It is open season for foreign banks in Saudi Arabia, thanks to the economic reforms required for the Kingdom to join the World Trade Organization, which in this case necessitated opening up of the banking industry to international competition. Ten wholly foreign-owned banks were licensed by the Saudi Arabian Monetary Agency (SAMA) to operate in the Kingdom this month. They include BNP Paribas, J.P. Morgan, Deutsche Bank, the National Bank of Kuwait, the National Bank of Bahrain, Emirates Bank, Gulf International Bank, State Bank of India (SBI) and the National Bank of Pakistan. Their arrival has been widely welcomed by the business community. There is, however, concern that the presence of some of them will affect significantly the business of local banks. Most know the Saudi market well, including its strengths and weaknesses, having done business here at one step removed, often Bahrain, for many years.
Some have already opened their doors and are doing business. BNP Paribas, which has long covered the Saudi market out of Bahrain, opened a branch in Riyadh last month. It was the first European bank to enter the Saudi market as a 100 percent foreign-owned entity.
BankMuscat Chairman Abdul Malik Al-Khalili said his bank had recently received SAMA approval to open offices in the Kingdom, with its first branch scheduled to open in Riyadh early next year.
Other banks and finance houses are expected shortly. London-based MerchantBridge has applied for a license from the Capital Market Authority in Riyadh as part of its plan to open a branch office in Saudi Arabia with the help of local Saudi partners. “We shall be offering different products and services in the field of corporate finance,” said Basil Al-Rahim and Samir A. Arab, managing partners of MerchantBridge. They added that Bank Frey (based in Zurich, Switzerland) might come later. Bank Frey’s CEO Cyrill Escher was also in Riyadh trying to establish the bank’s presence through MerchantBridge.
There are mixed views about how the presence of these newcomers will affect the banking business. Mutasher Al-Murshid, a Riyadh-based financial consultant, says they should also go a long way in stimulating competition among the banks and streamlining their services in terms of investment banking.
Describing the entry of the banks as a positive development for the Saudi market, Al-Murshid said that the newcomers posed no threat in retail banking, since the local commercial banks are well established with a network of 1,300 branches all over the Kingdom. “However, investment banking services will be affected,” he thought.
According to him, Saudi banks need to develop investment banking know-how. Many outsource business in the sector, sometimes to the very foreign banks that are now coming in. That could be damaging.
The new banks arriving are now competitors to the local banks they were servicing. They have the products, which some of the local banks do not; they know the market; they are in a powerful position.
In Al-Murshid’s view, Saudi banks need to pay particular attention to increasingly popular Islamic financial instruments, such as sukuk, ijara, musharaka and murabaha. In most cases, Saudi banks merely market Islamic financial products created by foreign banks, mainly European banks. On the positive side, the entry of foreign banks could spur competition in this sector as well as in project finance, flotation and management of IPOs, including privatization, Al-Murshid said.
On the downside, he believes that the entry of HSBC and ABN Amro in particular could place the local banks at a severe disadvantage. The two banks, he pointed out, know the Saudi market very well. They could use their vast expertise and experience to lure customers away, whether for asset management or any other corporate banking sector.
“They can pull the rug from under the local banks. They have inside information. SAMA should have allowed only newcomers. If they wanted to let them in, there should have been an intervening gap in order to allow an affiliate of a foreign bank in the Kingdom to strengthen its local presence. Otherwise, there will always be a conflict of interest.” Al-Murshid did not think that was what WTO rules were intended to permit. They do not allow unfair competition — and this could be construed as that.
BNP Paribas is another bank that has been actively involved at one step removed, on the Saudi banking scene, notably its Islamic banking side, providing many of the Islamic financial products for local banks. Like HSBC and ABN Amro, its transparency and reputation could be another pulling point.
Asked if the entry of the State Bank of India (SBI) could have an adverse impact on banks such as Al-Rajhi Banking and Investment Corporation, Al-Mutasher ruled it out in the near future, saying that Al-Rajhi is strongly entrenched in the Kingdom, including the remittance market.
The wider view, however, is the arrival of SBI and the National Bank of Pakistan will eat into the business of local banks. “The presence of the State Bank of India will affect Saudi banks,” one Indian diplomat confided. “Indians will use it not just because it is Indian but because they know they can get remittances straight to their towns and villages back home. Their families will get the money instantly. It will be the same for Pakistanis with the National Bank of Pakistan.”
SBI plans to open about 110 branches in the Kingdom in a phased operation starting next year in an effort to attract high-net-worth customers. The potential competition has already acted in part as a spur to Al-Rajhi. Plans are under way to expand electronic banking using new technology in order to retain customers and attract new ones, offering them a speedy dispatch of funds home in a hassle-free environment.
The State Bank of India is India’s biggest state-owned bank with an annual income of $6 billion from overseas operations. Welcoming the license issued to SBI, Saudi Ambassador to India Saleh Al-Ghamdi said: “We already have banks from European and other countries doing successful business in Saudi Arabia. I don’t see any reason why Indian banks won’t do the same.”
Although it will be the first Indian bank to open branch in Saudi Arabia, two other Indian banks already have a presence through tie-ups with Saudi commercial banks. They are HDFC, which works in partnership with the Arab National Bank (involved in ANB’s Telemoney remittance service to India), and ICICI, the country’s major private sector bank. It is linked with the Al-Rajhi Banking and Investment Corporation, again providing remittance facilities to Indian expatriates.
Indian Embassy sources say that the arrival of SBI will be widely welcomed by the Indian community — at 1.6 million, the largest expatriate group in the country. It could also cater to their requirements in terms of loans for housing, education, health care and cars, both here and back home. These are areas where SBI already offers products to the home market. Now there could be a tie-up — loans in India based on salaries here, or loans here backed by assets in India. Linked to this is another potential area of business, SBI’s microcredit program for self-help groups (SHGs) to finance smallscale business ventures back home. It aims at funding 15,000 SHGs this year. Since a majority of the Indians in the Kingdom fall into the low-income category, they could benefit from the SBI scheme. All this could mean many Indian expats moving their accounts and business to the SBI.
Meanwhile, according to Muhammad Al-Jasser, deputy governor of SAMA, there are no plans to license any new Saudi banks at present in addition to the existing 11. “We now have the necessary number of banks to meet the country’s requirements. New banks would be opened when there is a huge new supply of capital,” he added.
The banking sector in the Kingdom, he said, has remained a force to reckon with in the Middle East by virtue of the presence of foreign banks since 1926. The licensing of the newcomers “is thus a continuation of the old policy that predates the birth of the World Trade Organization.”
Under regulatory changes introduced to enable WTO membership, foreign licensed banks can now set up branches, and existing joint venture banks can increase their foreign equity to 60 percent from 40 percent. Foreign banks, however, have to follow the country’s banking control, company and foreign investment laws.
The 11 Saudi banks — National Commercial Bank, Riyad Bank, Samba Financial Group, Al-Rajhi, The Saudi-British Bank, Banque Saudi Fransi, Arab National Bank, Bank AlJazira, Saudi Hollandi Bank, Bank Albilad and the Saudi Investment Bank — made a combined third quarter profit of SR19.6 billion this year. WTO accession will boost foreign investment in the Kingdom, providing funds for diversification of the largely oil-based economy and bring new export opportunities for Saudi firms, especially in the petrochemical industry.
According to leading Saudi economist and member of the Shoura Council Dr. Ihsan Bu-Hulaiga, WTO accession will see new developments in the financial industry. Credit lines to finance Saudi exports is one such area. At present, in the absence of any funding mechanisms, the private sector has to rely on the Saudi Fund for Development, which requires many conditions to be fulfilled before export credit is provided. Some companies will also be forced to restructure or merge to boost their competitiveness, while others will want to ensure access for Saudi goods and services in member countries; it all means more business for the banks and finance houses.
