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Author: 
Mohamed A. Ramady
Publication Date: 
Tue, 2010-11-30 00:53

By all accounts, family businesses play a significant
role in the various economies of the Gulf Cooperation Council, with estimates
as to their contribution to the Gross Domestic Product (GDP) varying from lows
of around 35-38 percent in Saudi Arabia where the state sector is prominent, to
as high as 65 percent of GDP for countries such as Kuwait. As such, disputes
between family businesses, and between them and those in the wider financial
and business world, are not trivial matters to be  brushed aside in the hope that the world will tire and
forget, as fallouts from such disputes 
impacts those not directly involved.
Bankers are now insisting on transparency and a more
formalized management structure in family run  businesses, and recent episodes of family businesses in
dispute or other financial troubles seems to have accelerated the gradual
demise of so-called name lending by banks, unless of course amnesia sets in and
bankers forget over time, as they are wont to do. The persistent cycles of
excessive lending, followed by abrupt credit squeezes, illustrates this
phenomenon, whether it is for individual corporations, or sovereign states. In
the Gulf, family businesses have played a positive role in diversifying the
economic base, introducing new products and joint venture partnerships and
creating employment, although they are accused of preferring non-nationals to
locals due to lower wages. The recent Saudi Ninth Five-Year Plan places high
hopes on the Saudi private sector to continue diversifying the economic base,
and generate anywhere between 300-400,000 new jobs every year to try and absorb
the ever increasing labor market entrants of a young population. A slowdown in
this key national objective will put social and economic strain on society as a
whole. At the same time the fallout seems to have been a blessing in disguise
as it has convinced some of the larger family  groups to opt for a larger degree of transparency, and
become publicly listed entities in order to  continue growing.  
The fallout from high profile family business disputes is
beginning to bite as there has been a perceptible slowdown in bank lending to
the Saudi corporate and private sector, as evidenced by the latest financial
and economic data, with anecdotal evidence that the hardest hit are the
non-listed private family groups. Bankers, whether in the Kingdom, or abroad,
are more loathe to extend facilities on a name basis and now require more
transparent accounts as well as answers to simple questions of how funds are to
be utilized. Gone are the days, it seems, of general purpose funding
facilities, to avoid a repeat of falling into a non- asset lending black hole.
Regulators are also putting pressure on banks to be more
prudent to meet higher capitalization ratios. Saudi Arabia is now a prominent
member of the G20 and an active member of the Basel Committee which sets global
standards for prudent financial oversight.
As such, there is also external indirect pressure on the
Kingdom to have the Saudi parties reach an amicable settlement of the dispute,
and which involves banks from many countries including the GCC, some of whom
paradoxically have been the most vociferous in publicly stating that they will
not lend anything into Saudi Arabia for the time being. A final outcome of such
a settlement is that it should treat all financial institutions, whether Saudi
or foreign, on an equal basis.
There have been previous spectacular bankruptcies around
the world, and sometimes lenders have to take the blame and risk for not doing
their proper due diligence, and so find themselves left with no assets as a
basis for a settlement. In Saudi Arabia family businesses have substantial
assets and operating vehicles through which they can generate income to meet
obligations if faced by inter- family business disputes. Creditors might not
fully recover their loans, but this is far better than the current limbo
situation which, like a dripping water tap, slowly eats into banking confidence
and the sector's willingness to lend to the Saudi private sector, despite the
fact that the Saudi economy is one of the healthiest in the Arab and Muslim
world...
 
(Mohamed A. Ramady is a former banker and currently a
visiting associate professor of finance and economics at King Fahd University
of Petroleum and Minerals.)
 
 

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