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For the past decade, Saudi Arabia has been at the forefront of development in the Islamic financial services (IFS) sector. The Kingdom, which is home to more than a quarter of the GCC’s Islamic financial assets and a handful of the world’s largest sharia-compliant financial institutions, is currently among the top IFS markets in the world. In 2011-12 the sector continued to expand, buoyed by strong economic fundamentals and the Kingdom’s growing reputation as a centre for innovation in IFS. Of course, the sector does face challenges, including the lack of a large, well-trained national financial workforce. However, the IFS industry as a whole is poised for substantial expansion for years to come. With GDP growth expected to top 6% in 2013, according to IMF forecasts, the government and private sector alike are bullish on growth for the foreseeable future.

It has been a good couple of years for the Saudi Stock Exchange (Tadawul), which posted considerable growth in 2011 and 2012. Market capitalisation was up more than 10% over 2011 due to a spate of initial public offerings (IPOs) in late 2011 and 2012. However, while the Tadawul is the largest and most liquid exchange in the region, it lacks large institutional investors; around 90% of trading activity in recent years has been driven by individual retail investors. Additionally, the exchange-based bond market remains small and largely operates on a buy-and-hold basis. Yet despite these issues, the Tadawul is widely expected to continue to grow in the coming years: the government’s ongoing large-scale infrastructure and housing investment programme will likely result in considerable demand for local financing for some time to come.

The Kingdom’s banking sector posted solid growth in 2011 and 2012 and is now one of the largest in the GCC, with total assets reaching $439.7bn by the third quarter of 2012. In addition, bank profitability has risen in recent years, reaching $8.23bn at the end of 2011, up from $6.94bn at the end of 2010 and $7.14bn at the end of 2009. The industry’s expansion over the past few years is largely the result of strong fundamentals and proactive government oversight, especially in the wake of the 2008-09 international economic downturn. Since mid-2011, in particular, the banking sector has benefitted from solid non-oil GDP growth and strong spending from both the government and private sector players. Looking ahead, the sector is poised for continued expansion, with high liquidity levels meaning that many banks are preparing to boost lending further. This chapter includes a dialogue between Patrice Couvegnes, CEO, Banque Saudi Fransi, and Bernd van Linder, Managing Director, Saudi Hollandi Bank.

Saudi Arabia continues to post strong economic growth on the back of its thriving petroleum sector anchored by a steady political and financial base. One of the largest exporters of oil worldwide, the country has also had some of the highest economic growth rates. Real GDP growth was forecast at 6.8% for 2012, following 8.5% expansion in 2011 and 4.8% in 2010. However, a new wave of strong state expenditures has spread revenues across a wide array of economic subsectors. As a result, the government has been able to accelerate its long-term strategic goal of economic diversification away from oil as well as address key social issues like education, employment and the availability of affordable housing. Looking ahead, the state’s continued investments in both infrastructure and social services should continue to fuel domestic growth, particularly in the private sector. This chapter includes interviews with Zafer Çağlayan, Turkey’s Minister of Economy; Karel De Gucht, EU Trade Commissioner; and Muhammad Al Jasser, Minister of Economy and Planning.