RIYADH, 17 June 2003 — Saudi Arabia is the only country in the world with an estimated SR153 billion non-interest-bearing current account deposits which the banks are utilizing without giving anything to their customers in return.
“This has placed the Kingdom in a paradoxical situation, since despite such huge liquidity in the market, mega projects in the oil and petrochemical sectors continue to be financed by overseas banks. The most glaring example of this is the gas sector, which could have been easily financed by local investors instead of depending on international oil corporations,” Motashar T. Al-Murshed, a well-known financial consultant, told Arab News.
He hoped that the Capital Market Law, approved by the Supreme Economic Council, would rectify the situation.
“The Kingdom’s commercial banks were flush with these ‘free funds,’ which they were diverting into lucrative channels, such as personal loans, installment schemes, etc. The surplus funds are placed abroad for asset management.”
An evidence of this liquidity glut in the market is the mail shot campaign by the banks baiting prospective customers with various incentives if they sign up for credit cards. Young Saudis recruited by the banks are attempting to convince both their compatriots and expatriates to apply for these cards.
According to Al-Murshed, banks have developed a “conflict of interest” within the system, since the same bank has various divisions dealing in share trading, brokerage, mutual funds, project finance, Islamic banking and other allied transactions. “Conducting such transactions under one roof raises a question mark in the minds of investors. It is a question of the conflict of interest within the bank and whether it is in a position to provide genuine guidance to an investor.”
Al-Murshed said that in the face of global competition it was imperative that there should be reforms in the capital market, so that the Kingdom could play an effective role in responding to changing economic circumstances. There was a need to streamline the functioning of the capital market and boost its efficiency.
His suggestion came as the Supreme Economic Council approved the Capital Market Law paving the way for the launch of a full-fledged stock exchange.
Welcoming the decision of the SEC, he said the members of the Securities Commission (which will regulate the stock exchange) should be chosen carefully on the basis of their distinguished background. They should not be from the same financial market but from outside. “What we do know is that it will be an independent body whose chairman will be reporting directly to the Council of Ministers.”
The announcement will be made simultaneously along with details of the capital market reforms. It will be equivalent to the Security and Exchange Commission in the US. Its mandate will be to ensure that all companies listed on the stock exchange are properly managed, he added.
Al-Murshed said the Kingdom’s banking sector would have to gear itself up to face new challenges in the context of privatization and various investment opportunities in the industrial sector.
In November 2001 the Council of Ministers authorized the General Investment Fund to sell the state’s shares in a number of joint venture companies to the private sector.
They were: Saudi-Egyptian Construction Company; Saudi Egyptian Industrial Investment Company; Saudi Syrian Industrial and Agricultural Investment Company; Saudi Tunisian Development Investment Company; Saudi Moroccan Development Investment Company; Saudi Pakistani Industrial and Agricultural Company and Saudi Bangladeshi Industrial and Agricultural Investment Company.
They were targeted for privatization on the basis of their sound track record, but the programs are still on hold. In citing them, Al-Murshed drives home the point that the market is in need of one or two investment banks to meet the growing demand for capital injection. In the absence of such a measure capital market reforms would have no meaning.
By contrast, he pointed out, there were hundreds of banks in much smaller countries with the right mix of commercial and investment banks as well as brokerage and other financial institutions. “This enhances the investor’s knowledge and makes him aware of the various investment channels.”
