Al Rajhi is Saudi Arabia’s most profitable Islamic bank, generating $1.8 billion in 2009. Thanks to its position as the dominant retail force in Saudi Arabia, the bank has the biggest market share of unremunerated deposits, in line with Islamic finance provisions that prohibit deposit holders directly benefiting from interest rate-based income.
As a result, Al Rajhi has a huge competitive advantage, with pools of cost-free capital and liquidity. Thanks to its low cost of funding and stable revenue streams, Standard & Poor’s raised the bank’s credit rating to A+ from A in May.
The bank’s dominance in the retail market has set off a virtuous cycle, says the rating agency. The Saudi Arabian government’s history of supporting systemically important financial institutions has boosted its creditworthiness, which in turn has buttressed Al Rajhi's franchise.
During the boom years, the bank strengthened its risk management procedures and maintained a tight grip on costs. The bank’s risk-adjusted capital ratio was 14.6% at the end of last year, while non-performing loans represented 3.2% of total loans.
But not content with resting on its laurels, over the past year Al Rajhi has moved determinedly outside its Saudi Arabian foothold to boost its geographic outreach and diversify business streams. It is set to open an Islamic finance franchise in Jordan this year and, in February, became the first foreign bank to be licensed under Islamic bank regulations in Kuwait.
These moves should help Al Rajhi act as kingmaker for cross-border deals in the coming years and entrench its budding status as a regional powerhouse.