The economic performance of Middle East is always looking at the positive side of Saudi Arabia in its oil exports to the world market. Likewise, the emerging industrial-commercial community of Dubai highlights the investment portfolio of foreign investors. On the contrary, economies are being restructured in other parts of neighbouring Islamic countries, like Egypt, Jordan, Israel, Lebanon, and Syria, and the Arabian Peninsula that composes Afghanistan, Libya, Turkey and Sudan. At this point in time, Saudi Arabia keeps its promising window to world economies.
Particularly, the production of oil and petrochemical products is bolstered by continuous foreign investments that may seem impressive of having a sustainable capital market. However, several industrialists and economists predicts the bolstering as superficial, indicating the relevance of financial management system that can support the existing banks. Indicative of the world market performance, the economic recession in Europe and the United States is perceived to affect the downturn in oil exports.
As cited, export growth in 2006 has achieved 4. 2 percent but fell short at 3. 4 percent in 2007 as a result of sudden financial recession, in which Saudi Arabia’s small industry sector may destabilize their production (Business Monitor International 2008). As forecasted by Business Monitor International (BMI), the “competitive intelligence” in banking system could be the immediate necessity of Saudi Arabian banks to support the 5-year economic development plan of the government, and as well guarantee the survival of the banks in its liquidity.
BMI’s economic forecasting indicates perseverance of the banks to redirect and redefine their financial management in domestic and foreign investments. The performance of Saudi Arabia’s banking system can be reviewed through their programs in financial and capital market management. Thus, looking at the organizational framework of the banks could determine the economic perspectives of Saudi Arabia reflective of the Middle East. Introduction
The financial sector is claimed to have created the “golden age of business”, where capital gains has found its own social sphere in the marketplace. The rapidly increasing financial institutions have expanded their roles not only as a bank where savings are drawn but in the span of economic modalities. Financial and economic experts view the private and public fiscal management as a phenomenal endeavour in the realms of society and the global economic landscape. The financial transmission evolves in the capital markets.
Thus, the ‘golden age of business” outlines the mode of global economies. Over the years, the financial management of the bank has gone beyond its interceding role in borrowing and saving. The financial collection is earmark at a “juggling financial system”, where financial surplus is invested according to prevailing market demands. The role of the bank’s financial management have found critical by investors, in a way the bank may directly invest or facilitate the investment portfolio among the saver and borrower, and acts as a financial trader.
In undeveloped and developing countries, the role of the bank in the global financial transmission is defined in the stock market brokering. The method of banking classifies the private, industrial and non-commercial use. The classification of private and commercial crediting has been sub-classified in industrial and non-industrial crediting. This can be exemplified by the financial trading of the bank in the issuance of borrowing through credit cards or “plastic money transaction” where electronic commerce has been globally acknowledged.
On the other hand, industrial and non-industrial borrowing has been realized in the promotion of direct financing or co-financing in the private sector. This research paper will examine the financial institutional development and aims to devise a business report, relating the Year 2007 status of the banking sector in the Middle East. Research Method The methodology of this research paper will adopt a two-prong approach, such as (1) the review and examination of relevant literatures, and (2) provide an analysis of the derivatives being utilized in the business report.
The process of review and examination will be focused on the corporate programs, role and directions of the financial institutions, specifically the banking sector in the Middle East, as follows: the Samba Financial Group, the National Commercial Bank (NCB) of Saudi Arabia, the Riyad Bank, and the Saudi Arabia British Bank (SABB). Several literatures will be used to substantiate the reference and guide the overall analysis and findings. Thus, the analysis of data will be provided in an illustrative discussion.
The process of data collection will be derived from electronic reports and journals, ranging from various governmental and non-governmental agencies, and scholarly published articles or journals. It is expected in the adopted research method to generally examine the performance of the banking sector in its financial services, business development plans and economic programs. A more specific examination will focus on the corporate role of the financial institutions relating to the development of micro and macro economies in the private business sector. Literature Review
History, rationale, role and risk of the banks In the ‘Mystery of Banking’ by Murray N. Ruthbard (2008) which was published by the Ludwig von Mises Institute has described the historical evolution of the banking and financial system. According to the historical data, the ancient Babylonian kingdom has first introduced the banking system, where “sacred places” were built with a “gold keeper” that administers the storing of gold of wealthy merchants. Babylonian King Hammurabi has enacted the “Hammurabi Code” as a bank law in 3rd and 5th millennium BC (Ruthbard 2008).
The reign of the Roman Empire has subjected the cashiering of the gold and precious metals to taxation. However, the defiance of the “Great Crusaders” against the Roman Empire has re-emerged the ideals of the “Hammarubi Code” where Mediterranean merchants established the ethics in banking. In 1889, the dynasty of Naser-eddin shah Qajar of Persia (Iran) has introduced the “inscription of gold value” through inscribing the amount of denomination which was later known as the “bank notes”, wherein Western civilization developed the currency value.
The ancient times of banking system from the medieval society of Middle East has led the contemporary global financial structure. The capitalist state has utilized monetized gains of profit, wherein capital investment in the form of money competes and controls the marketplace (Ruthbard 2008). The rationale in banking is the accumulation of monetized capital, of which the bank is capable of programming its cash flow from short and long-term borrowings. The role of the bank in the industry sector can liquidate or make liquid the business venture.
Meaning to invest the money on the value of goods and meeting the adequate and on-time demand of the market. It may be summarized that the contemporary role of the bank can be attributed to the medieval role of the “gold keeper” who can access the capital from the accumulated gold savings of the travellers. Otherwise could be dissolved in the occurrence of a “bank run”, as a result of simultaneous closure of accounts that depletes the cash reserves over interest payments. Financial Institutions of Saudi Arabia
This portion of the paper will discuss and examine the financial institutions of Saudi Arabia. The general objective will relate the performance of the banking system, and specifically aim to: (1) identify the key banking sector, (2) describe the key strategies, (3) assess the relevance of success that differ from other firms, (4) critically examine major policy issues affecting the banking sector, (5) define the specific issues that draws impact to the banking sector, and (6) assess the prospects of the banking sector for the next five years and identify the sustainable strategies.
Samba Financial Group The Samba Financial Group was established in 1980 in accordance with the absorption of stockholding equity from foreign banks who were directed by a Royal Decree to liquidate their stocks in favor of local banking operators. As cited, the liquidation of stockholding was through an offering of 44. 5 percent public shares, while 15. 5 percent was sold to the founding members of the Board of Directors, retaining 40 percent of corporate proprietorship, overall Samba has 70 percent equity that left Citibank 30 percent of local shareholding (Samba 2008).
Based on the data in 1991, Samba has allocated 3. 25 percent from its stockholding which was offered to the United Saudi Bank (USB) to enable local-based financial partnership. Eight years later in 1999, USB has finally agreed on the allocated 3. 25 shareholding and duly represented a corporate function to Samba’s Board of Directors. In 2005, Samba has successfully drawn the approval of the rest of the shareholders in a bid to augment the current capital balance of SR 4-million to SR 6-million, increasing the “nominal value” of stock among its shareholders.
As a result of the increase in capital stockholding, Samba has enabled a financing program dubbed as “Priority Banking”. In addition to enabling the enhanced-services, Samba have able to established the “first local equity fund” which encourages international investments and obtained the London Security Exchange listing (Samba 2008). It may be related that one of the highlighted key strategies of Samba was favored by the Royal Decree, absorbing the liquidated foreign stocks and restructuring of the shareholding among local and foreign (the Citibank group) shareholders.
Moreover, Samba’s local-financial partnership with United Saudi Bank has still strategically positioned its capital stock to enable the banking services, in which a more clientele-based-focused financing program has envisioned the global representation through the London Security Exchange. The relevance of key strategic financial management of Samba could have differ the financial venture (stockholding) of Citibank, being a foreign bank that complies with the Royal Decree in favor of liquidating the foreign capitalization and only retain as a minority investor to Samba.
It may be examined that one of the significant policy issue in the liquidation of foreign capitalization is the leveling-off of the stockholding decision, in which corporate decision-making relinquishes the “bid and compromise” to major decisions that may be overcome by the majority votes. In this regard, the situation of minority stockholding may not only apply to the compliance of the Citibank [since it is a foreign bank that represents a foreign equity that is subject to Royal Decree provision] but as well with the situation of USB which is also considered as a minority shareholder.
The correlating impact of Royal Decree [in liquidating a foreign capitalization or equity] could be defined as an opportunity of the local banking sector in Saudi Arabia. The opportunity may be viewed in favor of generating a locally participated investment in banking. However, a “safety net” in monetized investments must be formulated and enacted to restrict the flaws on investments, like the mitigation of “financial dummy” or the use and sponsorship of an investor from financier-counterparts that seemed to sneak from the folds of the law.
A review of Samba’s key implementing strategies has found the relevance of envisioning a world renowned service-oriented ethics, such as (1) meeting the consumer’s financial needs, (2) reaching out the institutional and corporate clienteles, (3) consumer participation to enhance products and services, (4) developing personnel knowledge and skills, and (5) social investments to communities through financial assistance to micro-livelihood projects (Samba, 2008).
It may be perceived that with Samba’s key implementing strategies, its organizational vision and mission outlines its objectives to diversify and expand the business operation in banking. To cite, Samba has positioned its long-term investments within the Middle East countries, likewise in Asia and Europe, wherein the 20th year of banking operation in UK has refocused the financial venture in Dubai as of June 2008 (Samba 2008). Marking the expansive modality of Samba’s domestic and foreign financial system could forecast its 5-year prospects. The National Commercial Bank
On December 26th 1953 was the establishment of the National Commercial Bank (NCB) as a pioneering bank in Saudi Arabia which earmarked a “paid-up capital” or start-up capitalization of SR 30-million equivalent to $8-million US Dollars. In 1997, NCB retained its official organization for “general partnership” which eventually transformed as “Saudi Joint Stock Company” and engaged into Initial Public Offerings (IPOs). Representing as a “Public Investment Fund” or PIF, the Saudi Arabia Ministry of Finance has obtained major stockholding in 1999.
The representation of NCB as partly private-public bank has repositioned its operation for “corporate governance”, separating the qualification of ownership to majority stockholders (being the government as the leading shareholder) while the management was given to minority stockholders. As cited, NCB claims to be leading in its year 2007 financial report that indicated the liquidity of assets, such as the following (NCB 2008): • Paid-up capital of SR 15-million or USD $4-million; • Totality of fixed-asset valued at SR 208. 717 million or USD $55. 658 million; • Net income of SR 6. 038 million or USD $1. 610 million;
• Equity-stock of SR 28. 181 million or USD $7. 515 million; • Proceeds on common equity-stock at a rate of 23. 1 percent; and, • Allotment of revenue at SR4. 01 or USD $1. 07 per share to stockholders. To further cite, NCB’s corporate achievements have indicated the following (NCB 2008): • Rate of credit has improved from “A flat” to “A plus”; • Enable the operation of 266 branches within the Saudi Arabia solely for Islamic bank service; • Obtained 2 million clients in a year time; • Generated employment of 5,412 personnel representing 86. 07 percent of local manpower; • Established 1,184 ATMs with 10,750 “point-of-sale terminals”;
• Established 2 banks in Beirut and Bahrain and 3 managing-offices in Seoul, Singapore and London; • Established a broad delivery network as “alternative routing channels”, such as Al-Ahli Telephone Banking, Al-Ahli Mobile Banking, Al-Ahli Online, Alahli e-Corp, Alahli e-Pay, Al-Ahli Tadawul and Al-Ahli International Brokerage; • Catered to more than 85. 47 percent of bank-clients’ operation utilizing the broad delivery network; • Leads in innovative servicing and acts as a “financial asset manager”; and, • Implements corporate-social investments in a diverse community-based partnership.
The key strategies of NCB can be well described by its corporate programs, wherein the “management” of banking operations has been separated from its qualification on minority stockholding, referring to the private stockholders. At this point, the privatization of management has optimized the overall performance of NCB. Hence, the position of financial stockholding in a “government-owned and controlled corporation” or GOCC can earmark significant management of a private sector that utilizes the ownership of the government, strengthening a regulatory framework (SAMA 2003: pp. 4-6).
Meaning, the financial and banking services of a government bank [like NCB] has been capably delegated to private or non-governmental management function, wherein “system of bureaucracy” is streamlined and redirected to tangible services. Assessing NCB’s relevant success that differs from other firms could be exemplified by “deliverable capability” in separating and qualifying the retention of ownership from management. The “functionary role” of the private or non-governmental groups of technical managers has rationalized the pre-requisites and requisites in availing the services of NCB, affecting the deliverables of the government.
With NCB’s status as a public investment fund (PIF), the underlying policy may favor the locally-generated financial investment. The private acquisition of public stockholding could create a vibrant financial environment where fixed-assets of the government [representing various forms of non-liquidated stocks] could be liquidated as a readily available monetary stock, in which the capital gains can be divested to various financial services like what NCB earmark the liquidity.
In which case, this specific policy issue could be advantageous for private-public financial partnership and patterns the strengthening of the banking sector. It may be assessed that the prospects of NCB in innovative servicing and financial asset management could be its key implementing strategies to sustain its banking operation. Likewise, the growth of revenue has enabled NCB’s contribution to national development through creation and generation of employment, corporate-social investment, and setting its local and international marketing that could widen the financial linkages in a 5-year span.
Riyad Bank The Riyad Bank operates in “retail banking franchise”, acting as a leading funder through “loan syndication” or organized financing in sector-related industries, such as petrochemical products, power generation, water sourcing and infrastructural or aggregate ventures. The “retail banking franchise” operation has strategically established project management offices (PMOs) in UK, US and Singapore to support the international clientele network.
Through this venture, the Investment Product Committee of Saudi Arabian Monetary Agency (SAMA) has acknowledged Riyad Bank as a “fund manager” in dealing with industry-sector-clientele investment (Riyad Bank 2008). In sum, Riyad Bank has achieved a variety of investments dealing with services and industry support, as cited on the following (Riyad Bank 2008): • Establishment of 200 branches to provide customer-network access; • Establishment of “RiyadNet” to provide electronic-based banking network; • Establishment of technical support to provide home-based customer services;
• Upgrading of advanced technologies to provide wireless and mobile transaction, such as making available the 1,560 multi-functional ATMs and creation of RiyadTadawul web site for online shareholders’ trading. Based on the 2007 year-end financial report, Riyad Bank has gained net revenue of SR3. 011 million, in which significantly increased from the year 2006 net revenue of SR2. 909 million. The total “net assets” of Riyad Bank has amounted to SR 121 billion with SR13. 2 billion as equity of shareholders.
Fitch Company’s independent performance rating to Riyad Bank in 2007 has improved from “A minus I” to “A flat”. However, the rating has even improved during the 2nd and 3rd Quarter of 2008 which obtained “A plus” (representing long-term performance) and “A one” (representing short-term performance) with reference to “capital intelligence” or judicious and efficient handling of investments (Riyad Bank 2008). It may be reflected that Riyad Bank implements its key strategies in “retail banking franchising”, wherein it provides financing guarantees to the industry sector.
In return, the market-led position of the industry sector guarantees 100% returns on investments of the Riyad Bank. The relevance of success that differs from other firms can be capsulated in the key strategic retail-franchise investment which retains the “liquidity” of capital or monetized value. The policy issue that may be affecting the relevance of capitalization on the cost of services could be the industrial tax that can be absorbed by Riyad Bank in auxiliary financing.
Meaning, being a franchiser has to absorb the tariff and duties of capital gains or to defray the franchisee with the cost of expense in meeting the Securities and Exchange requirements As cited, the “disclosure” upon application is prescribed as a “mandatory application” under the International Accounting Standards (IAS) to a company that operates as a subsidiary, wherein franchiser-franchisee agreement is mandated (Hamid 2004: pp. 1-3). The investment schemes of Riyad Bank can be perceived to successfully achieve its sustainable venture in the next 5 years.
Saudi Arabia British Bank (SABB) Established in 1978, SABB is a merger of British holdings’ Hongkong and Shanghai Banking Company or known as HSBC Holdings. SABB is a commercial bank under a “joint stockholding” of HSBC with 75 branches allover Saudi Arabia and employs 2,865 personnel of which 85. 5 percent are Saudis. SABB’s representation of stockholding is 60% over HSBC’s 40% in paid-up capitalization (SABB 2008). As a commercial bank and a merger of HSBC, SABB jointly implements its programs with HSBC’s banking schemes, rules and regulations.
Highlighted in SABB’s corporate-commercial financing is the e-commerce retail crediting through credit cards which has 350,000 ATMs within Saudi Arabia. On the other hand, to cite, SABB has engaged in secondary financial investments, such as (1) personal, commercial, corporate, private and Islamic banking, and (2) treasury and trade services to include public industrial sector (SABB 2008). According to SABB’s 2007 financial report, the net assets of SR 98. 2 billion (equivalent to USD $26. 2 billion) has increased from the 2006 net assets of SR 77.
2 billion (equivalent to USD $20. 6 billion). Meanwhile the net profit of SR2. 607 million (equivalent to USD $695 million) has been achieved and far from the year 2006 net profit of SR3. 040 million (equivalent to USD $811 million). The key strategies of SABB can emanate from HSBC’s subsidiary operation in commercial banking, although SABB is a majority stockholder in the paid-up capitalization. The relevant success of SABB that differs from other banks could be on its capability to complement the retail-crediting (credit card) with service-facilities.
Indicative of SABB’s merging with a transnational banking firm, the dominant implementing banking rules and regulations of HSBC could be one of specific issue that may draw impact to SABB’s “secondary investments”, which may separate from the commercial banking operation of HSBC. It may be assessed that the ongoing developments of “capital marketing” could be defeated by financial recession wherein spending is reduced at the volume units of monetization, which means crediting may only apply to viable returns of industry sector aside from individual creditors.
Therefore, SABB’s secondary investments may cushion its cash flows in crediting which could derive its 5-year financial plan to sustain the long-term investments. Findings and conclusion It is generally found that most banks operate in capital or monetized investments, ranging from its capability on financial management. In the Middle East, Islamic banking envisions to partner in the growth of industries and create a business environment that is dealing with a capital market.
However, it may be specifically found that monetized commerce may only favor the strengths of those who are capable of competing with accumulated capital. The retail banking scheme of investments are only meant for limited creditors with limited borrowings. The predicament could be attributed by a lesser capital market that can buffer the monetary exchange. Indicative of the performance of the banks depicted in this research paper, the role of the banks can be described to creating a capital market through industrial partnership.
Somehow, there is only one bank that contributes the relevance of capital market in the growth of industries. It may be further reviewed that the National Commercial Bank (NCB), being a “Saudi Joint Stock Company” under general partnership, could be the bank that attributes its belongingness for the Islamic communities, specifically for Saudi Arabia. Indicative of NCB’s capability in financial asset management, its organizational character is an endowment of a private sector group that may create the independent investments, utilizing the natural resource capacity of Saudi Arabia.
Therefore, a capital market can be created within the requirements of a national industry that belongs to the Saudis. The significance of capital market, where banks has supposed to establish, is attributed by the development of primary and secondary industries, in which the bank may utilize to sustain its financial investments. It may be emphasized that one of the prequalifying determinants of a viable investment under a “banking system” is the establishment of a capital market that can efficiently sustain the economic activities of all sectors in an economy.
It may be summarized that capital market makes available the financial stability of long term investments by strengthening the “liquidity” of economy. In layman’s understanding, capital market is the achievement of economic progress, wherein consumers are empowered with a purchasing power. In which case, by stabilizing a capital market correlates the stabilization of public spending that will provide the “liquidity” or monetary capability to pay the loans or borrowings from the banks.
As acknowledged by an empirical understanding, it may be cited that capital market plays a critical role to consolidate and mobilize a domestic economic resource and the linkages for a more dynamic, efficient and viable investment, wherein the capital build up through savings mobilization can be financially managed by the banks (Hamid 2004). Correlating the above findings on the performance of NCB, the function of its public investment fund can objectively implement the financial asset management that may draw impact to the private sector.
At this point, it is interesting to mention the existence of micro-economies within the ranks of the small business entrepreneurs. While financial asset management is referring to the “fixed assets”, the micro-business ventures can be provided with the necessary “liquidity” of capitalization to pursue the entrepreneurship. In financial asset management, the role of the banks is to assist the borrowers or creditors in availing the funds through guaranty fund facilitation.
A bank can venture out the co-financing by approving the loan and monetize the fixed asset [as exemplified by a real property mortgage] without accrual of interests. The co-financing may as well provide the investment portfolio to the entrepreneur by facilitating the market linkages or business matching, in a way that the bank would be assured of a viable co-financing of the project. The financial asset management acknowledges that anything of value can be monetized and the monetary proceeds will be utilized for such business ventures.
With the similar ideals of NCB, the financial asset management accompanies the entrepreneur to survived the short-term financial plan [as its infancy stage] until the venture achieves the first stabilization period. In conclusion, the roles of the banks in assisting the entrepreneurs to develop an investment are to be provided with necessary capital budget in terms of money and production utilities. As exemplified by the case of entrepreneurship in manufacturing where the bank may provide the needed equity that will form part of the capital build-up.
Just like in financial asset management, in which NCB promotes the realization of industry partnership by streamlining the acquirement of government deliverables to industrial entrepreneurs towards the creation of a viable capital market. List of References Business Monitor International (2008). ‘Saudi Arabia Commercial Banking Report 2008’. [online] available from http://www. businessmonitor. com/banking/saudiarabia. html [08 December 2008] Hamid, N. (2004). ‘Role of Capital Markets in Investment Banking Development’. Asian Development Bank. [online] available from < http://www.
adb. org/Documents/Speeches/2004/ms2004001. asp> [08 December 2008] National Commercial Bank (2008). ‘About NCB’. [online] available from < http://www. alahli. com/content/aboutncb. asp> [08 December 2008] Ruthbard, M. N. (2008). ‘Mystery of Banking’. Ludwig von Mises Institute. [online] available from < http://www. mises. org/Books/mysteryofbanking. pdf> [08 December 2008] Riyad Bank (2008). ‘About Riyad Bank’. [online] available from <http://www. riyadbank. com/wps/portal/! ut/p/kcxml/04_Sj9SPykssy0xPLMnMz0vM0Y_QjzKLd4w39DQESYGZFgH6kShiBvGOCBFfj_zcVP2g1Dx9b_0A_YLc0IhyR0dFAH2tCxE!
/delta/base64xml/L3dJdyEvd0ZNQUFzQUMvNElVRS82X0FfMUJR> [08 December 2008} Samba Bank (2008). ‘About Samba’. [online] available from <http://www. samba. com/ENGLISH/INDEX_01_01_en. html> [08 December 2008] Saudi Arabia British Bank (2008). ‘Profile’. [online] available from < http://www. sabb. com/About%20SABB/Profile/Profile_en. shtml> [08 December 2008] Saudi Arabian Monetary Agency (2003). ‘Globalization: The Role of Institution Building in the Financial Sector’. [online] available from < http://www. banxico. org. mx/tipo/publicaciones/seminarios/XIII-Saudi%20Arabia. pdf> [08 December 2008]