The Saudi banking sector and, by extension, the Saudi consumer have never had it so good. With an economy boosted by sky-high oil prices and revenues, it is not surprising that national income grew by 16.8 percent and the real GDP (gross domestic product) by 5.3 percent in 2004 and continues to do so in 2005. The budget recorded a surplus of SR107 billion.
“Money supply,” stressed Hamad Al-Sayari, governor of the Saudi Arabian Monetary Agency (SAMA), in his address to Custodian of the Two Holy Mosques King Abdullah at the presentation of the 41st Annual Report of the central bank in October 2005, “increased at high rates in the preceding year and in recent months, motivated by expansion in credit extended by commercial banks to the private sector, signifying the dynamic role of the sector in the expansion of economic activity. It is expected that the robust performance of the Saudi economy will continue during the current year and forthcoming years.”
The combined third quarter (Q3) 2005 profits of Saudi commercial banks rose by 57.38 percent to SR19.6 billion compared to SR12.48 billion for the same period in 2004. Al-Rajhi Banking & Investment Corporation (ARABIC) posted the highest Q3 profit of SR3.8 billion, followed by National Commercial Bank (NCB) with SR3.7 billion and Samba Financial Group with SR3 billion. Profit growth rate ranged from 307 percent for Bank AlJazira to 33 percent for Saudi Hollandi Bank.
The impact of higher oil prices and revenues are reflected especially in consumer credit. According to Dr. Said Al-Shaikh, chief economist at NCB, at the end of August 2005, Saudi banks’ portfolio of loans and advances rose by 23.9 percent to SR411.5 billion, from SR332.1 billion at the end of December 2004, suggesting a net credit expansion equivalent of SR79.4 billion in the first eight months of this year. Total expansion for the whole of 2004 was SR85.2 billion.
“In all, banks’ contribution to liquidity expansion occurs through industry’s overall loans-to-deposit ratio, which stood at 77.2 percent in 2004 and further rose to 88.4 percent in July 2005. This implies that for each SR100 of total deposits, the banks lent out SR88.4 during the January-August 2005 period, and SR77.2 in the entire 2004,” Dr. Al-Shaikh stresses.
The increased lending in the retail sector is not only due to the high liquidity but also the low interest rate environment. Some 37 percent or SR122.72 million of total bank credit facilities of SR332.13 million in 2004 comprised individual consumer credit.
According to SAMA, at the end of September 2005, the Saudi commercial banks had a total of 1,240 branches throughout the Kingdom, with ARABIC the largest with 397 branches followed by NCB with 248 branches. Similarly, in terms of ATMs (automated teller machines) there were 4,413 in the Kingdom at the end of September 2005, which processed 45,386,900 transactions worth SR22.65 billion. In the same period, Saudi banks had issued a total of 7,557,353 bank cards of various descriptions and uses.
With all these market dynamics, competition in the retail and consumer finance services market is toughening up, even though the cake is getting bigger all the time, given the age and consumer demographics of the Kingdom. Saudi Arabia’s population is growing at an annual rate of 3.5 percent. Some 70 percent of Saudis are under 25 years of age. As such, for banks and consumer companies Saudi Arabia represents effectively a captive market. There are also those who stress that Saudi Arabia is still under-banked, both in terms of products and services in terms of consumer choice and in terms of competition and market access, especially to foreign players.
There are three drivers of the Saudi financial services sector that will have a profound effect on the market over the next few years.
Saudi Arabia’s accession to the World Trade Organization has just been approved. Under the provisions of accession rules, commercial presence of banks in the Kingdom will be permitted in the form of a locally incorporated joint stock company or as a branch of an international bank.
The foreign equity cap for joint ventures in banking will be increased to 60 percent. While financial services can only be provided by commercial banks, asset management and advisory services may also be provided by non-commercial banking financial institutions.
The emergence of foreign competition will have both a beneficial effect and a possible dampener on the Saudi domestic banking market. Local banks will be forced to refine and improve their services and products — in pricing, flexibility, delivery, and after-sales services — to meet the standards especially of the banking majors such as HSBC, Deutsche Bank and Citigroup.
On the other hand, the smaller Saudi banks may feel the pinch and be forced even further into niche markets. However, consolidation of the sector may result in mergers to form a number of large “anchor” banks, as in Malaysia, to withstand competition from global majors.
Islamic banking is the fastest growing market segment in the Kingdom and the Gulf region and competition is set to be fierce in this sector. Already NCB, the largest bank in Saudi Arabia and the Middle East and North Africa (MENA) region in terms of balance sheet, has already announced that it is in the process of converting its entire retail banking function into Islamic retail banking.
To date some 80 branches of NCB’s network are dedicated Islamic banking branches. In fact, according to banking sources, some 80 percent of new borrowing by both individuals and corporates in the Kingdom in the first two quarters of 2005 was done on an Islamic banking basis.
“Most of the Saudi banks have been working hard during the last few years to capture a slice of this low-cost funding source by introducing new products and services to attract deposits of corporates as well as individual clients. Saudi banks are currently offering a wide range of Islamic products ranging from Islamic corporate loans to Islamic consumer loans and even credit cards. The growth of the Islamic investment avenues will act as a strong motivator for the investors to place their money in these instruments,” stresses Global Investment House’s latest study on the Saudi banking sector.
The third factor is the pace of reforms in the Kingdom, especially in the economy and in regulation and supervision of financial institutions, as well as the protection of consumers especially with the rise of electronic and Internet banking. Saudi banking and capital market infrastructure at best is evolving. Bankers agree that a lot more needs to be done including in the area of compliance enforcement.
With the rise of Islamic banking, the government needs to come up with the appropriate legal, regulatory and accounting infrastructure for such banks. Shariah governance is also a major issue. Saudi consumers have recently been complaining about the confusion in the market relating to Islamic financial products, because of a perceived free-for-all in terms of fatwas (legal opinions) as to what is a Shariah-compliant financial product or not. Here, Riyadh can study the Malaysian experience by setting up a national Shariah council at SAMA to set the rules for Islamic banking, which all Saudi banks must follow.
At the same time, SAMA could require all Islamic financial products offered in the Kingdom to be prefixed by the letter ‘I’ so that consumers instantly know that this is a Shariah-compliant product.
Market sectors set to offer excellent opportunities include housing finance, education plans, insurance, small businesses, pensions, credit cards, retail investment products and remittances. But competition will be tough — which would require imaginative marketing of these products and services.
ARABIC, for instance, recently announced a major expansion plan under which it will set up 18 new exchange and remittance centers across the Kingdom this year. The move to open high-tech customer-friendly remittance centers is part of the new policy of ARABIC to ensure a guaranteed and efficient delivery of funds to the beneficiaries.
NCB, on the other hand, recently launched a new promotional campaign titled “One Easy Way to Win,” offering its customers an opportunity to win six luxury villas valued at SR1 million each. The promotion comes with NCB’s Islamic credit card. According to Abdulrazzak Elkhraijy, head of NCB’s Islamic Retail Banking Division, “it is the only credit card in the world which allows its customers to pay the value of their merchandise in accordance with the principles of ‘tawarruq’ sales.”
Tawarruq is a Shariah-compliant cash flow management tool for retail customers.
NCB also has products that allow customers to receive Islamic personal loans based on the “murabaha” concept. Islamic finance enables its customers to make purchases through easy monthly installments. It also boasts the largest family of Islamic investment funds under its Al-Ahli brand.
In contrast, the Saudi British Bank (SABB), part of the HSBC Group, introduced “Amanah Personal Finance,” a new product from the bank’s Amanah Islamic Financial Services division, to provide consumer finance to both Saudis and expatriates with a minimum basic salary of SR3,000 and to self-employed individuals.
Sulaiman Al-Hamdan, SABB deputy managing director, said: “We are proud to be the first bank to provide this service to our customers. In line with our ‘Customer First’ strategy, the new service is a key part to meet the demands of our customers in a Shariah-compliant way.”
Insurance too, especially Islamic insurance (“takaful”), is set to increase dramatically in the Gulf Cooperation Council states, especially Saudi Arabia, over the next few years. In Saudi Arabia, health insurance becomes mandatory on Jan. 1, 2006, albeit that the new policy is being introduced in a staggered way, with firms of 500 or more employees required to comply with the provisions of the new Cooperative Health Insurance Law at the onset.
In Saudi Arabia alone, some 20 firms are in the process of being licensed, and another 10 have lodged incorporation applications with the SAMA. The government is also allowing foreign insurance companies to open branches in the Kingdom.
The Jeddah Chamber of Commerce & Industry expects the Kingdom’s insurance market to triple from SR8 billion to SR24 billion within the next 10 years. At present insurance contributes only 0.7 percent of the GDP and which is expected to reach 3.7 percent in five years once the companies are licensed and more businesses are insured.
One “takaful” company which got approval in September 2005 from SAMA to set up an operation in the Kingdom is the Dubai-based International Arab Insurance Company (IAIC). The company recently successfully closed a capital increase exercise in which its capital was increased from 50 million dirhams to a staggering one billion dirhams.
The Labuan-incorporated but largely Saudi-owned RUSD Investment Bank, headed by Dr. Saleh Jameel Malaikah, formerly CEO of Al-Tawfeek Company for Investment Funds, in its first major advisory transaction was mandated the Lead Financial Adviser for the deal.
The IAIC capital increase makes it one of the largest if not the largest Islamic insurance company in the world. IAIC’s Saudi subsidiary is due to start operations early next year. IAIC will have a 51 percent stake in the firm while Saudi companies and investors will own the remaining 49 percent stake.
The global “takaful” market is projected to grow between 15 percent annually over the next few years. IAIC’s own feasibility study reveals that “takaful” gross contributions in Saudi Arabia could total 33 billion dirhams per annum; almost twice that in the UAE and Egypt at 17 billion dirhams each.