Learning to survive the shocks
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Learning to survive the shocks

The recent fall in oil prices might once have spelt disaster for the Saudi Arabia's banking sector - slashing government revenues and weakening banks' asset quality. But this time the authorities seem well prepared for the current wave of economic turbulence and the banks are optimistic of riding out the storm. Michael Peterson reports.

In theory, banking in Saudi Arabia should be a straightforward and immensely profitable business. The Saudi population is affluent, saves a lot and, because of Sharia (Islamic) law, does not expect interest on its bank deposits. And on the asset side of the balance sheet, Saudi banks are first in line to lend to the government of a country sitting on over a quarter of the world's proven oil reserves.

In addition, Saudi Arabia's banks have been protected in recent years not only from foreign competition but also from new domestic rivals. The central bank, the Saudi Arabian Monetary Agency (Sama), has not issued a new banking licence since 1988 - and even that was a one-off.

The downside to this easy existence is that Saudi banks are highly exposed to fluctuations in the Saudi economy, which, in turn, is extremely vulnerable to any fall in the price of oil - a commodity that still accounts for almost 40% of Saudi GDP. Over the past 15 years, the Saudi financial sector has been hit twice by sudden economic shocks. In the mid-1980s a sharp fall in oil prices led to cuts in public spending and a wave of bad debts.

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