Introduction
Following the introduction of the Finance Companies Regulations in 2012, the number of finance companies licensed and operating in the Kingdom of Saudi Arabia has grown from just 3 in 2013 to 34 in 2016. The Capital committed to the sector has increased from SAR 1.6 Billion to SAR 12.4 Billion a growth of almost 800%. In 2016, an additional four non real estate finance companies were added to the sector. Although the rate of growth of issuing new licenses has slowed a small number of additional companies are expected to be added over the course of 2017.
Total Assets
In line with the economic slowdown within the country the asset growth of the finance companies has slowed in 2016 to 4.84%. Net Finance assets increased by 10% over 2015 to 2016, with real estate companies net financial assets growing at 16% against non-real estate company growth of 8%. Much of the growth between 2014 and 2015 is attributed to the new companies falling under SAMA’s regulatory umbrella. In 2016 real estate assets made up 29% of the overall company assets with 71% falling under non real estate finance companies.
The Overall economic outlook for Saudi Arabia remains lackluster. Recent economic reports show that Saudi real GDP growth contracted 1% y-o-y in 2Q 2017 and this was the second successive quarter of yearly decline. Overall the economy remains weak despite the reversal of cuts to public sector allowances. The construction sector fell 1.6% y-o-y in 2Q with no signs of a pick-up in investment. The Saudi Government continues its ambitious change agenda with its Vision 2030 and the NTP 2020, expecting to deliver a structural shift in the economy away from dependence on hydrocarbon revenues towards the non-oil private sector. This program includes the IPO of approximately 5% of Saudi Aramco, the national oil company, the introduction of VAT on January 1 2018, and elimination of subsidies on fuel and electricity. Change is also happening within the social fabric of the Kingdom highlighted by the recent Royal Decree to allow women to drive.
Finance companies remain an important source of funding for SMEs especially in the contracting and construction sector. In 2016 SMEs took 17% of the total finance (down from 20% in 2015) with 64% going to individuals and 19% to Corporates. In terms of geographic distribution over 50% was allocated to the Central Region with 23% in the Western province and 17% in the East.
Capital and reserves continue to be the main source of funding for finance companies. Regulatory leverage remains low across the sector. Under the Implementing Regulations of the Finance companies Control Law the maximum finance limit for real estate finance companies is limited to five times capital and reserves and three times for non-real estate companies. Current leverage levels are 2.1 in real estate and 1.7 in non-real estate finance companies.
Challenges remain for finance companies. The significant reduction in construction activity due to cut backs in Government expenditure, with many projects being put on hold or cancelled has caused delayed payments which has had a knock on effect on the ability of contractors to make their repayments on their leased assets. This has caused a sharp increase in the overdues of those finance companies where between 40 and 60% of their portfolios were exposed to the finance of yellow metal. A perfect storm has occurred with a reduced demand resulting in a surplus of stock with equipment vendors and rapidly falling resale values for repossessed and second had equipment. Finance companies have been faced with companies having to reschedule their repayments or return the assets.