The Saudi economy is undergoing an unprecedented boom across all sectors of the economy, including oil and gas, heavy, medium and light industries; banking, investment and insurance services; and transport and tourism, within a population demographic structure which indicates an expected growth in the segment that will need banking services. These factors leave the banking and financial services market poised to grow exponentially, with great opportunities for banks to expand in the provision of their conventional services in addition to the expansion in the area of investment banking.
Banks will benefit greatly from their expertise and experience to provide advisory services in the area of underwriting and covering of new IPO’s, corporate finance, financing projects (particularly mega projects in the fields of petroleum and gas, petrochemicals, water, electricity, housing, education and health), mergers and acquisitions, securities advisory services and domestic and international brokerage, private wealth management and asset management businesses.
It is expected that the financial market will both broaden and deepen, and the competitive edge will be with banks that can innovate and harness new technologies. The great expansion in demand for investment services will tempt international institutions to compete with domestic banks in the provision of such services to the various economic sectors.
Shariah-compliant banking services have recorded continued phenomenal growth in the area of retail, corporate services and assets management. This area is demand-driven and banks that offer new Shariah-compliant solutions in response to market need will benefit.
It is no exaggeration to expect that the number of employees in the financial sector may double over the next five years. Saudi banks will face a more competitive environment both domestically and in the region. This is because with open policies in the Kingdom, the number of banks operating in Saudi Arabia could almost double to 20 by the end of 2006. These will include the best group of regional and international banks.
competitive environment
The banks will also compete, in the area of financial and advisory services, with non-banking financial institutions licensed by the Capital Market Authority. These institutions will compete in providing a number of financial and advisory services.
The significant growth, diversification and profitability of the Saudi banking system has been underpinned by a strong and advanced regulatory system. Over the past two decades, the Saudi Arabian Monetary Agency (SAMA) has introduced many modern supervisory standards compliant with international standards. In the past two years alone, the SAMA has developed regulations relating to market risk, loan classification and provisioning, controls of consumer lending and updated the requirements for appointment in senior posts of banks.
In recent years, the strength of the Saudi banking system and the SAMA’s sound banking supervision practices have been recognized by a number of important international institutions. One of the findings of the Financial Sector Assessment Program by an IMF/World Bank team in 2005 indicated that the SAMA Banking Supervision, fully or largely met the 25 Basle Core Principles. On the other hand, external rating agencies including S&P, Fitch and Capital Intelligence in 2004 and 2005 have issued favourable reports on the Saudi banking system. The recent external rating upgrade by S&P to A+ reflects the inherent strength of the domestic banking system. The development of the banking sector has reflected positively on the performance of the Saudi economy. Over the preceding three years, GDP (at current prices) has increased by an annual average growth rate of 18.1%, and private sector GDP by 6.7%. Money supply has grown by an annual average rate of 12.9%, providing adequate liquidity to the growth requirements of the economy. Looking ahead, the financial system and the banking sector will benefit from the state’s efforts to diversify the economy and improve the investment environment through regulatory and structural measures taken in various sectors.
a deeper capital market
Turning to the capital market, its contribution to the growth of the Saudi economy has been clearly evident. Over the last few years, the market has witnessed remarkable development, and its role as a financial intermediary between savers and investors has been boosted. It would be appropriate to indicate that the recent market correction witnessed by the market has had no adverse consequences on the banks and banking system. This is because SAMA, through its supervisory functions, has undertaken measures necessary to safeguard banks and customers against unfavourable developments in the market. The measures included tightening prudential limits related to lending for trading in the market, issuing controls for consumer loans and other measures that would protect customers and banks against expansion in consumer loans, which may end with trading in the equity market. Consequently, Saudi banks have managed to do well in the first quarter of 2006. As the shares market stabilizes and continued good performance by banks is maintained, the financial system should greatly benefit from the efforts of the authorities to deepen and broaden the capital market.”