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Bankers: Cashing in
Banks are also dealing with more sophisticated expectations from their base of individual customers, many of whom now expect a return on their deposits and – in some cases – consumer equity investment vehicles. Many bank customers are also demanding stricter compliance with Islamic principles in their banking services and products. A growing sub-sector of Islamic banking is expected to offer genuine competition to the nine local commercial banks that dominate the marketplace.
Banking in Saudi Arabia is unique. "Retail" banks (the ones that cater to individuals) may offer account-holders innovations like Internet banking, but a bank-issued "credit card" only debits money from the cardholder's future salary. Home mortgages are nonexistent, largely because banks are forbidden by law to foreclose on an unpaid property loan. (The government-owned Real Estate Bank, however, offers loans that are based on Islamic principles.)
In spite of these restrictions, banking in the Kingdom is big business: "Saudi banks are thriving," says Alan Thompson, president and chief executive officer of Riyad Bank. "We estimate that the assets of Saudi Banks now exceed $20 billion."
The Islamic code of ethics applies to business and finance, just as it does to every other facet of life in Saudi Arabia. Likewise, Islamic law (Shari'ah), which is applied to all walks of life in Saudi Arabia, is also applied to the banking sector. To solve disputes that might arise – a dispute over a promissory note, for example – Saudi banks have a committee for settlement of disputes that comes under the authority of the central bank. "And this has helped,” says the head of a top Saudi bank. “Disputes and other types of claims go to the Ministry of Commerce.... But when the dispute is against the bank or the borrower, it is handled by the committee."
A new banking reform initiative under discussion involves establishing "investment banks" in the Kingdom. The plan, first proposed last August by Prince Abdullah Bin Faisal bin Turki, Governor of the Saudi Arabian General Investment Authority (SAGIA), would involve the creation of banks specifically to provide loans and investment services.
Usamah M. Al-Kurdi, secretary general of the Council of Saudi Chamber of Commerce and Industry, believes the new investment banks will be critical to the growth of the Saudi economy, and will help speed the privatization of government owned businesses.
"In 1999, private sector investment in the Kingdom increased by 8.44 percent," says Al-Kurdi. "I am certain the private sector's contribution to the economy will continue to grow as new sectors of the economy are privatized. These include airlines, railways, ports, postal service, municipality projects, power generation, and desalination plants."
A top Saudi bank official says he is excited by the prospect of new investment banks being established in the Kingdom. "The investment side of banking is where we haven't focused - it will be interesting in the future."
Kevin Taecker, a former official with Saudi American Bank, believes sweeping change has already come to banking in the Kingdom. "This process of finding the right foreign investments and businesses has already happened in Saudi Arabia's banking sector," says Taecker. "What Saudi Arabia really needed early on was a world class banking sector. Initially, this was accomplished by 'Saudizing' the banks, which meant they required at least majority Saudi ownership.
"They were successful in being able to develop several really good international joint ventures, Saudi American Bank being one," says Taecker.
"Thus the banking sector in Saudi Arabia is already globalized."
Alan Thompson is equally bullish about predications that Saudi Arabia might one day become a center for finance in the Gulf.
"I definitely believe Saudi Arabia has the potential to become a regional financial center," says Thompson. "We have the largest economy in GCC [Gulf Cooperative Council] and the largest stock market. Over time, I think it will emerge as a regional financial center."
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Table of Contents Crown Prince Abdullah: A leader with a global vision |
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Saudi Arabian banking is going through a period of transition as it matures and faces a number of changes, including increased competition.