Economic Update

Published 15 Jun 2018

The Financial Sector Development Programme (FSDP) 2020, which was approved in early May, aims to expand the capacity of financial services firms to meet the financing needs of Vision 2030, Saudi Arabia’s long-term national development plan.

The latest blueprint for sector growth outlines three main strategic pillars to strengthen the sector: enabling financial institutions to support growth in the private sector; ensuring the formation of an advanced capital market; and promoting and facilitating financial planning services, such as retirement, savings and financial literacy.  

To achieve these broader objectives, the programme specifies four key targets to be reached by 2020.

First, the FSDP commits to raise the sector’s asset-to-GDP ratio – which stood at 192% in 2016 – to 201%. Second, it targets increasing the share of capital markets assets as a percentage of total assets from 41% to 45%, under the broader aim of diversifying the sector’s structure. Third, in order to enhance inclusiveness and productive financing, the proportion of total bank financing extended to small and medium-sized enterprises will be raised from 2% to 5%. Lastly, with a long-term view to create a cashless society, the FSDP seeks to raise the share of non-cash transactions from 18% to 28%.

Large-scale merger talks between banks under way

The targets included in the updated FSDP, which builds upon previous efforts to strengthen the sector, are prompting consolidation among some lenders, with some institutions already trying to build up reserves in anticipation of increased financial activity.  

In mid-May Saudi British Bank (SABB) and Alawwal Bank issued updates on the Saudi Stock Exchange regarding the progress of merger negotiations first announced in late April. The two lenders announced that a preliminary, non-binding agreement had been reached on a share exchange ratio.

While discussions have reached an advanced stage, the banks said any deal was still subject to completion of confirmatory due diligence, finalisation of the merger agreement, agreements on various commercial issues and other steps.

The proposed merger would create Saudi Arabia’s third-largest lender, with combined assets of some $77bn.

“Should the merger proceed, it would represent an important transaction in the context of developing the banking sector of Saudi Arabia, this being a key objective of the FSDP under Vision 2030,” SABB said in its statement.

Mergers and acquisitions under discussion among insurers

Consolidation is also at the fore of the insurance sector, with three separate merger talks under way since 2017. The FSDP explicitly calls for consolidation in the congested insurance sector in order to create better-capitalised insurers that are more capable of serving market needs. At present there are 35 licensed insurers and reinsurers.

Overhauling regulations in a way that clarifies and facilitates mergers and acquisitions is one way the FSDP hopes to encourage consolidation and establish underwriters that have the capacity to meet market needs.

Another aim of the FSDP is to strengthen enforcement of compulsory motor and health

coverage. In addition to opening opportunities in these segments, it should bolster the balance sheets of existing insurers, which came under pressure last year when sector profits fell by 55%, a significant correction after growth of 140% in 2016.

According to a Standard & Poor’s report issued in late April, lower earnings were due in part to a 1% decline in gross written premium, though increased reserve requirements and bad debt provisioning by some leading firms also contributed to the slowdown. 

A key issue facing the sector is recruitment of quality staff

While the FSDP implements a range of reforms to improve the capabilities of the sector, finding quality staff will likely be a central challenge for financial services firms.

According to a survey conducted by recruiting agency Robert Walters, the sector’s demand for professional staff is rising steeply. Its latest Middle East Jobs Index, released at the end of April, showed advertisements for accountancy and financial staff up 26%.

The agency stated that demand is being driven by renewed interest from regional and international banks in the Saudi market, anticipated domestic growth and Saudiisation requirements stipulating higher employment levels of nationals.

“The main challenge for employers, both local and international companies, is to hire good-quality Saudi talent,” the report said.

A subsequent report by the agency, issued in early May, said the implementation of Vision 2030 was fuelling a broader recruitment drive across economic sectors, including among women, in line with Vision 2030’s aim of increasing their participation in the workforce from 22% to 30%.

This change has already begun at the top tiers of banking and finance, with women executives appointed at Emirates NBD Capital, Samba Financial Group and the Saudi Stock Exchange, among others, in recent months.