Insights: Saudi eyes banking reform with NPL securitisation

Saudi Arabia’s banking sector is stepping into a defining moment. With the kingdom poised to execute its first major sale of non-performing loans (NPLs), it’s taking a bold step towards financial modernisation and showing a clear commitment to aligning with global standards in credit risk management.

This move couldn’t come at a better time.

Saudi Arabia is gearing up for a decade of transformational infrastructure projects under Vision 2030. By offloading legacy debts and freeing up much-needed capital for new lending, Saudi banks are preparing themselves for the demands of giga-projects and, in the process, setting an example for the wider GCC region.

Securitising NPLs is nothing new on the global stage. In financial markets like Europe and the US, it’s long been a proven way for banks to de-risk, free up capital, and refocus on lending. Now, the GCC is catching up, though not without its own set of regulatory and investor readiness challenges. For Saudi Arabia, aligning with these global practices is a significant leap forward in modernising its financial landscape.

We’ve already seen how effective this strategy can be. Take the UAE as an example – its approach to securitisation, built on transparent pricing, robust legal systems, and engaged investors, has shown how NPL sales can reshape a banking sector. For Saudi Arabia to replicate that success, it’ll need to tackle its legacy of “name lending”, where relationships often carried more weight than hard data.

Aligning with Saudi’s ambitious goals

Investors looking at Saudi NPL portfolios will be keenly focused on legal enforceability and transparency. Learning from the UAE’s experience is invaluable, but Saudi Arabia will need to adapt these lessons to its own regulatory realities.

When you consider Vision 2030’s ambitious goals – to diversify the economy and launch mega-projects across industries like tourism, technology, and logistics – it’s clear that vast amounts of capital will be required. For banks, managing their balance sheets efficiently is critical.

Offloading NPLs isn’t just a clean-up operation, it’s about freeing up risk-weighted assets and ensuring resources are available for future growth. By securitising bad loans, Saudi banks are positioning themselves as key drivers of the kingdom’s economic transformation.

A complex path

That said, the road ahead isn’t without challenges.

Valuing NPL portfolios accurately in what is still a nascent distressed debt market is tricky. Legal uncertainties and enforcement obstacles, especially in a system historically reliant on implicit guarantees, could make investors wary. Strengthening loan documentation and improving collateral frameworks will be vital steps in addressing these concerns. It’s a complex path, but navigating it is essential to building a more dynamic and trustworthy financial ecosystem.

The emergence of specialist debt funds in the region is a promising sign. These funds bring in expertise, liquidity, and the ability to make markets – bridging the gap between banks and potential investors. Over time, their presence could lead to standardised pricing, better predictability, and the development of an active secondary market for NPLs. These are all foundational elements for the GCC’s distressed debt market to truly mature.

But the impact of securitising NPLs goes beyond stabilising balance sheets.

It sends a clear signal to global investors, showcasing Saudi Arabia’s financial sector as mature, forward-thinking, and ready to integrate with the broader global economy. On a larger scale, this move ties directly into Vision 2030’s diversification agenda, reallocating financial resources from the weight of legacy debts into sectors that will shape the kingdom’s future.

As with everything these days, advanced analytics will play a critical role in this process, helping banks value their NPL portfolios more accurately. Tools like independent portfolio reviews, stress testing, and data driven recovery models can enhance investor confidence.

Looking ahead, the momentum created by this trend could spark wider financial innovation in the region – think asset-backed securities, project bonds, and hybrid financing models, all of which could help distribute the risks tied to Saudi Arabia’s ambitious giga-projects.

As the kingdom prepares to host its first major NPL sale, the implications extend far beyond its banking sector. This initiative highlights Saudi Arabia’s dedication to financial modernisation and economic resilience.

By addressing long-standing challenges and embracing global standards, the country’s banking sector is setting itself up for a pivotal decade.

The writer is a director at 4most, a financial consultancy.