Saudi Banks Go From Humble Beginnings To Global Players – OpEd

By Dr. Mohamed Ramady*

Today, Saudi Arabia is home to nearly 30 percent of the GCC’s total banking assets and the largest in terms of market capitalization.

The journey has been a mirror of the Kingdom’s economic development, from a mixture of foreign operators to the 1975 requirement that all commercial banks be majority-owned by a local partner — the so-called “Saudization” policy to the ongoing mega-mergers of banks.

The Saudization option to the foreign bankers was a simple choice: Either conform, benefit from a countrywide branch expansion, gain access to a larger market and retain management control, or leave. No one left, however.

In the 2000s, an increasingly confident Saudi Central Bank, then known as the Saudi Arabian Monetary Agency, began to open the domestic market to majority foreign-owned commercial and investment banks eager to participate in the opportunities provided by the liberalization and economic initiatives of the Vision 2030 program.

It has come full circle, except this time, the local Saudi banks can stand on their feet and compete in all spheres of banking with their foreign competitors.

In 2020, the Saudi banking sector comprised 13 local banks, five of which held assets with more than SR200 billion ($53.3 billion). The National Commercial Bank was the largest with assets of SR510 billion while the other Saudi megabanks included Al-Rajhi (SR384 billion), Riyad Bank (SR265 billion), and Saudi British Bank (SR270 billion) following its merger with Alawal Bank.

The allure of globalization and domestic liberalization swept through many global financial centers as regulators had to keep abreast of the latest controls to ensure the soundness of their local banking systems.

To meet these regulatory responsibilities, its name was changed to the Saudi Arabian Monetary Authority in 2016 as supervision of banks would now take a higher role for the newly named “authority.” It was then converted to a central bank in November 2020, but continued using its old acronym “SAMA.”

The new influx of foreign banks in the Kingdom was led by BNP Paribas and JP Morgan Chase, and as of June 2021, 18 other regional and global financial institutions joined them. But with 20 local branches compared to the Saudi banks, it highlighted the preference for investment banking activities of foreign banks as opposed to retail branch business.

There are exceptions with three GCC banks — Emirates NBD, National Bank of Kuwait, and First Bank of Abu Dhabi — as they account for 10 of the 20 local branches due to inter-GCC economic relations and GCC citizens using these branches to carry out financial and commercial transactions in the larger Saudi economy.

Due to cost rationalization, more usage of ATM banking facilities, and credit card payments, there has been a small reduction in Saudi bank branches from 2,061 in October 2020 to 2,019 in August with the trend continuing.

There are no Saudi banks with the word “Islamic” in their name compared with some other GCC countries. Yet, Islamic finance and Shariah-compliant banking are very prominent in the Kingdom with four fully Shariah-compliant banks. There has been a perceptible rise in total Islamic banking assets from SR1.3 billion in 2017 to SR 1.4 billion by Q1 2020. This interest in Islamic finance is also underscored by the full take-up of the monthly sukuk trench offerings by the Ministry of Finance.

The Public Investment Fund holds significant ownership of Saudi banks, such as NCB, SAMBA, Riyad Bank, and Alinma Bank, which account for around 45 percent of the total Saudi banking financial assets.

Such a significant level of PIF banking ownership shows that SAMA-PIF cooperation is critical, especially in the latest merger of NCB and Samba, which was finalized in April 2021.

The combined entity now known as the Saudi National Bank will become the largest bank in Saudi Arabia with more than SR840 billion in assets, along with 25 percent of the retail and wholesale banking market.

Economic theory is split on the pros and cons of mega-mergers in the banking sector. Negative aspects include being detrimental to competition as customer choice will be limited. The specter of being “too big to fail” and supporting such banks by the government in times of financial stress, such as the 2008-2009 global financial crisis, is also a negative aspect.

Others who support mergers argue that these unlock a large synergy in the long run and send a positive signal where the existing number of banks is presumably greater than the local economy. It also means enhancing efficiency as Saudi Arabia opens its doors to foreign megabanks.

Such Saudi megabanks will also be able to underwrite and finance some of the Saudi Vision 2030 projects and lead international syndications. To date, the NCB-SAMBA merger has gone seamlessly.

The Saudi banking sector has come a long way since 1926 when the Netherlands Trading Society opened its branch in Jeddah to provide financial services to pilgrims on their way to the Far East. The first bank later became the Saudi Hollandi Bank during the era of Saudization, and then Al-Awwal Bank, before its merger with Saudi British Bank in 2019.

Other Saudi banks had colorful pedigrees, with Samba starting its life as Citibank in Saudi Arabia, and the sale by Credit Agricole of its final position in its stake in Banque Saudi Fransi in 2020.

Under an extremely competent regulator in SAMA, the Saudi banking sector is now embarking on its journey of implementing and adopting a wide range of new financial products and services to meet the challenges of a digital age. The recent spate of positive half-year financial results for the Saudi banks is a testimony to the sector’s adaptability and resilience.

• Dr. Mohamed Ramady is a former senior banker and professor of finance and economics, King Fahd University of Petroleum and Minerals, Dhahran.