Solvency: Everything You Need to Know About Financial Solvency in the Saudi

Financial solvency is the ability of an institution or individual to meet their financial obligations on time. This concept indicates whether available assets are sufficient to cover all debts and liabilities. In Arabic, the word "ملاءة" (solvency) means the ability to fulfill obligations, a meaning rooted in both financial and legal usage. Practically, solvency is usually measured by comparing total assets to total liabilities, or via the capital adequacy ratio in banks. The higher this ratio, the greater the ability to withstand financial shocks, and the higher the confidence from investors and creditors. In the Saudi financial market, solvency is a fundamental regulatory standard, with regulatory bodies such as the Saudi Central Bank (SAMA) and the Capital Market Authority monitoring solvency ratios for banks and insurance companies to ensure sector stability.

Financial solvency is calculated using several ratios and metrics, varying by sector. The most common ratios are:

1. Solvency Ratio = Assets / Liabilities: The simplest ratio, used generally. A ratio above 1 is a positive indicator.
2. Capital Adequacy Ratio (CAR) = Capital / Risk-Weighted Assets: Used especially for banks, which are typically required to exceed 12% in the Kingdom.
3. For insurance companies, the solvency ratio is calculated according to formulas that consider technical reserves and underwritten risks, and is often required to be no less than 125%-150% depending on the type of insurance business.

Saudi regulatory authorities follow Basel III standards for banks and the new IFRS 17 standards for insurance companies, providing the market with greater transparency and accuracy in solvency calculations. Understanding these ratios is essential for assessing the sustainability of financial institutions.

Saudi banks continued to strengthen their financial positions during 2024-2025, with the average Capital Adequacy Ratio (CAR) exceeding 18%, a rate that surpasses both international and local requirements (12% per SAMA and Basel III). Leading banks such as SNB (Saudi National Bank), Al Rajhi Bank, and Riyad Bank top the list with Tier-1 ratios above 17%. These figures reflect the strength of the banking sector and its ability to absorb financial crises and meet depositor and investor requirements. Solvency plays a pivotal role in banks' ability to expand, grant financing, and manage systemic risks, making it a key focus in financial stability reports issued by regulatory authorities.

The insurance sector in Saudi Arabia is subject to strict regulatory standards regarding financial solvency. The Insurance Supervision Authority requires companies to maintain a solvency ratio of no less than 125% of underwritten risks, with some major companies exceeding 150%. With the implementation of IFRS 17 in 2023, reserves and liabilities were recalculated, enhancing the accuracy of financial reports and ensuring companies' ability to settle claims. Data indicates that most Saudi insurance companies maintained safe solvency ratios in 2024-2025, reinforcing sector stability and client and investor confidence.

Government financial solvency reflects the state's ability to meet its financial obligations, especially when issuing bonds and sukuk. In 2024-2025, the Saudi government maintained strong solvency levels thanks to GDP growth and robust reserves, with public debt below 30% of GDP. This supports Saudi Arabia's high credit rating (AA) and boosts investor confidence in government debt issuances. The state relies on thorough solvency assessments when issuing sukuk and bonds to ensure repayment capacity and interest payments without affecting overall financial stability.

The concept of solvency is no longer limited to companies and the state; it has become increasingly important for individuals amid the expansion of consumer loans. Saudi regulators have launched initiatives to raise financial literacy and improve personal solvency, such as updating the credit reporting system in 2025 to include an individual solvency index. Tools like spending tracking apps and credit scoring services (e.g., SIMAH) help individuals better manage their financial obligations, reduce reliance on debt, and enhance their repayment capacity.

Saudi regulatory bodies monitor financial solvency ratios across various sectors to ensure market stability. The Saudi Central Bank (SAMA) requires banks to maintain a capital adequacy ratio of no less than 12%, while the Insurance Supervision Authority mandates a solvency ratio of at least 125% for insurance companies. The Capital Market Authority monitors the financial position of listed companies, focusing on the disclosure of solvency ratios in annual reports. These regulatory standards ensure that institutions can withstand financial risks and market fluctuations, protecting the rights of depositors, clients, and investors.

Solvency and liquidity are often confused, but they are distinct yet complementary concepts. Liquidity refers to the ability to meet short-term financial obligations through cash or quickly convertible assets. Solvency, on the other hand, measures the overall ability to cover all liabilities (short- and long-term) with all assets. A company may have good liquidity (enough cash), but if it is heavily indebted, it may lack sufficient solvency. Understanding the difference is crucial for assessing the financial strength of institutions and individuals.

Financial solvency is among the most important indicators reviewed by investors before making decisions. It reflects the ability of a company or bank to continue operating under volatile economic conditions and reduces the likelihood of default or bankruptcy. Companies with high solvency are often more attractive to investors, as they indicate sustainable profits and lower investment risks. In the Saudi market, weak solvency leads to regulatory intervention and corrective measures, making it essential for anyone considering investment or monitoring the performance of financial sectors to track this indicator.

Recent years have seen several initiatives and reports directly impacting the concept of solvency in the Kingdom. The Saudi Central Bank (SAMA) issued the 2024 Financial Stability Report, confirming the strength of solvency in the banking sector. IFRS 17 standards came into effect in insurance, leading to a reassessment of reserves and improved accuracy in financial reporting. The government issued new sukuk and bonds to support development projects while maintaining high solvency levels. In the personal sector, comprehensive updates to credit reports were made to enhance individual solvency and reduce the risk of financial default.

Competition in the Saudi financial market revolves around enhancing solvency across sectors. Banks compete to offer financial products and services backed by high solvency, such as secured financing and credit facilities. In insurance, companies strive to achieve the highest solvency ratios through improved risk management and strict accounting standards. In the government sector, maintaining strong financial solvency enables the issuance of bonds and sukuk on better terms. In the private and personal finance sectors, companies offer tools to help individuals improve their solvency and repayment capacity, raising overall market confidence.

Despite strong solvency in the Saudi market, institutions face several challenges. Chief among these is the rapid expansion of consumer credit, which could pressure solvency ratios if risks are not managed efficiently. The implementation of new accounting standards (such as IFRS 17) may also reveal previously hidden risks. Additionally, oil price volatility remains a factor affecting the state's public financial solvency, despite large reserves and prudent fiscal policies. Addressing these challenges requires continuous oversight, system updates, and increased financial awareness among institutions and individuals.

Improving financial solvency requires prudent financial policies, whether at the individual or institutional level. For individuals, this includes setting a monthly budget, reducing reliance on debt, and increasing savings and investment in safe assets. Institutions should monitor capital structure, reduce unnecessary debt, and diversify income sources. It is advisable to use risk management tools, implement accurate accounting systems, and leverage credit assessment services to enhance solvency. Investing in financial technology (Fintech) also helps monitor financial performance in real-time, supporting more effective decision-making to maintain safe solvency levels.