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4.

Banking Problems and their Resolution of the 1980’s

Deficiencies of the 1970s.

Notwithstanding the consolidation and restructuring of

the 1970s, significant gaps remained in the provision of banking and financial services. Some of the key gaps included, small business credit needs; limited chequing facilities to cash withdrawals; non-existent foreign currency transfers (as these were provided mostly by money changers); lack of consumer loans and facilities for small savers; antiquated banking methods; non-existent computer technology; and a regionally based clearing house

system.

A major deficiency at that time was the high dependence of banks on expatriate

workers and the lack of Saudi nationals in banking business.

Thus by 1980, Saudi banks

and Saudi authorities faced the challenge of rectifying these deficiencies.

The Trials and Tribulations of the Early 1980s. In line with the tremendous increase in government revenues during 1979 to 1981 and subsequent slow-down in 1982 to 1986, the Kingdom’s commercial banks saw rapid expansion followed by a difficult period of adjustment, deterioration in asset quality, and retrenchment. In fact, it was a kind of a boom-bust situation.

As oil prices tumbled from the all time high in 1981 and continued to decline in the next five years, it put significant pressure on the quality of banks’ assets which deteriorated with the economic slowdown. The credit to private sector which had increased over 500% during the period 1976-81 only grew by 20% during the next five years, i.e., at a rate of less than 4% per year. The Banks suffered much from non-performing loans which increased to over 20% of all loans by 1986. Banks’ profits suffered significantly and loan loss provisions and loan write-offs mounted. By 1988 most banks had made sufficient provisions for doubtful accounts and the average provision for the banking system as a

whole had risen to over 12% of total loans.

Slowdown in Economic Activity.

Rise and fall in oil prices resulted in

corresponding cahnges in real economic activity. Government revenues which had risen to SR 333 billion by 1981 started declining afterwards and dropped to just SR 74 billion by 1987. The rapid rise in bank assets and liquidity in late 70’s and early 80’s had given rise to a sharp increase in demand for private sector credit. Some banks expanded too rapidly, and did not have adequate credit assessment and monitoring procedures. They also lacked required technical expertise, qualified human resources, and adequate technology. Consequently when the economic slowdown occurred with the fall in oil revenues, many companies and businesses suffered from a lack of liquidity and faced a credit crunch. The construction and contracting sectors which had boomed earlier, faced the biggest setback and many projects were affected. Banks had difficulties to recover their loans and the

collateral in many cases proved to be difficult to realize.

Another challenge for the Supervisory System.

In 1982, SAMA faced another

major supervisory challenge when irregularities appeared in Saudi Cairo Bank’s operations. Two senior managers were involved in unauthorized trading in bullion during the 1979-81 period, and had concealed accumulated losses that exceeded the Bank’s share

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