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Durham E-Theses The role of nancial intermediaries in Saudi Arabia's development with particular reference to the national commercial bank Aara, Fatima Mohammed Seleh How to cite: Aara, Fatima Mohammed Seleh (1995) The role of nancial intermediaries in Saudi Arabia's development with particular reference to the national commercial bank, Durham theses, Durham University. Available at Durham E-Theses Online: http://etheses.dur.ac.uk/5122/ Use policy The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that: • a full bibliographic reference is made to the original source • a link is made to the metadata record in Durham E-Theses • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders. Please consult the full Durham E-Theses policy for further details. Academic Support Oce, Durham University, University Oce, Old Elvet, Durham DH1 3HP e-mail: [email protected] Tel: +44 0191 334 6107 http://etheses.dur.ac.uk 2 ABSTRACT The Role of Financial Intermediaries in Saudi Arabia's Development with Particular Reference to the National Commercial Bank by Fatima Mohammed Saleh Mfara The purpose of this thesis is to examine the role offinancial intermediaries in Saudi Arabia's development with particular reference to the experience of the National Commercial Bank, the oldest bank in the Kingdom and the largest in the Middle East. The objective of the work was to reveal to what extent financial intermediation was involved in the development process of Saudi Arabia? Were commercial banks a prerequisite for development or was their growth a consequence of it? Was the development financed through Saudi Arabian financial intermediaries or was it funded from elsewhere, namely, revenues from crude oil disbursed through government spending? As a result, was the financial system permitted to deepen its financing or merely widen its activities? Was the Saudi Arabian government's role in development so great that commercial banks experienced crowding out? These issues were explored by examining the overall position of the commercial banks, and the National Commercial Bank in particular. The case study of the National Commercial Bank's financial statements and financial ratios over a period of two decades revealed its unfolding role within the economy. An investigation was made of the competitive position of the National Commercial Bank vis-a-vis other banks, and the fluctuations in its market share of deposits and loans was assessed. Finally, interviews and surveys revealed the bank's new managerial strategies and its plans for future business development to serve the needs of its clients. It was found that the liberalisation of the Saudi Arabian financial system had contributed to the Kingdom's economic development, and resulted in changes in institutions such as the National Commercial Bank which meant they could play an increasing role in the funding of industrialisation. i Dedication This work is dedicated in memory of two very special people. Sheikh Salem Bin Mahfouz, the founder of the National Commercial Bank and the inspiration behind this work, and to my aunt, Ne'ma Affara, who taught me the value of knowledge and education. 11 ACKNOWLEDGEMENT I am deeply indebted to my supervisor Dr. Rodney Wilson who has guided me through this research and provided invaluable advice and encouragement which has helped to bring this dissertation to a close. I also wish to convey my gratitude to Sheikh Mohamed Bin Salem Bin Mahfouz, Chairman and General Manager of the National Commercial Bank, as without his help this thesis would never have come to being. My extended appreciation also goes to the staff of the bank. To my parents, husband and daughter, Mona, I wish to express my admiration for their understanding enthusiasm and reassurances during my studies. I am also grateful to my friends Feroza Cooper and Avril Shields for their kindness and support. Finally, I would like to thank the Department of Economics and Durham University Library staff for their constant assistance. Durham, December, 1995. 111 The Role of Financial Intermediaries in Saudi Arabia's Development with Particular Reference to the National Commercial Bank by Fatima Mohammed Saleh Mfara Thesis Submitted in Partial Fulfilment of the Degree of Doctor of Philosophy The copyright of this thesis rests with the author. No quotation from it should be published without his prior written consent and information derived from it should be acknowledged. University of Durham Department of Economics 1995 iv {~ ... ~- TABLE OF CONTENTS Page No. CHAPTER ONE INTRODUCTION.................................................................................................... 1 CHAPTERIWO FINANCIAL POLICIES IN DEVELOPING COUNTRIES.............................. 7 2.1 MONETARY POLICY .................................................................................. 9 2.2 MONETISATION AND THE SUPPLY OF MONEY................................... 10 2.3 THE FINANCIAL SYSTEM.......................................................................... 13 2.4 THE DEVELOPMENT OF THE BANKING SYSTEM................................ 14 2.4.1 THE ROLE OF CENTRAL BANKS IN DEVELOPING ECONOMIES.......................................................................................... 14 2.4.2 FINANCIAL INTERMEDIATION ....................................................... 16 2.4.2.1 Commercial Banks .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ...... .. .. .. .. .. .... .. .. .. 18 2.4.2.2 Development Banks................................................................. 19 2.4.2.3 Informal Finance ........ ...................... ............................ ............ 20 2.5 SHALLOW AND DEEP FINANCE................................................................. 21 2.6 FINANCIAL WIDENING ................................................................................ 25 2.7 FINANCIAL LffiERALISATION ................................................................... 25 2.8 CONCLUSION ................................................................................................. 38 CHAPTER THREE THE ROLE OF OIL IN FINANCING SAUDI ARABIA'S ECONOMIC DEVELOPMENT .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 44 3.1 THE ORIGINS OF SAUDI ARABIAN OIL PRODUCTION ........................ 45 3.2 THE IMPACT OF OPEC ................................................................................. 46 3.3 OIL SUPPLY AND DEMAND IN THE 1980's AND EARLY 1990's AND THE IMPLICATIONS FOR SAUDI ARABIA ............................................... 49 3.4 EXPORT, PRODUCTION AND REVENUE FROM OIL ............................. 53 3.5 OIL DIVERSIFICATION............................................................................... 58 CHAPTER FOUR FINANCING THE NON-OIL ECONOMIC SECTORS IN SAUDI ARABIA ......................................................................................... 68 4.1 THE AGRICULTURAL ECONOMY ............. .... .......................... ...... .... ...... 70 4.1.1 Food, Pricing and Production Problems .. .. .. .. .. .. .. .. .. ... .. .. ............ .. ... 74 v Page No. 4.2 THE FISHING INDUSTRY............................................................................. 80 4.3 THE INFRASTRUCTURE.............................................................................. 81 4.3.1 Electricity.............................................................................................. 81 4.3.2 Transportation and Communication..................................................... 85 4.3.3 Water.................................................................................................... 89 4.4 THE CONSTRUCTION SECTOR................................................................... 91 4.5 TRADING ACTIVITY..................................................................................... 93 4.6 IMPORT SUBSTITUTION INDUSTRIES..................................................... 94 CHAPTER FIVE SAUDI ARABIAN FINANCIAL AND ECONOMIC POLICY............................ 104 5.1 GOVERNMENT EXPENDITURE, REVENUE AND THE BUDGET.......... 105 5.2 THE EFFECTS OF DEVELOPMENT EXPENDITURE ............................... 107 5.3 EXPENDITURE ALLOCATIONS AND INFLATION .................................. 110 5.4 EXPENDITURE CONSTRAINTS.................................................................. 113 5.5 PRIVATE AND GOVERNMENT CONSUMPTION ..................................... 118 5.6 INVESTMENT (GROSS CAPITAL FORMATION) ...................................... 119 5.7 THEBALANCEOFPAYMENT.................................................................... 121 5.8 CONCLUSION................................................................................................ 123 CHAPTER SIX THE FUNCTIONS OF THE SAUDI ARABIAN MONETARY AGENCY IN THE KINGDOM's FINANCIAL SYSTEM.................................................. 126 6.1 THE BIRTH OF SAMA................................................................................... 128 6.2 THE DEVELOPMENT OF SAMA's RESPONSIBILIDES.. ......................... 130 6.3 ISSUES OF NOTES AND COINS................................................................... 136 6.4 BANKER TO THE GOVERNMENT .............................................................