All You Need to Know About Microfinance in Saudi Arabia

Microfinance as an industry has been on the rise in Saudi Arabia, with the Kingdom being among the fastest growing microfinance markets, despite being a relatively nascent industry.

The number of consumer microfinance loans in KSA grew from a measly 4 loans in 2019, when the Saudi Arabian Monetary Authority (SAMA) set capital requirements for microfinance firms, to around 47,000 in 2022, according to research by Statista.

Loans to micro businesses grew 36% year-on-year in 2023 to SAR 25 billion, according to SAMA data. The Saudi microfinance market is expected to grow to around USD 1.68 billion by 2031, according to Allied Market Research.

This growth is largely seen coming off the back of increase adoption, the advent of fintech, relatively low default rate, the establishment of regulation conducive to growth, and the microfinance being adopted as among the industries the government is targeting for growth in its Vision 2030.

Today, we’ll explore some of the key features of microfinance in Saudi, including the types of financing, the players, the targets, and industry trends. 

What are the key features of microfinance in Saudi Arabia?

A wholly Shariah-compliant market

Financing as whole in Saudi Arabia strictly abides by Shariah law, thus banning the use of interest-bearing credit, excessive speculation, and haram activities. Microfinancing is no different, utilizing common Shariah-compliant tools in consumer and commercial financing, including:

·        Murabaha: A financing arrangement whereby the lender purchases an asset and then sells it to the borrower at a mark-up or cost-plus profit. 

·        Tawaruq: Similar to a Murabaha with the added step of then reselling the asset to obtain the desired liquidity.

·        Mudarabah: A profit-sharing agreement whereby the lender enters into a partnership with a borrower for a project or business, and then distribute the profits from the project based on agreed upon terms. 

·        Musharakah: The lender and the borrower enter into a partnership and share in the profit and losses. In a Diminishing Musharakah, the borrower (who isn’t required to enter into the arrangement with any financial capital) tends to buy the lender’s stake in the project over time.

·        Zero-interest, collateral-free loans: As the name suggests, these are direct loans that have no interest and typically no collateral is required. These are typically subsidized by the government or development finance institutions as there is no profit in it for the lender.


Read more about: Collateral Assessment: How Lenders Evaluate Loan Eligibility for SMEs?

Terms, conditions & trends of microfinance in the Saudi market

The trends & criteria

Some of the criteria and trends seen in microfinance in Saudi include:

·        Funding size: The financing must not exceed SAR 100k without approval from SAMA, which can then authorize funding of a maximum of SAR 200k, according to SAMA regulations.A typical micro loan in Saudi is usually between SAR 2-25K.

·        Eligibility: Recipients must be Saudi citizens, typically aged between 21-65, and must have a sponsor to guarantee the facility, according to research published in the Corporate and Business Strategy Review.

·        Duration: The typical duration of a micro loan is 2-5 years.  

The targets

Microfinancing is used to provide relatively small amounts of financing to consumers and businesses who are not large enough or generate enough income to be banked by traditional financial institutions.

Primary used a means to promote financial inclusion, the targets of microfinancing are typically people and businesses that cannot meet collateral obligations and sustained minimum revenue requirements by traditional banks. Ideal candidates include:

·      -  Entrepreneurs and founders of startups and micro enterprises (those with revenues of up to SAR 3 million and up to five full-time employees).

·       -  Traditionally underprivileged and historically marginalized members of society, including women and low-income Saudi nationals.

The players

The landscape of institutions providing microfinance loans can be divided into the following categories:

Traditional financial institutions

Ironically, traditional banks, who have historically shunned lending to the unbanked, are among the largest players in the Saudi market after having been given a mandate by the Saudi government to expand their microfinance programs. 

They have come to dominate the industry typically by establishing microfinance arms. These include: 

·       -  Alinma bank for Islamic Microfinance;

·        - Al Rajhi bank through its microfance arm Emkan Finance;

·        - Banque Saudi Fransi

·       -  Riyad bank

Fintech and crowdfunding

 As noted above, microfinancing has grown hand-in-hand with fintech companies, who offer financing through loan applications online and through apps. Peer-to-peer and crowdfunding is among the fastest growing segments in the fintech category.

Players in the field include:

·        - Tamam

·        - Alyusr

·        - Tamed

·        - Lendo

·        - Funding Souq

·       -  Manafa.

Government institutions and NGOs

 As microfinance is seen as a mechanism to lift people out of poverty, policymakers in Saudi have made it a priority by incorporating it in its Vision 2030 policy initiative.

As a relatively new industry in need of help, the Kingdom has deployed funding through its state institutions. Furthermore, several NGOs have stepped up their microlending efforts.

 These include:

·        - Saudi Social Development Bank (SDB)

·        - SME Bank

·        - Small and Medium Enterprises General Authority (Monshaat)

·