Question

Q3. The banking system in Saudi Arabia is considered one of the most developed banking system in the region, discuss this statement explaining the structure of that system explaining kinds of banks, Number of branches, numbers of ATM, ownership structure, size of banks measured by total assets and explain whether or not merger or acquisition transactions are required to improve performance through small number of banks with large branch networks instead of large number of banks with small branch networks

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Answer 1

The banking industry in the Kingdom of Saudi Arabia (“KSA”) embodies one of the main commercial industries. The Saudi Arabia Monetary Agency (“SAMA”) performs the central bank role in KSA, overseeing the local and foreign banking businesses in Kingdom of Saudi Arabia (“KSA”). The first was the Law of SAMA (“SAMA’s Law”) and the second is the Banking Control Law (“BCL”).

SAMA’s Law outlines its role and regulates its relationship with local and foreign banks conducting banking businesses in KSA and sets forth the governing and supervisory role of SAMA over banking activity in KSA. The BCL regulates banking businesses in terms of the statutory requirements to conduct banking business in KSA and provides various provisions that govern the activities that a bank is allowed to carry out and those which are prohibited. Further all banking transactions have to be Shari’ah compliant.

Bank licenses are issued by the Council of Ministers upon the recommendation from the Finance Minister and a review by SAMA (Saudi Arabia’s central bank) and the government stake is less than 10 percent. There are 13 domestic banks, 10 foreign banks & 91 foreign and local financial & brokerage companies. In totality there are 1931 Bank branches , 15,906 bank ATM’s 4 types of banks : Commercial bank , Industrial Bank , Agricultural bank , Real estate banks. in Saudi Arabia. In terms of the balance sheet size, National Commercial Bank (NCB) (with assets of more than SAR 443.9billion) is the largest bank in the Kingdom, accounting for 20.0% of the total market, followed by Al Rajhi Bank (asset base of SAR 343.1billion and 15.4% market share). Samba (asset base of SAR 227.6billion) and Riyadh Bank (total assets worth SAR 216.3billion) account for 10.2% and 9.7% of total banking assets, respectively. Of the 12 banks, Al Rajhi Bank, Alinma Bank, Bank Albilad, and Bank AlJazira are Shariah-compliant and account for 26.5% of total banking assets.

Acquisition of smaller banks by bigger network of banks is beneficial due to following reasons:

A bank merger helps scale up quickly and gain a large number of new customers instantly. Not only does an acquisition give your bank more capital to work with when it comes to lending and investments, but it also provides a broader geographic footprint in which to operate. Acquiring a smaller bank that offers a unique revenue model or financial product is sometimes easier than building that business unit from scratch.