LONDON, 12 July 2004 — Unfounded rumors that the National Commercial Bank (NCB) is converting into a dedicated Islamic bank were rife this week. At the same time, analysts are still trying to make sense of Citigroup’s exit from Saudi Arabia, and the granting of new licenses by the Saudi Arabian Monetary Agency (SAMA) to foreign majors such as BNP Paribas, Deutsche Bank, and J.P. Morgan Chase.
The approval too by the Saudi Supreme Economic Council in May 2004 of the privatization of the government’s stake in the National Company for Cooperative Insurance (NCCI) suggests that the financial sector in the Kingdom is in a state of strategic flux.
Cynics will argue that the real test for the Saudi banking sector will come after the country’s accession to membership of the World Trade Organization (WTO), whenever that will happen, once the full impact of economic and financial liberalization starts taking effect. How will they then face up to the competition and develop new revenue streams and products and services?
On the regulatory front too the reform and bureaucratic procedures remain at best frustratingly and predictably slow, and in some instances creating further confusion because of a lack of policy clarity on the part of both government and regulatory authority. The capital market law, the insurance law, and possibly a mortgage law have been or are in the process of being approved.
But the implementation process seems to be overtly drawn out. In the case of the insurance law, first approved in November 2002, it created more confusion in the market because it seemed to institutionalize a monopoly position for NCCI, as if the Kingdom was finding it difficult to get out from the economic straightjacket of protectionism and paternalism.
The Saudi banking sector is by far the most powerful and liquid in the Middle East. While it currently operates from a position of strength in the GCC, it remains to be seen how well it would stand up to financial market liberalization. HSBC Middle East, the largest international bank in the Middle East, for instance, has recently announced a repositioning of its Islamic brand, HSBC Amanah following the launch of a spate of Shariah-compliant financial products.
HSBC Middle East CEO David Hodgkinson is cautiously bullish about the region’s economic prospects and about HSBC Middle East’s commitment to the region, which includes further expansion of its activities. The bank has applied for an investment banking license in Saudi Arabia under the new capital markets law. But the Kingdom has yet to finalize the capital market regulatory authority, a process which many foreign bankers stress should be speeded up.
There seems also to be an inherent dichotomy in Saudi privatization policy especially relating to the banking and insurance sector. Citigroup, to seal its final divestment from Samba, sold the remaining 20 percent of its stake to the Saudi Public Investment Fund (PIF), the investment arm of the Saudi Ministry of Finance. The PIF also holds the majority stake in the National Commercial Bank (NCB) together with the General Organization for Social Insurance (GOSI), another public utility. This ownership maze is unhealthy for any banking sector. NCB, for instance, in 2003 signed an exclusive agreement with GOSI, for the collection of the subscription fees of the optional subscribers in the social insurance system.
NCB is the largest bank in the Kingdom in terms of assets and financing. Following its restructuring, which saw the bank not publishing annual financial results for three consecutive years, NCB was effectively wrestled out of private ownership and taken into quasi-state owned ownership. Today, the only major private shareholder in NCB is Abdullah Salim Bahamdan, who is also the chairman and managing director of the bank. As such, it would be interesting to see who the major shareholders of NCCI turn out to be when the sell-off eventually takes place.
NCB too has recently repositioned its brand. Perhaps it was this announcement that gave rise to the speculation that NCB is converting into an Islamic bank. However, the bank has dismissed such rumors and stressed that it is merely converting its retail business into a fully Islamic operation, probably by the end of next year. Some 111 NCB branches out of 252 branches are dedicated Islamic banking branches. The Islamic side of both its consumer loan portfolio of SR20 billion and its asset management business constitutes over 50 per cent.
Yet NCB has consistently failed to publish separate accounts for the Islamic side of its business. It is inconceivable that a major Saudi conventional bank that is now embarking seemingly toward an Islamization of its operations does not publish separate accounts for the conventional and Islamic sides of its business. It is equally inconceivable that NCB’s Shariah Advisory Board and its regulator, SAMA, have not insisted on this. Separation of accounts is essential to prevent co-mingling of riba and non-riba funds and operations. It must be a nightmare for NCB’s internal and external auditors to sift through this accounting quagmire. It is also impossible to analyze the true state and performance of NCB’s Islamic business, say compared to its conventional business.
Perhaps SAMA should take a cue from Bank Negara Malaysia, which has introduced new regulations requiring the Islamic banking windows of conventional banks to publish separate accounts from the other business of their banks.