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Saudi Arabia in a connected world

By Paul McNamara For many in the Islamic finance industry in the Gulf - and the rest of the world - the Kingdom of Saudi Arabia is seen as something as a beacon of hope. This is not simply because KSA is the home of Mecca and other holy sites but because the nation has such vast reserves of oil, estimated at 20% of total world supply, and, with it, vast wealth.

Because KSA is also rather isolationist, it is often easy to imagine that it can avoid the worst vagaries of the world markets when they fall into turmoil, as they have done over recent weeks. Sadly for Islamic finance houses in KSA this is not always the case and they are reminded that the world of financial services is just one vast pond with a small pool of Islamic finance at one end. When there is a big splash at one end then the ripples can be felt all over the place.

Shares in KSA fell dramatically over a two week period ending on Saturday August 20 as reports signaled that the global economic recovery was faltering, making investors more risk averse and as oil declined. Shares in Al Rajhi Bank , KSA's largest publicly traded lender and paragon of Islamic banking, sank more than 2% during the two week period and the Tadawul All Share Index lost 2.6% to finish at 5,931.29 - extending this month's slump to 7.2% and plunging below the psychologically significant 6,000 mark. The market will close on August 27 for Eid Al Fitr and open again on September 3.

So what had happened in KSA itself to justify such a market rout? The answer is 'nothing much' and the market seemed to be reacting to negative signals coming from other markets as well as the weak economic performance in Europe and the US. If global equities and commodities fall then so will the Saudi market it seems. Estimates have it that upwards of $8trn has been wiped from the value of global equities in the past four weeks over worries that the US may enter a recession and the European debt crisis unfolds.

Al Rajhi Bank is by no means the only Islamic lender in the kingdom to see its share price come under pressure and similar drops can be seen at Saudi Hollandi Bank , Bank Al Jazira , Riyad Bank , Banque Saudi Fransi , Alinma Bank , Bank AlBilad and Samba, amongst others.

Jarmo Kotilaine, chief economist at the National Commercial Bank of Saudi Arabia told Arab News: "The renewed market turbulence in Saudi Arabia highlights the persistent sensitivity of the national market to global concerns. Even though the Saudi economy can be expected to be very resilient in the face of a severe global crisis thanks to its strong fundamentals and large reserves, external shocks have persistently exerted a pronounced negative effect throughout the global crisis. This is partly due to the heavily retail investor-driven nature of the regional markets in the GCC."

Thankfully the rout does not appear to have afflicted the Saudi Takaful space to the same extent as it has the Islamic banking sector. While the stock prices of SABB Takaful, Al Ahli Takaful Company, Solidarity Saudi Takaful Company, Al Rajhi Company for Cooperative Insurance and Weqaya Takaful Insurance and Reinsurance Company have all seen gyrations of their own, the downward pressure over the past week on their share price has been much less on these companies than on the banks. In part this might be explained by the lower volume of trading in these stocks but the essentially 'insularity' of a domestic Takaful industry is likely to provide more of a buffer that the banking sector simply does not have.

The undisputed conclusion is that companies with an international exposure in KSA do worst when things are tough: Saudi Basic Industries Corp., or Sabic, the world's biggest petrochemicals maker for instance saw its share price dive by 2% over the past two weeks.

There are many who would hope that the Islamic finance industry - and the banking market in particular - should be isolated from the conventional world for the very reason that debt-riddled economic collapses in conventional financial markets tend to spill over into the Islamic finance realm. The reality seems to be that even the relatively isolated Saudi economy, and within that the Islamic banking sector, cannot withstand such extrinsic shocks as sovereign downgrades and speculative collapse of the eurozone. This might hint at 'better' way of doing things in the future, which is, after all, what Islamic finance is supposed to be about.

© The Islamic Globe 2011