Essay Title: 

Saudi Arabia Banking System and Financial Institutions.

March 24, 2016 | Author: | Posted in globalization, social sciences

Saudi Arabia Banking System and Financial Institutions

October 16 , 2006


The turn of 20th century greatly benefited Saudi Arabia . The oil discovery as well as its development led to the country development in infrastructure and social services at par with other western countries These developments led to the development of money and banking system in the country patterned after the Islamic Law being a country that subscribed to Islam

This will examine the various modalities of the banking system of the country as well as assess the critical role [banner_entry_middle]

of its central bank in responding to the economic challenges of the 21st century

Saudi Arabia ‘ Banking System

The Market Assessment of Saudi Arabia in 2003 revealed that [s]audi banks are a mix of conventional , Western-style banks and Islamic institutions that avoid the charging of interest ‘ On the part of the [o]ther financial intermediaries-such as investment banks , fund managers and leasing companies-have enjoyed only limited development The country barred [f]oreign financial institutions .from the local markets , with a few exceptions for banks from neighbouring states and Western investment bankers with international mandates ‘ Having a large financial system , Saudi Arabia ‘s banking and money sectors ‘ development remains constrained by restrictions in Islamic law and a tradition of secrecy in corporate affairs ‘ Conventional bank credit , Islamic financing and leasing are all viable sources of funds

There are systematic differences in Islamic and non-islamic banks According to Kamal Naser and Luiz Moutinho ‘s entitled Strategic marketing management : the case of Islamic banks ‘ published in the International Journal of Bank Marketing states that the basic difference between Islamic and non-Islamic banks lies in the fact that the former operate on an equity-participation system in which a predetermined rate of return is not guaranteed , whereas the latter ‘s operation is based on both equity and debt systems that are driven by interest . This essential difference resulting from the implementation of the Islamic Sharia ‘h principles , provides the incentive for Islamic bankers to search for different products /services to offer

The Saudi Arabia Information Resources give the following banks HYPERLINK “http /www .alahli .com ” National Commercial Bank , Riyad HYPERLINK “http /www .riyad-bank .com ” Riyad Bank , Riyad HYPERLINK “http /www .samba .com .sa /index .html ” Saudi American Bank , Riyad HYPERLINK “http /www .alrajhibank .com .sa ” Al Rajhi Banking and Investment Corp , Riyad HYPERLINK “http /www .sabb .com .sa ” Saudi British Bank , Riyad HYPERLINK “http /www .anb .com .sa ” Arab National Bank , Riyad ( HYPERLINK “http /arabbank .com /branches /asia /saudi .html ” Arab Bank Subs HYPERLINK “http /www .alfransi .com ” Al Bank Al Saudi Al Fransi , Abha HYPERLINK “http /www .saudihollandibank .com ” Saudi Hollandi Bank Riyad and Al-Jazeera bank , Riyad . The other banks are : Al-Akami bank Riyad Al Bank Al Saudi Al Tejari Al Muttahed , Dammam Faysal Islamic Bank of Bahrain , Jeddah International bank , Riyad HYPERLINK “http /www .isdb .org ” Islamic Development Bank , Jeddah Saudi Arabian Agricultural Bank , Riyadh Saudi Cairo Bank , Riyadh Saudi Development and Industrial Corp , Riyadh Saudi French bank , Riyad HYPERLINK “http /www .saibank .com .sa ” Saudi Investment Bank , Riyad Saudi United commercial bank , Riyad United Saudi Bank , Riyadh Western union Jeddah and World Bank , Riyadh

There are no banks specified for women only . Saudi banks only create a separate section for women and men in accordance with Islamic Laws

According to Marketing Assessment for Saudi Arabia , [a] of the kingdom ‘s commercial banks , [they] offer a broad range of services like any other commercial banks . Banks are located in almost in every major and minor cities as well as provinces and municipalities as evidenced by its branches and ATM sites located in these areas (Major Banks in Saudi Arabia , n .p

The Info-Prod Research (Middle East ) Ltd ‘s country guide on Saudi Arabia provides that the Saudi Arabia ‘s Banking Control Law provides for state owned and private banks and the [t]he distribution of government subsidies and grants of loans to public and private sector projects are funneled through specialized public funds or banks . For the private banks , [t]here are twelve commercial banks operating in [the country] , three of which are fully Saudi-owned and the remainder of which have a minimum 60 percent Saudi participation . Thus , the banking sector is slowly leaning on full privatization as evidenced by the opening of some equities for foreigners

Banking Control Law of 1966 created the Saudi Arabia Monetary Agency (SAMA .established in 1952 [as the] country ‘s central bank . Among other things , SAMA issues and controls currency , regulates the money supply , and monitors commercial banks (including deposits , loans and investments ) and manages foreign assets

The Saudi Arabia ‘s Market Assessment revealed that [t]he Saudi Arabian Monetary Agency (SAMA , based in Riyadh , is the kingdom ‘s central bank and is technically under the supervision of the Ministry of Finance and National Economy . SAMA issues currency and regulates commercial banks and other financial institutions under its control . It manages the government bond programme , oversees the foreign- exchange and stock markets , and the nation ‘s electronic debit- payment system . SAMA also closely monitors international loan syndications and has a say in any government or private-sector moves to develop financial institutions systems and instruments . The Ministry of Commerce also has a role in licensing banks and in certain areas of regulation related to the stock and government bond markets , but SAMA is the dominant force ‘ Being a central bank of the country , it set fiscal and monetary policy for all the banks within the kingdom to follow thus there is no competition to speak off with other banks

SAMA has restriction on saving loans in Saudi Arabia . According to the Market Assessment of Saudi Arabia , it revealed that for a single depositor , his and reserves ‘ and for loans to a single customer , may not exceed 25 of a bank ‘s capital and reserves , and exposures of more than 10 must be reported to SAMA ‘ and any lending to shareholders and other related parties is limited to 10 of a bank ‘s capital

The government tells the bank who to lend but since this is a bad banking practice , the government created a specialized credit institution to remedy this . According to U .S . Library of Congress Country Studies on Saudi Arabia commercial banks favored short-term lending to established firms and individuals [thus] the government created special credit institutions to channel funds to other sectors and groups in the economy . The Saudi Arabian Agricultural Bank was formed in 1963 to provide development financing and subsidies to the agricultural sector . The Saudi Credit Bank was formed in 1971 to provide interest-free loans to low-income Saudis who could not obtain credit from commercial banks . The Public Investment Fund was created in 1973 to help finance large public ventures . The Saudi Industrial Development Fund was established in 1974 to provide interest-free , medium- and long-term financing of up to 50 percent of the cost of a private sector project . The Real Estate Development Fund , also founded in 1974 , was designed to encourage private sector residential and commercial building , partly through interest-free loans to low- and medium-income Saudis for up to 70 percent of the cost of a home

Finally , according to Country Study of Saudi Arabia by the US Library of Congress , it revealed that since Saudi Arabia ‘s banks are under Islamic law , thus , any form of interest is strictly prohibited . To circumvent the Islamic Law , SAMA issued a regulation in 1980s to charge a service fee instead of interest and [a]s of the early 1990s , banks were subject[ed] to reserve requirements . A statutory reserve requirement obliged each commercial bank to maintain a minimum of non-interest-bearing deposits with SAMA . Marginal reserve requirements applied to deposits exceeding a factor of the bank ‘s paid-in capital and reserves . Moreover , banks had to hold additional liquid assets– such as currency , deposits with SAMA beyond the reserve accounts , and Government Development Bonds–equal to part of their deposit liabilities . SAMA used two other instruments to manage commercial bank liquidity . The Bankers Security Deposit Account (BSDA ) was a short-term instrument with low yield , rediscountable with SAMA and transferable to other banks . In November 1991 , SAMA issued the first treasury bills , which were short-term , usable for both liquidity management and government deficit financing , and designed gradually to replace the BSDAs


Having stated the unique monetary and banking practices of Saudi Arabia that is based on Islamic Law , one can easily conclude that economic growth cannot be realized

This is not the case

The issuance of sound fiscal and monetary regulations by the Saudi Arabia Monetary Agency consistent with sound practices of western economies clearly showed that the country is on the verge of monetary stability at par with other financial giants both in Europe and America The economic stability both in infrastructure and banking was manifested through the opening of foreign banks like the Citigroup and HSBC in the kingdom . Otherwise they will not risk their capital if the market is on the verge of collapse


Development And Restructuring Of The Saudi Banking System- Saudi Arabian Monetary Agency Retrieved October 15 , 2006 from , HYPERLINK “http /www .bis .org /publ /plcy06g .pdf http /www .bis .org /publ /plcy06g .pdf

Major Banks in Saudi Arabia . Retrieved October 15 , 2006 from HYPERLINK “http /www .the-saudi .net /directory /banks .htm http /www .the-saudi .net /directory /banks .htm

Market Assessment–Saudi Arabia January 2003 . Country Finance Saudi Arabia 2003 . Retrieved October 15 , 2006 from , HYPERLINK “http /store .eiu .com /index .asp ?layout show_sample product_id 8 country_id SA http /store .eiu .com /index .asp ?layout show_sample product_id 8 c ountry_id SA

Naser Kamal and Moutinho Luiz . Strategic marketing management : the case of Islamic banks . International Journal of Bank Marketing . Nov 1997 15 (6 : 187 – 203

SAMA – Links to Commercial Banks in Saudi Arabia . Saudi Arabia Information Resource . Retrieved October 115 , 2006 from , HYPERLINK “http /www .saudinf .com /MAIN /e26 .htm http /www .saudinf .com /MAIN /e26 .htm Saudi Arabia ‘s Currency and Banking . The Info-Prod Research (Middle East ) Ltd . Retrieved October 15 , 2006 from , HYPERLINK “http /www .infoprod .co .il /country /saudia2c .htm http /www .infoprod .co .il /country /saudia2c .htm

Saudi Arabia . Country Studies . U .S . Library of Congress . Retrieved October 14 , 2006 from

HYPERLINK “http /www .countrystudies .us /saudi-arabia /44 .htm http /www .countrystudies .us /saudi-arabia /44 .htm



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