Saudi Arabia Banking System

The Saudis were faced with the need to create a national monetary system in the late 1920s. At that time, financial and credit functions in Arabia were carried out by two types of economic entities: branches of foreign banks and the so-called exchange dealers. The first branch of a foreign bank, the Netherlands Trading Company (now Saudi- Hollandi Bank), was opened in Jeddah in 1927, then branches of the Indian Al-Mu'in Trading Corporation and Egyptian Arif Namiani were opened in the 1930s. Corporation. These branches were exclusively involved in financing export-import operations, money transfers and currency exchange. They did not accept funds for deposits and did not give loans in the Western sense of these operations and even avoided using the word “bank” in their names, which was connected with the dominance of Islamic ideology in Arabia condemning the implementation of usury operations . Issues related to deposits and lending were dealt with by just exchange dealers who arose in the 1940s-1950s. Being the prototypes of the current Islamic banks , exchange dealers issued formally interest-free loans, while charging their commission for servicing this loan. However, mainly exchange dealers engaged in foreign currency trading. All these financial and credit institutions were concentrated mainly in the cities of Jeddah and Mecca , since their activities were mainly related to serving pilgrims (which in the 1920s provided 75% of all the Kingdom's income), as well as import operations.

The Kingdom’s first state tax and monetary authority, the General Finance Agency, was established in 1932 and was subsequently transformed into the Saudi Ministry of Finance. The General Financial Agency was entrusted with the functions of the central bank, including the minting of banknotes. At the initial stage of its existence, the General Financial Agency had a minimal impact on the financial sector of the Kingdom because, firstly, Saudi Arabia did not yet have a single monetary unit (in the country, currencies of other Arab states, in particular Egypt, were used in addition to riyal ). Secondly, there was no legislative base regulating relations in the banking sector. Thirdly, sources of budget revenues were extremely scarce.

The Birth of a National Banking System

The sharp increase in the volume of export-import operations and government revenues and expenditures following the discovery of oil in Saudi Arabia in 1939 caused an increase in domestic demand for banking services. In 1948-1959, a large number of branches of foreign banks were opened in Jeddah , Mecca , Medina and the Eastern Province : Banque d'Indochine , British Bank of Middle East , National Bank of Pakistan , Misr Bank , Banque du Caire , First National City Bank and Banque du Liban . However, these banks occupied an extremely small share of the retail banking sector, because they did not gain popularity among the religiously Muslim population, who hostilely perceived the Koran’s condemned methods of European banking. The bulk of their income was provided by financing operations for export-import operations. With difficulty, it was even possible to establish a stable rial to dollar exchange rate, since the implementation of exchange operations with currencies, according to some Muslim theologians, also contradicted the Koran . Moreover, operations with paper money were also condemned by the Islamic authorities as ungodly, so the first banknotes of the rial were issued only in 1952 and then at first in the form of checks for pilgrims.

The beginning of the 50s of the XX century was a turning point in the development of the Saudi banking system. In addition to the introduction of paper riyal, in 1952 a state body was established with the functions of a central bank - the Saudi Arabia Monetary Agency ( Arabic. مؤسسة النقد العربي السعودي , English. Saudi Arabian Monetary Agency, SAMA ), and in December 26, 1953 was a royal decree The National Commercial Bank was created - the first national bank, working in addition to the principles of European banking.

King Faisal's Financial Sector Development

The further development of the financial system of Saudi Arabia is connected with the name of King Faisal ibn Abd al-Aziz (1964-1975). During his reign, the Ministry of Finance was directly subordinate to the king, government spending was cut and special stabilization funds were created, to which regular deductions from oil revenues were made. Under King Faisal , a five-year development plan for the Kingdom was introduced (since 1970) in order to maintain economic growth, reduce the raw material dependence of the economy and diversify sources of budget revenues. In order to successfully achieve its goals, the government took up the creation and development of investment instruments. For these purposes, King Faisal paid great attention to the reform of the banking system, designed to solve the problem of accumulating the money of the population for their subsequent investment in the economy. By 1970, there were already 59 banks operating in the financial sector of Saudi Arabia, mainly with foreign capital.

Saudization of the banking system

The goal of the Saudi program for foreign banks, launched in 1976, was to change the ownership of branches and subsidiaries of foreign banks operating in the Kingdom. To do this, they were asked to transform into joint-stock companies, and their main shareholders should have been citizens of Saudi Arabia. By 1980, the “Saudization” of most foreign banks was successfully implemented (the latter was the “Saudi” branch of New York's First National City Bank (the future Citicorp ). By 1980, the number of banks in the Kingdom grew to 259. In the 1980s, Saudi banks began to open their branches abroad: in Geneva, London, Istanbul, Manama, Beirut and other cities, and structural units of offshore companies began to open in Saudi Arabia.

Along with the development of banking institutions, the market of exchange dealers was actively developing: by 1980, about 250 of their branches had already been registered, with 150 of them in Jeddah , Mecca and Medina . Exchange dealers occupied a highly demanded sector of the financial market, which included operations with foreign currency, and exchange dealers did not need to obtain a license to start their activities. All this made their activities financially more productive than the activities of commercial banks.

Gulf War Consequences

The invasion of Iraqi regular forces in Kuwait on August 2, 1990 caused a panic in the financial sector, yielding to which many citizens of the Kingdom began to transfer money abroad. The banking sector of Saudi Arabia was saved from a serious crisis by the timely and coordinated measures of the Money Management Agency (SAMA) , in particular, through the use of foreign currency deposits, the liquidity of Saudi banks was increased, which allowed to restore public confidence in the national banking system.

• Currency Law, approved by Royal Decree No. 6 of 07/01/1379 Hijra (12/31/1959)
• The Law on Banking Control, approved by royal decree M / 5 of 02.22.1386 of the hijra year (11.06.1966)

In order to provide long-term lending and subsidies to various sectors of the economy, including small business and the social sphere, the government created six financial institutions: the Saudi Agricultural Bank , the Saudi Industrial Development Fund, the Public Investment Fund, Real Estate Development Bank (lending to housing) and the Saudi Credit Bank (inappropriate financing of low-income individuals). For the 1986/87 financial year, the volume of loans and financing provided by these institutions amounted to 166,402 million riyals , for the 1991/92 financial year - 152,872 million riyals .

Currently, the banking system of Saudi Arabia consists of parallel functioning traditional and Islamic credit and financial institutions (sometimes within the same bank), allowing citizens of the Kingdom to use the unique capabilities of both systems. The founder of Islamic banking is Egyptian Ahmed al-Najjar , who in 1969 was forced to emigrate to Saudi Arabia. Thanks to the ideas adopted by the Saudis of the Egyptian economist, Saudi Arabia soon became the world center of Islamic banking . In 1975, the international Islamic Development Bank , headquartered in Jeddah , began, one of the main founding countries of which is Saudi Arabia. Soon, on the initiative of Prince Mohammed al-Faisal al-Saud , the International Association of Islamic Banks (in 1977) was created in the Kingdom, which in 2000 was transformed into the General Council for Islamic Banks and Financial Institutions with headquartered in neighboring Bahrain. Currently (2012), there are 12 national banks in the Kingdom that provide either exclusively Islamic banking services or along with traditional banking services.

Currently, there are branches or subsidiaries of 11 of the following foreign banks in Saudi Arabia:

• Gulf International Bank BSC (GIB) is a Bahraini bank, but 97% of the shares are owned by the Public Investment Fund (Saudi Arabia)
• Emirates NBD - UAE Banking Group
• National Bank of Bahrain (NBB)
• National Bank of Kuwait
• BankMuscat SAOG ( Oman )
• Deutsche Bank - received a banking license in Saudi Arabia in 2003-2004.
• BNP Paribas - received a banking license in Saudi Arabia in 2003-2004.
• JPMorgan Chase NA - received a banking license in Saudi Arabia in 2003-2004.
• National Bank of Pakistan (NBP)
• State Bank of India (SBI)
• TC ZIRAAT BANKASI AS (Turkey)

• Baklanova E. Evolution of the banking system of Saudi Arabia // Asia and Africa today. 2007. No. 7. P. 54-57
• Saudi Arabia Banks
• Gulf banking system (inaccessible link)
• Saudi Arabia Monetary Agency
• Hamamdeh Muhammad. SAUDI ARABIA: THE PROBLEMS OF LIBERALIZATION OF THE ECONOMY BASED ON OIL
• bunich.ru SAUDI ARABIA (inaccessible link)