as it involves a clear agreement
between the bank and the customer and avoids the element of interest, which is considered
usury and prohibited in Islam (Kettell, 2011).
Ijara financing:
Ijara financing is a common mode of financing used in Islamic banking. It is based on the
principle of leasing and is used to finance the purchase of assets such as real estate, vehicles,
and equipment.
In this financing service the bank acquires the asset that the customer wishes to purchase. The
bank then leases the asset to the customer for a specified period of time, with the customer
having the option to purchase the asset at the end of the lease term. The customer agrees to
pay a rental fee for the use of the asset during the lease term. This rental fee is usually fixed
and is calculated based on the value of the asset, the lease period, and the expected
depreciation of the asset over that period. At the end of the lease term, the customer has the
option to purchase the asset for a predetermined price, which is often set at a nominal
amount. The key feature of ijara financing is that it provides customers with the use of an
asset without the need to purchase it outright. This allows customers to conserve their capital
and use it for other investments, while also benefiting from the use of the asset. Ijara
financing is considered to be compliant with Sharia law as it avoids the element of interest,
which is considered usury and prohibited in Islam. Instead, the bank earns a profit through
the rental fee charged to the customer (Kettell, 2011).
Musharaka financing:
Musharaka financing is a mode of financing used in Islamic banking that is based on the
principle of profit and loss sharing. It is used to finance various types of investments,
including real estate, small businesses, and infrastructure projects.
Under musharaka financing bank and the customer agree to invest in a specific project or
business venture. The parties agree on the share of profits and losses that each will receive,
based on the amount of their investment. The profits generated from the investment are
shared between the bank and the customer in accordance with the agreed ratios. In the event
of losses, the losses are also shared between the bank and the customer in the same ratios as
the profits. The key feature of musharaka financing is that it involves the sharing of risk
between the bank and the customer. The bank is not just a passive lender, but is also an active
participant in the investment, sharing in the profits and losses of the venture. Musharaka
financing is considered to be compliant with Sharia law as it avoids the element of interest,
which is considered usury and prohibited in Islam. Instead, the bank earns a profit through
the sharing of profits from the investment. Overall, musharaka financing provides a flexible
and innovative financing option for individuals and businesses, while also being in line with
Islamic principles and values. It allows both the bank and the customer to share in the risk
and reward of the investment, promoting a closer alignment of interests and a more
sustainable financing model (Kettell, 2011).
Sukuk:
Sukuk are Islamic financial certificates, similar to bonds in traditional finance, that represent
ownership in a tangible asset, a share of profits generated by a specific project or investment,
or a right to a beneficial interest in an underlying asset.
The issuer of the sukuk raises funds by issuing sukuk to investors. The funds raised are used
to finance a specific project or investment. The sukuk holders receive regular returns based
on the underlying assets or the profits generated by the project or investment. At the end of
the sukuk term, the sukuk holders have the option to sell their sukuk on the secondary market
or redeem them for the value of the underlying assets. Sukuk are considered to be compliant
with Sharia law as they are based on the principles of profit and loss sharing and avoid the
element of interest, which is considered usury and prohibited in Islam. Overall, sukuk provide
a flexible and innovative financing option for governments, corporations, and infrastructure
projects, while also being in line with Islamic principles and values. They offer a costeffective means of raising capital and provide investors with a unique investment opportunity
that is both ethical and profitable. Additionally, sukuk have become increasingly popular as a
means of financing infrastructure projects and economic development, as they provide a way
for countries to tap into the large pool of Islamic finance funds available globally (Kettell,
2011).
Islamic insurance (Takaful):
Islamic insurance, also known as takaful, is an alternative form of insurance that is based on
the principles of mutual cooperation and solidarity. It is designed to be in line with the values
and principles of Islam and avoids the elements of uncertainty, gambling, and interest, which
are considered prohibited in Islamic finance.
Participants in a takaful scheme make regular contributions to a common pool of funds. The
funds in the pool are used to provide insurance coverage for the participants, and any surplus
funds are distributed among the participants. In the event of a claim, the takaful operator pays
the claims from the common pool of funds, and the participants share the costs of the claim.
The takaful operator acts as the administrator of the scheme and manages the funds, but does
not assume any risk. Instead, the risk is shared among the participants. The key feature of
takaful is that it is based on the principle of mutual cooperation and solidarity, with
participants sharing in both the risks and the rewards of the scheme. This creates a sense of
community and helps to promote the values of mutual support and cooperation. Takaful
insurance is considered to be a more ethical and sustainable form of insurance, as it is based
on the principles of mutual cooperation and fairness, and avoids the elements of uncertainty
and gambling that are present in conventional insurance. Overall, takaful insurance provides a
flexible and innovative insurance option for individuals and businesses, while also being in
line with Islamic principles and values. It provides a cost-effective means of obtaining
insurance coverage and promotes a sense of community and solidarity among the participants
(Kettell, 2011).
These are just a few examples of the types of products and services offered by Islamic banks
in Saudi Arabia. The specific offerings may vary depending on the individual needs and
requirements of each customer and the bank they are working with.
List of some of the top Islamic banks in the Kingdom of Saudi Arabia (KSA):
Al-Rajhi Bank: Al-Rajhi Bank is one of the largest Islamic banks in the world and is
headquartered in Riyadh, Saudi Arabia. It offers a range of Islamic banking products and
services, including retail banking, corporate banking, investment banking, and wealth
management (Wikipedia, 2023).
Saudi National Bank: Saudi National Bank is one of the largest banks in Saudi Arabia and is
headquartered in Jeddah. It offers a range of Islamic banking products and services, including
personal and car financing, home financing, credit cards, and current and savings accounts
(Wikipedia, 2023).
The Saudi British Bank (SABB): SABB is a joint venture between the Saudi Arabian and
British governments and is headquartered in Riyadh. It offers a range of Islamic banking
products and services, including personal and car financing, home financing, credit cards, and
current and savings accounts (Wikipedia, 2023).
Al-Rajhi Bank:
710 billion SAR worth of assets, SAR 40 billion ($10.66 billion) in paid-up capital, and
around 9,300 colleagues working for the company. The various independent establishments
operating under the alrajhi name, which had over 60 years of experience in banking and
trading, were merged into the "Al Rajhi trading and exchange corporation" in 1978. The bank
was established as a Saudi joint stock company in 1988 under the name "alrajhi Banking and
Investment Corporation," and it was given its current name, "alrajhi bank," in 2006. The
Sharia compliant banking organisation, which is deeply entrenched in Islamic banking
principles, has been at the forefront of various industry standards and developments while
bridging the gap between contemporary financial demands and the underlying values of
Sharia (Bank, 2023). Some of the key products and services offered by Al-Rajhi Bank in
Saudi Arabia include:
a) Retail banking: Al-Rajhi Bank offers a range of retail banking products, including
personal and car financing, home financing, credit cards, and current and savings
accounts.
b) Corporate banking: The bank offers a range of corporate banking products, including
trade financing, working capital financing, project financing, and treasury services.
c) Investment banking: Al-Rajhi Bank provides investment banking services, including
underwriting and placement of sukuk (Islamic bonds) and other financial instruments.
d) Asset management: The bank offers asset management services to help clients
manage their investment portfolios and achieve their financial goals.
e) Online banking: Al-Rajhi Bank provides online banking services that allow customers
to access their accounts and perform transactions online.
f) Mobile banking: The bank also offers a mobile banking app that allows customers to
perform transactions and manage their finances on-the-go.
g) Wealth management: Al-Rajhi Bank provides wealth management services to help
high net worth individuals manage and grow their wealth.
These are some of the main products and services offered by Al-Rajhi Bank in Saudi Arabia.
The bank is committed to providing high-quality Islamic banking products and services that
meet the financial needs of its customers while adhering to the principles of Islamic law.
Saudi National Bank:
The main financial institution in Saudi Arabia and one of the key players in the region is the
Saudi National Bank (SNB). By modernising the local banking industry and accelerating the
implementation of Saudi Arabia's Vision 2030, SNB plays a crucial part in assisting the
country's economic transformation. Its strategy closely resembles the Vision's programmatic
initiatives. SNB uses its status as the largest institutional and specialised financier in the
Kingdom to support important transactions and large-scale initiatives. Following the merging
of the National Commercial Bank and Samba Financial Group, SNB was created. The Royal
Decree of December 26, 1953, or the 20th of Rabi Al-Thani 1373H, after the merger of Saudi
Arabia's largest currency exchange houses at the time, has been regarded as the largest and
the first bank to officially be licenced and operate in Saudi Arabia. This was followed by the
establishment of the National Commercial Bank (NCB), which is now the largest bank in
Saudi Arabia. In 1996, the Bank created its Shariah Board, and in 1997, it became a joint
stock company. The General Organization for Social Insurance and a number of Saudi
investors jointly controlled the remaining shares of the Bank in 1999, with the majority of
shares owned by the Saudi Government, represented through the Public Investment Fund
(SNB, 2023). Some of the products and services offered by Saudi National Bank include:
a) Personal banking: This includes savings and checking accounts, personal loans,
mortgages, credit cards, and wealth management services.
b) Corporate banking: NCB provides a range of services for businesses, including
corporate finance, working capital solutions, trade finance, and cash management.
c) Investment services: NCB offers investment solutions such as mutual funds, bonds,
and portfolio management services.
d) Islamic banking: NCB is a leading provider of Islamic banking services in Saudi
Arabia, offering products and services that are in line with Sharia principles.
e) Digital banking: NCB provides a range of digital banking services, including online
and mobile banking, to make banking more convenient and accessible for its
customers.
These are just some of the products and services offered by NCB in Saudi Arabia. The
specific offerings may vary depending on the individual needs and requirements of each
customer.
The Saudi British Bank (SABB):
The Saudi British Bank (SABB) is a member of the HSBC Group and a regulated financial
institution that operates under SAMA supervision and regulation. With roots in Saudi Arabia
dating back nearly 70 years, SABB was founded there in 1978 as a Saudi Joint Stock
Company. During that time, it has actively supported the country's social and economic
development. One of the top corporate and institutional international banks in the Kingdom,
SABB is a member of the HSBC Group and offers outstanding retail banking and wealth
management services. Additionally, SABB is a pioneer in digital service innovation, ESG,
equity and debt wholesale banking, trade finance, foreign exchange, and the region, setting
the way for excellence and transformation. Corporate banking, investment, private banking,
and treasury are just a few of the integrated financial and banking services that SABB
provides. After a formal merger with Alawwal Bank, SABB now has a paid-up capital of
SAR 20.5 billion, making it one of the biggest banks in the Kingdom of Saudi Arabia
(SABB, 2023).
Some of the products and services offered by SABB include:
a) Personal banking: SABB provides a range of personal banking services, including
savings and current accounts, personal loans, credit cards, mortgages, and wealth
management services.
b) Corporate banking: SABB offers a range of services for businesses, including trade
finance, working capital solutions, cash management, and corporate finance.
c) Investment services: SABB offers a variety of investment products and services, such
as mutual funds, bonds, and portfolio management.
d) Islamic banking: SABB is a leading provider of Islamic banking services in Saudi
Arabia, offering products and services that are in line with Sharia principles.
e) Digital banking: SABB provides a range of digital banking services, including online
and mobile banking, to make banking more convenient and accessible for its
customers.
These are just some of the products and services offered by SABB in Saudi Arabia. The
specific offerings may vary depending on the individual needs and requirements of each
customer.
Conclusion:
Islamic banking is a growing sector and its future is expected to be bright, with increasing
demand for ethical and socially responsible financial services. Here are a few factors that are
likely to influence the future of Islamic banking:
Expansion into new markets: Islamic banking is expanding into new markets, particularly in
non-Muslim majority countries, where there is increasing demand for sharia-compliant
financial services.
Technological advancements: The adoption of digital technologies is likely to play a key role
in the growth of Islamic banking, as it allows for the delivery of financial services to a wider
customer base and improves operational efficiency.
Increased competition: As the industry grows, there is likely to be increased competition
among Islamic banks, which will drive innovation and improve customer experience.
Regulation and standardization: There is a growing need for standardization and
harmonization of Islamic finance regulations across different jurisdictions, which will help to
build trust in the industry and increase its competitiveness.
Overall, the future of Islamic banking looks promising, and with the right approach and
investments in technology, it has the potential to become a major player in the global
financial landscape.
References
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Kettell, B., 2011. Introduction to Islamic Banking and Finance. s.l.:John Wiley & Sons.
Khan, M. M. & Bhatti, M. I., 2008. Islamic banking and finance: on its way to globalization. Managerial Finance,
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SABB, 2023. Abiut SAAB. [Online]
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[Accessed 13 Feburary 2023].