That our problems are many is clear. Solutions of course are less clear. Evidence, however, indicates our banks are responsible for many problems. The simple truth is that chaos would be preferable to the damage they have caused to our society over the past ten years.
Some major concerns today are a high unemployment rate, a rising crime rate and a shortage of trained Saudi professionals. This is the end of the spectrum that we are all familiar with; the other end is less familiar, containing highly-skilled but frustrated Saudis exiting the economy and giving us our own “brain drain.” This talented group has discovered that in our economy, business innovation and standards of excellence are worthless. The primary success factor is whether one has capital — and lots of it — at hand.
Connections can be made between the lack of local investment instruments, billions of private sector funds sitting idle and government deficits increasing annually. It is easy to see that the fat margins resulting from monopolies in our economy have created a widening disparity between rich and poor businesses. This in turn stifles competition with consumers ultimately paying the price in the form of lack of choice, poor quality or unjustifiably high prices. Worse yet, without healthy competition, most of our companies will have no chance when foreign competition enters — as is planned. So we have untrained unemployed Saudis and we also have highly qualified Saudis who cannot get business opportunities. We have billions sitting idle with the private sector and we have companies that lack funding for growth, training and hiring. Something is not right.
That something is our banks. They are impervious to the risks to which they have subjected our economy and society. They have exploited their licenses and treated their monopolies as rights to exorbitant profits at the expense of the country’s economic and social health. Profits can be positive when they are the result of productivity and performance rather than of a monopoly. Credit and financing skills, normally the backbone of a banking sector, are non-existent in our banks.
To our banks, it is an alien concept that their primary function is to act as an intermediary, passing funds to sectors of the economy that need capital to increase productivity and job creation which translates into economic growth. Passing the money on does not mean parking it in each other’s Treasury departments, and then on to Bahrain and London for a 25+ basis point margin. Placing deposits on the interbank market is probably the one skill area in which our bankers can say they are unsurpassed. How proud that makes us! Especially when they exercise the skill with non-interest bearing deposits and so capture the full spread, making themselves the envy of the world banking community. Our banks have the largest profit margins in the global banking industry. No wonder they have fought aggressively against any local or foreign competition.
Our banks maintain huge and diversified deposit bases unmatched by equivalent loan books. Funds are lent to companies that do not need them. Normally, that means companies which have peaked and have become mature businesses throwing off plenty of cash. The impact of lending to already mature businesses is not job creation. The capital is used by the businesses to grow through acquisition, rather than through capital investment that provides jobs or improves productivity. (For example, take the recent case of a Saudi company buying over a billion riyals worth of shares in a bank where it is a major shareholder with funds borrowed from another bank in which it is also a major shareholder. Where is the job creation in that transaction? What gain in productivity did the economy experience? This example is indicative of our banks’ lending activities.) This is a cancerous phenomenon for an economy. The big just keep getting bigger and the high growth sectors short of cash get squeezed out. Monopolies are created as capital becomes a barrier to entry and the benefits of competition are foregone.
The irony is that the little lending that banks do is within guidelines that ensure it is only to those who do not need the capital. For this, banks do not need staff; they can automate the whole process. Why do entities that have capital borrow from banks? Because they can then “leverage” their assets by using their own + borrowed capital for their businesses and their portfolios. Take, for example, the recent STC share offering that was intended to bring fresh capital into the market. Instead, the usual big players with large stock holdings borrowed against the holdings to buy STC shares, crowding out new money and creating an artificial over-subscription.
Our bankers hide behind a mixture of excuses for their incompetence. Some common ones are 1) blame it on the ‘80’s bubble when big names borrowed and defaulted — however, then, just as now, it was the banks’ greed and lack of skills that caused the problem; 2) blame it on their boards where shareholders want to control lending and funnel it to preferred sectors and companies; 3) blame it on the Saudi banker’s dilemma: why bother learning how to assess credit and business risk when they can make outrageous profits risk-free with “no brainers” (e.g. lending against cash deposits); 4) blame it on the regulatory environment, using Shariah as the excuse for religious constraints — here our bankers ignore the spirit of the law while selectively exploiting the letter. Our banks pick and choose what part of Shariah they wish to apply.
When trade finance transactions and “Islamic” products look like big money makers, the banks are the first to exploit the Shariah for marketing purposes. When it comes to charging individuals over 15 percent compound annual rates for credit card debts, the Shariah’s teaching against usury is conveniently overlooked.
Hiding behind the constantly repeated excuse that our system does not protect them when they are chasing bad debt is ridiculous. No major banking institution or credit issuer abroad relies on the regulatory system. They rely on their own credit skills and resign themselves to the fact that there inevitably will be some “bad debt” on their books. That is why loan loss provisions are there. If every major bank abroad approached debt re-payment through the courts, they would be bankrupt. Instead, they rely on professional business and credit analysis skills — exactly what our banks lack.
The most outrageous excuse heard for the banks’ lending deficiencies is that they are protecting their depositors. Our banks have no credibility with this because our bankers have no problem placing these depositors in investment funds that have a much higher potential risk than a well-run loan book. The bankers have little idea of what they are marketing on the investment side or its appropriateness to their customers. They do, however, have a good idea of the fees that they collect for this. But that’s another story. The difference between the banks’ supposed concern for depositors in one area and lack of the same in the other is clear. When fees can be generated and unjustifiable profits can be made with no risk to the banks, then banks are happy to put aside their concern for depositors. A bad investment puts the customers’ capital at risk. A poor performing loan book puts the banks’ capital at risk. So whom are the banks protecting?
Let’s step back a minute. Any economy has certain fundamental requirements. An economy consists of various spending units — business firms, households, consumers and government bodies — each constantly receiving and using funds. For growing companies, cash savings from current operations fall short of covering current capital expenditures. A successful growing company puts its cash back into the business in order to grow.
These companies run a funds deficit that is further exacerbated by the lack of financing sources in our economy (no mechanism available to issue money market instruments, bonds or equity). In contrast to the business sector, the consumer sector is running a funds surplus (savings). Anyone who doubts that should look at the banks’ deposit base. In a functioning economy, most of the consumer sector’s annual funds surplus is absorbed by making loans to, and equity investments in, business firms that seek outside funds to cover their funds deficits. This flow of funds from consumer to business sector is facilitated by “financial intermediaries.” Without this flow, an economy chokes. By failing to act as intermediaries, our banks are choking our economy. Their insipid credit policies direct surplus funds to businesses running funds surplus. Just the opposite of what they are supposed to do. The premise is not complicated; banks exist in an economy to act as intermediaries between funds-surplus units and funds-deficit units. I challenge any Saudi bank to demonstrate that this is what they do.
Our banking sector should be an intermediary of critical importance because they are the only game in town. Other economies have brokers, financial underwriters, savings & loan institutions and multiple stock market exchanges. They also have various stage investment funds (e.g. venture capital) and a host of government-sponsored programs to insure efficient transfer of surplus funds to growing sectors of the economy that require them.
The solution? Force the banks to lend to growing sectors of the economy, not just to the existing fat cats. Banks should be required to maintain loan books wherein distribution is spread to various sectors and businesses. The policy of only extending risk-free secured loans should be outlawed. It creates an environment in which usury flourishes.
Ultimatum time: Either the banks develop credit skills, acceptable risk ratios and assume the responsibilities that come with their licenses or we should revoke those licenses and open the sector to other entities, local and foreign, that will do the job right. Time is up for this monopoly. The days of exorbitant endless profits for Saudi banks at the expense of creating economic and social problems for the rest of us are over. Any bank shareholder not happy with this should sell his shares and find another monopoly to create somewhere else and let us get on with building a real economy. The benefits to us as a nation far outweigh the potential cost of defaults and upsets along the way.
(Saud Al-Sowayel is a businessman based in Riyadh.)
