Case Study gif T
Under the Capital Market Law (CML),
all licensed banks - in- cluding those with foreign ownership - are required to create subsidiaries in order to carry out under- served business activities, such as investment bank- ing, asset management and project financing. For these subsidiaries with 50 per cent of their total equity owned by foreign banks, these are the seg- ment area of growth
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he concept of boutique Islamic
“Investment” banking is relatively new in the GCC region. Saudi Arabia, renowned of its retail-driven industry, is not an exception and here lies the growth opportunity for the other universal banks who are keen to penetrate the Islamic “Investment” niche market.
We believe through implementing the seg- mentation’s marketing strategy, we can tap into the underserved business opportunities of Islamic investment banking. Nonetheless, our emphasis here is not on the heavily- serviced wealth management nor on the dy- ing model of Islamic private equity (for more detail on P/E, please refer to the published research paper by the same author entitled by:” The Rise & Fall of Gulf Finance House).
For those universal banks that are keen to examine the unrealized opportunities of growth, this article will highlight the fastest means to obtain a license and which type of Islamic banking model should be leveraged on. After a thorough examination of foreign banks’ ownership structure within the Sau- di banking sector - which compromises 11 banks - I can see that there are three means of penetration to this market; A) a joint ven- ture, B) through a branch or C) the subsidiary method.
Commercial foreign banking presence is most commonly through a locally incorporat- ed joint-stock company. The ownership pro- file of the local banks characteristically con- sists of large strategic holdings by a handful of top-tier global financial institutions, public institutions, and prominent Saudi business families (Standard & Poor’s, 2007). The shareholdings of these joint ventures range from one per cent to 40 per cent of a bank’s total capital. Links with foreign owners are often enhanced through ‘technical manage- ment agreements,’ whereby the foreign part- ner seconds key staff and provides technical support: a competitive advantage in market where experienced staff is a scare resource.
In this review of the first type of foreign bank- ing presence, these JV banks were accorded full national treatment, on an equal playing field with banks fully owned by Saudis. After an initial tax-free holiday period of five years, foreign-owned banks were permitted to rap- idly expand their branch networks and to ac- cess all the benefits and privileges available
to local banks (BIS, 2006). The entrance of foreign banks did not result from changes related to the WTO accession in December 2005. The Saudi Arabian Monetary Agency (SAMA) still uses its own discretion to decide whether to allow a foreign bank to enter the country (Oxford, 2007,p.42). Clearly, the big- gest challenge for foreign banks is to get a license to operate (in spite of SAMA’s argu- ment that the sector is adequately served by the existing banking network). According to Standard & Poor’s (2007), the regulatory and commercial barriers to entry are deemed to be high.
The second way for foreign banks to penetra- tion the Saudi market is through opening a corporate branch. BNP Paribas, JP Morgan and Deutsche Bank are among the 11 li- censed branches belonging to foreign banks in the Kingdom. It is worth mentioning that besides these three banks, the market lacks high caliber, sophisticated investment bank- ing services. In addition, due to their limited network, these banks tend to enter niche areas, mainly focusing on large corporations and individuals with a high net worth (Stand- ard & Poor’s, 2007).
Under the Capital Market Law (CML), all li- censed banks - including those with foreign ownership - are required to create subsidiar- ies in order to carry out under-served busi- ness activities, such as investment banking, asset management and project financing. For these subsidiaries with 50 per cent of their total equity owned by foreign banks, these are the segment area of growth. As BNP describes, the market has been stuck at a very elementary stage (for these types of niche segments), so one important con- tribution which foreign banks can bring is sophistication (Oxford, 2007, p.42).
Our interpretation of the consumer lending market indicates that a branch or subsidi- ary of a foreign bank can maximize its share of this sector through the introducion of a full range of Islamic finance solutions and services. According to Moody’s (2010), 80 per cent of the total consumer lending is structured according to Shari’ah law. Fur- thermore, in the past year some 90 per cent of new consumer transactions have been structured under Shari’ah law - service offer- ings have gone beyond Islamic liquidity and low-cost deposits to include personal, trade
2011 February Global Islamic Finance 57
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