Gulf banking poised for growth.

Author:Parker, Mushtak
Position:Middle Eastern banking industry

Higher oil prices and a downward trend in interest rates have heralded a return to confidence to the Gulf banking sector. Mushtak Parker assesses the prospects for development and growth around the region.

WHEN SAUDI ARABIA SNEEZES, the rest of the Gulf states cough. For the last few years the international media and analysts have predicted all sorts of doomsday scenarios for the Saudi economy, then faced with low oil prices and the resultant budget deficits and inevitable payment delays.

In May this year, the Kingdom, buoyed by an upturn in the oil market and by greater budgetary controls, provided a robust response by making a final payment out of cash resources to international banks on a $4.5bn sovereign loan taken out in the aftermath of the Gulf War. In June, a $700m syndicated loan for Saudi Petrochemical Company (Sadaf) was heavily over-subscribed attracting 39 banks, including Chase Manhattan, Citibank, Gulf International Bank, National Commercial Bank, and Saudi-American, Saudi-British, Saudi Hollandi Banks. This loan, say analysts in London, signals the return of confidence by international bankers in Saudi risk.

The Kingdom has clearly undergone a financial recovery and is unlikely to hurry to the international markets for more funding at least in the near future. At the same time, domestic and regional banks are playing an increasing role in financing development and projects in the Kingdom and the region. The improving economy and extra oil revenues of about $4bn more than predicted in the Saudi budget in January this year, has impacted positively on the national and regional banking sector. Gulf banking, after bleak expectations earlier in the year, is now poised for good growth in the second half of 1995. Higher than expected oil prices, payments of contractors and suppliers in Saudi Arabia, the awarding of several major contracts, and the downward trend in interest rates is giving the sector a new breath of life. But bankers in the Kingdom and elsewhere in the GCC warn that it will take some time for this new found confidence to filter through the Gulf economies.

Most bankers in the Gulf considered 1994 a tough year. For instance, in Saudi Arabia the consolidated balance sheet of the Kingdom's 12 banks showed their combined assets grew by a mere 3.8% from SR319.4bn in 1993 to SR331.6bn in 1994. Total net profit at the same time was almost the same for the period, increasing from SR4.6bn to SR4.8bn.

Demand for loans and advances went up by only 10% showing caution in the market on the side of both banks and consumers, deposits increased by only 2.2',. to SR219.3bn from SR214.9m. Banks which posted losses in 1994 include Saudi Arabia's Al-Jazcera Bank and The Commercial Bank of Kuwait.

As such, an overspill into 1995 was seen as inevitable. Saudi American Bank (Samba) which last year...

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