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Feb 03 2011

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Saudi Arabia: Banks

Overview

In recent years the Saudi Arabian banking sector has evolved from a closed market of mostly state-dominated banks to a market supported by a growing number of foreign financial institutions. As of end-2010 the sector comprised 12 locally incorporated commercial banks and 11 branches of foreign banks. Eleven of the 12 local banks are majority private-owned, but the country’s largest bank, National Commercial Bank ( NCB ), is majority owned by the Saudi government through the Public Investment Fund (69.3%) and the General Organisation for Social Insurance (10%); the remaining shares are owned by undisclosed investors. The government holds various minority shares in many other Saudi-incorporated banks.

The NCB’s Saudi Banking Sector Review, published in January 2011, highlighted a shift to recuperation from the 2008–09 financial sector crisis. The majority of Saudi banks recorded moderate growth in the first three quarters of 2010. According to the report, corporate sector demand for funding expanded by 2.6% year-on-year during the third quarter of 2010, marking the third quarter of consecutive growth since its pickup in the fourth quarter of 2009, while consumer lending rebounded from -0.5% in the second quarter of 2009, to 9.2% year-on-year in the second quarter of 2010. Pointing to banks’ high capital buffers, adequate provisions, and ample liquidity, the report noted that net investments in the third quarter of 2010 grew by SR9.2bn and the ratio of bank loans to deposits fell to 77.5% in the third quarter of 2010 from around 80.4% in the third quarter of 2009.

Nevertheless, the picture painted by the Saudi Arabian Monetary Agency (SAMA—the central bank) is less rosy. It reported that the kingdom’s banks earned close to SR24.2bn in the first 11 months of 2010, while net profits for the year are projected to fall short of those in 2009 when banks recorded net profits of SR26.8bn—the sector’s worst consolidated results since 2005. Higher oil prices have boosted the economy, but low lending activity and soaring loan loss provisions—which the NCB admitted will likely remain far above the historical norm—meant that moves to spur lending growth resulted only in an accumulation of excess reserves at the central bank. According to SAMA , the capital-to-assets ratio of commercial banks was 12.83% at end-November 2010, compared to 11.94% at end-2009.

According to the latest available statistics from SAMA , combined bank assets as of end-November 2010 stood at SR1.40trn compared to SR1.37trn as of end-2009. A breakdown of the banking sector’s combined assets revealed that 55% of the total was accounted for by loans to the domestic private sector, 14% by loans to the domestic public sector, and another 14% by foreign assets; the remainder was comprised of cash in vault and statutory deposits.

All the kingdom’s commercial banks offer a broad range of services, but some institutions have established themselves as market leaders in particular areas, often as a result of the expertise of their foreign partners. Samba Financial Group , for instance, has pushed itself to the fore as a provider of investment-banking services, in large part by drawing on the expertise of its former minority shareholder, Citigroup (US). The NCB has led the way in establishing and marketing mutual funds to local savers.

Saudi Arabia hosts four fully operational Islamic commercial banks: Alinma Bank, Al Bilad Bank, Al Jazira Bank and Al Rajhi Bank . But all banks have introduced Islamic products and services as the market for such investments has surged in recent years.

The nucleus of the banking sector is the capital city, Riyadh, where SAMA is based and where the country’s key banks have their headquarters. Jeddah, the traditional trading hub, also has a substantial financial services sector—it hosts much of the insurance business as well as the headquarters of the largest bank in terms of assets, the NCB .

As the authorities try to develop Riyadh as a financial centre, they will continue to face competition from existing financial centres in the region, such as Bahrain, Dubai and Qatar. However, the risk to Saudi banking is limited, as international and regional banks are likely to continue to need an on-the-ground presence in order to do significant business in the kingdom—which is by far the largest of the Gulf Co-operation Council (GCC) markets. The GCC was established in 1981 as a political and economic bloc; its members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The GCC is not expected to introduce EU-style financial services "passporting" in the coming years given the interest of each of the states in retaining banks on its own territory. Moreover, as the kingdom’s financial sector becomes increasingly sophisticated, the importance of offshore banking units in Bahrain and Dubai, previously major players in Saudi Arabia, is diminishing.

Banks dominate the financial sector; other institutions are still only marginal players despite their increasing relevance and breadth. The passage of an insurance law in 2003, for instance, has brought greater depth to the market by attracting new foreign and domestic insurers. However, insurers do not offer financing, as is common in other countries.

Bank regulators

The Saudi Arabian Monetary Agency ( SAMA ), based in Riyadh, is the kingdom’s central bank and is under the supervision of the Ministry of Finance. SAMA issues currency and regulates commercial banks and other financial institutions under its control. It manages the government bond programme, oversees the foreign-exchange market and stockmarket, and manages the nation’s electronic debit-payment system. SAMA also closely monitors international loan syndications and has a say in any government or private-sector moves to develop financial institutions, systems and instruments. The Ministry of Commerce and Industry also has a role in licensing banks and certain areas of regulation related to the stockmarket and government-bond markets, but SAMA is the dominant force. The Capital Market Authority (CMA), the Saudi stockmarket regulator, is responsible for licensing and regulating investment-banking, brokerage, asset management, corporate advisory and custodial activities.

Staffed largely by Western-educated technocrats, SAMA is well regarded as an efficient and effective regulator. It has been the driving force behind most efforts in recent years to strengthen and reform the banking and financial services sector. It has broadened the range and depth of its supervision and has stepped up disclosure requirements for the banks it oversees. For example, in 2000 SAMA decreed that all banks adopt International Accounting Standards Nos. 34 and 39. These rules standardise accounting norms between interim and annual reports (No. 34) and establish guidelines for valuing certain assets in company balance sheets (No. 39). SAMA also introduced rigorous disclosure requirements for banks in relation to money-laundering legislation enacted in the aftermath of the September 2001 terrorist attacks in the United States.

SAMA carries out a full review of the operations of each bank every three years and more regular assessments of specific functions within each institution. Aside from the formal inspection process, the small number of operational banks allows SAMA to stay closely informed about financial sector developments on an ongoing, informal basis.

SAMA has intervened to support banks that have found themselves in difficulties, and it is widely believed that no bank failures will be allowed. It intervened most explicitly in the early 1960s when it saved Riyad Bank from insolvency. It acted to ease the panic that followed the 1990 Iraqi invasion of Kuwait, which directly threatened Saudi Arabia’s own security. Given the general strength of the Saudi banking sector, SAMA did not intervene directly to shore up Saudi banks in the wake of the corporate scandal involving the Saad and Ahmad Hamad Algosaibi & Brothers conglomerates in 2009, which were estimated to have a record amount of toxic debt. According to a 2009 report by HSBC (UK), Saudi banks may have between US$4bn and US$7bn in lending exposure to these troubled organisations. On September 17th 2009, local newswire Zawya reported that an agreement had been reached between Saad Group and local banks to settle about US$2.6bn in outstanding loans; however, no official details had been confirmed at that time. In the most recent developments, by February 10th 2012, ten Saudi banks had filed claims with SAMA amounting to US$2.4bn. The largest claim came from the Saudi Investment Bank, which filed for US$533m.

SAMA exercises broad control over the local availability of credit by enforcing the provisions of the Banking Control Law of 1966. Among the important regulations are the following:

• A bank’s risk-weighted capital-to-assets ratio must exceed the agreed minimum international standard of 8% (under Basle I; Saudi Arabia and the other Gulf Co-operation Council states implemented Basle II standards by end-2008 which maintained the 8% ratio).
• Total deposits may not exceed 15 times a bank’s capital and reserves.
• Loans to a single customer may not exceed 25% of a bank’s capital and reserves, and exposures of more than 10% must be reported to SAMA .
• Lending to shareholders and other related parties is limited to 10% of a bank’s capital.
• Banks must maintain a liquid-asset level of 15% of deposit liabilities. Banks may not hold more than a 10% stake in any company.
• Banks must keep 7% of their demand deposits and 2% of their time/savings deposits with SAMA in non-interest-bearing accounts. The banks may not access these statutory requirements.

In addition to SAMA and the Ministry of Commerce and Industry , the clergy (ulema) play an occasional role in banking by ruling on whether certain instruments contravene Islamic law. There are occasional difficulties, but the clergy have proved to be quite lenient in their interpretation of what constitutes a violation of Islamic prohibitions on the charging or payment of interest. Ultimately, they have caused little disruption to the financial markets.

In November 2008 SAMA published anti-money-laundering (AML) and anti-terrorist-financing regulations for insurance companies, aimed at codifying existing royal decrees and legislation and adopting international standards promulgated by the Paris-based Financial Action Task Force. According to Article 15 of the Insurance Implementing Regulations, companies must commit to developing written policies aimed at combating money-laundering and terrorist financing. Companies are also required to co-operate with the Financial Intelligence Unit of the Ministry of the Interior to ensure the implementation of internationally accepted accounting and reporting standards. The following month, SAMA published similar regulations for financing companies in general. These regulations require employees to be trained in how to detect suspicious transactions, how to improve record management and how to handle external audits.

To implement its range of AML rules, SAMA has instituted a separate Anti-Money-Laundering Committee to oversee the community of government agencies involved in AML, including, among others, the Customs Department and the Ministries of Finance, Interior and Justice. According to the AML regulations, those found guilty face jail sentences of up to 15 years, fines of up to SR7m, and the confiscation of assets and proceeds connected with the crime.

Regulatory watchlist

Saudi Arabia’s decade-long pursuit of a comprehensive mortgage law shows no sign of ending any time soon, despite assurances in 2009 that the law would pass in early 2010. The legislation—if it is ever implemented—is expected to revolutionise housing finance in Saudi Arabia, where the mortgage-finance market is virtually nonexistent.

The Saudi housing market is likely to offer significant opportunities for public and private firms alike, but only after the implementation of clearly defined legislation on property ownership, property repossession, enforced eviction and asset liquidation in the case of delinquency. It is hoped that the eventual ratification of the law could facilitate the growth of the asset-securitisation industry, providing housing loans, although such a development might require the approval of Islamic jurists. It is also anticipated that, once legal uncertainties concerning home ownership are settled, international mortgage companies and specialised banks will be keener to enter the Saudi market.

Historically, to circumvent the lack of clearly delineated mortgage laws, Saudi banks created new methods of mortgage financing. For example, Saudi British Bank launched a housing-finance product in June 2001, as a joint venture with the Saudi Real Estate Company, whereby the bank legally owned the property during the term of the loan. Saudi Arabia’s instalment-finance sector, which helps finance consumer consumption, may also facilitate mortgage financing in the future.

In November 2008 the managing director of Saudi Home Loans (SHL), an Islamic mortgage lender, said that only 30% of Saudi nationals owned their homes, although official estimates tend to be higher. With no formal mortgage legislation and only limited state help, middle- to low-income Saudis have been reliant on family support or occasional government grants to purchase houses.

The residential market is also substantially undersupplied: Citigroup (US) warns of an undersupply of residential units of up to 800,000 by 2012, and property consultant Jones Lang LaSalle (US) has said it expects Saudi Arabia to face a shortfall of 1m homes by 2012.

New legislation for reinsurance activities, which had previously been published in draft form in November 2008, was officially published in October 2010. The key requirements of the new regulations include that reinsurance strategies must be submitted to the Saudi Arabian Monetary Agency (SAMA—the central bank) for approval on an annual basis; that internal controls must be established to monitor a company's reinsurance arrangements; and that companies must submit a report on the financial implications of their reinsurance programs to SAMA , including details of profit-sharing commissions, loss-sharing mechanisms, the cap on the reinsurers’ total liability and aggregation limitations. As per the existing Insurance Law and Regulations, insurance companies in Saudi Arabia must retain not less than 30% of total written premiums and cannot cede more than 40% of their premiums to reinsurers outside the kingdom without SAMA approval. The new legislation is intended to provide standards and guidance to the burgeoning insurance sector. Its impact on the industry, once fully implemented, could be enormous, by demonstrating to foreign insurers and reinsurers in particular the growing transparency and stability of the sector. However, as of February 2011, it was unclear when the legislation would be fully implemented.

Domestic banks

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The first stop for any corporate or project borrower is one of the commercial banks specialising in these types of credit, or one of the well-known nonbank investment and financial-consulting firms. Financial-advisory services are available from all the major banks, several private firms and some banks located abroad. Fixed-rate, long-term debt financing is difficult to secure. Most commercial banks still primarily provide short-term financing, in large part due to their short-term balance-sheet liability structure. However, banks are increasingly lengthening the terms on loans, reflecting their growing sophistication. Most of the major banks act as universal banks.

Saudi Arabia’s economy—and indirectly its banking sector—is highly dependent on oil exports. After a relatively stagnant 2009, prices began to rise again in 2010 and that was immediately reflected in the Saudi economy, as higher prices supported increased levels of government expenditure, consumer confidence and loan demand from the private sector. By the end of 2010, the price of Saudi Arabia Light—the kingdom’s benchmark oil—had risen to US$91.37 a barrel from US$71.97 at end-2009 and US$38.35 a barrel at end-2008.

According to the Saudi Arabian Monetary Agency (SAMA—the central bank), total banking sector assets amounted to SR1.38trn at end-September 2010 (the latest period for which individual bank figures are available). The largest private domestic bank was the Samba Financial Group with total assets of SR185.0bn and a market share of 13.4%. Al Rajhi Bank came in second place with SR181.5bn in total assets (13.2% market share) and Riyad Bank came in third with SR171.7bn (12.5%).

The number of retail branches of domestic banks grew from 1,496 at end-2009 to 1,569 at end-November 2010, according to the most recent SAMA figures. Savings, mortgage and co-operative banks do not exist as such in Saudi Arabia.

The eventual introduction of a mortgage law in Saudi Arabia, still pending in early 2011, will bring mortgage financing capabilities to the major commercial banks. The widespread establishment of mortgage-specific entities, however, will likely take a longer time to realise. All commercial banks offer savings accounts as part of their broader retail-banking services. To ease Islamic sensibilities on the payment of interest, these “investment accounts” are often operated on a mudarabah, or profit-sharing, basis. Under this system, payment on a savings account is linked to the profit generated by the bank as a whole. Current accounts offer no remuneration.

Islamic finance, particularly in the Gulf, has grown at double-digit annual rates for over a decade. According to the most recent figures from Standard & Poor’s (the US-based ratings agency), the assets of the top 500 Islamic banks globally had expanded by 28.6% to reach US$822bn at end-2009. (Detailed figures for Saudi Arabia are not available.) Islamic financial institutions and banks—such as Alinma Bank, Al Bilad Bank, Al Jazira Bank and Al Rajhi Bank in Saudi Arabia—have been somewhat insulated from the difficulties in global finance that began in 2008. This insulation is in part because of their prohibition against handling interest-based financial instruments—a significant contributor to the derivatives market—the values of which slumped in the wake of the global downturn. The general economic slowdown resulted in a knock-on effect on all forms of finance, but local market analysts believe the Islamic finance institutions will weather the effects with ease.

All commercial banks had to spin off their investment-banking, brokerage and asset-management divisions into separate legal entities by the end of the second quarter of 2007. As a result, some banks created new divisions and subsidiaries to conduct their portfolio-management and investment-banking operations.

According to an August 2010 report by local asset management firm Al Masah Capital, Saudi women are estimated to be sitting on US$11.9bn in cash alone. As a consequence, in addition to expansion in most banking areas, women-only banking services (in separate or segregated branches) are also likely to expand further. This market is already well established, but banks have stepped up their efforts to market their services to women in recent years and are likely to develop their product offerings further (with more incentives such as loyalty programmes, discounts and events for customers) in line with the regional trend of greater market segmentation.

Saudi Arabia’s biggest bank in terms of assets, National Commercial Bank , boasts 46 female branches while Saudi Hollandi Bank has announced it is to increase the number of women-only outlets it offers from 11 to 15 in 2011. Meanwhile Al-Rajhi Bank launched its Ladies Wealth Management division in 2010; this is in addition to the Al Jawharah Ladies Fund, which targets Saudi women seeking diversified investments. There is also increasing interest on the part of Western financial institutions in catering to wealthy Saudi women, for example, through investment banking or wealth management.

Foreign banks

The passage of the Capital Market Law in July 2003, among other changes, encouraged the limited entrance of foreign branch banks into Saudi Arabia. It also facilitated the kingdom’s entry into the World Trade Organisation in December 2005, which in turn made financial services in the kingdom more transparent. Furthermore, given that Saudi banks are among the largest and most profitable in the region, there is little threat to their well-being from the incursion of neighbouring competition. In fact, Saudi banks could stand to gain from the policy, should reciprocal access to other Gulf Co-operation Council (GCC) markets be granted. However, there had been no developments in this regard as of February 2011.

Eleven majority foreign-owned banks operate in the kingdom through branches. In October 2000 the Saudi Arabian Monetary Agency (SAMA—the central bank) granted a licence to Bahrain-based Gulf International Bank (GIB) to open an office in Riyadh. This was the first licence to be issued to a foreign bank in many years. All of the other GCC governments have a small stake in GIB, although Saudi’s Public Investment Fund is the majority shareholder with a 97.2% stake. Despite the small foreign presence in the bank, it still considered a foreign bank by SAMA standards.

Since granting the licence to GIB, the Saudi government has approved similar operating licences for Emirates Bank International of the United Arab Emirates (February 2002), National Bank of Kuwait (September 2002) and National Bank of Bahrain (September 2002). All three banks opened branches in Saudi Arabia during 2003. Deutsche Bank (Germany), BNP Paribas (France), JP Morgan Chase (US), Bank Muscat (Oman), State Bank of India and National Bank of Pakistan followed in 2004–06. TC Ziraat Bankasi (Turkey) in late 2009 became the latest (and 11th) foreign bank to open a branch in Saudi Arabia as of early February 2011. That could be the last branch of a foreign bank to open in the kingdom, at least in the short term; due in part to the tough international financial environment, SAMA froze the extension of new licences to foreign banks in late 2009 and no new banks have since entered the market.

Foreign presence in banking is not limited to branches, however. Western banks have maintained minority holdings in some of the kingdom’s largest banks for decades. HSBC (UK) has a 40% stake in Saudi British Bank; Crédit Agricole (France) has a 31% share in Banque Saudi Fransi; and ABN AMRO (Netherlands) has a 40% share in Saudi Hollandi. Citigroup (US)—one of the first foreign banks to establish a presence in Saudi Arabia, in 1955—sold its 20% stake in the Samba Financial Group to the government’s Public Investment Fund in May 2004. Citigroup and Samba already agreed in October 2003 to end their technical management agreement, which had existed since Samba’s establishment in the 1970s.

Investment banks and brokerages

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The major Saudi commercial banks dominate the investment-banking market through specialised corporate finance divisions. The domestic commercial banks used to have a monopoly over primary and secondary dealings in stocks and government securities. This monopoly was broken under the Capital Market Law passed in July 2003, which allowed the establishment of independent brokerages that operate on a formal stock exchange under an industry regulator. Before the promulgation of the Capital Market Law, the well-regarded private firm Rana Investment was the only domestic nonbank institution providing financial-advisory and investment-banking services. But since the passage of the law, spurred by burgeoning development options and record-high oil prices (which generated wealth), foreign and domestic financial services firms have rapidly entered the Saudi market.

Saudi Arabia’s accession to the World Trade Organisation in December 2005 also helped make the financial sector more transparent. According to figures from the Saudi Stock Exchange, the Tadawul, as of November 2010, the largest firms ranked by monthly trade value were Al Jazira Capital, Al Rajhi Capital, SABB Securities, Samba Capital and NCB Capital.

The US-Saudi Arabian Business Council in September 2007 (most recent available) reported that the Capital Market Authority (CMA), the Saudi stockmarket regulator, had granted 67 licences to investment companies to operate in the kingdom. The liquidity crunch of late 2008 and 2009—and the subsequent reluctance of numerous financial services companies to expand—has stymied the expansion of investment banks and brokerages in Saudi Arabia; moreover, the authorities in mid-2008 began slowing the issuance of licences for fear of market saturation.

Despite the slowdown, a handful of notable foreign financial institutions have recently entered the market. In 2009 UBS Financial Services (Switzerland) and Standard Charted Capital Saudi Arabia (UK) began to operate in the country. In 2010 Barclays (UK) launched an investment banking and wealth management arm to tap the growing market of wealthy corporate houses and individuals in the kingdom. Saudi Arabia became the fourth country Barclays has entered, after Egypt, Qatar and the United Arab Emirates. Société Générale (France) was granted a license in 2009 and said it would begin offering corporate and private banking services in 2010 but this had not yet occurred by February 2011.

Morgan Stanley (US) signed an agreement in April 2007 to partner with Saudi-based Capital Group to offer investment-banking services. Morgan Stanley owns the majority stake (though the exact amount was not specified) in the venture—named Morgan Stanley Saudi Arabia—with offices in Riyadh, Jeddah and Alkhobar. In January 2009 Morgan Stanley Saudi Arabia launched an open-ended fund to invest in Saudi equities and initial public offerings, and in June 2009 it launched equity trading on the Saudi Stock Exchange, the Tadawul. In September 2007 Saudi Hollandi Capital received a licence to provide financial and consultancy services and hold client portfolios. Regional financial services companies also entered the Saudi market in 2007, including Watheeqa Capital (Kuwait) and Shuaa Capital Saudi Arabia (United Arab Emirates-Saudi Arabia), among others.

In 2007 Falcom Financial Services Company became the kingdom’s first investment bank to offer comprehensive shariah-compliant (that is, in agreement with Islamic law) investment and financial services. Falcom is privately owned by Saudi investors. In 2008 Falcom partnered with Saudi Hollandi Bank to offer shariah-compliant structured notes, and in 2009 Falcom partnered with the private Rafal Real Estate Development Company to launch a US$160m real estate investment fund. In March 2010 Falcom received approval from the CMA to launch the first and second Saudi exchange-traded funds (ETFs), in a bid to boost foreign investment in the kingdom. Previously, nonresident foreigners were only permitted to trade through share-swap transactions through authorised dealers.

Development and postal banks

There are no financial institutions in Saudi Arabia analogous to the development banks of other countries. Instead, Saudi Arabia has five government development funds, or specialised credit institutions, which have a long history of providing funds to the kingdom’s agricultural, industrial-project and real estate sectors—in effect, offering a form of development assistance. These institutions provide subsidised funding to areas targeted for special development support, but there has been little net lending. Saudi Arabia’s increasingly sophisticated financial markets and readily available access to capital have lessened the importance of these specialised institutions in providing long-term financing.

The Public Investment Fund (PIF) provides low-cost medium- and long-term loans to what the Saudi Arabian Monetary Agency (SAMA—the central bank) terms “commercially orientated public corporations”. This refers principally to the state airline, Saudia, and the large conglomerate Saudi Arabia Basic Industries (SABIC), though other interests also have benefited. At the end of 2009, according to the most recent SAMA figures, the fund’s total outstanding loans stood at SR42.1bn, up from the SR28.7bn a year earlier, a rise of 46.7%. SABIC signed an agreement for a private bond placement with PIF in late December 2009. The placement is worth an estimated SR10bn and proceeds from the bonds, which will carry maturities of seven years from the date of each issue, are intended to finance a portion of SABIC’s strategic expansion. In August 2010 PIF announced that it would sign a financing agreement worth some US$2.6bn with the Saudi Arabian Mining Company (Maaden)—which is 50% owned by PIF—and Alcoa (US). The joint venture between Maaden and Alcoa is to build a fully integrated industrial complex, including a bauxite mine, an alumina refinery, and aluminium smelter and a rolling mill—it is expected to be one of the most technologically advanced complexes in the world.

The Real Estate Development Fund was founded in 1975 and provides subsidised funds for urban development, mainly the construction of new residential property. For personal mortgage use, the fund grants interest-free loans for up to 70% of the value of a home, repayable over 25 years. For investment purposes, the fund finances up to 50% of the construction costs. At end-2009 outstanding loans stood at SR76.8bn, compared to SR75.4bn at end-2008, according to most recent SAMA figures. Despite the boom in the housing market, the fund’s loans have remained relatively constant, a sign that Saudis are tapping private commercial banks for housing finance. The value of loans disbursed by the fund in 2009 was SR5.3bn, up from SR5bn in 2008.

The Saudi Arabian Agricultural Bank was established in 1961 to provide financing for irrigation and agricultural projects. Through some 70 offices across the country, the bank extends loans that are usually interest-free and repayable over a period of 15 years. These loans are part of the government’s long-held but diminishing strategy of reducing dependence on imported foods. At end-2009 the bank’s total outstanding loans stood at SR9.5bn, according to the most recently published data provided by SAMA , down just 0.4% from the figure at end-2008. Lending has stabilised since the initial drive to boost agricultural production, and outstanding loans have remained more or less unchanged since the mid-1990s.

The much smaller Saudi Credit Bank, founded in 1973, extends interest-free credit to support low-income individuals for home improvement, marriage, vocational training and the purchase of cars for use as taxis, as well as for small-scale business activities. The bank’s total outstanding loans at end-2009 amounted to SR14.2bn, up from SR9.9bn at end-2008. According to local market analysts, there is speculation that the large jump in lending may have been due to the slump in lending in the private banking market during 2009.

The Saudi Industrial Development Fund (SIDF), established in 1974, offers subsidised medium- and long-term credits to private-sector industrial projects. The loans are part of the government’s effort to diversify the kingdom’s industrial base away from oil, reduce import dependence and boost non-energy exports. Under the Foreign Investment Act of April 2000, majority foreign-owned ventures can gain access to funds, provided projects are in line with the government’s development goals. Loans are extended for a maximum of 15 years, with the repayment schedule designed to match the projected cashflow of the borrowing projects. SIDF finances up to 50% of fixed assets, pre-operating expenses and start-up working capital for approved projects. According to the latest figures from SAMA , at end-2009 outstanding loans stood at SR20.9bn, up from SR17.2bn at end-2008.

As part of the kingdom’s 2011 budget, it was announced that specialised credit institutions such as the PIF, the Real Estate Development Fund, and the Saudi Credit Bank will receive SR47bn over the course of the year, to support housing and industrial projects and small and medium-sized enterprises. According to the Ministry of Finance, these institutions, along with others including the Saudi Industrial Development Fund and Government Lending Programme, have disbursed SR414.3bn since their inception in loans to support housing and industrial projects and small and medium-sized enterprises. And while the allocation is some 2.7% smaller than that in the 2010 budget, analysts have interpreted the shift as an effort to reintegrate Saudi and foreign investors into the development process.

There is no postal bank in Saudi Arabia.

Offshore banks

There are no offshore banking centres that operate outside the normal regulatory environment. Offshore entities that play a role in Saudi Arabia’s financial system are based outside the kingdom (in Bahrain and Dubai, for example).