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Feb 03 2011

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Saudi Arabia: Cash management

Overview

Bank deposits remain the principal outlet for excess funds. Commercial banks accept demand and time deposits for periods ranging up to 12 months. About 50% of all banking-system deposits are demand deposits or otherwise do not pay interest. Treasury bills offered by the Saudi Arabian Monetary Agency (SAMA—the central bank) offer another straight, short-term investment instrument, but there is no sizeable secondary market for them.

Investment funds (mutual funds) have gained widespread acceptance in recent years and are a growing destination for investors. Equally important is the advent of Islamic investment accounts, which have become increasingly common as Islamic banking and finance become more popular. Islamic funds do not participate in the money market per se—as Islamic law prohibits charging interest—but the result is very similar to typical money-market instruments in terms of rates and liquidity.

Most bank credits in Saudi Arabia are short term in nature—usually self-extinguishing overdraft facilities or loan terms of one year or less. Short-term bank credit totalled SR466bn at end-November 2010, according to SAMA . This constituted 60% of all bank credit (which amounted to SR774bn), compared with 61% in 2009 and 64% in 2008. The decrease in the share of short-term financing relative to longer terms is indicative of the rush to liquidity in the difficult financial market that began in 2008 and continued into 2009 and 2010.

Some banks offer short-term cash facilities in the form of one-, three- or six-month rollovers that the bank has the right to call. Banker’s acceptances, commercial paper and factoring are not commonly used financing techniques, although some banks put their own acceptances on letters of credit.

Personal relations still interfere with lending policy, but standards have become more professional—though those individuals with connections to the large ruling family still receive special treatment. The kingdom gradually has evolved from the informal and easy credit market of the 1980s—which contributed to massive loan defaults during the 1985–89 recession—to a market with greater uniformity and international lending standards.

Most financial instruments relating to the currency market are available in Saudi Arabia, and the market is relatively active because of the kingdom’s importance in the international trade of petroleum. But instruments for interest-rate products are limited because of the regulatory antipathy that exists with regard to the payment of interest, which is contrary to Islamic law, and limited enthusiasm among the public. Complex derivatives are virtually unknown.

Cash management

Saudi Arabia long ago ceased being a cash market. It has a highly evolved consumer and commercial credit industry. All commercial banks have introduced sophisticated cash management systems that include computerised processing with customer terminals. Until recently, banks supplied little corporate cash management advice and the little that was on offer was rarely accessed. However, the severe economic slowdown of the mid-1990s and greater competitiveness among banks stimulated new technology investments, resulting in both banks and corporate borrowers spending more energy on all aspects of cash management. In October 2010 Euromoney voted the Saudi British Bank (SABB) the best bank in Saudi Arabia for cash management for a third consecutive year.

According to the latest data published by the Saudi Arabian Monetary Agency (SAMA—the central bank), the number of payment cards in circulation—such as those used for ATM (automated teller machine) and EFTPOS (electronic funds transfer point-of-sale) transactions—had decreased by 14.2% as of end-November 2010 to just under 12m, from 13.7m as of end-2009. This brought an end to five consecutive years of double-digit annual growth. However, increases were shown in the number of accepting terminals. The number of ATMs increased to 10,979 as of end-November 2010 from 9,950 as of end-2009, a rise of 10.3%. The growth in ATMs since 2000, when only 2,222 were in operation, has been remarkable.

Saudi Arabia’s commercial banks created the kingdom’s first consumer credit-rating agency, the Saudi Credit Information Company (SIMAH), or Saudi Credit Bureau, in April 2004. Participating member banks disclose credit-related information to and obtain information from the bureau to assess the creditworthiness of their existing and prospective customers. The bureau facilitates higher levels of transparency in the consumer-credit market. Before the launch of the bureau, commercial banks shared a blacklist of defaulters and conducted their own ad hoc credit assessments. In January 2009 SIMAH and ratings agency Standard & Poor's signed an agreement to build a common national database that measures credit risk and helps bring Saudi banks in line with Basel II standards.

SIMAH provides credit reports, which aggregate consumer credit information collected from its participating members (such as Saudi banks, real estate, telecom and financial companies) and public records. The aggregated information is then provided in standardised format to participating members who need to assess the creditworthiness of current or prospective borrowers. SIMAH has launched campaigns on financial awareness to guard against the increasing frequency of cheque-bouncing, and in January 2011 it said that the total number of bad cheques during the third quarter of 2010 was half the amount written in the same quarter of the previous year. It said that 21,781 bad cheques had been written in the third quarter of 2010, compared to 43,457 in the third quarter of 2009.

In August 2010 it was announced that the Bureau of Investigation and Prosecution would take legal action against persons writing bad checks, following a cabinet ruling setting penalties for the offence, which include prison and public defamation through local media outlets. Settlement offices may exempt defendants from prison if they subsequently pay the sum owed or if a settlement is reached between the parties involved. However, if a person issues another bad cheque within three years of being convicted of a first offense, he or she will be fined SR100,000 and sentenced to five years in prison.

Sales terms vary considerably, according to the consignor, the consignee, and the value and type of goods. Credit sales followed by cash collections are a common payment method. Debts that are not paid within credit terms are first subject to negotiation and attempts at compromise, then require intensive efforts to collect if unresolved.

US-based Western Union Financial Services has entered into strategic alliances with Al Bilad Bank and Samba to provide money-transfer services to its customers in Saudi Arabia. Saudi Arabia is a major source of remittances, particularly to south Asia, necessitating a wide range of options for fund transfers.

In January 2009 SAMA issued a directive to inform all citizens and residents operating money-exchange businesses that a valid licence must be obtained from SAMA to operate within the kingdom. The short directive warned individuals exchanging currencies, purchasing travellers’ cheques or transferring funds inside or outside the kingdom to make sure they deal with licensed money exchangers who display their official licence at a prominent location in their shops.

There are no restrictions on cash pooling. SAMA must approve crossborder transfers. Major banks offer this cash-management service.

There are no restrictions on foreign or domestic currency accounts held by residents or nonresidents. Nonresident companies and individuals may borrow locally with prior approval from SAMA .

Netting services are not permitted in Saudi Arabia.

Payment clearing systems

The Saudi Arabian Monetary Agency (SAMA—the central bank) owns and operates the Saudi Arabian Riyal Interbank Express (SARIE), which began operations in May 1997. It is a modern payment-settlement system, and it has become the basic infrastructure on which a number of advanced payment-settlement systems depend. Those systems include the Automated Clearing House (ACH) and the Saudi Payment Network (SPAN—upgraded to the second-generation SPAN2 in May 2006), which connects ATM (automated teller machine) and EFTPOS (electronic funds transfer point-of-sale) terminals. It also includes the banknote-settlement system. The technical improvement and the modern banking services that SARIE contributed to the Saudi banking sector are considered pivotal events in the history of the kingdom’s payment-system development.

SPAN2 is the national ATM and EFTPOS network that connects all Saudi banks and provides a common service point in the kingdom. The network has facilitated transaction availability regardless of terminal ownership. The movement towards electronic transactions has reduced the overall demand for bank notes and increased the uptake in banking facilities. SPAN2 has increased the efficiency in the banking sector by avoiding ineffective competition at the transaction delivery points.

SPAN2 provides other banking services as well, such as supporting international-association transactions, including those of Visa and MasterCard, originating either within or outside the kingdom. SPAN2 has direct connections to these associations and provides connectivity in a pass-through mode to the Saudi banks. This support includes a full range of credit- and debit-card transactions at both ATM and EFTPOS terminals.

Receivables management

Although larger creditors are protected by the mechanisms for default-collection under the central bank’s Board for the Settlement of Commercial Disputes, no effective mechanism has been established for smaller debt disputes. As a result, collection is often time consuming, laborious and expensive. Some companies anticipate writing off a percentage of bad debt; others seek settlement through discounting, rescheduling or bartering. Debt-collection companies have proliferated in recent years, and they use the same methods to secure repayment as those in the West.

Court settlements may be obtained against debtors, especially if signed contracts can be produced. The Saudi tradition of negotiation and compromise, however, pervades the judiciary, and authorities almost always will attempt to guide parties towards settlement. In addition, some practices, such as foreclosure, are rare. Since no official bankruptcy figures are published, it is difficult to assess trends in the legal system with regard to the actual enforcement of judgments.

Payables management

Payables management is becoming a fine art, with businesses giving greater attention to the timing of their obligations and receipts. The periodically sluggish economy and related liquidity shortages have the virtue of forcing all businesses to concentrate on improving their cash-management practices and, in the process, increasing efficiencies in receivables and payables management. Corporate finance departments of major banks continue to aid this process by offering cash-management advice to their clients.

As the use of electronic payments has surged, cheques are declining in importance as a noncash payment instrument. The use of post-dated cheques is prohibited, and violators can be fined or imprisoned if found guilty.

The Saudi Arabian Monetary Agency (SAMA—the central bank) established the SADAD Payment System in October 2004 to be the national electronic bill presentment and payment service provider for the kingdom. SADAD facilitates consumers’ bill payment transactions through commercial banks. Government ministries and a range of commercial enterprises have incorporated the SADAD system to facilitate payments between one another.