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capital. SAMA required the Bank to issue new shares and double its capital in 1986. SAMA arranged this increase to be taken up entirely by the Public Investment Fund (PIF). The Bank also benefited from “low-cost” deposits from the Public Investment Fund. These measures helped the Bank with liquidity and rescued it back to a healthy position.

The Government’s Response.

In this period, SAMA in collaboration with the

Ministry of Finance took and to help the banks to included the following;

a number of steps to ensure the overcome the problems caused

stability of the financial by economic downturn.

system These

1.

Banks were required to seek SAMA’s approval prior to announcing their dividends. The Banking Control Law required all banks to build their statutory reserves equal to their share capital. SAMA further encouraged Saudi banks to build additional reserves to strengthen their capital base.

3.

In 1986, SAMA obtained a ruling from the Tax Department that permitted the tax deduction of loan loss provisions on an accrual basis. This encouraged banks to increase their loan loss provisions for doubtful accounts.

4.

To encourage Saudi banks to increase their inter-bank dealings and to support the development of a riyal inter-bank market, a tax ruling was obtained which exempted foreign banks from withholding taxes when carrying out inter-bank transactions with Saudi banks.

2.

Most foreign shareholders in Saudi banks enjoyed a tax holiday for the first

five

years

of

their

ownership.

To

encourage

retention

of

profits,

the

tax

another 5 years after which a deferred

by

holiday was extended in most tax scheme was permitted.

cases

5.

Corporate Governance. SAMA recognized the need to encourage banks

to take strong steps to improve their risk management

procedures.

Consequently

it

took

major

initiatives

in

and the

control area of

corporate governance. Firstly, strengthen their internal audit

it required all banks to develop and departments, and secondly it issued

minimum internal control guidelines. Also SAMA issued standards for Commercial Banks in Saudi Arabia which were International Accounting Standards.

accounting in line with

6.

Creation of Banking Disputes Committee. In 1987, Saudi authorities established a Banking Dispute Committee by the order of the Council of Ministers. The creation of this Committee as the only relevant quasi- court to handle dispute between banks and their customers significantly strengthened the legal system. By law, all banking disputes had to be referred to this Committee and the rulings of this Committee were given the same enforcement support as decisions from any other court.

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