"I see that the kingdom's financial position is as solid and as promising as ever. It gives no grounds for any concern," proclaimed Mohammed Abalkhail, the Minister of Finance and National Economy of Saudi Arabia.
So it would appear when he and his fellow ministers talk blithely of a forthcoming "golden age" for oil prices in the early 1990s. And when the sovereign, King Fahd Bin Abdul Aziz, can afford to spend $1 billion a kilometre on a 4km palace on a corniche in Jeddah.
Whatever happended, then, to the Saudi budget? It was due in March, was postponed until August and now December looks like the earliest date. Apparently there's no need to panic.
"The prevailing conditions of the oil markets were the reasons why it was difficult, if not impossible, to make reasonably reliable projections for the government revenues in the new fiscal year," explained Abalkhail. "The government's decision to postpone the issuance of the state budget was not in any way a surprise to both the business and financial communities -- they were expecting that among the options open to the government was one to take a far-reacing action which would enable it to cope with the continuing falling oil prices."
A large section of the banking community demurs. "There are genuinely-held fears that this means the coffers are empty and the government is merely stalling for time," said a senior international officer at one of the 11 commercial banks in Saudi Arabia.
No budget means uncertainty for the banks. But they are used to that now for it's not easy being a bank in Saudi Arabia. Your customers are apt to stop paying interest on their loans. If you take them to court, you're met with intractability of Sharia law based on the Holy Koran, which states that no interest should be given or taken on financial transactions. This means that you end up paying back all the interest you may have received -- often more than the loan.
Then if you try and diversify away from loans and introduce new products, SAMA (Saudi Arabian Monetary Agency) is apt to step in and halt your innovation. SAMA has no fixed charter: it's somewhere between a central bank and a coercive advisory agency. But for those attempting to bring Saudi banking into the late 1980s, it stands out as a bastion of reactionary conservatism.
Caught in the middle of these two negative forces, Saudi Arabia's 11 commercial banks are being buffeted mercilessly. Half-yearly figures scream out their protests.
Bank Al-Jazira, the ninth largest in Saudi Arabia, reported pre-provision earnings for the first half of this year at 63.3% down on the corresponding period last year. Assets decreased by 9.8% from SR5.1 billion to SR4.6 billion. Placements with other banks, both foreign and domestic, were down by 14.4% to SR2.5 billion. And its loan portfolio shrank by 4.k% to SR1.86 billion.
There's a similar situation facing Albank Alsaudi Alhollandi (Saudi Dutch Bank) where profits, at SR11 million, were 56% lower in the first six months this year than for the same period last year. United Saudi Commercial Banks (USCB), a newcomer, reported it was still SR5.9 million in the red although this was a 55% reduction on last year's figures.
At Saudi Cairo Bank, which is 40%-owned by Banque du Caire and 60% by the Saudi public, no half-yearly figures are yet available. Last year's figures surfaced in mid-August, showing a 2% decrease in shareholders' funds to SR67.5 million and a 37% decline in contra accounts to SR3,010 million.
Perhaps the most ominous trend revealed by these figures has been the spiralling increase in loan loss provisions. Saudi Cairo announced a zero net income for last year's results because it had provisioned all its revenues for possible loan losses.
Saudi American Bank (Samba), the biggest of the kingdom's joint-venture operations--only National Commercial Bank and Riyad Bank are indegenous, Saudi-owned houses -- not only suffered a 38% fall in profits to SR85.8 million from January to June this year but also had to announce it had increased reserves for non-performing loans by 135% to SR70.3 million.
At Albank Alsaudi Alfrnsi (Saudi French Bank) provisions were up by 104% to SR84.6% and at USCB there was a 90% increase to SR19 million.
"Banks in Saudi Arabia are plagued by non-performing loans," said Stanley Robertson, the departing managing director of Saudi British Bank, "and they will continue to build up provisions as quickly as they can until they can entirely cover the bad loans."
Robertson is not alone in believing that it will be at least another two or three years before provisions begin to fall.
The oil price decline, which has resulted in lows of $8 a barrel, was only the beginning of the banks' troubles. As contractors and service companies became more and more pressed for funds, many turned to the Sharia law loophole.
"The banks have not won a single case when it has gone to the Sharia courts," Robertson said, "and companies are literally laughing all the way to the bank because they know they have religious backing for their actions."
The future of Saudi banking and commerce is at stake. For as long as borrowers can renege on their obligtaions legally, there will be no incentive for banks to make loans. And lasting damage has been done to so-called corporate relations by the immorality of the borrowers.
"It may take decades to repair the image of the Saudi borrower," said an outraged commercial banker, "even assuming that something is done soon to begin to heal the rift." A new definition of bank robbery has entered the Saudi banker's vernacular: make a loan to a prince.
Ostensibly, nothing is being done to protect the ailing banks. The government is aware of the situation but has rebutted suggestions to provide a civil legal system which could combat Sharia. There is perhaps a more fundamental problem for the banking system: an innate antipathy to it from Saudi nationals.
"In Saudi Arabia, the people are not overly fond of banks," said Robertson, "and legislation to protect the banks is always going to meet with stiff opposition."
The biggest names in construction, automobiles and cement have bee hit. Decreasing oil revenues have forced the Sauid government to delay payments to companies over the past two years. And since, two years ago, the prestigious Shobokshi brothers Ali and Fahd were forced to reschedule more than $400 million in debt, nobody has been safe.
Early this year, $300 million-worth of Prince Zaid al Sudairi's debt -- he is related to the Royal family -- came up for rescheduling. In a separate incident, Abdul Latif al Jameel, a major distributor of Toyota cars, was deprived of his agency rights by the parent company. Such actions have further hit confidence in Saudi Arabia.
And there have been others. Saudi Redec Ltd, the contruction and shipping outlet in thekingdom for Ghaith Pharaon -- reputed personal net worth $900 million -- is going through a rescheduling of its $356 million debt.
One banker said, "It goes beyond financial problems and becomes a question of morality. At the moment, the Saudis do not come off well."
The weakness of the 11 banks is accentuated by their inability to act as a unit. Under SAMA regulations, they are not permitted to form an association. And at a time when uncertainty and confusion are rife, this enforced lack of communication makes a solid front impossible.
"The central bank prefers that the banks meet under its auspices," said Robertson, "because it doesn't like the idea of them ganging up and forming cartels."
SAMA's attempt to bridge the gap between itself and the banks has resulted in a series of lunches at its headquarters for the banks' managing directors. These are informal affairs which are described diplomatically by one recent attendant as "a useful forum for the exchange of ideas and information."
The agency's problems are due to international banking standards differing greatly from the Sharia law. It describes itself as a governmental agency established by Royal Decree, being responsible for issuing and maintaining the currency of the kingdom and for regulating commercial banks. It is not obliged to act as a lender of last resort.
It is, however, giving Saudi Cairo, Riyad Bank and Saudi Investment Bank free deposits, which would suggest that no bank will be allowed to go down by SAMA. As a government agent, it has to support Sharia as far as the Saudi banking practices are concerned but it also has its own funds earning interest overseas with banks such as Merrill Lynch, Chase Manhattan and Morgan Guaranty. These double standards alienate the Saudi banking system from the rest of the world.
SAMA holds the banks on a very short rein, and the stifling effect can be seen from the languor of Saudi Arabia's capital markets -- there is little or no interbank activity.
"I'm hoping to see a Saudi Riyal-denominated certificate of deposit market before the end of the year," said Geza Steingaszner, manager of the capital markets department at Saudi French Bank.
At the moment, Jibor (the Jeddah interbank offered rate) is meaningless. "It's a joke," said one managing director. "We all call it Sibor and you ought to be able to guess what the 'S' stands for."
The Saudi stock market has been brought to a standstill by its restrictive regulations. The banks are now the only institutions allowed to deal in the shares of the 46 listed Saudi companies. The brokers were disintermediated more than a year ago because SAMA feared they were over-speculating.
"They were worried there would be another Souk al Manakh," said Steingaszner. The spectre of the Kuwaiti stock market crash still haunts Middle Eastern countries.
Now the banks have to match deals before they can be transacted. They are not allowed to take positions. Their links to other banks are via telex, telefax and telephone but there are no electronic communication systems. Shared delivery is physical and a tardy process. Dividends are paid only on the presentation of the share certificate by the owner.
The results of these restrictions have been dramatic: the share market has lost all liquidity and shares have dropped by about 40% in price across the board. The banks have tried hard to stimulate investor interest.
"Officially, the commission is 1% on the purchase of shares and nothing on the sale. But if there is a chance of attracting a large professional investor, we are at liberty not to ask fo r the 1%," said Andre van Hove, a senior manager of the international department at Riyad Bank.
This loss-leading business has also been tried unsuccesfully by other banks. "It's like the real estate market," said one bored share dealer. "You can pick up once prime land or once highly sought-after stocks for about half the price. But no one wants them."
Half-finished apartment blocks and neglected building sites are the outward symbols of these two moribund markets.
One possible vivifying solution is a new venture -- the Saudi Share Corporation. "There will never be a floor exchange," said van Hove, "but this company may provide a computer market. It's anticipatory but the banks would like to see it happen."
The envisaged system would only be able to match offers and demands. It would speed up the process but would not attract the much-needed new investors.
"What it needs is a little support fr om the banks in terms of share trading and market making to create an active share market," said Omar Bajamal, deputy general manager of National Commercial Bank. "This would reassure the small investors and ensure them of liquidity, thus encouraging them to participate actively. If, in the opinion of the regulatory authority, a role for the banks in market-making is not available, then perhaps securities companies should be created to develop the underwriting and trading activities." There is not evidence yet of these companies being formed.
One bank, Saudi French, has decided that the best form of defence is attack. "We were the first bank in the kingdom to offer a client a note issuance facility," claimed Steingaszner.
In February, a brace of Saudi Riyal-denominated revolving underwriting facilities (RUFs) hit the market for Mohamed Binladin Organisation (MBLO) for SR 100 million and Saudi Cable Company for SR 150 million. Saudi French was arranger and underwriter for the Binladin issue and underwrote SR50 million of the Saudi Cable issue. Riyad Bank arranged the latter, apparently appropriating the mandate from Saudi French.
"We had the mandate but advised Saudi Cable to wait until the liquidity problems at Arab Bulk Trading (ABT) were sorted out before going to the market," said Steingaszner. "Saudi Cable is 30%-owned by the Alireza group which, in turn, is a majority owner of ABT and we felt that invesot confidence might be damaged by the connection." The Alirezas are an established merchant family.
"It was a very good first step," said Sheikh Yeslam Binladin, general manager of MBLO, who claimed that 30% of the issue had been placed. Binladin now spends his time between London and Geneva fronting for his money-broking operation, Saudi Investment Company. His has been an innovatory role.
"Nothing could have been done without Binladin's help," said Steingaszner.
"I hope, however, that it will be easier to do in the future," said Binladin. In fact, many problems surrounding the RUF highlight the more generally applicable afflictions of Saudi banking.
MBLO did not publish any financials which meant that potential investors had to take a punt on name alone. And Binladin is certainly a respected name. But so were Shobokshi, Pharaon and Zahed. In the absence of any pressure from SAMA on companies to produce audited reporting, investor confidence can only deteriorate.
The possiblity of an indepedent ratings house being instituted to assess the credit of Saudi companies is ruled out by Steingaszner: "SAMA would be very reluctant to create such an agency." Presumably , the state of many companies does not bear scrutiny.
Another obstacle to the issues' success was the nature of the instrument. "The security is transferable but but not bearer," said Steingaszner. "One has to be very careful when issuing anything like a bearer security and placing it with no matter whom. Sharia is the supreme authority here and we have to do whatever we do in line with Sharia."
Although the paper is issued at a discount, the fact that the earning of interest is implicit in the purchase warrants tight control over the number and identity of the end investor. Each time the security changes hands it has to do so through the arranging bank and the name of the new holder is printed there. This is laborious process.
Saudi French hopes it can persuade SAMA to allow the paper to change hands six times before it has to return to the bank for reissuing. This would make it similar to the stock exchange system -- hardly the perfect solution.
"The goal is to create an instrument as close to a bearer security as possible without it being a bearer security," said Steingaszner. He wants to use the First Chicago grid note system which does away with physical notes and involves book entry at a central register held by the bank.
It's been a marketing and educational exercise for Saudi French and MBLO. "As people get to know the instrument, it will be easier to trade. Slowly we are creating a customer market and a secondary market," said Binladin.
They are aiming at institutional investors like GOSI (General Organisation for Social Insurance), pension funds and government-sponsored funds like the Real Estate Development Fund. It is proving a hard task both for Saudi French and Riyad Bank. So far, only SR5 million of the Saudi Cable issue has been drawn down and this, by Saudi French, is a show of good faith.
SAMA has not helped. There have been no issues since these two because SAMA intervened and prevented futher activity in the market. It claims to be considering the implications of the first two before it allows any more.
"They're sitting on the only progressive market in Saudi Arabia," said one banker.
Steingaszner claims to have several mandates for similar issues and is fervently awaiting approval from SAMA: "We can stimulate the market with issues for respected public instituions."
SAMA and the Ministry of Finance want to repatriate the immense amount of capital invested overseas. It is hard to see this happening while there are so few alternative viable sources of investment in the kingdom.
"Domestically, the market is too imperfect," said a Saudi economist. "There are too many protocol deals where companies and individuals deposit their money with banks interest-free in return for free banking. Free-market practices are alien in Saudi finance."
SAMA has itself launched various Treasury bill-type instruments. The latest is a 180-day bankers' security deposit account. Many banks have felt forced to take paper for political reasons.
The yield, at around 8%, is less attractive than the 8.47% yield offered on SAMA's previous 91-day instrument. "The rates are quite simply too low to be competitive," said the economist.
Binladin claimed his paper was more liquid than SAMA's and bankers generally have refused to tie up their money with SAMA for more than 60 days.
Contrary to the regulatory authorities' wishes, money continues to flow out of the country in the hands of "carpet-baggers", foreign bankers who visit Saudi Arabia to reap armfuls of Saudi riyals. And their sales pitch does not have to be too convincing.
"If a banker from Switzerland approaches a rich Saudi and offers to put his funds into high-yielding Euromarket instruments with guaranteed anonymity, he'd have to be a fool not to accept," said one exasperated fund manager.
Against a background of ever-decreasing profits, slippery borrowers and stultifying regulations, the position of the foreign banks with investments in Saudi banks is becoming more and more untenable. There are 14 foreign banks involved in joint ventures formed eight years ago when SAMA began the Saudiization of banking.
Saudiization was intended to bring Arabs to the fore and meant that foreign banks that were invited into joint ventures wre allowed a maximum equity investment of 40%. Now their management contracts are up for renewal and some are thinking twice before renegotiating.
"The boot is now on the other foot," said one Saudi banker. "When the foreign partners originally went in, it was in the middle of the boom. They were given a tax holiday and were making money hand over fist. Now that they're having to pay tax and losing fortunes during the recession, some want to turn tail."
Chase Manhattan Overseas Banking Corporation, which has 20% of Saudi Investment Bank (Saib), plans to terminate its management contract and is trying to pull out its 20%. Saib's total assets shrank from SR3.82 billion last year to SR3.47 billion in the first six months of this year and it is still making provisions of SR20 million which has reduced net profit to SR1.1 million.
If it looks like it's time to go for Chase, then SAMA is reluctant to wish it a fond farewell. "They (SAMA) are desperately worried about image and will not let the foreign banks escape with their money at such a sensitive time as this," said a Bahraini banker.
There are rumours that Citibank is trying to complete the American banks' exodus by retrieving at least 50% of the 40% share it has in Saudi American Bank (Samba). Citi refuses to confirm these.
"We have every intention of staying," said Glen Moreno, group executive for Citicorp Investment Bank for Europe, the Middle East and Africa. Yet the rumours persist with sources close to SAMA privately reporting the bank has twice tried to pull out and been prevented by SAMA.
"I know there have been rumours but it's not our plan to go away," said Kloos der Boer, a spokesman for Algemene Bank Nederland which owns 40% of Albank Alsaudi Alhollandi, "because we believe that Saudi Arabia is a country with enormous potential and possibilities."
These platitudes are echoed by others. "We are renegotiating our management contract with Saudi French and will remain partners," said Bernard Vernhes, a first vice-president of international relationships at Banque Indosuez. "Some banks like the British Bank of the Middle East are planning to withdraw but ours has been a long-standing with Saudi French and we are not about to terminate it now."
"We have a strong commitment to Saudi Arabia and are confident that the economy will soon begin to grow again," said a spokesman for the British Bank of the Middle East, which owns 40% of Saudi British Bank.
The official view demands a sense of perspective and strict objectivity. Finance minister Abalkhail said: "Foreign partners have to look at the current situation and its potentials as they really are at present, rather than in comparison with what is to be regarded as the extraordinary situation which prevailed a few years ago.
"It seems to me that the foreign partners doing business in Saudi Arabia are under pressure from both today's world debt crisis and the political problems taking place in the region. These factors seem to have contributed to make their views hardly objective or free of bias."
The region's political problems centre on the Gulf War between Iran and Iraq. The struggle, now in its sixth year, not only damages business confidence in the area but its possible outcome scares the Saudis. If Iran were to win, they fear the Ayatollah's Islamic fundamentalism would drive him to a crusade throughout the oil-rich Arabian peninsula.
In response, advertisements adorn the lamp-posts and billboards in Riyadh, calling for new recruits for the Saudi armed forces. And the air traffic above the city is dominated by Tornado planes as the Saudis practise in their newly-acquired British-made bombers.
This threat is a further source of anxiety for the expatriots who play a major role in the kingdom's banking and financial sectors. The early gloss of a highly-paid job in a Saudi bank is now wearing very thin. Before, the allure was obvious: the expatriot was the high-profile loan officer, the star of the show dazzling all with his western expertise, the bright young thing who could return heroically to his parent bank having made it a fortune. Now that he's been undermined by Saudiization, he's not making any more loans and his salary has suffered by the devaluation of the Saudi riyal.
The uncertainty that pervades Saudi banking is being heightened by SAMA's insistence that all the banks move to riyadh. "SAMA wants to be able to exert even closer control over the banks," said Robertson, of Saudi British, "and grouping them around it geographically is one way of doing this. It means, among other things, that the managing directors can be summoned at short notice to meetings at SAMA headquarters."
Saudi French, Saudi Dutch and Riyad Bank, where SAMA owns 38.25%, have been ordered to move their head offices from Jeddah to Riyadh next year, which will leave only National Commercial Bank and Bank Al-Jazira in the west coast city. Apart from the obvious traumas of upheaval, this command is proving extremely unpopular with the Saudis in Jeddah.
"People from Jeddah do not normally like Riyadh and will be very reluctant to be posted here," said Robertson. In what is still a society divided by tribal differences, the coastal dwellers from the west do not mix comfortably with the Bedouins who populate desert-locked Riyadh. Also, in a time of austerity, the cost of establishing new headquarters some 800km away will not be defrayed gladly by those banks.
Two banks which wanted to make a move but couldn't were National Commercial Bank and Saudi American Bank. Both set their hearts on UK branches in London as early as January last year when SAMA gave permission for them to apply to the Bank of England for licences. Before then, SAMA had allowed only two applications for overseas branch status three years ago. And National Commercial Bank had chosen New York with Riyad Bank getting the leftover London.
This time, however, the Bank of England has proved harder to please. It required more information about SAMA and its procedures and ability to rescue the banks. It also demanded more information about the banks and their prospective employees, including the curriculum vitae.
It remained unimpressed with SAMA until last month when it finally granted both banks licences to become deposit-takers. They will not be up and running until early next year. Both banks will be extending their treasury operations and are hoping to do more trade finance by having a London branch.