SAUDI ARABIA LIBERALISES BANKING SYSTEM
Saudi Arabia has speeded up reform of
its financial system with a package of measures designed to
boost the economy and open up the Kingdom to the lucrative
world of investment banking.
    Bankers in Saudi Arabia detect a fundamental shift in
policy stemming from a need to tackle the underlying
contradiction between an Islamic legal framework and western
banking system.
    One senior banker in Jeddah said: "There is a new wind
blowing... Saudi Arabia is moving on many fronts in a manner
that is extraordinarily aggressive."
    The speed of reform, begun last year but now gathering
pace, has surprised bankers who have had to contend with a
financial system that restricted internationalisation of the
riyal and a religious court system that made debt collecting
difficult.
    Saudi banks, once the most profitable in the world, have
generally reported falling profits for 1986 -- the fourth
successive year of decline -- as loan loss provisions ate into
already dwindling earnings.
    Bankers say the Saudi Finance Ministry and Saudi Arabian
Monetary Agency (SAMA) seem to have developed a new strategy
although it remains to be seen how it will be implemented.
    Reform started in 1986 with measures to boost previously
dormant stock trading, but took off in earnest this year.
    -- From January 1, SAMA liberalised the money market,
giving banks greater access to liquidity aid via repurchase
agreements.
    -- From March 22, the Finance Ministry abolished
withholding tax on funds borrowed by Saudi banks abroad.
    -- From the same date, banks were notified of a new
committee to be set up under the auspices of SAMA to hear bank
disputes with creditors over non-payment of loans.
    -- Also from the same date, banks were allowed to use
mortgages as collateral for lending, banned since 1981.
    -- Within a few weeks, the Kingdom's first stock market
trading floor is expected to be opened.
    Housed in central Riyadh in the building of the Saudi
Industrial Development Fund, the floor will initially be used
to trade shares on an auction system. Staff from each of the 11
commercial banks have been trained ahead of the launch and a
new computer network has been set up.
    One banker said: "The abolition of withholding tax will give
banks the opportunity to participate in new instruments such as
interest rate or currency swaps. At last SAMA and the Finance
Ministry are opening up markets for investment banking."
    Bankers say Saudi authorities appear to have been shocked
into reform by pressure from banks and alarm at bank reluctance
to extend further loans to the private sector.
    Banks have lobbied hard for change, arguing that the
religious, or Sharia, legal framework was inconsistent with the
Kingdom's western banking system and made it nigh impossible
for them to collect interest on bad loans through the courts.
    As a result, many banks had virtually stopped new lending,
but found themselves cut off from world investment banking by a
series of restrictions. Withholding tax made it punitively
expensive to take part in interest rate or currency swaps.
    The private sector's frustration at the virtual standstill
in bank lending overflowed at a businessmen's conference in the
mountain resort in Abha last month and some powerful merchant
families also called for change, bankers said.
    "Banks lobbied hard and had the ultimate weapon to force
change -- they stopped lending," another banker said. "That was
stifling growth of the economy."
    It is still unclear whether the new committee that will be
set up to hear bank disputes with creditors will prove any more
efficient than another non-Sharia system already in force, the
Committees for the Settlement of Commercial Disputes (CSCDs).
    Some bankers believe the new committee, yet to be formed,
will simply delay pending cases and force banks into a series
of private deals with creditors.
    Nor is it clear what stance the new committee will take on
interest payments, generally not recognised under Islamic law.
    But other bankers say the move is clear recognition by SAMA
and the Finance Ministry that Sharia courts and the CSCDs were
not the correct bodies for hearing bank disputes.
    Other reforms have been taken or are in the pipeline.
Finance Minister Mohammed Ali Abal-Khail said in March that a
new body would examine late government payments to contractors.
    In addition, further moves are under way to align business
life to the Gregorian calendar year, with companies being urged
to adopt it as their financial year.
    A black list of borrowers, started more than two years ago
by banks, has recently been effectively sanctioned by SAMA,
bankers say.
    Banks are now not permitted to lend or engage in securities
transactions with any party on the list.
 REUTER
