Complex Made Simple

Banking on change

The man behind the first – and only – hostile takeover in Saudi banking history has a few ideas about how to unify the Gulf and stand up to Iran at the same time.
By Ranvir Nayar

Bankers, especially those from Saudi Arabia, have a reputation for staid, traditional methods. It’s what makes bankers so comforting. They’re safe, conservative, maybe a little boring. That’s a good thing.

Ali al-Shihabi is anything but boring. And he’s certainly not staid or conservative. An unrepentant risk-taker, he’s best known for leading the only hostile takeover of a leading Saudi bank in the early 1990s. After that, he shook up the clubby environment of the Saudi banking sector with wholesale restructuring of the new firm, with loads of firings.

Now, Shihabi is doing it again, with a new book that aims to shake up the political discussion in the Gulf. Safe? No. Boring? Never. Shihabi resists categorisation.

Shihabi is the son of a high-profile Saudi diplomat, something that helped to make him the man he is today. Raised in Turkey and educated in English schools, at the age of nine he was sent to a Beirut boarding school to learn Arabic. When the civil war broke out in 1975 he was first sent back home to Jeddah. But a year of studying there clearly showed him that the Saudi curriculum, with emphasis on religious studies, was not for him. So he went to Switzerland to pursue his studies. “As a young man coming from Beirut, Switzerland was easier to acclimatize than Jeddah,” he says.

From Switzerland, he went on to Princeton to pursue political science. Then he joined the Saudi Arabian Monetary Authority (SAMA) and was sent to work at the Saudi International Bank in London – a joint venture between SAMA and JP Morgan. After two years, he completed his MBA from Harvard and went back to Saudi Arabia and SAMA.

“SAMA was very conservative in its investment strategy, very dissimilar to the Kuwaitis or the Gulf or Abu Dhabi,” he says. “SAMA is a very plain investor that has always been conservative with investment bonds and stocks.”

In 1989 he joined a group called al-Mawarid, which took over Saudi Hollandi Bank, the first bank to operate in Saudi Arabia. He was barely 30 years old, and he and his team came in with the brashness of youth in what was to date the only hostile takeover of a Saudi bank. In the tight business environment of the Saudi banking sector, such things simply aren’t done.

“When you’re young, you’re ambitious … and in those days I very aggressively restructured that bank, fired 50 percent of the staff, changed the whole management,” he says. “It was something that had never happened before. The community received it with a lot of discomfort. The regulators and the business community were not used to this sort of aggressive firing, aggressive restructuring.”

As leader of the raiding party, Shihabi became the Chairman of the Board Management Committee. He chose a new team and they set about setting new benchmarks and standards in the Saudi banking industry. They rebuilt the bank from zero, he says, and in the process  alienated a big chunk of the Saudi business community.

This led to a drop in market share for three years, he says, and tremendous pressure to change his tactics. But the strategy ultimately began to pay off. From the fourth year on, annual growth was in the double digits.

“From 1993 until 1998 we have compounded annual growth in profits of 30 per cent every year,” he says.

He admits that it was disruptive and he would do it differently if he had to do it now.

“I would have done it much more softly and gently. Particularly, the region is a very small place; this is not New York,” he says.

“Back in those days we cut people’s loans, we put new conditions on loans, we did a lot of things that you would do in the States that had not been done in Riyadh before.”

Shihabi admits that it all became possible because Prince Fahed bin Khaled bin Abdallah bin Abed Rahman was a mentor in the group that led the takeover.

Calling him “one of the brightest and most intellectual members of the family,” Shihabi says Rahman stood by his protégé.

“He backed me up. When the market was upset, the business community was upset and when we were losing market share, profits were going down, had he not backed me up, I would have been kicked out.”

But even he admits maybe he was too young for such a project. “Someone once told me never to hire a Harvard business graduate straight after school because they learn these case studies and think they can run General Motors. It’s easy to look at numbers and easy to take big decisions, but you need people to translate those,” he says.

“Now they are talking about Facebook, about Zuckerberg running it,” he says. “I will never invest in that company because he’s a kid. Now, yes, he has built it, but he just doesn’t have the wisdom to run a 100-billion-dollar company. He should be Chief Creative Officer, he should not control.”

The need for such wrenching change was because of the local business practices, he says. “We fired every senior manager down to the branch managers. So we really took the top layer off of the bank and 50 percent of the staff. I don’t know if I would do it that brutally anywhere because I think that in the process you destroy a part of your franchise. But in doing it we did the right thing, so that’s why we came back strongly. So, if you have the power and you are a commercial bank, even when people get upset, it takes them a lot to leave a bank. So it has a resiliency to it.”

Shihabi blames the Saudi education system for not putting enough emphasis upon finance and banking in the curriculum. “I think the Saudi market still lacks first-class bankers. It also lacks a good business school, economists, bankers and good business education.”

Rasmala

After exiting Saudi Hollandi bank, Shihabi set up his own firm, Rasmala Investments. But he realised he did not know enough and that his business degree from Harvard had not prepared him for the bold move. “I knew the financial markets, but nothing about what it takes to set up a company that would become a regional platform. I realised how difficult it was to do business in the region where each market in itself was too small and there were far too many barriers in place against setting up a regional player,” he says. Also, the region is challenging for any private equity player, like Rasmala, as there is no scarcity of capital here.”

He transformed Rasmala from private equity to assets management and then acquired a brokerage operation in Egypt and Oman. Then came the financial crisis and Shihabi admits that he underestimated the impact the crisis would have on the Gulf.

He blames the central bankers of the region for the mess saying they were not able to communicate the strength of the local economies effectively to the business community. So the business community was psychologically impacted with all that was happening in the world.

“The central banks also did not address the banking problems quickly enough. They did exactly what other central banks around the world did, that is they colluded with banks and auditors to cover up the problem. Instead of solving the problem in one year by forcing banks to write down their bad debts, they were going to solve it over 10 years. Maybe the banks in Britain had to do that, even the banks in America had to do that, but in the Gulf the banks did not have to because the Gulf had capital. What the Gulf could have done was force the bank to go out to the market and raise capital and the banking problem would have been solved in one year. What is happening now is the bank lending dropped and when bank lending drops the economy slips. The policy they applied was a mistake,” he says.

New directions

But after that, the world of finance held little allure for Shihabi. He moved into farming, taking over the commercial farm in Portugal his father had bought some years ago. Shihabi’s son, Omar, asked to take control of it to grow avocados and other fruits.

“You buy the land, you plant the tree,” he says. “You only have one variable which is the weather and if the tree grows it’s a much simpler world.”

He says he is relieved as no one now questions him on the future of the euro or when the crisis will be over.

Having more time to himself, Shihabi has also taken up writing and he has published a book on the strategic situation of the Gulf and the competition between Iran and the GCC countries. In his book, Shihabi takes a grim view of GCC states’ situation, saying that Iran is a very large neighbor with more than 80 million people – and not necessarily friendly.

Facing it are the five small states of the GCC and Saudi Arabia. His new book, “Arabian War Games” proposes a federation between the GCC and Yemen to counter the rising Iranian threat and any threat posed by the Arab spring.

“I wanted to raise some uncomfortable issues about the political environment in this part of the world and about vulnerabilities that I see, start a bit of debate about them,” he says. “The western imperial umbrella protected the region in the days of the British and in the days of the Americans, but assuming that that protection would be indefinite is naïve.”

He speaks of national strategy in terms familiar to any businessman, using terms like “scale” and “vulnerabilities” and even referring to countries’ “business plans”.

“I think that the peninsula should become a federation, Saudi Arabia, Yemen and the Gulf, which is one unified country with one flag, one embassy, but they can retain autonomy, foreign affairs, military affairs, a lot of things centralized but still retain a lot of autonomy in lifestyle and things like that that they want to have,” he says. The other elements needed in the GCC are an independent legal system, transparency in governance, good governance and freedom of expression.

But the odds are long that such a union would happen.

“I think that Saudi Arabia is taking it much more seriously than some other countries that are resistant. Qatar is resistant and I also think the UAE is a little resistant as well, Kuwait is resistant. So everybody wants to be independent, but I think you need scale. Like in a business and in a bank, you need scale, countries need scale especially when they are in a vulnerable situation. So, the Gulf countries have to take integration much more seriously and much more urgently,” he warns.

As for the smaller country’s unease with Saudi Arabia’s almost certain dominance in such a union, he is dismissive and perhaps betrays a bit of his own nationalism.

“A Saudi hegemony is better Iranian hegemony at the end of the day,” he says.