THE BANKING SYSTEM IN

Rolf Meyer-Reumann*

THE SAUDI ARABIAN MONETARY AGENCY (SAMA)

The banking system in Saudi Arabia is governed by the Saudi Arabian Monetary Agency (SAMA). It is headed by a board of directors, consisting of the Governor (Hamad Saud AI-Sayari), the Vice-Governor (Dr Ahmed Almalek), and three directors, who are non-governmental employees. SAMA is an independent autonomous governmental agency. It is directly subject to the instructions of the Council of Ministers of whom the Minister of Finance and National Economy is in charge for all SAMA matters. The functions of the Saudi are laid down and governed by the Law of SAMA.1 Art. 1 of this Law divides the scope of activities of SAMA into the following three categories.

1. Custodian of the Saudi currency As custodian of the Saudi currency SAMA discharges, supports, and consolidates the Saudi currency inside and outside of Saudi Arabia: Art.la, Art.3a,b,c of the Law. When SAMA was founded in Sha'ban 1371 H (May 1952) the commercial bank business in Saudi Arabia was mainly in the hands of the traditional Saudi money exchangers and some foreign banks. No bank notes existed, and the leading currencies were Silver Riyals and Sovereigns. Only one year after its foundation SAMA successfully introduced paper money, first by issuing receipts for pilgrims by which they were able to convert foreign currency into Silver Riyals and vice versa. The bank notes of the followed in early 1379 H (mid-1959). Nowadays, the Saudi Riyal has a firm place among the stable currencies in the

*RolfMeyer-Reumann is a German lawyerand a partner in Meyer-ReumannLegal Consultancy, with officesin Dubai and Abu Dhabi;the firm is associatedwith Dr HasanAl-Mulla Lawyers & Legal Consultantsin Riyadhand with the Law OfficeOsama S. Al-Yamaniin . This articleis basedon a speechsubmitted at a Seminarof Dr Hasan Al Mulla Lawyers& Legal Consultantson 6 June 1995at the SheratonHotel in Riyadhheld under the sponsorshipof the German Embassy, . The first edition was a Commemorativearticle on the occasionof the fiffh anniversaryof the Representativeoffice of DeutscheBank in Bahrainand a farewellto its first President Dr GerhardFischer on 7 ' June 1988. Saudi Arabian MonetaryAgency; Royal Decree M/23 of 23.05.1377H (15 December 1957) (hereinafterreferred to as the Law, or the SAMALaw).

207 208 world. It was adopted as one of the 16 currencies that define the Special Drawing Rights (SDRs) of the International Monetary Fund (IMF). Traditionally, and mainly because of the fact that the international oil price is based on the US Dollar currency, SAMA has assessed a fixed parity of the Saudi Riyal towards the US Dollar. Realignments of the parity are rare and not very substantial. There have been no realignments at all since 1 June 1986.

2. The Bank of the Saudi Government As the Bank of the Saudi Government SAMA receives the governmental revenues and is responsible for its expenditures: Art.lb, Art.4 of the Law. As the government's agency SAMA also holds the country's gold and foreign currency reserves. Granting subsidies is more than just effecting payment. It requires political and economical considerations and certain requirements have to be met by applicants. Therefore, the distribution of subsidies is not undertaken directly through SAMA but by separate agencies which have been specially created for this purpose and which are linked to the Ministry of Finance and National Economy.

3. The supervisory authority of the private banks SAMA is the supervisory authority ot' the Saudi commercial banks and the traditional money exchangers: Art.lc, Art.3d of the Law. All Saudi banks and money exchangers are subject to the guidelines and instructions of SAMA and are required to provide financial reports each month. The balance sheets are to be submitted, and published quarterly in the daily papers, and are the basis for the Quarterly Bulletins published by SAMA. Details are laid down in the Banking Control Law, which will be discussed later. SAMA not only supervises but has actively developed the Saudi banking system. It Saudialised (sic) the banks operating in the Kingdom and it developed a stock market and a market for bonds in which SAMA continues to play an active role. A Banking Institute established by SAMA, where prospective Saudi share dealers are trained for their jobs, safeguards the standard of experience. SAMA enjoys a good international reputation. It has successfully implemented and maintained a stable, freely convertible currency and efficiently controls the activities of the Saudi banks, as well as the income and expenditures of the Saudi Government.

THE BANKING CONTROL LAW2

Control over the commercial banks operating in the Kingdom was given to SAMA

Banking ControlLaw; Royal Decree No. M/5 of 22.2.1386H (11 June 1966).