Confirmation of Saudi banks’ extra zakat payments for years up to and including 2017 removes a key near-term uncertainty that could have pressured some banks’ ratings, according to Fitch Ratings.
The extra amounts, due to a backdated change in the zakat calculation, will not materially deplete banks’ capital buffers and therefore do not affect their ratings, the ratings agency said in a new research note.
“We do not expect a significant impact on liquidity or profitability as we believe the banks will be allowed to spread payments over several years,” it added.
Banks disclosed their extra zakat amounts last month after reaching a settlement with Saudi Arabia’s General Authority of Zakat and Tax (GAZT).
However, the settlement amounts for 2018 will be disclosed separately, and the calculation method for future years’ zakat is not yet clear, noted Fitch.
Some banks could still face pressure on ratings if future zakat assessments appear likely to structurally weaken their internal capital generation, Fitch added.
Zakat is an annual payment obligation under Islamic sharia on wealth, used for charitable and religious purposes. Zakat is one of the five pillars of Islam. In Saudi Arabia, it has historically been set at 2.5 percent of a company’s “zakat base”.
Banks were in discussions with the authorities for some time over the calculation of historical zakat liabilities, backdated in some cases as far as 2002. Some banks made provisions for the extra zakat, but most did not disclose their size.
Al Rajhi Bank reported the largest outstanding amount SR5.4 billion, or about $1.4 billion, followed by Riyad Bank (SR3 billion) and SAMBA Financial Group (SR2.3 billion).
“We will continue to monitor developments around the calculation method for future years’ zakat and provide updates on any implications for banks’ internal capital generation and ratings,” added Fitch.
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