Interview: Patrice Couvegnes
What can the government do to encourage new credit lines, such as loans for small and medium-sized enterprises (SMEs)? How serious are local banks about increasing lending to SMEs?
PATRICE COUVEGNES: The government is doing a lot in this regard, because they are serious about job creation, as well as pushing development in the private sector. The government is working with the Ministry of Finance and the Saudi Arabian Monetary Agency to provide financial guarantees for SME loans. They are also providing nonfinancial support through training, business incubation centres and export development programmes. A good and comprehensive framework has been put in place to support SME growth. The first major step was the development of the Kafala programme, which keeps these firms’ capital secure. Secondly, they introduced other state guarantee programmes to stimulate financing for less well-known SME sectors, such as construction and manufacturing. Thirdly, the Saudi Credit Bureau recently introduced the Taqeem rating system. This is important because SME lending has risks that are not the same as corporate lending.
Banks are also committed to developing this sector, as it is our responsibility to support the diversification of the Saudi economy. It is a nationwide project and will create jobs everywhere, not only in Riyadh, Al Khobar and Jeddah, but also in more remote areas. Banks view SMEs as a strong potential line of business, and as such are developing specialised units to improve SME coverage while also investing in the support functions required to develop this business safely.
Although sukuk, or Islamic bond, issuances have been limited to date, they are anticipated to become more prominent. Do you expect demand for advisory services on corporate issuances to grow?
COUVEGNES: During the last five years the Saudi sukuk market has grown significantly with a number of large new issuances. For example, the Saudi Aramco Total Refining and Petrochemicals Company project sukuk is a mix of loan and sukuk, and the General Authority of Civil Aviation issued a big sukuk to finance its expansion projects. Traditionally, if you cannot finance a project through a loan, then you need to go to the debt market to find funds. So in the future, medium- to long-term projects should be increasingly financed through the debt market. The problem today is largely the lack of interested investors. We mainly see investment coming from government investors such as the Public Investment Fund, General Organisation for Social Insurance. Given the high volatility of the market today, there is a need to distribute sukuk to retail either directly or indirectly through asset managers.
We as banks should have other products and distribution capabilities to manage our assets and our balance sheets. There are limited opportunities right now. Instead, there are massive amounts of liquidity sitting as deposits that are not being used, which makes returns on these accounts very small. Fostering a stronger debt market will also allow us to better assist our clients by offering alternative solutions to their financing needs.
With the creation of a nascent industry specialising in mortgage lending, how will these players compete with traditional banks?
COUVEGNES: We know and work with these firms, and we see that they are doing quite well, and expect continued, steady growth. However, traditional banks currently have a competitive advantage, as we enjoy a lower cost of funding given our size and how we manage our funding. We are widening our sources of liquidity and reducing the cost of growing that liquidity, which these companies cannot do. They can, however, make up the difference by offering more flexible loans and specialised services. Overall, we consider the development of these firms to be a benefit to the market by creating healthy competition. It is welcome, provided newcomers are professional and responsible in pursuing market share. So far this has not been an issue though, and this is good for Saudi Arabia’s market.
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