Center for Information Technology and the
Global Economy
Student Research Working Paper series
S03-007
Financial Sector of Saudi Arabia
May 2003
Authors: Bonnie Benetato, Nawaf Jamjoom, Mangal Kumar, Okafor Chukwuka
CITGE student research working paper series
TABLE OF CONTENTS
1. Executive Summary…………………………………………………….1
2. History
…………………………………………………...3
3. Financial Background …………………………………………………4
4. Macroeconomics fundamentals : GNP & GDP …………………..….8
5. Stages of Banking in KSA ………………………………………….…12
(i)
Primitive Stage (1920-1960) ………………………………12
(a) SAMA ……………………………………………….13
(ii)
Consolidation Stage (1961-1980) ………………………...13
(a) Commercial Banks …..……………………………..14
(b) Saudization …………………………………………14
(c) Retail Banking Services ……………………………15
(d) Women only banking ………………………………15
(iii)
Growth Stage (1981-2003) ………………………………..16
(a) Ebanking ……………………………………………17
(b) Credit cards…………………………………………17
(c) Islamic banking …………………………………….20
(d) Stock Market ……………………………………….21
6. Future Outlook ………………………………………………………..22
7. Conclusion …………………………………………………………….22
8. References …………………………………………………………….25
9. Appendices ……………………………………………………………27
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Executive Summary
Saudi Arabia is the largest crude oil producer and exporter in the world. The
country’s financial system has grown in the past fifty years from infancy to a
modern competitive financial system. From the banking system’s beginnings as
mainly branches of foreign banks there are now ten commercial Saudi banks with
over 200 branches throughout the country.
Credit card use in Saudi Arabia is very popular. When compared to the Gulf
Coast Region Saudis use credit cards more than any other region and comprise
48% of all credit card use in the region. Visa and MasterCard are the most
popular credit cards; however, American Express recently launched its blue card
in the country with a Saudi riyal-denominated card offering.
Although Saudi
Arabia is known for its acceptance of credit cards, approximately 9% of the
population uses this form of transaction over cash. For now, Saudis prefer using
cash and do not mirror the western (US) credit card consumer. The legal system
favors individuals over banks, rendering the collection process very difficult.
The Saudi stock exchange was established in 1990 and has evolved into a
modern electronic trading system. Shares are traded through a sophisticated
computerized trading system supervised by the Saudi central bank, SAMA. Saudi
Arabia’s stock market is the largest equity market in the Arab world.
Saudi Arabia has seen a decline in economic growth in the past years with a
steady increase in budget deficits. The economy can no longer rely on oil and oil
products to support the economy. The financial system offers a profitable and
growing market that can stimulate the economy. Furthermore, they have some of
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the strongest banks in the region and the new regional currency will be
implemented by 2010 and will make it easier for banks to be regional rather than
national.
Areas for financial improvement include transparency of financial transactions,
loan to deposit ratios, regulate appointments of senior bank executives and
board members, and institute credit reporting. It is the right time for financial
institutions and foreign banks to move into the Kingdom of Saudi Arabia and
reap the benefits of the liberalizing financial sector and social modernization. It is
believed that the geo-strategic importance of the area would probe the world
body to help in stabilizing this area for the benefit of all nations.
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FINANCIAL SECTOR OF SAUDI ARABIA
History
The Kingdom of Saudi Arabia is located in the Middle East and is about one-fifth
the size of the United States. The climate is harsh, with a dry, sandy desert over
most of the uninhabited terrain and the country is subject to frequent sand and
dust storms. However, from this harsh climate and vast desert comes Saudi
Arabia’s crude oil; Saudi Arabia is the largest crude oil producer and exporter in
the world. To Saudi Arabia’s good fortune, the extensive coastlines on the
Persian Gulf and Red Sea provide excellent shipping opportunities for crude oil
through the Persian Gulf and the Suez Canal. Ninety percent of their export
commodities are petroleum and petroleum products with their major trading
partners: US, Japan, South Korea, Singapore, and India. Imports include
machinery and equipment, foodstuffs, chemicals, motor vehicles, and textiles
with major import partners with the US, Japan, Germany, and the UK. Saudi
Arabia was not always a major oil-producing country. A brief history of this
fascinating country will add to the understanding of the emerging Saudi financial
system.
The modern Saudi royal family can be traced back to the early 18 th century when
the Al-Saud was the ruling sheikh of the oasis village of Dir’aiyah. They formed
an alliance with Mohammed bin Abdul Wahhab in the mid-18th century and this
alliance resulted in Wahhabism, which is Saudi Arabia’s official form of Islam.
Islamic law is an extremely important factor in understanding Saudi Arabia’s
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financial system and will be covered in detail later in the paper. By 1806, the
Wahhabism converting armies had conquered most of modern Saudi Arabia;
however, technically, they were still part of the Ottoman Empire. In 1812 armies
from Constantinople retook western Arabia and the Al-Saud family (tribe) took
sanctuary in Kuwait.
Financial Background
In 1925, one of the Al-Saud leaders, Ibn Saud, invaded and conquered Riyadh
and then Jeddah. In the following year the Dutch established the first commercial
bank, Nederlandsche Handel Maatschappij, in Saudi the first commercial bank
Arabia.1 Foreign banks were set up in anticipation of a major expansion in local
business following the exploration for oil. In 1932, Saudi Arabia gained
independence from Turkey and in 1938 Chevron found commercial quantities of
oil in the Saudi deserts. During this time, the indigenous communities had their
long-standing traditions and practices in trading, business, and money exchange
and consequently had little need for modern commercial banking. 2
During the tribal or pre-oil time, successful merchants in Saudi Arabia financed
import trade transactions themselves and acted as lenders or financial advisors
to the ruling families. The concept of financial dualism was embedded in the
socioeconomic structure of the oil countries, whose ancient institutions coexisted
with modern intuitions, each serving the distinct financial and commercial
interests and needs of vastly different communities. From this modest beginning,
some of the first local banks established a foundation. It is worth noting again
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that rudimentary banking began in the 1920’s and is approximately 80 years of
age today. Saudi Arabia’s social modernization is closely related to the discovery
of oil and although oil revenues that the government received were initially small,
oil revenues initiated the beginning of banking and the essential parts of the
country’s infrastructure. The establishment of modern banks, the financial
dualism began to disappear. One of the first Saudi family-owned banks, National
Commercial Bank, began operations in Jeddah in 1938. Saudi Arabia allowed
both national and fully owned foreign commercial banks. By 1974 there were 12
banks with 72 branches. Ten of the twelve banks in the country at that time were
foreign owned and operated. An important historical note is that in 1975 the
Saudi government launched a “Saudization” campaign that completed in 1981.
During this time, all non-Saudi banks had to accept 60% Saudi ownership. In the
early years of affluence large inflows of workers came into the country seeking
better work opportunities and higher pay. For a while, the supply the oil revenues
were virtually unlimited. As incomes in the private sector increased, so did
expenditures, especially on imported consumer goods and durables. Cost of
capital was low and conditions of lending were relaxed and based on the
individual applicant’s family connections and personal reputation. On the
international front, a large part of the funds generated from the oil reserves were
being channeled into larger and more diverse markets. The Euro market, which
was emerging in the early 1970s, was given a major boost from the capital
surplus flowing through Arab and non-Arab institutions.
The business and
financial opportunities involving oil-related wealth led to the establishment of
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specialized international banks to promote bilateral cooperation between
Mediterranean countries and Arab countries. The Banco Saudi-Espanol
(Saudesbank) was established in Madrid in 1979. The roles of many specialized
international banks at this time were short-term in nature. Examples of short-term
actives include financing trade, repatriating the increased flows of workers
remittances, and international guarantees for contractors working in Saudi
Arabia. It should be noted that establishing a foreign bank was not easy in Saudi
Arabia due to legal (Islamic Law) barriers and many foreign banks found Bahrain
a convenient alternative.
By and large, the first modern banking institutions in Arab countries, including
Saudi Arabia, were branches of either British or French banks as some Arab
territories were colonies of Britain or France during the last two centuries. London
and Paris naturally became the first international centers to host Arab financial
institutions. In the early 1980s other centers emerged as international bases.
New York, the world center of dollar transactions and the base of most US giant
banks became a vital Saudi investment center. For private Saudi investors, the
US provided a safe base and the most diversified investment opportunities. Other
key centers of commerce, finance, and investments that emerged were
Singapore and Hong Kong; older established banks also remained in London,
Paris, and Switzerland.
Any discussion of the international orientation of Saudi Arabia’s financial system
would be inconsistent if it failed to mention Islamic banks. To the world’s
Moslems, an Islamic economic order represents an alternative to capitalist and
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socialist systems. The principles of Islamic economics derive from Shari’a, the
legal system based on the Quran (the Holy Book of Islam) and Sunna, (the
traditions of the Prophet Muhammad). Instead of a lender-borrower relationship,
Islamic finance relies on the notion of distributive justice, that of equitable risk
sharing by the sources of capital (banks) and the users of capital
(entrepreneurs).5
Under the Mosharaka principle, an Islamic bank and a client
establish a partnership, sharing profits and losses until the time, normally fixed,
when the client will buy out the bank’s holding. Remuneration is based on a
predetermined percentage of profits, whereas capital providers assume losses
alone; the modareb foregoes financial compensation for his work. 5 Ijara is rental
financing where the bank acquires equipment or buildings and makes them
available on a straightforward rental basis.
In addition to banning the paying of interest, Islamic law prohibits Muslims from
investing in companies with interests in gambling, pornography or liquor, or that
are involved in the production or sale of pork products. Islamic law also frowns on
deals that have an element of uncertainty in their results because they might be
seen as gambling. Western bankers that want to market Islamic mortgages or
savings accounts, or set up mutual funds that invest in companies that comply
with Islamic law often hire religious or consulting experts. “You don’t want to go
and finalize a structure and spend $250,000 or whatever setting it up, only to find
out what you’ve done isn’t compliant,” says London-based Saad Ashraf, a senior
Islamic banker at Citigroup.
To help foreign and local banks with religious
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approval for their products, the government has set up a standards board with
international Islamic experts.
Macroeconomic fundamentals : GNP and GDP
Gross domestic product (GDP), gross national product (GNP), and balance of
payments (BoP) statistics are key information used in analyzing the economic
activities of Saudi economy. Although these indicators are intuitive to many it is
worthwhile clarifying their definitions and differences before analyzing Saudi
Arabia’s economy. Residents of an economy include both individuals and
organizations. Resident individuals refer to those who normally stay in the
economic territory of the economy for at least 12 months or longer, or intend to
do so, irrespective of their nationality.
6
Therefore, the resident status of
individuals and organizations depends on their center of economic interests. This
is important in the analysis of Saudi Arabia’s economy. For example, a foreign oil
worker working in Saudi Arabia is regarded as a resident of Saudi Arabia, or a
branch of a foreign bank operating in Saudi Arabia is defined as a resident
organization.
If the objective is to track the size of an expanding economy, the growth rate of
real GDP is the natural choice. International growth comparisons normally focus
on this measure. But increasing size of an economy per se may be of limited
interest. For example, the 2003 US GDP is $10,313 billion vs. the current 2003
Saudi GDP SR 695 billion ($US 185 billion). To give value to the comparison one
needs to look at the population of the two countries.
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Saudi Arabia
USA
GDP
$185 billion
$10,313 billion
Population
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24,000,000
287,400,000
Source: World Population Data Sheet
If, instead, the objective is to indicate how rapidly a country’s standard of living is
rising, a different measure is used. The growth rate of real GDP pre capita, or the
total GDP divided by the population makes more sense because it automatically
ignores the growth that occurs simply because there are more people. Staying
Growth GDP GDP Capita
with the USA/Saudi Arabia example above the data now looks like the following.
Saudi Arabia
USA
$9,000
$31,500
4.9
2.6
2002 data
Several factors boost a nation’s growth rate other than faster population growth
and simply working harder. One is accumulating more capital. A nation that
builds more capital for its future will grow faster. The other way to increase the
growth rate is by improving technology.7 The most important thing to remember
when comparing countries GDP, per capita GDP, and growth rates is that the
indicators have specific meanings and comparisons are not always as
straightforward as they first appear. The last important economic indicator to
distinguish is the difference between GDP and GNP as they will be used in future
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examples. An individual can live on both the salaries earned currently and
interest earned from bank deposits. Alternatively, an economy apart from its
income from current production can also have income from the “rest of the
world.” GDP represents current income generated by production within an
economy.
Saudi Arabia has seen higher deficits over the years. Economic growth has been
volatile. According to the Consulting Center for Finance and Investment (CCFI),
Economic and Investment Research Division of the Kingdom of Saudi Arabia, the
Budget 2003 advocates a spending of SR 209 billion bringing the deficit of SR 39
billion or 5.6% of the current GDP (SR 695 billion).9 Paris projects its 2003 deficit
at 3.4% of GDP, which breaches the European Union’s 3% limit. 10 According to
the Wall Street Journal, May 7, 2003, this is expected to draw a formal warning
from the EU and possible sanctions later as the commission can fine serial
budget offenders. Both France and Germany, the Euro zone’s two largest
economies, have deficits above the 3% ceiling. Saudi Arabia’s budget is 5.6% of
the GDP and although it does not face economic sanctions, this is not a positive
economic indicator and is cause for concern. Saudi Arabia spends 60% on
Human Resource and Defense and Security expenditures. Steps needed to be
taken to reduce the dependence on oil, which stands in the range of 75-80% of
the total revenue, increase the capital expenditure and reduce the current
expenditure, which attributes to the accumulation of debt. 11 Saudi Arabia’s
economic problems could deepen should the US seize oil fields after the war
prompting a sustained decline in oil prices that would throw the Saudi economy
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into a tailspin. The per capita income now at $8,000 has shrunk about two-thirds
since the late 1970s. The budget deficit is projected at 5.6% this year, and
national debt is about equal to annual gross domestic product.
Unemployment among Saudis exceeds 10% and is growing; contrast this to the
US. According to the Bureau of Labor Statistics of the US Department of Labor,
US unemployment rose in April, 2003 to 6%. The foreign work force continues to
grow in Saudi Arabia leading to high public debt and is hurting Saudi citizens
seeking employment. Saad al Zahrani, a professor at Umm al Qura University in
Mecca, says even graduates from high-demand departments such as medicine
have to wait months for job openings. Ordinary Saudis, he says, are ready to
take any job, for as little as 1,000 riyals ($270) a month.
The economic section will conclude with a brief comparison of Saudi Arabia and
Argentina. Note the similarities in 1997 and the changes in GDP (Argentina’s
decline) and Population growth (Saudi Arabia’s increase) during the following
years. More recently, Argentina is experiencing an improvement in economic
growth while Saudi Arabia is experiencing a decline.
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Economic Comparison
of Saudi Arabia
and Argentina
1997
Saudi Arabia
GDP
165 B
Per Capita
$8,110
GDP Growth
2%
Population
19.2 M
Population
2.6%
Growth
Argentina
293 B
$8,140
8.1 %
35.7 M
2000
Saudi Arabia
GDP
188.7 B
Per Capita
$8,120
GDP Growth
4.9%
Population
20.7 M
Population
3.3%
Growth
Argentina
284.2 B
$7,450
-0.8%
37.0 M
2001
Saudi Arabia
GDP
181.1 B
Per Capita
$8,460
GDP Growth
1.2%
Population
21.4 M
Population
3.3%
Growth
Argentina
268.6 B
$6,940
-4.5%
37.5 M
1.3%
1.2%
1.2%
Stages of Banking in Saudi
The banking sector in Saudi has seen different growth cycles in the last fifty
years. In order to emphasize the importance of different different benchmarks
achieved by Saudi banking sector in these years, Banking has been divided into
three stages, (a) Primitive Stage (1920-1960), (b) Consolidation stage (19611980) and (c) Growth stage (1981-2003).
Stage I : Primitive Stage (1920-1960)
The Saudi government issued silver riyal for the first time in 1927 in order to
standardize the monetary units in circulation. A few banking functions existed
such as moneychangers largely for pilgrims visiting Mecca. Development of
banking was generally inhibited by the religious injunction against interest. The
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initial banks were foreign collaborated banks from Netherlands, Britain and
France. These banks had opened up in Jeddah for money transactions from oil
sale to other countries. By early 50s the oil boom had started and money started
to flow into Saudi from all over the world.
(a) Saudi Arabian Monetary Agency (SAMA). SAMA was established in
1952 and is the Central bank of Saudi Arabia. All banks and banking
operations in the Kingdom are controlled and regulated by SAMA. The
functions of SAMA include (a) Issue national currency, the Saudi Riyal, (b)
Act as a banker to the government, (c) Supervise commercial banks, (e)
Manage Kingdom’s foreign exchange reserves, (f) Conducts monetary
policy for promoting price and exchange rate stability, and (g) Promotes
the growth and ensures the soundness of the financial system. SAMA
conformed to Islamic law hence it could not be a profit making institution
and could neither pay nor receive interest.
(b) Government reserves. The government allowed SAMA to fund the
government reserve for investment into the huge infrastructure for
petroleum industry. More regulations were passed to streamline the
functioning of different local banks.
Stage II :Consolidation Stage (1961 –1980)
The range of bank activities grew tremendously during this period. Also many
more foreign banks were permitted to open up branches in Saudi by tie-ups with
local or national banks. There was a great deal of consolidation taking place with
many local banks joining together to become regional or national banks. This
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helped the banking sector in regulating and standardizing the banking policies.
This helped in the acceptance of full convertibility of Saudi Riyal in accordance
with Article VIII of IMF. The foreign exchange increased exponentially resulting
in a booming economy. The banks improved their infrastructure to meet the
future needs; weaker banks either closed down or were acquired by national
banks. The major events during this period are summarized below:(a) Commercial Banks. The 10 commercial banks are Saudi American Bank,
National Commercial Bank, Riyad Bank, Al-Rajhi Banking and Investment
Company, Saudi British Bank, Arab National Bank, Al-Bank al-Saudi alFransi, Saudi Hollandi Bank, Saudi Investment Bank and Bank al-Jazira.
Modern banking in the Kingdom began with branches of foreign banks.
(b) Saudization. In mid-1970s, a process of "Saudinization" of foreign banks
was undertaken that was completed in the early 1980s. The Saudinization
process required that foreign banks sell majority equity interests to Saudi
nationals. Currently, foreign banks cannot operate directly through branches
in the Kingdom and must rely on Saudi banks. Due to the Saudinization
process, a number of banks came into existence. Including Saudi American
Bank from Citibank, Saudi British Bank from the British Bank of the Middle
East, and Saudi Investment Bank from Chase Manhattan. Commercial banks
in Saudi have made steady and incremental profits in 1this consolidation
period. The increased profits have a lot to do with new regulations allowing
for foreign ownership of mutual funds that came about late 1999.
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(c) Retail Banking Services Offered in Saudi Banks. Services usually
includes time deposit accounts, foreign currency deposits, call accounts,
current accounts, maximum return accounts, foreign exchange transactions,
money transfers, standing orders, utility bill payments, foreign currency
investments (shares and bonds), precious metal transactions, safety deposit
boxes, credit card services, ATM services, Travelers cheques enabling cash
drawings abroad, local and abroad insurance arrangements, travel
arrangements including hotel booking using bank travel agents, and
Murahaba contracts an Islamic product offering clients an alternative to
traditional banking products, and involving the purchase and subsequent
sale of specific commodities by the bank at the request of the client.
(d) Women Only Banking. Saudi women are forbidden to bank with men,
attend classes with men, deal directly with men, drive cars, or travel on their
own. Hence in Saudi, Banks have special branches just for women. The
branches are staffed and managed by women, and men are prohibited from
entering women branches of banks. Women also use special women credit
cards. Women in Saudi Arabia are a very important component of Saudi’s
growing economy. Over 6,000 commercial licenses have been issued to
women, many of whom run their own women-only businesses. And in these
days of depressed oil prices, the government needs their money. As Middle
Eastern countries, with the exception of Saudi have introduced reforms to
improve women’s status and remove many disabilities imposed under the
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Sharia Islamic law, including gender segregation and discrimination2. If these
reforms get introduced in Saudi, it could mark an end to Women-Only
Banking.
Stage III : Growth Stage (1981 –2003)
The mergers and acquisition of banks during the consolidation stage in Saudi
Arabia was followed by further convergence of technology and financial
instruments resulting in a stronger and vibrant banking system. Saudi American
Bank (SAMBA) and United Saudi Bank (USB) in January 1999, Saudi Arabia
now has 10 commercial banks, which operate over 1,200 branches. The Global
credit agency in financial sector, Moody’s has given the following ratings to the
Saudi banks.
Moody’s Rating
Name of Bank
Al-Rajhi Banking and Inv. Corp.
D+
Arab National Bank
D+
Bank Al-Jazira
D-
Banque Saudi Fransi
C
National Commercial Bank
D+
Riyadh Bank
C-
Saudi American Bank
C+
Saudi British Bank
C
Saudi Hollandi Bank
C-
Saudi Investment Bank
D+
2
http://www.geocities.com/saudiwoman2001/women.html
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(a) Electronic Banking. Electronic banking was introduced in Saudi in the mid1980s. Since then there has been a remarkable growth in the electronic
banking business in Saudi Arabia, especially during the past few years, with
the number of ATMs growing to 2768 by the end of May 2002, while the
number of ATM debt cards in circulation reached 6.3 million during the same
period. This is expected to increase further as Saudi society adapts further to
electronic means of payment.
(b) Credit Cards. Credit Card use in Saudi has skyrocketed. This trend is
apparent in the entire Arab world. The numbers of banks that choose to issue
credit cards and the slew of businesses that currently accept credit as
payment. VISA and MasterCard has most of their Arab members in Saudi
Arabia. Even during this current period of global economy downturn, the
country’s credit card growth has been outstanding. Last year, there was a
31% increase in VISA card membership and a 27% increase in MasterCard
membership in the Gulf region, this growth in membership was led by young
citizens of Saudi.
A recent VISA survey done in Saudi Arabia, Visa’s largest market in terms of
both the number of cardholders and cardholder expenditure, showed that
65% of VISA cardholders in Saudi use their cards for day-to-day personal
and family shopping and other entertainment purposes. Saudi Arabia with 2.1
million VISA cardholders is the largest issuer of credit cards in the Arab
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world. Recently, American Express launched its latest “blue” card in Saudi
Arabia, with special features for the local audience including the company’s
first Saudi riyal-denominated card offering.
However, despite the disproportionately larger percent of Arab credit card
users in Saudi Arabia, plastic card products is yet to catch up significantly in
a major way in the Kingdom, as it has in the Western world. Out of the total
population of around 20 million in the Kingdom, only about 9% population
uses plastic cards as a substitute for money. The use of Credit Cards has
been a new trend in the Gulf region, but has shown remarkable growth. Of
the $24 billion in plastic card expenditure in Arab countries last year, $11.65
billion was made in Saudi. This represents a growth of 45% over previous
year. In fact, the Kingdom is the biggest market in terms of cardholder
expenditure among Visa’s Central Europe, Middle East and Africa (CEMEA)
markets comprising 92 countries. The number of cards in circulation in Saudi
Arabia as of end 2000 was 1.7 million showing a growth of 36% over the last
five years3. Every bank in Saudi Arabia has the association arrangements
with some franchiser for the settlement of dealing on the cards including
international agencies like VISA, MasterCard, American Express, and other
local agencies as well. Of these franchisers, VISA holds around 70% market
in the Saudi Kingdom.
Plastic cards include credit cards, debit cards and charged cards. The growth
in the plastic card usage in Saudi did not exactly parallel the growth in the
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credit card market. The market size is estimated to have just above 600,000
credit card accounts, representing about 3% of the total population of the
Kingdom. Of the eight banks in the market, three banks namely Saudi
American Bank, Saudi British Bank and The National Commercial Bank is
estimated to account for more than 80% of the total market.
Plastic Card Expenditure in the Gulf Coast Region (VISA 2000 Survey)
UAE Bahrain
Qutar 17% 2%
3%
Kuwait
27%
Bahrain
Saudi Arabia
Saudi Arabia
48%
Oman
3%
Oman
Kuwait
Qutar
UAE
Reasons for the poor penetration ratio of credit card products in the Kingdom
include the following:- (a) Preference for Cash: easier to use cash in Saudi,
and credit card use is still optional for all transactions, and more
cumbersome, (b) Strong ATM Network: ATM usage is very convenient, and
Saudis can do all their transactions with their ATM cards, (c) Lack of Legal
Support: The legal system favors individuals over banks, rendering collection
process very difficult. This makes banks reluctant to extend credit, and forces
them to do excessive due diligence on credit applications, (d) Lack of Credit
Bureau providing credit reports on individual also impedes the process,
causing an average of a 15% delinquency rate, (e) Non-Islamic Nature: If the
consumers do not pay their dues on time, they incur interest charges, which
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is prohibited as per Sharia laws, (f) Limited Market Potential, and (g) Higher
Cost of Operations.
(c) Islamic Banking. There has been a growing trend in the Muslim world to
pursue products and services that comply with the Islamic Sharia principles.
These trends recently lead to the birth of Islamic Banks. Of historical interest,
the first Islamic bank was privately established in Egypt in 1962. In 1975 the
establishment of the Islamic Development Bank supported the concept of
Islamic financial institutions with memberships from forty Muslim countries,
including Saudi Arabia. The International Association of Islamic Banks (IAIB)
was established in 1978 to provide technical advice and to promote
cooperation among Islamic banks. Finally, after demand increased in the late
1970s for Islamic banks, the International Institute of Islamic Banking and
Economics was established in 1982.
Saudi authorities encourage Saudi banks to offer non-interest based banking
products and services. Saudi Banks do not have to choose any specific
organizational model for delivering activities that comply with Sharia
principles. All banks in Saudi Arabia currently offers Islamic banking services,
and these range from banks that offer all products and services in Islamic
basis to banks that provide these services through special branches,
departments, or through investment and mutual funds. Islamic investment
funds are one of the fastest growing sectors within the Islamic financial
systems in Saudi Arabia, as well as other countries. There are currently 100
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Islamic equity funds worldwide, representing a total asset of over $5 billion,
and growing at about a 15% rate per year.
(d) Stock Market. The Saudi stocks exchange (the National Center for
Financial and Economic Information index, NCFEI), established by SAMA in
1990, is an over-the-counter market where commercial banks buy and sell
shares through an electronic trading system. Shares are traded through ESIS
(Electronic Share Information System), a sophisticated computerized trading
system supervised by the Saudi’s central bank, the SAMA. Saudi Arabia’s
stock market is the largest equity market in the Arab world. In February 1999,
it listed 74 companies, and over the last 10 years the NCFEI has had an
average market capitalization of $43.88 trillion, making it the largest in the
Middle East. The Saudi stock market is one of the leading stock exchanges
by value among emerging markets. A resolution issued by the Ministry of
Commerce in 1999 relaxed criteria for transforming companies into joint
stock entities, and analysts predict that this will most likely make Saudi’s
stock market more lively in the near future. The Saudi security market has
been experiencing a steady growth in the last decade. It is not highly
developed, but continues to mature.
The trading volume and the number of new mutual funds have been
progressively growing. Banks are the only entities that can act as
stockbrokers for publicly traded shares or for joint stock companies. Of great
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CITGE student research working paper series
significance, SAMA recently started allowing foreigners to buy and trade
shares of Saudi companies within a closed-end fund listed in the U.K.
Future outlook
With the banks having a double digit growth in the past few years, which is more
than petroleum growth and looking to grow even more the future of the banking
sector is filled with potential growth and profits. Saudi Arabia is working to be part
of the World Trade Organization (WTO), no date has yet to be established, which
will open international competition. The top institutions are well placed to face
that competition; they are well capitalized and structured. Having the strongest
banks in the region is beneficial when the new regional currency will be
implemented by 2010, the Islamic Dinar (ID) will make it easier for banks to be
regional rather than national. In addition this will generate a new consolidation
era, this time it will be regional banks consolidating rather than national ones.
Islamic banking is a market that has a huge potential, with over a billion Muslims
worldwide, developing the right Islamic bank model will attract a large portion of
that market.
Another promising issue is the increase demand for housing will stimulate a
mortgage finance market. Banks have jumped to this opportunity and developed
a product that is effectively an Islamic lease with an option to buy. This will help
the banks achieve the goal of increasing the loan-to-deposits ratio (credit deposit
ratio) from 66% by the end of September 2001 to 80% by 2005.
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CITGE student research working paper series
Conclusion
In
conclusion,
Saudi
Arabia
experienced
wealth
quite
suddenly
and
unexpectedly. This resulted in a dramatic economic growth from the mid-1900s
to the end of the century. The wealth that the oil brought to the country came at a
time when the political, social, and infrastructure was in its infancy. Saudi Arabia
relied on foreign workers to supply not only labor but also industry knowledge.
Initially, this was most likely positive and gave the new leadership vial
international partners. Unfortunately, year after year of dependence on foreign
labor became a burden on the economy.
The banking industry is the second most profitable business sector in Saudi after
Petroleum. The decision of SAMA to allow local and national banks to forge tieups with leading foreign has helped Saudi banks to be a step ahead of its
counterparts in the Middle East. Saudi Banks invested in Information Technology
and modernization in a big way in the early 1990s thus achieving 100% in IT
infrastructure. In the last ten years its Global credit rating has improved
tremendously and is now positioned 34th in the world. The areas that need to be
improved are (a) increase the transparency in transactions, (b) regulate the
appointment of bank managers and higher ups, and (c) improve the loans to
deposit ratio.
Today, Saudi unemployment is at a staggering rate of 10% and the uneven
economic growth rates prohibit business from planning ahead. Successive
deficits since 1982 have resulted in higher public debt that is a major concern.
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CITGE student research working paper series
Economists are suggesting that the government reduce the size of the
administration and foreign workers which account for a substantial portion of the
current expenditure. Additionally, some suggest a restructure of the expenses on
defense and security. In light of the recent events in the Middle East, this seems
unlikely.
As traditional Western investment declines there exists a market that has been
largely untapped: the Muslim investing market that some bankers expect to grow
12% to 15% a year over the next few years, according to the Wall Street Journal.
Malaysia’s central bank and some Western bankers estimate that Muslims
currently hold $180 billion in funds in banks around the world-money that could
be lured into Islamic financial products. Perhaps now is the time for Saudi Arabia
to tap into another resource, Islamic finance. One thing is for certain, the oil
revenues will not sustain the economy in the coming years.
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CITGE student research working paper series
References
1. Sherbiny, N.A. Arab Financial Institutions and Developing Countries, World
Bank Staff Working Papers, Number 794, The World Bank, Washington, DC.,
1996.
2. Electronic conversation with Mr. Raad Bakri, VP of finance for the Dinners
Club in the Middle East.
3. “Learning Islamic Finance,” The Wall Street Journal, March 12, 2003.
4. Baumol, W.J. & Blinder, A.S. Macroeconomics Principles and Policy, SouthWestern, Ohio, 2003.
5. Saudi Budget 2003 Analysis and Implications, Special Report, The Consulting
Center for Finance and Investment, Kingdom of Saudi Arabia.
6. “French Deficit is Expected to Draw EU Warning,” The Wall Street Journal,
4May
8, 2003.
7. “The Saudis’ Tepid Modernizing,” The Wall Street Journal, February 10, 2003.
8. http://www.sama.gov.sa
9. http://saib.com.sa/docs/pdf/english/SAIB%20Retail%Banking%Product%20E
ng.pdf
10. http://www.menafn.com/updates/research_center/Saudi_Arabia/Special_Ed/C
CFIbank1201.pdf
11. http://www.arabdatanet.com
12. http://www.isbd.org/english_docs/ibd_home/backgrnd.htm#Establishment
Saudi Banking sector
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CITGE student research working paper series
13. http://www.arabdatanet.com/country/profiles/profile.asp?CityName=Saudi%Ar
abia&CtryAbrv=sa&NavTitle=Sector%20Analysis
14. http://www.reach4saudiarabia.com/Stockmarkets.asp?p=1517
15. http://www.sama.gov.sa/kf/emoneymarket.htm
16. http://www.saudiembassy.net/publications/Magazine-Spring-00/Women.htm
17. http://www.geocities.com/saudiwomen2001/women.html
18. http://www.moodys.com
19. http://www.washingtonpost.com/wp-adv/specialsales/spotlight/saudi/art10.html
20. www.conway.com/wdf/jubail2000/reports/Thompson.ppt
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Appendix A
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CITGE student research working paper series
Saudi Arabia Economy
1990-1999
2000-2002
1991: Persian Gulf War
1996: Growth Rate: 6%
Per Capita GDP: $8,110
Industry: 50%
Services: 41%
Agriculture: 9%
Industries: crude oil
production, basic
petrochemicals, cement,
fertilizer, plastic
growth rate: 17%
Export Partners:
Japan: 18%
US: 15%
South Korea: 10%
Singapore: 7%
France: 4%
Import Partners:
US: 21%
UK: 9%
Germany: 8%
Japan: 8%
Switzerland: 5%
France: 5%
2000: Growth rate: 4.9%
Per Capita GDP: $8,120
Industry: 25%
Services: 63%
Agriculture: 12%
(wheat, barley, melons,
dates, mutton, chicken,
eggs, milk)
Export Partners:
US: 17%
Japan: 17.3 %
South Korea: 11.7%
Singapore: 5.3%
Import Partners:
US: 21.1%
Japan: 9.4%
Germany: 7.4%
UK: 7.3%
(machinery, foodstuffs,
motor vehicles, textiles)
2001: Growth rate: 1.2
Per Capita GDP: $8,460
2003-
Economy Weakness:
Joblessness is rising
2000: 8.5%
2003: 12.5%
Foreign work force grows
2000: 5.3 M
2003: 5.6 M
Public debt stays high
2000: 80.5% domestic debt
as % of GDP
2003: 90.1%
Unemployment: > 10%
Ordinary Saudis are ready
to take jobs for as little as
1,000 SR/month ($270)
US seize Iraqi oil fields?
Prompt a decline in oil
prices throw the Saudi
economy in a tailspin
Muslim investing market
grow: 12-15%: know
Islamic Law
No interest, investing in
porno, liquor, gambling,
pork products; no equity
risk (gambling)
Appendix B
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CITGE student research working paper series
Consolidated Balance Sheet of Commercial Banks: Assets5 (Billion SR)
Cash &
Foreign
Reserves
Assets
1982
11
66
1985
13
1990
Claims on
Other
Total
Assets
Assets
49
12
138
73
58
10
155
12
123
65
32
232
1995
11
98
121
111
341
2000
19
101
172
161
453
Sep 2001
15
99
183
166
463
End of period
the Private
Sector
Consolidated Balance Sheet of Commercial Banks: Liabilities6 (Billion SR)
Bank
Foreign
Capital
& Other
Total
Deposits
Liabilities
Reserves
Liabilities
Liabilities
1982
99
6
8.5
25
138
1985
113
11
13
17
155
1990
144
30
17
41
232
1995
197
40
35
70
341
2000
264
64
44
82
453
Sep 2001
274
57
44
88
463
End of period
5
6
http://www.sama.gov.sa/kf/ebanksector.htm
Ibid
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CITGE student research working paper series
Appendix C
SELECTED RATIOS OF COMMERCIAL BANKS
1995
2000
2002*
Bank Reserves/Total Deposit
5.7
7.2
5.7
Bank claims on private sector/Total deposits
61.5
65.3
66.5
47.3
48.3
Bank
claims
on
Govt.
and
public 39
enterprises/Total deposits
Foreign assets/Total deposits
49.7
38.4
35.9
Foreign assets/Total assets
28.7
22.3
21.3
Capital and Reserves/Total deposits
17.6
16.5
16.3
Capital and Reserves/Total assets
10.2
9.6
9.6
Demand deposits/Total deposits
41.3
43.4
46.3
Time and Savings deposits/Total deposits
31.1
34.5
32.8
Foreign currency deposits/Total deposits
23.4
18.6
18

Up to Aug 2002
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Appendix D
SPAN ACTIVITIES:1991-2002
Period
Number of ATMs
Cards Issued (000) Average
Number
of Cards Per ATM
1991
462
553.1
1,197
1992
643
806.3
1,254
1993
766
1,133.2
1,479
1994
968
1,600.6
1,654
1995
1124
1,972.8
1,755
1996
1359
2,482.9
1,827
1997
1591
3,052.1
1,918
1998
1808
3,647.9
2,018
1999
1997
4,696.3
2,352
2000
2,234
4,775.4
2,137
2001
2,577
5,561.353
2,158
2002 (MAY)
2,756
6,345.215
2,302
Statistics of Banking Electronic Technology
1995
2000
Aug 2001
Number of Teller Machines
1124
2234
2424
No. of Payment cards(million)
2
4.8
5.6
No. of payment operations (million)
53
169
124
Amount of withdrawals (billion riyals)
22
121
88
No. of POS Terminals
14020
16982
19902
Amount of POS operations (Billion) 2
7
6.5
No.
of SARIE operations (Thousand)
riyals)
606
547*
5239
4363*
--
Amounts of SARIE operations (Billion) -riyals)
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Appendix E
Average breakdown of a Saudi Credit Card owners expenses
Saudi Monthly Credit Card Expense
Others
13%
Travel Related
14%
Capital Goods
21%
Household
52%
Household
Capital Goods
Travel Related
Others
Saudi Monthly Household Credit Card Expense
Breakdown
Other
15%
Entertainment
13%
Utilities
30%
Clothing
15%
Reasons Why Saudi's Do Not Have Credit Cards
6%
Clothing
Food
Food
27%
17%
Utilities
29%
6%
42%
Entertainment
Other
Not Interested
Not Comfortable with the
Concept
Will Increase Spending
No Body Approached
Do Not Know How to Get
10
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CITGE student research working paper series
Appendix F
SAUDI STOCK MARKET INDICATORS
1995 1996 1997 1998 1999
NCFEI Index
1,368 1,531 1,958 1,413 2,029
No. of Listed Companies
69
70
70
74
73
Price / Earnings Ratio
10.1
13.1
16.1
16.7
21.0
Price / Book Value ratio
1.9
1.8
2.5
1.6
1.8
SHARE MARKET INDICATORS
Period
No.
of Value
of Market
No.
of General
Shares
Shares
Capitalization Transactions Share Price
Traded
Traded
(Billion riyals)
(Million)
(Million
Index
(1985=1000)
riyals)
1985
4
760
67
7842
690.88
1990
17
4403
97
85298
979.80
1995
117
23227
153
291742
1367.60
2000
555
65292
254
498135
2258.29
2001
597
69528
261
509474
2311.4
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CITGE student research working paper series
Appendix G
Mutual Investment Funds (1992 – Jun 2001)
STOCK MARKET INDICATORS
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CITGE student research working paper series
Appendix H
Banks' Investments in Government Securities (1992 – Sep 2001)
The average breakdown of a Saudi Credit Card owners expenses are as follow7:
Saudi Monthly Credit Card Expense
Others
13%
Travel Related
14%
Capital Goods
21%
7
Household
Household
52%
Capital Goods
Travel Related
Others
http://www.menafn.com/updates/research_center/Saudi_Arabia/Special_Ed/CCFIcredit.pdf
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CITGE student research working paper series
Appendix J
Saudi Monthly Household Credit Card Expense
Breakdown
Other
15%
Entertainment
13%
Utilities
30%
Utilities
Clothing
Food
Food
27%
Clothing
15%
Saudi Banking sector
Entertainment
Other
37