Saudis feel the heat as bankers tighten lending

10:07, March 25, 2010      

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Majid al-Saadi's father and grandfather used to get bank loans simply by giving their name.

The 31-year-old owner of Saudi technology company Virgin Horizons Group now needs detailed earnings statements and proof of collateral after defaults by two of the kingdom's best-known family businesses during the seizure of credit markets.

"It became more complicated, even if you had a good relationship with the bank," al-Saadi said by telephone from Riyadh. "Especially for small and medium-sized businesses, you have to have solid guarantees - land, real estate."

For borrowers in Europe and the United States, documents and dates of birth are standard. In Saudi Arabia, where older people often don't have a birth certificate, finance was based on a handshake. Now concern is mounting that access to credit is stifling an economic revival amid a $400 billion government stimulus package and interest rates at a six-year low.

Bank lending to businesses in Saudi Arabia was flat last year after average annual growth of 27 percent between 2004 and 2008, according to Jadwa Investment Co in Riyadh, the capital. Private companies comprise almost half of the economy in the country, the world's largest oil exporter.

"The way it was done before is that you had many banks approaching us," said Aamir Al-Ghamdi, 30, marketing and business development manager at Quraish Trading Company, a family-owned importer of consumer goods. "Now, it's not that they come less, we don't see them at all."

Stifled recovery

Oil accounts for 45 percent of Saudi economic output, according to the CIA Factbook. Crude is now holding above $75 a barrel, what the kingdom deems a "fair price".

Yet if credit growth remains weak, the economy will expand by less than the 4 percent rate predicted by HSBC Holdings Plc, Simon Williams, a Dubai-based economist at the British bank, said in a March 4 report. It expanded by 0.2 percent in 2009.

"We would have had a lot stronger recovery if the banks were lending," said Paul Gamble, head of research at Jadwa. "Until bank lending resumes to a reasonable pace, the private sector won't be able to fully participate in the recovery." January showed a small pick-up in lending, though not enough to convince analysts the problems were over. Data for February is due in coming weeks.

The Tadawul All Share Index is up about 9 percent this year, led by building materials company Saudi Cement Co and Samba, a bank. The Saudi benchmark rose 27 percent in 2009, tracking a similar gain in the MSCI World Index.

Non-performing loans at Saudi British Bank, which is 40 percent owned by London-based HSBC, increased last year to 3.53 billion riyals ($941 million) from 193.7 million riyals in 2008, while provisions tripled. Banque Saudi Fransi, part-owned by France's CreditAgricole SA, set aside more than seven times more money for bad loans in the fourth quarter.

"There is less appetite to provide general facilities for speculative or investment purposes," said Richard Groves, chief executive officer of Saudi British Bank in Riyadh. Lenders want "improved levels of disclosure, including the timely release of audited financial statements, along with greater detail on the purpose and sources of repayment."

Banks in Saudi Arabia were spooked after the defaults of Saad Group and Ahmad Hamad Al-Gosaibi & Brothers Co, two of the best-known names from the country's Eastern Province.

The two groups are linked by marriage through Maan al-Sanea, the founder of Saad Group who ranked 62nd on the Forbes billionaires list last year. Their units borrowed at least $15.7 billion from about 80 banks, according to documents provided by lenders. About $5 billion of that is owed to Saudi banks, Standard Chartered Plc said in an Aug 26 report.

Al-Tuwairqi Group, another well-known Saudi Arabian family business, was forced to restructure $1.9 billion.

Since then, lenders have been looking for more than just a name when considering a loan, John Sfakianakis, the Riyadh-based chief economist at Banque Saudi Fransi, said.

"There is a shift away from how business was conducted a year ago and that's why it's taking time now for projects to go through," he said. "They're looking at the fine print, the cash flow of the companies, not just resting on the name or reputation of the business family."

The central bank, which has cut its benchmark interest rate to 2 percent, wants lenders "to get more serious about small and medium-scale lending", Governor Muhammad al-Jasser said in an interview on Jan 24.

"I do not underestimate the obstacles," he said, adding that "some of these companies do not have sufficiently transparent accounting systems."

Source:China Daily
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