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Saudi Arabia – Case Study

1.

Introduction

Since the dawn of its modern history, Saudi Arabia has been an open and liberal economy which has benefited and extensively flourished from free movement of goods, services, capital and human resources. Consequently, it has played an important role in supporting international efforts towards a more globalized and interlinked world economy. Also, during this period Saudi Arabia has recognized the importance of institution building to ensure that the country can develop an economy with strong and stable fundamentals which can allow an optimal participation in the global market as well as absorb external shocks that may arise in the global economy. This paper presents the experience of Saudi Arabia as a case study on ‘Globalization and the Role of Institution Building in the Financial Sector.’

The history of this experience is best presented in the context of the evolution of the Saudi Arabian banking system and the role played by the Saudi Arabian Monetary Agency (SAMA), the central bank, in the institutionalization of the financial market. This is because for over half a century, Saudi banks and SAMA have been the key players in the Saudi financial system. Pedagogically, the history can be divided into four distinct phases

  • the genesis, the adolescence period of the 1970’s, the trials and tribulations of the 1980’s,

and the restructuring for growth of the 1990’s leading into the prospects for the new millennium. The paper traces the main theme through the six decades of evolution of the Saudi banking system, characterized by strength, stability and resilience. It also featured consistency in financial and monetary policies and effective banking supervision.

2.

The Genesis and Early Years

The Genesis of the Banking System. The genesis of a modern banking system in Saudi Arabia has its roots in the creation in October 1952 of the Saudi Arabian Monetary Agency (SAMA) with primary responsibility for monetary management. Prior to this, branches of a few foreign banks and some local money changers provided all financial services to meet the needs of the trading community and the pilgrims. By 1952, the inflow of the royalty revenues from increasing production and demand for oil had contributed to a sharp rise in government revenues and expenditures. As this gave a boost to the domestic economy, demand for financial services rose sharply. The Government followed open and liberal policy which encouraged a competitive banking environment and permitted opening of new domestic and foreign banks in Saudi Arabia. SAMA’s creation was followed by the licensing of more foreign bank branches including Banque de Caire, Banque du Liban et d’Outremer and First National City Bank of New York. This was the first wave of

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