Financial Sector Development Program

Five years after the launch of the Kingdom's Vision 2030, Vision Realization Programs were announced, where each program focuses on achieving certain goals of the Vision in the field in which it is specialized. In this article, we will highlight the Financial Sector Development Program.

The Financial Sector Development Program which launched in 2017 aims to build a diversified and effective financial sector to support the national economy, through the development of financial sector institutions, including the development of the Saudi capital market, while maintaining the stability and strength of the financial sector by diversifying sources of income, encouraging savings, financing, and investment, enabling financial institutions to support the growth of the private sector, developing the capital market, in addition to enhancing and enabling financial planning. Sub-sectors, such as banking and insurance, investment, equity markets, and debt, fall under the financial sector development program.

The program empowers the private sector of financial institutions, enhances financial planning options to ensure the growth of an advanced capital market, and increases the shares of financing enterprises of all types in banks. It also aims to develop the insurance sector in the Kingdom and adhere to international standards, including international organizations of securities commissions and the Bank for International Settlements.

The program is based on four main pillars: 

1. Enabling financial institutions to support the growth of the private sector.
2. Developing an advanced financial market. 
3. Promote and enable financial planning.
4. Financial Technology.

These pillars have been translated into several initiatives in order to achieve the program's commitments, as the first main pillar includes 12 initiatives, most notably: moving towards a cashless society, promoting the implementation of compulsory health insurance and compulsory motor insurance, the government's venture capital fund for small and medium enterprises, facilitating electronic transactions for financing activities, and supporting innovation in the financial sector. The second main pillar includes 14 initiatives, most notably: listing government commercial assets and projects in the capital market, deepening the debt instruments market, stimulating the private sector to list in the Saudi capital market, enabling the establishment of capital market infrastructure institutions, addressing the mechanism of calculating zakat on financial products, and sustainable financing in the Kingdom of Saudi Arabia and (ESG). Under the third main pillar is one initiative: the establishment of a national savings entity (government-subsidized savings products). Finally, the FinTech pillar includes 11 initiatives, including promoting FinTech-related innovation at the Saudi Central Bank, accelerating the implementation of FinTech cloud computing, Enabling FinTech Regulatory within the framework of the Capital Market Authority and the Saudi Central Bank, identifying mechanisms for providing financial support to FinTech companies in the Kingdom, Enhancing FinTech knowledge in the Kingdom, and enabling FinTech Saudi as the primary market driver.

The program has completed 24 completed initiatives, including establishing an infrastructure for financing and microinsurance, providing equal opportunities for finance companies, designing and launching mortgage guarantee products, building a national electronic platform for factoring, stimulating the financial sector to finance SMEs, opening the way for the derivatives market, enhancing information security, developing a mechanism to facilitate access to and standardization of financial and economic indicators, supporting the growth of private equity and venture capital funds, developing products specifically designed for low-income groups, enhancing investor incomes.  Qualified foreigners, and digital enablement of the investment account opening process.

The program faces several key challenges for the financial sector in the Kingdom:

1- The heavy reliance on bank financing, which is the main driver of the financial sector, as the volume of financing granted by the stock market and the debt instruments market reached 123 billion riyals in 2019, compared to the volume of bank credit, which amounted to 1,553 billion riyals for the same year.

2- Gaps in financial inclusion and productive finance, a key success factor for a thriving financial sector is its ability to serve a wide range of economic actors. In 2018, 71 percent of adults in Saudi Arabia had a bank account, and developed markets recorded more than 90 percent inclusion, specifically 58.2 percent among adult women and 78.8 percent among men and women in remote areas.

3- Digitization infrastructure development, although the Kingdom has invested heavily in various components of the technical infrastructure, there is still a lot of room to improve the use of this infrastructure. In 2019, cashless transactions accounted for 36 percent of all payment transactions, including cash.

4-Global Fintech Indicators.

5-Financial literacy levels, according to the 2017 OECD survey, the levels of adult financial literacy in the Kingdom have reached 9.6, which is low compared to similar countries and the average of the G20 countries.

6-Challenges of the banking sector, One of the most important challenges of the sector is the application of standards issued by international organizations and committees, as well as a challenge in developing internal systems to facilitate the process of providing products and services to customers, in addition to the emergence of competitors (payment companies) that provide banking products.

Among the most prominent objectives of the program by 2025, which form the foundations for achieving the ambitions of the Kingdom's vision:

1.  An increase in the share of non-cash operations by 70 percent, which will contribute to the development of digital infrastructure. 
2. The increase in the contribution of the insurance sector and the increase in gross written premiums by 2.4 percent as a percentage of GDP. 
3. An increase in the share of financing small and medium enterprises from banks by 11 percent. 
4. Opening the way for 30 startups to drive innovation and competition.  
5. The increase in the market value of the stock market by 80.8 percent of GDP (excluding Aramco). 
6.  Increasing the total banking assets of the banking sector by 3.515 billion riyals.

The program has achieved several achievements, most notably:

1.  Providing direct lending initiatives of more than two billion riyals to more than 2,300 companies. 
2. The Saudi Central Bank granted a license to 18 financial technology companies for the year 2021. 
3. For the first time, the share of electronic payments exceeds cash payments to reach 57 percent for the year 2021. 
4.  Launching the derivatives market on August 30, 2020, and starting trading futures contracts as the first derivatives product to be traded in the Saudi market. 
5. The Kafalah program of the Financial Sector Development Program witnessed significant growth in 2020, which is concerned with guaranteeing to finance for small and medium enterprises, as it achieved an increase in the value of guarantees issued by 156 percent, which amounted to 12.3 billion riyals. 
6. The accession of the Saudi Stock Exchange "Tadawul" to the international indices "FTSE" and "MSCI", which contributed to the Saudi market being one of the 10 largest markets in the world.

Recourses:

Program Implementation Plan File https://www.mof.gov.sa/about/Ministry_Departments/Pages/Financial_Sector.aspx https://tinyurl.com/y7h65c76

Prepared By: 

Reem Alsherif