The presence of foreign banks in Saudi Arabia can be traced back to 1926 with the Netherlands Trading Company, later to become ABN AMRO in 1991. It enjoyed a virtual monopoly until the late 1940s. In 1947, Banque de l’Indochine opened a branch followed by the Arab Bank Limited (1949), the British Bank of the Middle East (1950) and the National Bank of Pakistan (1950). In October 1952, the Saudi Arabian Monetary Agency (SAMA) was established by the Saudi government with monetary stability the primary responsibility. Following SAMA’s creation, the government followed an open and liberal policy and permitted the opening of new foreign bank branches, including Banque de Caire, Banque du Liban et d’Outremer and First National City Bank of New York. This first wave of foreign banks linked Saudi Arabia firmly with the global financial markets and encouraged a competitive domestic environment. During this period, three domestic banks were also licensed. The National Commercial Bank was licensed in 1953, Riyad Bank started operations in 1957 and Al-Watany Bank in January 1958. By 1975, 10 international banks with 29 branches were present in the Kingdom. These institutions operated as branches of their parent companies but, in 1976, the Saudi government took a decision that these should become incorporated as local banks with majority Saudi shareholdings. The major reason for this important policy decision was that with the boom in oil revenues in the mid-1970s, the Saudi economy expanded and grew very rapidly. This led to a sharp rise in demand for banking products and services, which the existing banks found difficult to cope with. The government quickly recognized the need for larger and more sophisticated banks. It also observed that capital invested in the banking sector was insufficient and inhibited banks from investing in branch networks, implementing new technology and training human resources. While the government encouraged all foreign banks to invest more capital, it realized their constraints and also noted that many local investors were ready to make large capital investments for developing the banking system.

Consequently, in 1976 the Council of Ministers (the Kingdom’s final legislative authority) offered foreign banks operating in the Kingdom a chance to form joint venture banks with Saudi shareholders. This decision required foreign banks to convert their branch operations to Saudi joint stock companies in which they could retain up to a 40 percent shareholding. In subsequent years, all foreign banks accepted these proposals and formed joint ventures, as there were a number of incentives offered.

It is impossible to think about Banque Saudi Fransi without reverting back to the history of its French joint-venture partner. Banque de l’Indochine was established in Paris in 1875, for the territories of France in Asia. Up to World War II, the bank experienced three phases of development. From 1875 to 1888, it functioned as a colonial bank to help the French government manage its colonial properties in Southeast Asia. Then from 1889 to 1900, the bank shifted its operations from Indochina to China. Thereafter, from 1900 to 1941, the bank represented the interests of the French government in handling international trade between France and China. It merged with Banque de Suez in 1974 to form Banque Indosuez. It was in 1977 when Banque Saudi Fransi was established with the minority shareholding participation of Banque Indosuez at that. But the history and ownership of large commercial banks has changed and evolved over the years. Since its inception, Banque Saudi Fransi kept its name and its founding shareholders intact and those who interact with the bank refer to it in its abbreviated form as BSF. Continuity which is a hallmark of the Saudi banking system is an essential trait of Banque Saudi Fransi as its foreign partner in 1996 became part of Crédit Agricole group, which operated it as Agricole Indosuez (CAI), until a 2004 merger with Crédit Lyonnais, which created Calyon. Once again, earlier this year Calyon was renamed Crédit Agricole Corporate and Investment Bank. Today, Banque Saudi Fransi is as much a proud member of the Credit Agricole family, one of the largest banks in Europe, as much as Crédit Agricole and its affiliation with Saudi Arabia in general and BSF in particular.

The Saudi Arabian financial system has always been open to foreign presence. The government has encouraged this policy to promote trade, investment and economic relations, and to attract expertise and technology. It already has considerable foreign investor presence as six of the 11 publicly listed banks have substantial foreign ownership. Four foreign partners in Saudi joint venture banks have technical management agreements. In the past five years, Saudi Arabia has licensed a number of Gulf Cooperation Council (GCC) banking institutions, as a result of a decision of the GCC Summit to permit reciprocal opening of their banking markets. The government has also decided to allow major international banks from different parts of the world to obtain banking licenses. It should be noted that with the opening of the branches of these new foreign banks by the end of 2010, the number of licensed banks in the Kingdom will have nearly tripled since 2000. The entrance of these institutions into the Saudi banking market should enhance competition, support the transfer of technology, improve financial services in all sectors and create employment opportunities.

— John Sfakianakis is chief economist at Banque Saudi Fransi, Riyadh.