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Banks seek to soak up liquidity.

THE SECOND HALF of last year was a boom time for the Saudi banks and their general well-being should continue throughout this year. There has been much welcome concentration on the personal sector, with new products and an increased range of services since the conclusion of the Gulf War. The need to improve standards of customer care is also being more professionally addressed.

Two years after the liberation of Kuwait and the collapse of the Bank of Credit and Commerce International, profitability and a sense of confidence has largely returned. Most of the money that moved out of the kingdom to find a safe haven during the hostilities has returned, while at the same time lower dollar related interest rates have proved a further deterrent to transferring money abroad. There is also increasing evidence that more Saudis, traditionally apprehensive about the safety of banks, are growing more confident about banking in the kingdom.

Suleiman Olayan, chairman of the wide-ranging Olayan Group and a main board director of the Saudi British Bank, was honoured at last year's 10th anniversary of the Arab-Bankers Association of North America, receiving a "Lifetime Achievement Award."

In his acceptance speech, he pointed to the bullish situation pertaining to the industry. "Saudi banking assets had increased to over $78 billion, and customers' deposits to $57 billion," he said.

"At the end of last June, shareholders' equity stood at $5.3 billion, 24,000 people were employed in the banking industry, and an increasing number of these were Saudi nationals."

The leading Saudi banks are among the most profitable in the Gulf region, and none of those reporting their results in 1991 declared a loss. At the same time several of the major banks have taken advantage of the improving climate to strengthen their capital bases.

When Riyad Bank announced that it was going to offer eight million shares to the public and hence increase its share capital tenfold, this was the largest share issue ever in the financial sector. Implemented in February last year, it was a huge success, being more than three times oversubscribed.

With the increasing enthusiasm among stock exchange investors, other banks have also made successful public offers. These have included Bank Al Jazira last October which put three million shares on the market, reducing the stake of the National Bank of Pakistan to 8.75% from 35%. Saudi British Bank is increasing its share capital by 150% to SR1.2 billion ($320 million). It will capitalise SR400 million of reserves, sell 1.2 million shares to the public and 800,000 to the British Bank of the Middle East, its foreign joint venture partner.

Al Bank Al Saudi Al Fransi made a public offering of two million shares in October to raise SR1,140 million ($304 million). Banque Indosuez, which has a 40% stake in Al Bank Al Saudi Al Fransi, is not subscribing to the share issue and its holding will fall to 31% as a result.

Saudi American Bank (Samba) and Arab National Bank (ANB) have taken a different path. Samba will double its capital to SR1.2 billion by transferring funds from reserves, which will mean that Citibank, its foreign shareholder, will retain a 30% holding. ANB, in partnership with Jordan's Arab Bank will also increase its capital twofold to SR1.2 billion by issuing new shares to existing shareholders.

Abdullah Dabbagh, secretary-general of the Council of Saudi Chambers of Commerce, echoes the thoughts of many on the subject of liquidity. "The amount of liquidity in the market is tremendous," he says. "In the banking system alone there is at least SR180 billion. We still have a long way to go before we absorb this kind of liquidity."

While the government budgets for both 1992 and 1993 are both forecast to be in deficit, this has produced opportunities for the banks. In May 1991, the government signed two huge commercial loans, one for the international market and the second offered to local banks. The early part of last year also saw a further SR10 billion sovereign loan offered locally.

The expansion plans of the Saudi heavy industry sector have offered considerable opportunities to the banks, with the Eastern Petrochemical Company (Sharq), National Methanol Company and Saudi European Petrochemical Company (Ibn Zahr) all successfully coming to the market last year. Corporate finance generally is becoming an increasingly important activity among local Saudi banks.

Alongside the mainstream banks has been the emergence and growing influence of Islamic interest free, profit and loss banking in the kingdom, and elsewhere in the Arab world. In less than 20 years, as more and more depositors are made aware that interest is specifically against the teachings of the Koran, Islamic banks operating in accordance with Sharia law are gaining much support. Although overall deposits in the Gulf States probably account for little more than 10% of the total at present, there are indications that this sum could increase to 50% by the middle of the decade.

One of the main problems facing Islamic banks is to provide further innovative products in addition to trade finance and lease financing that would produce sensible alternatives to those services offered by their rivals. Improved competitiveness and corporate identity are also important factors.

Nevertheless several Saudi Islamic banks and financial institutions are expected to increase their importance in the years ahead. Al Rajhi Banking and Investment Corporation, which has the most branches in Saudi Arabia, recorded a 25% growth in assets of any bank in 1991. The Dallah Al Baraka Group, headed by Sheikh Saleh Abdullah Kamel and based in Jeddah, has combined assets of $18 billion, and aims to be "the leading Islamic private bank providing high quality and innovative services." It already has subsidiaries and affiliates in 20 countries and has plans for further expansion.

On a wider plane, the Islamic Development Bank, also with headquarters in Jeddah and with 45 members states, has announced plans to double its subscribed capital to assist its role in aiding Muslim countries to establish new industries and improve their agricultural infrastructure.
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Title Annotation:Saudi Arabia Special Report; Saudi banking industry
Author:Johnson, Mark
Publication:The Middle East
Date:Mar 1, 1993
Previous Article:Faith in the private sector.
Next Article:A sea of liquidity.

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