Foreign banks launch into Saudi financial market

Deutsche Bank's entry to the Kingdom follows on from its provision of a $1 billion Islamic financing vehicle for SABIC as well as its recent mandate from the King Faisal Foundation to advise on the upcoming initial public offering of the foundation's real estate holding company Al Khozama Management Company.

Deutsche Bank was among ten foreign banks licensed to operate in the Kingdom by the Saudi Arabian Monetary Agency last December. The list also includes BNP Paribas, J.P Morgan, National Bank of Kuwait, National Bank of Bahrain, Emirates Bank, Gulf International Bank, State Bank of India (SBI) and National Bank of Pakistan.

Many of the newly licensed arrivals such as BNP Paribas have been doing business for years from bases in Bahrain. Their long desired ability to establish operations in Saudi Arabia arises from the Kingdom's accession to the World Trade Organisation last year.

WTO influence

While SAMA officials have played down the licensing of the foreign banks directly to World Trade Organisation membership, WTO rules insist that countries must open up their financial and other service areas on a level playing field basis to the institutions and companies of other WTO members.

Foreign banks are permitted to enter joint-venture companies in Saudi Arabia with a previous foreign equity cap of 40 per cent lifted to 60 per cent. They can now as well open direct branches in the Kingdom. The government has also opened up asset management and financial advisory services and financial brokerage to outside institutions.

As a result BankMuscat, the UK's MerchantBridge and Zurich-based Bank Frey have been authorised to conduct business. Last year HSBC and Credit Suisse also obtained licenses to provide financial brokerage services in the Kingdom. It represents a time of opportunity and potentially great and accelerating change in the Saudi financial market.

DB opens brokerage

While Deutsche Bank opened its first branch in Saudi Arabia on April 30, a few days later it announced the launch of its brokerage business on the Saudi stock exchange. This authorisation represents the first time a western broker has become a full member of the exchange.

While existing Saudi banks at present have the edge in retail banking with about 1,300 branches in the Kingdom, foreign banks are likely to provide increasingly robust competition for business in project finance, initial public offerings and Islamic financial instruments.

However, the retail side is also facing competition with SBI and National Bank of Pakistan likely to attract remittance transactions from their nationals working in the Kingdom.

Deutsche Bank's head of global private wealth management Pierre de Weck says the bank is seeking to become a leader in Shariah-compliant products. BNP Paribas is also going to make a strong pitch to provide Islamic banking services in addition to project and corporate finance business according to its CEO Baudouin Prot.