gif Case Study


and project finance (Moody’s, 2010). Given the above, we should also highlight two fun- damental trends which pertain to foreign bank penetration. Firstly, it is much easier to penetrate the financial sector though CML. Secondly, despite the fact that local- ly-incorporated players can benefit from their well entrenched domestic franchise, especially on the retail side, we believe that SAMA is protecting this sector by halting the “unofficial” granting of commercial banking licenses. Indeed their branch networks, rep- utations and know-how should assure that they maintain their position at the top of the market (Oxford, 2007,p.42).


Mohammed Khnifer is regarded as part of a second generation of Islamic banking practitioners, who come with a solid academic background in Islam- ic finance. He is a holder of an MSc. in Investment Banking & Islamic Finance from Reading University and the title of Chartered Islamic Finance Profes- sional (CIFP) from INCEIF. He is one of the most prolific and well-known jour- nalists specialising in Islamic Finance who is working today. For the past six years he has been in charge of the edi- torial content for the Islamic Banking section of Al Eqtisadiah (Kingdom of Saudi Arabia). By 2011, he is expect- ed to earn his MBA in Islamic Banking & Finance, after winning the Silver Scholarship Award from Bangor Uni- versity. He can be contacted at mkhnifer1@gmail.com


Competitive Threat to Domestic Banks When the world’s biggest oil producer launches a spending plan of US $400 bil- lion, it is predictable that foreign banks will compete intensely for these big-ticket trans- actions, and at the same time sideline do- mestically-owned banks when sovereign-re- lated entities increase demand for complex engineered instruments. By “domestically- owned banks,” we are referring to the Saudi banks which lack financial know-how, and medium-sized foreign-owned banks.


Indeed, this “default” in the sophistication of corporate finance and investment bank- ing services can be an opportunity for large- sized foreign banks. According to Moody’s (2010), smaller banks face a challenge when trying to meet more demanding cor- porate requirements, in terms of the diver- sity of their product ranges, their fast turna- round time and their complex engineering. For a banking sector known to have a high proportion of non-interest-bearing deposits (a factor which makes the cost of funding low), it is not surprising that the investment banking services have become underdevel- oped. In other words, the foundation of the Saudi banking sector was built on the con- cept of retail banking; and we believe that the wholesale banking concept was ignored for “cultural” reasons.


Given the above argument, it is obvious that there is a shortage of expertise, and of in- novative corporate products and services. As a result, foreign banks can gain leverage on M&A advisory, structured finance, equity and debt capital market solutions. Another area promising future sector growth is that of mortgage financing; important given its severely low penetration rates (Oxford, 2007,p.42). Even though, collectively, these foreign investment banks will play an impor- tant role in the development of a ‘new’ sec- tor with these under-served business activi- ties, they will still need to find a way around their weakness; that is, a lack of personal connections with high net worth individuals (HNWIs) and of local knowledge of the Saudi market. All in all, it is extremely difficult to


58 Global Islamic Finance February 2011


compete in retail banking; far more so that in niche areas such as private banking or large corporations. Regarding the optimal method of penetrating, we have come to the conclusion that establishing a presence through subsidiaries is the best answer. There are certain types of business activities in which foreign banks - either those who chose to serve Saudi Arabia from outside or those which operate from the inside - have a competitive edge over the local banks; this is effected through Islamic syndicated loans as well as project finance through the asset- backed or based sukuk. There is also a need to establish a dedicated arm for Islamic treasury products, derivatives and most im- portantly a dedicated team for Islamic capi- tal & money markets.


With an active financial stimulus in place in reaction to the global financial crisis, it is not uncommon to register a growing trend in raising long-term funds through syndicated lending facilities. Indeed, foreign banks are active players in this capital market, where there is an appetite for government-spon- sored projects. Local banks are often unable to compete with foreign banks in this area, due to the large-scale size of this type of funding as well as the absence of a globally recognized Saudi investment bank.


When we describe project financing, both sides of the coin must be pointed out. What we’ve noticed here is a growing appetite to- wards the issuing of Islamic bonds for major projects, notably those undertaken by quasi- sovereign Saudi entities. Foreign banks la- bel this type of business activity as project-fi- nancing Sukuk. In this case, the investment bank can either undertake or arrange the connection between the originator and the Islamic certificate-holders. After observing the ways in which how foreign investment banks can pose a competitive threat to local banks with regards to project financing, one must note that there is a reduced appetite from these foreign banks to finance those infrastructure projects by the private sector. As a result, local banks which are flush with liquidity have exploited this market along- side SME financing.


References and Further Reading: gif


• Standard & Poor’s (2007). A Bright Future For Saudi Banks, Despite Stock Market Collapse, May, London. • Moody’s (2010) Banking System Outlook-Saudi Arabia, London. • Bank for International Settlements (BIS), 2006, “The Banking System in Emerging Economies: How Much Progress Has Been Made?” BIS Pa- per No. 28 • Oxford (2007) The Report - Emerging Saudi Ara- bia, Volume 2007, Number 1, London, Oxford Business Group.


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