DUBAI/JEDDAH — Saudi Arabia's Islamic finance market is set to grow with demand from corporate and retail clients, and supportive regulations, Moody’s Investors Service said in a report published Tuesday.

The kingdom had Islamic finance assets of $299 billion as of March, making it the world's biggest market, and leaving Malaysia a distant second with $134 billion. Moody's expects Islamic finance penetration in the kingdom to increase to 80% of system-wide loans over the next 12 to 18 months, from 77% in 2018.

Saudi Arabia's Islamic finance market, already the largest in the world, is set to expand on demand from corporate and retail clients, and a supportive regulatory environment, Moody's said.

"Islamic finance is growing faster than conventional banking in the kingdom and the market is opening up to international investors as the government seeks to diversify the Saudi economy from its oil dependency," said Ashraf Madani, VP-Senior Analyst at Moody's. "Higher penetration of Islamic finance is boosting banking system profits due to the favorable funding profile of Islamic banks, where Shariah-compliant deposit accounts do not earn interest."

The Saudi Arabia Monetary Authority (SAMA) and Capital Market Authority are working closely with the Ministry of Finance to provide a regulatory framework to promote sector growth.

The Islamic finance industry will continue to grow slowly in 2019-2020, S&P Global Ratings said recently. The industry expanded by about 2% in 2018 compared with 10% the previous year, according to S&P Global estimates, with strong support from the sukuk market.

In 2017, most of the growth stemmed from jumbo sukuk issuances in some Gulf Cooperation Council (GCC) countries, but this was followed by about 5% reduction in issuances in 2018.

In 2019, S&P expects the market to fare much better given the significant volatility in key parameters such as oil prices and geopolitical risk.

The growth of banking assets has also slowed down in almost all core Islamic finance markets. “Of specific note, Turkey and Iran lead the decline under a trend that we expect will continue in the next 12-24 months.” Malaysia, Indonesia, and the GCC countries were among the few sources of industry growth.

Due to sharply declined trends in oil prices, slow economic pace and Arab Spring, the trend of the Islamic Banking & Finance had been slow paced in 2016 in Middle East and Arab region, while a sufficient development was recorded in Africa, Central Asia & Far East, especially in African market, another industry report said.

Islamic Banking is the greatest contributor in Islamic Finance Industry, which contributes 80% to the total $ 2.3 trillion Islamic finance industry, while Sukuk contributing 14% volume in Islamic Finance industry and ranked as second largest contributor, Islamic Fund/Asset management Industry with 3% is ranked as 3rd while Takaful Industry is contributing 2% with slow pace and Islamic Microfinance contributing 1% stands as last. By 2017, the total volume of Islamic Finance Industry is expected to be $ 2.7 trillion. — SG