Monetary policy in Saudi Arabia
Assignment 2 : MONTRY POLICY in Saudi Arabia
Maryam Habib Al-Raba'an
201101071
HAMAD, MAHMOOD O. E
Monetary policy in Saudi Arabia
1. Implementation of Monetary Policy in Saudi Arabia
The monetary policy of Saudi Arabia is prepared and Issued by SAMA (Saudi Arabian
Monetary Agency) by carefully studying all the economics, fiscal and international
economic
indicators. The main purpose of monetary policy is managed the exchange rate mechanism of
Saudi Riyals against all international currencies. As Saudi riyals are pegged with USD (United
States Dollars and SAMA had to maintain the Riyals value against the GBP, Euro and Yen. And
the other function this agency is performing is controlling the inflation rate, foreign direct
investment monitoring and structuring the Saudi economy to make over all economical
development in the country.
SAMA issue regular guidelines regarding the monitory policies like interest rate (repo rate),
local and international banking regulations and managing the cash reserve ratios in the local
banks. Being controlling all these economic policies also includes the printing and issuing the
Saudi Riyals in the market. And all the Riyals which we are using daily only issued by SAMA.
And the SAMA involves in monetary policy statements and solely works for banking operational
independence and pursuing the policies to sustain the economic development of Saudi Arabia.
The main source of income for Saudi Arabia is through the export of crude oil in international
markets. And this revenue is very huge, so SAMA is playing very important role to manage this
revenue for development programs in Saudi Arabia through government approvals. The
monetary policy is the instrument through which SAMA tries to promote all the developmental
activities in all economics sectors of the economy like infrastructure, education ,military
expenditure and public health distribution system
SAMA Management Functions:
SAMA is presently managed by group of individuals and
headed by Dr.Fahad Al Mubarak
with his team of directors, vice governor. The main functions of SAMA is to manage the Saudi
riyals currency against all international
major currencies by applying
currency control
mechanism , issuance of monetary and fiscal policies for making economic progress on allthe
sphere of Saudi people lives.
Functions:
 SAMA is solely responsible for printing and issuing the Saudi currency notes of various
denominations like (5, 10, 20, 50,100,500 Riyals). Basically SAR is pegged with USD to
protect the currency to fall drastically in political and economical issues.
 It acts as banker to local banks for providing immediate cash needs for business needs.
 It acts as funder for all governmental social and development programs through the
banks. And it issue money to the bank for allocation of money into various
developmental programs in the country.
 Instrumental in developing and implementation of currency exchange mechanism
policies and managing the huge foreign exchange reserve for maintaining the foreign
currency reserves for balance of paymenet purposes.

SAMA is fully regularize all
the exports and imports financing, promoting price exchange mechanism between
different currencies and stability of Saudi riyals in international exchange markets

It
regularizes
all
foreign
direct investment proposals and facilitating all the economic development of the country.
Banking System of Saudi Arabia
Saudi Banking industry is among the fastest growing industry in the world. With increase
number of branches appearing all over cities and all branches had very successful customer base
performing all kinds of banking transaction safe and secure manner. All the branches are well
connected with phone banking, net banking facilities. Even with economic recession all aroid the
world economies , Saudi Arabian banks offer generous loans to business establishment, personal
loan to local Saudi and expatriates population amount to 891.6 billion Saudi Riyals. This amount
is almost 15% increase compare to previous year’s loan sanctions. .
These are the following main reason for robust banking sector industry expansion.
1) According to latest economic survey Middle East, Saudi banking sector annualized
growth rate is around 13% maintained. This is quite remarkable achievement under
economic recession faced by world economy.
2) According to Global Research, Saudi Banks posted the financial assets and loan
distribution growth of 9.1% and 11% respectively.
3) SAMA helps to maintain the repo rate at 3.5% and capital adequacy ratio is above 11%
which is outstanding achievement and good work done by SAMA agency.
4) The international rating agency Standard &Poor’s give Saudi Arabia banking system is
safest banking system rating in the world.
5) Saudi Arabia stood at number 2 positions in terms of safe and securing banking in the
world and two countries like Canada and Switzerland stood at number one position in
terms of banking security and safety standards.
6) Being the Islamic country, the central agencies are pursuing the Islamic sharia laws for
banking purposes. And mostly all bank are followed the Islamic banking system with
non-existence of any fraudulent activities.
Money Functions:
The money circulation in our economic system had performing various functions like
1) Medium of exchange: Money had been used since ages as the medium of exchange with
certain value exists between the two parties. The money can be store, exchange and invest to
gain monetary benefits in the future..
2)Unit of account: The Saudi riyals had been available in various denominators like ( 5, 10 ,15
,20, 50 ,100,500) used as local currency and for the multinational companies it is used as base
currency to calculate their yearly profit and loss and later on convert to their respective country.
The Saudi riyals is pegged with USD at the rate of (1USd- 3.765) fixed. This rate will not change
irrespective of any economic situation or currency fluctuation around the world
3) Store of value: the main function of money is storage value , as it can keep in safe places for
longer period of time can earn profit if invested in financial instruments like equity shares,
mutual fund or invest money in gold.
4) Standard of deferred payment: The money can be exchange with specific value is used to
fix its value for future use. The futures and options are the two strategies used by portfolio
manager in order to leverage its value for bills receivable and bills payable of large scale
business operations.
Exchange Rate and factors does influence the Exchange rate mechanism;
SAMA had taken the decision to peg Saudi riaysl against the USD in the year 1986 and fixed
the rate like (1 USD = 3.765 Saudi Riyals) in order leverage any drastic currency fluctuation in
international currency markets. And the SAMA responsibilities include maintaining the stable
currency exchange rate mechanism system against the major currencies like Euro, GPP and
YEN. The Saudi Arabia foreign exchange reserves always shows surplus figures as we receive
more foreign exchange reserves by selling crude oil in international markets then we import
lesser amount of goods from outside world. SAMA put the control mechanism of all exchange
rate currency fluctuation.
Saudi Arabia used USD as base currency for all payments and receipts purposes. And also
FDI (Foreign direct investment) issue had been control by regulations laid down by SAMA.
Inflation in Saudi Arabia
Presently Saudi Arabia inflation rate stood at 3.90 % in November 2012.This inflation rate had
been calculated as when the prices of goods and services continue to go up and standard of living
falls. It leads to more riyals tries to buy fewer amounts of goods and services. And these types of
situations are controlled by SAMA in order to control the money rotated in the system. But due
to increase generosity shows by bank to lend more loans to corporate and individual’s leads to
more supply of money in the system which results in increase the inflations rate. And SAMA is
always regulatory authority to control the inflation rate at manageable rates.
References:
1)http://www.sama.gov.sa
2)http://www.globalinv.net/research/SaudiBanking-092006.pdf
Global Investment House / September 2006 Saudi Arabia Banking Sector Report
Omar M. El-Quqa, CFA
Shailesh Dash, CFA
Faisal HASSAN, CFA
Chandresh Bhatt
Amit Tripathy
Mihir J. Marfatia