The Problem of Risk Management in Banking in Oil‐rich Gulf Economies

Abstract

Examines the impact of the oil recession on the viability of past banking business and its implications for the future loan portfolio of the commercial banks. Concludes that there is a need for greater risk management, not only in terms of loan recovery, but also in relation to more effective portfolio management; this embraces a greater emphasis upon the nature of risk and return in bank asset structure and greater diversification of assets in order to spread risks and to reduce bank exposure to particular sectors of the domestic economies.

Human Resource Development and Economic Growth in a Capital-Poor Islamic Economy:

“…Unlike most developing economies in the last two decades, the kingdom has had great financial resources and only modest human resources. This situation has created great pressure to import professional services especially in the economy's financial sector, with the result that 81 percent of all technical personnel are foreigners (Tawi 1984 Economy, and the Saudi Arabian Agricultural Bank, offer specialized training programs in lending and financial services to clients and employees (Presley 1992 Proceedings of the Fourth Internationa] Islamic Economics Seminar icizing the kingdom s banking structure (currently not allowed for mainstream usage). The government has realized fully that, given current levels of technical and managerial know-how in the Saudi Financial system, the practice of interest-free participatory financing in the economy cannot be implemented in a way that ensures optimal resource utilization without first having highly trained personnel in the business sector.…”

“…The fact that attempts at risk management in Saudi banking portfolios had failed became apparent in the mid-1980s, when declining oil prices forced government spending into retrenchment This, in turn, revealed the business community's confusion over cash flow management. Many business owners did not make a distinction between government-sponsored aid and loan receipts and cash flows provided by sales (al Hajjar and Presley 1992). As government subsidies declined, inefficient 90 Proceedings of the Fourth International Islamic Economics Seminar businesses dependent on government disbursements for survival began to default on their loans.…”

“…Instead of promoting dependence on private sector profits, a stated priority in each five-year development plan, aid and subsidy programs may have stilled demand-based entrepreneurship and may have created disincentives for profitgenerated circulating capital (Wright 1992). These disincentives arise from several sources: the government's crucial role in the acquisition and distribution of production resources; the fact that the government is the country's largest consumer; the government's policy bias towards distributing funds to real estate projects; and because capital circulation in Saudi Arabia involves the lending of financial resources and the borrowing of human and natural resources (al Hajjar and Presley 1992).…”

“…In the case of Saudi Arabia, specifically, the reasons for this should be sought in the negative attitudes of business owners toward participative forms of financing and in their management altitudes towards management practices required for commercial sector financing. In papers presented at the 1991 British Society of Middle Eastern Studies Conference (London) and at the 1991 International Conference on Islamic Economics (Kuala Luinpar), al Hajjar and Presley (1992) revealed an interesting phenomenon within Saudi Arabia's small business community. In their studies, questionnaires designed to identify private sector attitudes towards musliarakah and mudarabah financing were collected from 222 small firms within Saudi Arabia s manufacturing sector (53 percent of the questionnaires distributed were relumed).…”

“…This often makes business leaders more concerned with the businesses support of the family than with secular profits. Researchers have found that this culturallyased attachment to the family-owned business remains a factor for Arab families even after they have emigrated from the Arab world (al Hajjar and Presley 1992) Of the respondents, 36 percent were more prepared to share business ownership with a nend or relauve than with a financial institution or a national company. Of those Tcjectmg mushomkah finance, the overwhelming majority (nearly 90 percent) did so n ortler to remain the sole owner of the business so that they could hand it over to a amily member at a later date.…”