Insight & Analysis

Press release: Institutional Money Fund Foundations laid in Saudi Arabia

Published: May 2018

Overall, Fitch estimates that the Saudi Arabian money fund sector grew by around 10% over the three years to end-December 2017 in US dollar terms, with asset expansion particularly high in 2017. This compares with a global money fund growth of 5% over the same period.

Saudi money funds are primarily denominated in Saudi riyals, although a limited number are denominated in US dollars. Saudi Arabia is approximately by total asset the 20th-largest money fund domicile (approximately 19 billion in US dollar terms) globally. While Saudi Arabia is a middle-ranking money fund domicile, it is by far the largest in the Middle East region. Money funds represent around 73% of total mutual fund assets domiciled in Saudi Arabia. As in other smaller mutual fund markets, money funds offer a first step into investment for risk-averse investors through effecting limited maturity transformation and hence offering superior rates – and diversification – to bank deposits. Fitch expects continued growth in the Saudi Asset management industry, which is already the largest Islamic asset management industry globally.

Saudi money funds benefit from a solid regulatory framework: they are regulated under the Investment Funds Regulations of the Capital Market Authority of Saudi Arabia as amended 23 May 2016. This provides for limits on concentration, market and liquidity risk. For example, applicable regulation in Saudi Arabia caps funds’ weighted average life (WAL), a measure of sensitivity to spread risk, at 120 days. This aligns with US and European regulatory requirements. On the other hand, applicable regulation requires only10% weekly liquidity, which is substantially lower than the 30% required by US and European regulation. Furthermore, Saudi Arabian money funds can run more concentrated portfolios than would be permitted under US or European regulation, although the funds reviewed by Fitch demonstrate prudent diversification, with issuer exposures typically capped at 10%.

Saudi money funds primarily invest in murabaha contracts and sukuk issued by Fitch-rated domestic and regional sovereigns, banks or corporates. Saudi Arabia itself is rated ‘A+’/‘Stable’/‘F1+’, with a Country Ceiling of ‘AA’. Fitch rates most domestic and regional banks investment-grade.

The full report, ‘Money Market Funds in Saudi Arabia: Institutional Foundation in Place’, is available on www.fitchratings.com

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