A latecomer but a dangerous competitor

The Kingdom of Saudi Arabia has been a 'latecomer' to almost all aspects of modern life, but once the country has decided to go somewhere, it does so for real, usually on a gigantic scale. It was no different when the government decided it was time to develop a private financial sector, which it has been constructing almost from scratch since the onset of the millennium.

The banking sector in Saudi Arabia had been as closed – and as stable - as the country itself, but the ongoing structural changes have transformed the financial sector. From a closed government-run market, the system has become a privatised international club generating ever more interest. While the rest of the world is struggling to climb out of the financial crisis, Saudi Arabia is building the multi-billion dollar King Abdullah Financial District (KAFD), an emblematic construction in the heart of the capital set to enhance its already solid financial system and make the country a stronger global player. Indeed, Saudi capital has built the neighbouring financial systems and the opening of KAFD within an appropriately regulated environment is calculated to bring back home the money invested abroad.

The international financial crisis has scarcely affected the kingdom’s banking system. In KSA the word “default” is still unknown. There have been no bank failures, and none to be expected any time soon. The healthy policies of the controlling authority, the Saudi Arabian Monetary Agency (SAMA)[1], sustained support from the government, high levels of capitalisation and traditionally careful lending habits have all played a major role in protecting the Saudi financial system by imposing cautious policies and stringent monitoring.

In 2003, a comprehensive Capital Market Law and a Cooperative Insurance Companies Control Law were decreed. Both were designed to set up a framework for their respective sectors and to regulate them. In 2004, the Capital Market Authority was set up to formalise and monitor the sector and bring it up to international standards of best practice and transparency. The stock exchange market Tadawul was introduced as the first fully electronic exchange in the world and is currently the 11th largest globally in terms of volumes traded.

Although the Saudi Arabian financial system remains dependent on the highly volatile prices of oil and despite the relatively low levels of these prices since 2009, capitalisation has been sufficient and the system has proven its solidity over the past few difficult years. However, concerns about corporate risks due to the financial crisis have not gone away and lending and financing only started to pick up again in the Q4 of 2010. In the interval, government and semi-governmental institutions have provided most of the financing for the big projects. The Public Investment Fund (PIF) alone increased its lending by 48.6 percent to SR 42.2 billion in 2009. At the end of 2010, however, the total bank credit exceeded the levels registered in 2009 by almost 4%, sign of a revival of the private banking that ordinarily provides over 90% of total credit. According to the Jeddah-based National Commercial Bank (NCB), the challenge of bad loans and provisions has not been fully overcome but the situation is showing signs of stabilising, creating some room for additional lending. Saudi bank earnings saw an actual increase of 31.6 percent by year's end.

Currently, Saudi Arabia counts 12 locally incorporated commercial banks, 11 branches of foreign brands, 30 insurance companies, 15 companies dealing in securities and over a hundred brokers. According to the last figures released by SAMA, the combined total assets of the bank system in KSA grew by 22.5% year on year to SR370 billion ($99 billion) in 2009. The asset management industry has $135.8 billion under management and is growing at an estimated rate of 12.2% per annum.


Strong pillars, cautious players and firm legislation

The combination of a well-supervised sector, careful lending, the kingdom's robust economy – ranked 23rd worldwide - and its plentiful natural resources have made KSA's banking sector the biggest and most technologically advanced of the Middle East. At a turbulent and rather unpredictable moment of the global financial system, Saudi banks wisely opted to further protect themselves from the headaches of possible non-performing loans by increasing their provisions. “While the minimum capital adequacy for banks determined by Basel II stands at 8%, Saudi Investment Bank has increased the percentage to 14 per cent,” explains Mr Al Mineefi, General Manager of The Saudi Investment Bank.

According to SAMA, the capital-to-assets ratio of commercial banks was 11.94% at the end of 2009, compared to 10.12% at the end of 2008. The failure of two well-known Saudi conglomerates, Saad Group and Alghosaibi & Brothers, last year sent shockwaves through the system, showing that a reputed family name alone is not enough when it comes to lending.

Nevertheless, banks in Saudi remained profitable and well capitalised through the 2009 downturn. SAMA reported that the cumulative profitability of the sector for the full year of 2009 was SR 26.8 billion, compared with SR 29.9 billion in 2008, more than half originating from domestic private sector lending.

The banking and financial system of KSA is not only one of the best of the region but also of the G20. The monitoring of the Central bank with its most advanced electronic system has allowed the country to remain robust despite the crisis”, says Mr Al Mineefi. Indeed, after Saudi banks agreed to implement the Basle II Capital Adequacy Standard by end-2008, the system has become more transparent and reliable.

Reliance on financial institutions complying with Islamic law – which forbids handling interest-based financial instruments – has also contributed to insulate the Saudi banking sector from the international crisis. Sukuks, shariah-compliant debt instruments supported by revenue-generating assets rather than the reputation of a company or its fixed collateral, are now on the rise.

As a cheap, religiously acceptable source of financing, sukuks have transformed the bond market in KSA. More companies are now turning to debt financing as a new option alongside equity financing. Although all banks in Saudi Arabia offer Islamic products and services, the country hosts only four fully operational Islamic commercial banks: Al Rajhi Bank, Bank Al Jazira, Al Bilad Bank and the latest comer Bank Inma.


With the country expected to grow by almost 4% this year as compared to 0.15% in 2009, the financial system is already feeling the effect of government expenditure. In Q1 of 2010 alone, the government approved contracts worth $10.6 billion, as part of a larger 5-year investment program of $400 billion in infrastructure. In the whole of 2009, only $33 billion was invested. 2011 is expected to be a year of major growth in the sector.

And all numbers could double again once the long-awaited Mortgage Law is passed. According to some estimates, there is a shortage of 2 million houses in a country where only 30% of the population are homeowners. Although most banks have partnerships with real estate firms to circumvent the missing legislation and serve an already mortgage-hungry market, there is a need to clear up the legal situation in respect of property ownership, repossession, enforced eviction and asset liquidation in case of delinquency. The Mortgage Law will not only revolutionise the market but also attract specialised firms. Surprisingly, unlike some neighbouring GGC countries, Saudi Arabia’s real estate market is still underdeveloped and certainly not affected by the crisis.





Saudi Arabia's financial market is based on five public development funds that act as funders for the projects or sectors labelled as priorities by the government. Their combined assets amounted to SR328bn ($87.7bn) as of June 2009, a decrease of 0.6% from the previous year.


The Public Investment Fund (founded 1971) is the bank of commercially orientated government institutions such as SABIC (Saudi Basic Industry Corporation).


The Saudi Industrial Development Fund (1974) has been the main financier behind the industrial revolution of Saudi Arabia. Since the Foreign Investment Act was approved in 2000, foreign companies can also access these funds. Providing up to 50% of fixed assets, the maximum term provided to repay the loans extends to 15 years and repayment is tailor-made to the projected cash flow of every single case.


The Real Estate Development Fund (1975) provides financing mainly to residential properties on loans that account for up to 70% of the purchase price, repayable over 25 years. The fund also provides financial support to real estate projects, injecting some 50% of the total cost at low interest rates.


The Saudi Arabian Agricultural Bank (1961) acts as the development bank of the country for agricultural purposes. In light of the government's interest in reducing dependence on imported foods, the bank offers interest free loans to projects that comply with the requirements.


The Saudi Credit Bank (1971) is the smaller of the five and supports mainly individuals for personal purposes such as marriage or vocational training, as well as smaller companies.




• A bank's risk-weighted capital-to-assets ratio must exceed the agreed minimum international standard of 8% (all Gulf Cooperation Council states implement Basel II standards at the end of 2008).

• Total deposits may not exceed 15 times a bank's capital and reserves.

• Loans to a single customer may not exceed 25% of a bank's capital and reserves; exposures of more than 10% must be reported to SAMA.

• Lending to shareholders and other related parties is limited to 10% of a bank's capital.

• Banks must maintain a liquid-asset level of 15% of deposit liabilities. Banks may not hold more than a 10% stake in any company.

• Banks must keep 7% of their demand deposits and 2% of their time/savings deposits with SAMA in non-interest-bearing accounts. The banks may not access these monies.


SAMA, which resorts under the authority of the Ministry of Finance, is the central bank of the kingdom and has the authority to ban or back any financial institution, system or instrument in the country. It is in charge of issuing the currency and regulating all financial institutions. It manages the government bond programme and the nation's electronic debit-payment system and oversees the foreign exchange and stock market monitoring the international loan syndications.



Kuwait in Spain

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Our latest investment report on Kuwait was recently published in one of the leading Spanish dailies, ABC.  FindMe in Kuwait explores the economic perspectives of Kuwait and the country´s future plans to compete with its fast developing neighbours. Once the leading country of the Gulf, Kuwait has remained silent for the past decade. And although many would like to see faster changes, Kuwait is moving, at its pace, to them. Inexorably. Learn about who is who in Kuwait and read what the leaders say about their own future in our upcoming release: FindMe in Kuwait Mobile app.


Stay tuned - Stay Ahead

GGC launches FMS and FMB mobile apps

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GGC concludes FindMe in Bahrain

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Global Gulf Consulting has concluded its latest production on Bahrain, FindMe in Bahrain giving the country a fresh approach after a couple of difficult years of local demonstrations that matched the global recession.  Bahrain is a small island in the Arabian Gulf with an incredible potential for logistics, industries and tourism. FindMe in Bahrain was supported by both the public and private sector of Bahrain.  Banagas, Nass Corporation, BBK and DHL were GGC strategic partners in the development of the series among others.  

FindMe in Bahrain is available at the local bookstores Jashamal and online as well as in the Apple Store. It is a full business leisure and business guide for any investor or visitor interested in traveling to Bahrain or for those that already live there.


New release: FindMe in Saudi 2013 Edition

FindMe in Saudi offers a multi-faceted overview combining business and leisure, economy and heritage. The book aims to capture the current development of Saudi Arabia in the words of the people who live and work there. It is an authoritative source of information for investors, businessmen and travellers produced to firmly position KSA as an attractive investment destination.

In contains general information about the country´ economic performance and who is who as a sectorial overview and a leisure guide.    

FindMe in Saudi 2013
FMS 2012 A4 v15 web.pdf
Documento Adobe Acrobat [45.4 MB]

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