Running head: COMPARE AND CONTRAST SAUDI ARABIA FINANCIAL SYSTEM WITH

THAT OF BAHRAIN

Compare and Contrast Saudi Arabia Financial System with that of Bahrain
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Introduction

COMPARE AND CONTRAST SAUDI ARABIA & BAHRAIN FINANCIAL SYSTEMS

The financial markets, financial institutions and financial instruments in Saudi Arabia
and Bahrain, in the recent years, have indicated varied phenomena due to fiscal stability issues, which
have been receiving attention from the policy makers all over the world. One of the reasons for this is
that East Asian financial crisis of the 1990s. Due to that turmoil, the International Monetary Fund
(IMF) and the World Bank introduced the Financial Sector Assessment Program (FSAP) whose aim
was to assess regularly the weaknesses and strengths of the financial systems of their member states.
For example, in Saudi Arabia and Bahrain, the central banks and the regulatory authorities have taken
the issue of financial stability more serious and therefore establishing financial departments and
introducing the regular publications of the financial stability reports which focused on assessing the
potential risks to the financial stability (Alawode, 2008). Comparing and contrasting the financial
systems in the two countries is important in knowing the financial capabilities of the two countries
and determining their abilities to ensure cash flow within their borders. The continued decline of oil
prices that commenced in mid-2014 has had a significant negative impact on the fiscal indicators of
both Saudi Arabia and Bahrain. This is evidenced by the fact that the Standard & Poor's rating agency
downgraded the credit rating of Saudi Arabia and Bahrain in February 2016, citing increasing
sovereign default risk as a result of the oil glut (Reuters, 2016). As a result, S&P downgraded Saudi
Arabia to from A+ to A-, while Bahrain was downgraded from BBB- to BB with the potential for
further downgrades due to the relative instability of the oil market (Reuters, 2016).
The capacity of the banking sector in Saudi Arabia has responded to the macroeconomic
shocks and has been strengthened over the past decade. Historically, the environment for operating
has been of output volatility contributed to the pervasive dependence on the hydrocarbon sector. The
sector, therefore, is profitable with the returns on assets being an average of over 2%. The stability is
underpinned by an effective supervisory and regulatory structure that proactively contains risks (IMF,

COMPARE AND CONTRAST SAUDI ARABIA & BAHRAIN FINANCIAL SYSTEMS

2006). However, the recent decline in oil prices has significantly increased the credit risk of Saudi
Arabia largely due to its heavy dependence on oil as the primary revenue source. As a result, the
Moody's rating agency in March 2016 downgraded the Saudi Arabia banking system from a "stable"
outlook to "negative" outlook due to falling oil prices and declining government spending by 14% in
2016 (Ellyatt, 2016). This is expected to weaken the operations of Saudi Arabia banks due to
declining liquidity in the economy effectively increasing the credit risk of its financial systems. Saudi
Arabia's revenues and government budget primarily depend on oil exports and therefore the sharp
decline in international oil prices from $114 per barrel which was reported in June 2014 to $38 per
barrel in March 2016 has had expansive financial and economic implications. The declining liquidity
implies loan growth has slowed to between 3% in 2016 from 8% and 12% in 2015 and 2014
respectively (Ellyatt, 2016). Conversely, non-performing loans have increased from 1.4% of total
loans in 2015 to 2.5% due to high funding costs as well as loan-losses.
The Bahrain sector, on the other hand, is supported by a contemporary and proficient
settlement and payment infrastructure, but an improvement in the governance is needed. Following
the decline in oil prices, Bahrain has also been facing a significant decline in government revenues
necessitating the International Monetary Fund (IMF) to recommend a reduction in the budget deficit
in January 2016. This is contingent on IMF projections that GDP growth to will decline to 2.2% in
2016 down from 3.2% and 4.4% in 2015 and 2014 respectively (Financial Tribute, 2016). Bahrain has
a significantly high budget deficit of 15% of GDP which in addition to declining oil prices will
increase the level of national debt. According to the IMF, Bahrain is also experiencing intensive fiscal
vulnerabilities as well as weak consumer and investor sentiment and therefore it is important that
fiscal adjustments are implemented such as near term austerity measures generate non-oil revenue
and savings that could facilitate fiscal consolidation (Financial Tribute, 2016). The IMF asserted that

COMPARE AND CONTRAST SAUDI ARABIA & BAHRAIN FINANCIAL SYSTEMS

this would support the strong capitalization of Bahrain banks while the increased liquidity would
buffer the economy the declining growth effectively bolstering the financial system (Financial
Tribute, 2016).

Financial Markets between the Countries

The financial markets in the two regions have rapidly grown as a result of the relatable oil-rich
countries. The majority of this growth has been influenced by the banking sector of these countries.
The macroeconomic setting of Bahrain has proved to be one of the most diversified economies in the
region. This is because its financial sector has been able to develop strongly, which serves both the
domestic and the economy of the surrounding neighbors. This implies that the trading capability has
been improved significantly over the years in the country as a result of the growing financial markets.
The overall growth rate has been high in the country in the past years due to the surge in the prices of
oil. This condition, combined with a strong balance of payments has contributed to the rapid growth
of credit, especially regarding loans to the households by the Full Commercial banks (FCBs) as
illustrated in the graph below.

COMPARE AND CONTRAST SAUDI ARABIA & BAHRAIN FINANCIAL SYSTEMS

Fig 1 Growth of Credits regarding Loans by the FCBs between 2000 and 2004 (International
Monetary Fund, 2006)
In Saudi Arabia, the capacity of the ability of the banking division to respond to the
macroeconomic regional fears and shocks and has considerably been strengthened over the past
decade. Despite the upgrade that is in progress in the capital business sector regulation, the extra
changes have quickened the business sector and, hence, developing the framework's ability to expand
the risks (Barth, Dopico, Nolle, & Wilcox, 2001). The Saudi Stock Exchange (Tadawul) has a market
capitalization of approximately $569.87 billion and 169 listed companies, which is significantly
higher than the market capitalization of the Bahrain stock exchange which is $48.27 billion with 50
listed companies. Historical analysis of the stock market indices for both the Tadawul (TASI) and the
Bahrain stock exchange (BSE) indicates that both stock markets have been declining, but BSE has
underperformed the TASI evidenced by a -60.46% decline in the BSE compared to -32.41 decline in
the TASI since April 2008.

COMPARE AND CONTRAST SAUDI ARABIA & BAHRAIN FINANCIAL SYSTEMS

Figure 2: Comparative analysis of long term performance on the TASI and BSE (Source:
http://www.gulfbase.com/Home/PricePerformance/5/0/0)

This is because while the equity market sector is light with a high turnover proportion and has the
biggest business sector capitalization of the Arab stock trades, its free buoy is moderately littler than
that of Bahrain. At the point when this component is consolidated with the expanding edge
exchanging and the constrained procurement of the venture data, this could influence the value
revelation process in the country.
Comparing the financial markets in the two countries it is evident that Bahrain has a much
bigger financial capability when compared to Saudi Arabia. Looking at the typical features of the
financial markets of the two countries, it can be established that when the pervasive structural issue
has been resolved, the role of the collateral and its execution could serve as a noteworthy impetus to
the development of the markets. The ability to find the practical and workable framework for
resolving the issues in the financial markets in each country could foster a noteworthy development

COMPARE AND CONTRAST SAUDI ARABIA & BAHRAIN FINANCIAL SYSTEMS

of the business sector based on the housing finance systems. The financial markets of any country are
important in growing the economies of the respective states. A growing financial market directly
implies a growing economy. Since the financial markets of both Oil-rich Saudi Arabia and Bahrain
have been growing, then the economic prowess of the countries have also improved significantly.

Financial Institutions in the Countries

The National Commercial Bank (NCB) is the largest financial institution in Saudi Arabia. For
over sixty years, the people of the country have looked up to the bank for innovation and leadership
and have considered it a trusted partner in their personal and professional lives. Since its opening in
1953, the NCB has shown the steady march towards continual and modernity over the years. The
bank now serves more than four million customers, and it is considered one of the most significant
financial institution not only in Saudi Arabia but also in the entire Middle East (NCB, 2014). The
bank enjoys full customer confidence today, and it is often referred to as the AlAhli which means the
national bank that is owned fully by the Saudis. The bank has also evolved into an integrated financial
group over the years. The bank has also had the ability to expand at the international level, and its
branches are found in other countries of the Middle East and overseas.
Other financial institutions in Saudi Arabia are the Al Rajhi bank and the Samba financial
group. The Al Rajhi Bank was founded in 1957. It is also one of the oldest existing financial
institutions in the country. The bank is deeply rooted in the Islamic banking principles. It is sharia
compliant and instrumental in the bridging of the gap between the modern financial demands and the
intrinsic values while it spear heads numerous industry standards and developments. With an
established base in Saudi Arabia, the bank has a vast network that barely exceeds 500branches over

COMPARE AND CONTRAST SAUDI ARABIA & BAHRAIN FINANCIAL SYSTEMS

118 dedicated lady branches. The first lady branch was opened in 1979 in AlShmaisi and the first men
branch opened in 1957 in Aldrich. The third financial institution to be analyzed from the country is
the Samba financial group.
This financial institution is one of the regions most acclaimed and largest financial service
group. It has a reputation of solving world class financial problems (Samba Financial Group, 2016).
Since its inception, the group has been leasing the industry in innovation and has had a long list of
industries under it. It has played a major role in the modern transformation of banking in Saudi
Arabia. Its world class services market-leading concepts and superior technology have made it one of
the most successful financial institution in Saudi Arabia and the most internationally acclaimed bank
not only in Saudi Arabia but in all of the Middle East. On the other hand, Bahrain also has some of
the leading financial institutions that can be compared to those of Saudi Arabia. For example, some of
the financial institutions found in these countries include: the central bank of Bahrain, the Bank of
Bahrain and Kuwait and the future bank. The last two banks are retail banks that are found in the
country.
There are some foreign banks that could also be found in the country and include the city bank
and the HSBC bank. However, for this discussion. The first three banks mentioned are discussed. The
central bank of Bahrain is one of the oldest existing banks in the country. The bank was established
in accordance with the provisions of the law and at the time of its opening it was financially and
administratively independent. It was first established in the city of Manama where it would be easily
accessible by most people of the country. It was also made to have an independent budget to enable it
to be prepared commercially. The Bank of Bahrain and Kuwait was formed after an agreement by the
two countries to come up with a great financial institution that would benefit their people and would
act as a link between the two countries (Global Investment House, 2007). The future bank, on the

COMPARE AND CONTRAST SAUDI ARABIA & BAHRAIN FINANCIAL SYSTEMS

other hand, was first meant for the small scale retailers but expanded over time and became a fully
operational bank guided by the Sharia law.
Financial Instruments in the Countries
Despite the possession of the ingredients, high positioning in the Islamic world, its
qualification, great wealth and domestic demand, Saudi Arabia is still absent from the competition to
be in the capital of Islamic banking. Most people have put the blame on the Saudi Arabia's Ministry
of finance and the monetary agency. The concept of Islamic banking also still not yet internationally
recognized and this makes it difficult for the financial institutions of the country to grow as much as
they would desire. Financial instruments are important in any given country and could help in trading
with other countries and in benefiting themselves. The financial instruments are the tradable assets of
any kind. The three financial instruments in the country are cash, oil and gold. Cash is the common
mode of exchange that people use to acquire other things. It is one of the greatest financial
instruments in the country (IMF, 2005).
Sometimes storing huge amounts of cash in a bank could be monotonous and some people and
financial institutions prefer saving their money in terms of gold. Gold, which they deem as more
stable, can be resold to reclaim the money' worth with less depreciation and, as indicated through the
foreign-exchange markets, it only appreciates in most case. On both countries, money and oil have
been used as financial instruments. The oil-rich countries have traded their oil carefully to ensure cash
flows into the country. For this reason, the oil has been used as a trading commodity and therefore as
a vital financial instrument. In Bahrain, apart from cash and oil, another financial instrument is the
ownership interest of a given entity. For example, when an individual has a given amount of shares in
a company, they partly own that corporation. In the event of liquidation, they can be compensated

COMPARE AND CONTRAST SAUDI ARABIA & BAHRAIN FINANCIAL SYSTEMS

10

fully by their investment. For this reason, the stake they have in the company can be seen as a
financial instrument, which is a driving power towards financial security.
Conclusion
From the findings above, there have been major differences and similarities when comparing
the financial systems in the countries. As the paper contains; when reviewing the financial institutions
in the two countries, it was found that in Bahrain, most banks were retail bankers and followed the
sharia law while in Saudi Arabia most of the banks were internationally recognized as a huge
contribution to the financial markets. When comparing the financial markets of both countries, it was
established that a growing financial market had a direct relationship with the growing of the economy.
The financial markets of the two countries were somewhat similar in the sense that they both
expanded over time and, therefore, a growth in the economy for the two countries. When analyzing
the financial instrument, both Saudi Arabia and Bahrain had similarities in what they use as financial
instruments which included oil and money. On the other hand, however, it was found that Saudi
Arabia had adopted Gold at some point as the financial instrument while Bahrain considered having
stakes in companies as their financial instrument in ensuring financial security.

COMPARE AND CONTRAST SAUDI ARABIA & BAHRAIN FINANCIAL SYSTEMS

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References
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%20Stability.pdf
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