The following are excerpts from the interview:
Saudi banks have showed resilience during the time of global financial crisis because their fundamentals are very strong compared to other banks in the region. How do you foresee the future in view of the uncertainties in global energy and debt markets?
The resilience of Saudi banks during the global crisis was derived from three mutually reinforcing factors: Firstly, the concerns of an economic slowdown in 2009 that was largely caused by an oil price correction and cuts in the OPEC quotas proved relatively short-lived in Saudi Arabia. Apart from the recovery in oil prices, the government responded effectively with expansionary fiscal policies, including a number of steps to ensure that the ambitious infrastructure modernization agenda would remain on track. Second, going into the crisis, Saudi banks were very soundly capitalized and funded their balance sheets through highly reliable domestic customer deposits. Thus, unlike their international counterparts, Saudi banks were not heavily dependent on the kind of wholesale funding that proved vulnerable to market disruptions during periods of market stress. Third, under the effective supervision of SAMA (Saudi Arabian Monetary Agency), Saudi banks had fairly successfully shielded themselves from high-risk activities. They focused their activities primarily on the domestic market while their investment portfolios were dominated by high quality international securities. The domestic market also, had largely avoided excesses such as the leverage-driven real estate booms that proved a challenge in some of the Gulf countries. SAMA also responded effectively and proactively after the onset of the crisis to shore up confidence. The Saudi banking sector is now characterized by robust financial health and ample liquidity. With the economic fundamentals in Saudi Arabia set to remain strong, banks are well positioned to mobilize this liquidity for asset growth, which will support the economy, a process that clearly began to gather momentum last year. Bank credit has grown at more than 16 percent YoY, the fastest pace in more than three years. I expect these positive trends to continue, moreover in a way that is increasingly well aligned with the development imperatives of the Saudi economy as more focus is devoted to areas such as mortgages and small and medium-sized enterprises. Nevertheless, we must acknowledge that we live in an interdependent world, a fact that the experiences of the past several years have repeatedly highlighted. In spite of the strong fundamentals of the domestic economy, investor mood has been tested again and again. This in turn has manifested itself in the relatively lackluster performance of the regional financial markets, at least until recently. The global economic crisis was triggered by global imbalances and structural weaknesses that for the most part remain in place and still constitute a potential source of global economic risk. Any trouble, whether in the euro zone or elsewhere, may revive oil demand erosion concerns and increase market risk aversion. Even though oil prices proved remarkably resilient back in 2008-2009 due to the strength of emerging market demand and the increasing marginal cost of extraction, short-term corrections cannot be ruled out.
Profits of Saudi banks increased nearly 14 percent in 2011, which are close to the earning levels of recorded in 2006. What is in store for Saudi banks in 2012 and 2013?
The strong earnings performance of Saudi banks during 2011 was driven by strong loan growth and a sharp fall in loan provision charges as banks restored their provision coverage ratios to robust levels. We expect the banking sector to sustain double digit earnings growth in 2012 and 2013 driven by strong growth in corporate and trade finance, residential housing finance, and brokerage volumes. Even though the global economic recovery is a concern, we expect the Saudi banking sector to remain resilient, further supported by the macroeconomic stability of the Kingdom’s economy.
Saudi banks have reported a significant decrease in loan loss provisions (LLPs) because of the pragmatic policies of SAMA. Could these measures curb the growth of start-ups and SMEs?
Saudi banks increased their provisions in the aftermath of the crisis to fortify their balance sheets and to restore their capacity to absorb any future credit losses. I believe that most banks have significantly increased their provision coverage ratios and that the cycle of accelerated provision building has drawn to a close in 2011. Going forward, banks will continue to focus on building their loan books to deploy the ample liquidity driven by the continuing strong growth in customer deposits. With respect to SMEs, the Saudi government and the banking sector fully recognizes the vital role the SME sector can and should play in creating jobs and driving future economic growth. Thus, the government has recently taken steps to strengthen the kafala guarantee program so as to support the banks lending to the sector. NCB plays a leading role in this sector providing a range of banking products, including credit programs to support our SME customers.
Can you explain achievements made so far by NCB in corporate special responsibility? What are the future CSR plans?
We have endeavored to design and deliver CSR programs that create lasting benefits for individuals and society as a whole. Rather than merely making donations, our approach is to empower recipients to build a better future for their families. Since 2005, we have delivered programs that have supported more than 670,000 people in 166 cities Kingdomwide. These have centered on four themes: Job creation, education, health care and social welfare. Furthermore, NCB is a major contributor to numerous charities and local community activities. Going forward, NCB will continue to uphold its mission to provide “creative, innovative, and non-profit CSR programs that contribute to the country’s development.”
Saudi Arabia, which has made rapid strides in Islamic finance, could be a role model in promoting it in both Muslim and non-Muslim countries. What are the additional steps required to further promote such financial concepts?
I agree that Saudi Arabia is well positioned to be a role model in Islamic banking. It is the home of Makkah, which Muslims worldwide face five times a day for their prayers. It has a strong and growing economy, which provides a free environment where business can grow. It also has a young entrepreneurial population. Finally, being a pioneer in Islamic banking, Saudi Arabia has developed deep expertise and technical know-how in the field. Islamic finance has experienced rapid growth in Saudi Arabia. Shariah-compliant products are now the norm in retail banking and increasingly so in other areas as well. Saudi Arabia has also pioneered a number of new initiatives in the growing area of Islamic capital markets. Blue chip names such as Saudi Electricity Co. (SEC) and SABIC (Saudi Basic Industries Corp.) have led the way in domestic sukuk issuance but last year saw the emergence of new structure for project sukuk, led by SATORP (Saudi Aramco Total Refining and Petrochemical Company) for its Jubail refinery. This year witnessed the issuance of GACA’s (General Authority of Civil Aviation’s) sukuk, which not only continue the project sukuk theme but also potentially laid the foundation for sovereign-backed-sukuk issuance in the Kingdom. We believe that such Shariah-compliant products have an important role to play in bridging the large and deep pools of capital in the Kingdom with the massive investment needs in areas such as infrastructure and economic diversification. They also enable investors to buy into one of the most attractive economic growth stories globally.
Islamic banks have been in operation for 38 years but some analysts say a shortage of experts is delaying their worldwide expansion. How can this issued be tackled?
This is true to some extent, although naturally expertise will grow with the growth of the industry. Islamic banking started off with simple products, mainly focused on consumer banking using Murabaha contracts, and now it has become much more complex, covering Islamic alternatives to derivatives and treasury products as well as project finance, wealth management and structured products. There is a range of measures that would help alleviate the shortage of experts. For example, developing advanced training programs in Islamic banking at the bank level, national level, and international level and developing credible certification programs for Islamic banking professionals similar to the CPA and CFA certifications. Also, the quality of Islamic banking conferences is improving. Currently there are a lot of conferences in Islamic banking but we need to focus more on delivering quality programs that add new value to the industry. There is also a need to support academic and research institutions. It is critical to develop the intellectual and human resources upon which Islamic banking will stand. For example, NCB has taken the initiative to support the efforts of Harvard University’s Islamic finance research projects as well as funding a number of academic chairs dedicated to Islamic economics in the local Saudi universities. And lastly, encouraging the development of specialized Shariah scholars in the field of Islamic banking and training existing scholars in the business of banking. NCB has pioneered a Shariah scholar development program where selected Shariah scholars and Islamic economists are invited to participate with our Shariah Board in order to learn about the Shariah supervision process first hand and get mentored by our leading Shariah scholars.
Islamic banking represents 95 percent of banking activities for individuals in the Kingdom. They also make up 30 percent of the entire banking assets. What future and challenges do you see for Islamic banking in the Kingdom and worldwide?
I expect Islamic banking to continue to grow in the Kingdom and worldwide. Globally speaking, Islamic finance is still very much in the phase of extensive growth as it takes root in new jurisdictions and the product range is broadened. On the consumer finance side, one of the challenges that we must address is how to protect customers from excessive indebtedness. Although banks want to offer Islamic products to customers and grow their business, they should also be careful not to drive people to excessive consumption and debt by adopting responsible lending practices, something that SAMA has regulated effectively and NCB has embraced fully. It is also important for the Islamic banking industry to try to empower people through financing home ownership, and small businesses that will drive sustainable economic growth. There is also a need to use Islamic finance to inculcate more of a savings and investment culture in the Kingdom. In this sense, the ongoing efforts to foster product development by increasing the diversity of funds and other investment products are critical. On the corporate side, Islamic banks need to develop more sophisticated and customized solutions to meet the needs of corporate clients. In particular, Islamic banks must develop a suite of Shariah-compliant treasury solutions that enable corporate customers to hedge their genuine business risks.
You stated during the recent Jeddah Economic Forum that the global financial crisis had made Islamic banking more relevant. Can you elaborate?
Why did the crisis happen? It happened partially because of the excessive use of structured debt and securitization, which drove unsustainable levels of financial leverage. The fundamentals of Islamic banking prohibit all of these. Islamic products are based on real transactions that involve the real economy. Islamic Banks take responsibility for their customers and don’t merely sell the loans to second parties, who then sell them to third parties. Finally, there is a strong concern for ethics in Islamic banking, which serves to protect the customer, the bank, and the society at large.
Shariah-compliant financing is making a major impact on key infrastructure projects. What is your take on Shariah-compliant financing?
The theory of Islamic economics, of which Islamic banking is a part, aims to serve the interest of the greater community. It aims to use the wealth of savers and direct it to investments that will have a long-term benefit on the society in terms of economic development and improving the standard of living. With an estimated $1.2 trillion in assets in 2012, Islamic banks have now developed in size and capability to such an extent that they can participate in financing major infrastructure projects either through direct financing or through facilitating the issuance of sukuk. Today, countries all over the world are turning to Islamic capital markets for financing, and most major international financial institutions are active in Islamic banking. For example, experts estimate that the sukuk market will grow 66 percent in 2012 to over $44 billion compared to $26.5 billion in 2011. Moreover, in the GCC, statistics show that over the past 6 years the share of Islamic finance in the total project finance market has doubled from 12.5 percent in 2006 to over 25 percent in 2012. This is a testimony to how far Islamic banking has come. Through various innovative structures, today Islamic banks are able to finance both existing and new projects. We are happy that NCB has been central in supporting this activity by leading Islamic finance deals in the GCC with commitments exceeding $ 7 billion, an estimated one-fifth of the entire global Islamic project finance portfolio. The development of new structures and products, especially project specific sukuk, has been encouraging, since it enables capital markets to play greater role in mobilizing savings for the infrastructure agenda, while enabling investors to place their funds in an attractive growth opportunity. Moreover, it provides institutional investors with the kinds of low risk, long-term investment vehicles they desire.
Credit card debt is said to be heavy in Saudi Arabia. What are the measures required to curb this trend?
While this may be the prevailing perception, the fact is that credit card penetration, usage and debt are below international norms. Furthermore, SAMA has already implemented proactive measures to curb excessive credit card indebtedness by instituting minimum affordability, debt burden levels ratios as well as capping the amount of cash that can be utilized from a credit card limit. Nonetheless, we recognize the opportunity for proactive consumer education so as to prevent excesses as these products grow in reach in the future.
Some customers say front-end retail banking services in Saudi Arabia lag behind other advanced economies. What are your observations?
The scorecard for front-end services in Saudi Arabia is more nuanced. In electronic banking, there are clear success stories where the industry has leapfrogged more advanced economies. For example, the Sadad electronic bill payment and presentment service is a global reference for convenience to both retail customers and billers. Additionally, rich functionality in ATM, telephone and Internet banking channels have enabled banks to serve effectively their clients with up to 90 percent of all transactions conducted through electronic channels. On the other hand, the Saudi banking system has the challenge of meeting the rising service demands of a rapidly growing bankable population across an extended geography. To maintain high standards of service while meeting rapidly rising customer demand, Saudi banks have been working continuously on expanding their branch and ATM capacity and reach, which is not an easy challenge given the Kingdom’s vast geography and the rapidly growing population. Thus, over the past 4 years, the Saudi banking sector expanded its branches by 22 percent and ATM’s by 44 percent; by comparison, the number of SARIE payment transactions grew by 77 percent.
What are your views on e-commerce and the benefits and drawbacks of merger/acquisition of banks in the Kingdom?
The Saudi banking industry is undergoing rapid growth, propelled by favorable demographics and robust economic fundamentals. The challenge over the medium term is to build capacity and capability to serve an expanding customer base that is growing in sophistication. As the Saudi banking sector is going through a high growth cycle, I do not expect any movement toward domestic consolidation in the near future. The progress of e-commerce depends on multiple drivers — Internet penetration, card penetration and, most critically, logistical infrastructure for delivery. While Internet and card penetration are sufficient to support vibrant e-commerce activities, the growth of the channel continues to be constrained by the still developing logistical infrastructure. Nonetheless, the international precedents suggest that the process is likely to continue to gather steam in the years ahead.
What additional role banks can play in Kingdom’s economic development?
I do believe that banks play an integral role in the government’s strategy toward a balanced and sustainable economic development. In the aftermath of the global economic crisis, international banks reduced their appetite to fund local projects, but our local banks stepped in and covered the gap in the project finance market. For example, the massive oversubscription received in loan deals that involved projects sponsored by Maaden and Marafiq is a testimony on the expanding role played by domestic banks across diverse sectors.
SAMA’s foreign assets have crossed SR2 trillion mark. Do you believe some of these funds can be used for the Kingdom’s development projects and social welfare schemes?
These sizable reserves enable the government to sustain its strategic investment program in the face of any adverse movement in oil revenues. In parallel, the government is also mobilizing private sector capital to fund these strategic projects through public-private-partnerships (PPPs) or through the issuance of sukuk. Together, these measures provide the government with a very high degree of fiscal resilience.
The banking industry in the Middle East experienced a healthy revenue growth of 7 percent in 2011 after revenues had stagnated the year before. What are the factors that contributed to this strong performance?
I believe this healthy growth of Middle Eastern banks was largely attributable to GCC banks, both in terms of asset growth rates and the profitability drivers, especially, after the recovery from the consequences of the financial crisis in 2008 and 2009. Even though the drivers vary across the GCC, the overall GCC macro-economic environment remains favorable thanks to high oil prices coupled with continued high government spending on physical and social infrastructure. In turn, the GCC banks’ net income growth is approaching the pre-crisis level. In Saudi Arabia, Oman and Bahrain, the reduced loan loss provisions have supported the bottom-line, while the growth in the UAE and Kuwait was driven by loan volume expansion. In general, corporate banking continued to take the lead, growing by 13 percent compared to just 5 percent in retail banking.
What are the positive and negative influences of the Arab Spring on banks in Saudi Arabia and the Gulf region?
The heightened political tension in the region, especially following the disruption to oil supplies from Libya and the sanctions on Iran’s oil exports to certain markets, has more than offset the impact of the slower global demand on oil prices. Oil prices averaged $ 108 a barrel in 2011 and expected to average $ 105 a barrel in 2012. GCC governments, in turn, have generated unprecedented surpluses last year and expected to do the same in 2012. High oil revenues have in turn enabled GCC governments, including Saudi Arabia, to accelerate spending on physical and social infrastructure projects. This has contributed to growth, as we saw with the Kingdom’s 6.8 percent GDP increase last year while creating many new business opportunities for banks. The attention to important issues such as housing and job creation will generate longer-term benefits for banks and the broader economy. On the negative side, rising geopolitical risks in the region have reduced capital inflows to the region, highly evident in the project finance market, and foreign direct investment. Such uncertainties have further contributed to diminishing presence of European banks in the syndications’ market due to their deleveraging and recapitalization challenges.
(Arab News.Com / 14 May 2012)
