Money and Banking
Project
Mohammed Al Sadah
2000901338
Financial innovation
Innovation of financial market in Saudi Arabia
Contents
 Introduction
 History of the financial market
 The Saudi Arabian stock market
 Capital Market Authority (CMA)
 Historical development of Saudi capital market
 Saudi Arabian Money Market Repos
 Conclusion
 References
Introduction
The Saudi Arabian economy faced many rapid growth in years after the increase in the
oil prices. When the demand for oil is booming and due to this increases the oil revenues
increasing
Since oil prices are not stable so the Saudi Arabia also will not stable , the Saudi Arabian
economy should diversification away from oil the Saudi Arabian government went
forward to diversification the economy by supporting the private sector the private
sector has been expanded and improved its activities which are reflected on the financial
markets , and investors from all sectors need to finance their activities from financial
market
The Saudi financial market is increasing performing an important function in financial
intermediation to create channels between savers (lenders) and investors (barrowers) , so
the Saudi Arabian monetary agency (SAMA) for the banking industry, the Saudi
financial industry have improved and increased for the last 20 to 30 years and has
managed to avoid many of the crises hitting the global financial industry
History of the financial market
In the seventies and eighties the Saudi government forced and had no choice to take the
creativity in developing and promoting the economy and financial market, the Saudi
government spent billions in side Saudi Arabia to encourage the local and foreign
investment to participate in establishing one of the biggest economy and financial sector
in the middle east
The Saudi financial market was largely fluctuate of oil prices which was the major
challenge for Saudi economy stability and growth so the government approved and
create the Saudi stock exchange (Tadwul) company in march 2007 as a joint stock
company fully owned by the government investment . Tadawul is responsible for
operating the market efficiency and developing and leading the financial exchange by
supporting competition investment and financing
The Saudi Arabian financial market designed to have capacity to match the global
financial system
The Saudi Arabian stock market
The Saudi Arabian monetary agency established the Saudi Arabian stock market in 1985
and was regulator and supervisor for it from the years 1985 to 2003 which restricted
trading to Saudis citizen only and after that with some domestically crises in stock
market the Saudi government decide to allow foreigners to purchase stock only in
secondary market (buying shares from Saudi citizen not from primary market (new
issued shares ) and this rule applied up to this date.
Saudi Arabian monetary agency As a regulator of stock market was supporting of banks
who were most actively traded in the market to join partnership with a major global
banks for wider local shareholding base. which helped in creating a solid banking and
investment industry easier to supervise and mentor by regulators (moody’s 2008) to
improve the economic diversify and expansion the national economic resources , the
Saudi authority decide to launch different restricting initiatives for many industries
starting with the foremost financial pillars for the biggest bourse in the middle east .
Since establish in the capital market authority (CMA) and the increased in oil prices
since 2003 , Saudi stock market enjoyed a stronger increase represented by the Tadawul
all share index (TASI) which reached record levels until 2006 (the economist 2007)
The Saudi stock market has a high levels of investor confidence from 2003 by
improving the investment environment and economic growth and highly profit of public
companies leads to increase (TASI)to maximum levels from 2500 points in 2003 to
20634 points in February 2006 . from 2006 to 2009 the Saudi equity market was
strongly fluctuate which forced to decline in its performance and suffered badly
according to this fluctuating (Tadawul 2009)
Capital Market Authority (CMA)
Because of sophistication in the capital market and to improve regulatory of technical
infrastructure, the Saudi Arabia monetary agency established the capital market
authority as a independent market regulator in 2003 and CMA as an independent market
and controlling encouraging the investment and confidence in Saudi capital market
leading to significant boom in stock market activities CMA’s focus on market
liberalization and proved the way for foreign independent asset management companies
and non – banking investment houses to enter the Saudi capital market and this leads to
the innovation products as exchange trade funds (ETFs) and corporate finance products
in the Saudi capital market
CMA issues regulations on a number of critical topics such as corporate governance,
market conduct, mergers and acquisitions and issuance of financing tools as IPO, and
mutual funds
CMA also laid down the legal and regulatory frame work to open up the Saudi capital
market and support the government’s goal of privatization, promote greater efficiency
and increase public participation in financial markets
The CMA will be the driver in the following ranges.
i) Attracting Saudi investment capital from the world.
ii) The development of the domestic Saudi Capital Market will pay directly to higher
growth of the financial services industry by providing professional investment
management and suggested services to the public.
iii) Upgrading risk management of the economy by introducing new financial
instruments into the market to manage volatility resulting from irregular oil prices
iv) The CMA has the ability to help the government privatize many public industries and
promote the private sector to take the initiative in developing mega-infrastructure
projects and attract Foreign Direct Investment (FDI) into the economy.
Historical development of Saudi capital market
The historical development of the Saudi capital market fall into three periods
I-.Pre-industrialization period were the capital market was highly informal the
ministerial committee was formed to regulate and developed the capital market before
1980 fourteen joint stock companies was operating in the Saudi Arabia and most of them
were government owned and financed their development plans the government surpluses
, and the market was characterized by non – private sector and the major businesses was
family owned.
2- post – industrialization (1984 to 2001)
After 1984 with the fifth development plan with the established of industrial based
economy ,the industrialization improved and accelerate and financing of industrial
project by specialized credit institutions such as (SIDB) , the government also improved
the private sector participation for non – oil industrial development and this needs for
efficient domestic saving through capital markets to finance industrial growth
The Saudi government realized the important of foreign institutional capital to improve
the ability of capital markets to funds economic growth so the Saudi monetary agency
(SAMA) approved Saudi American bank’s proposal for mutual fund of Saudi stocks that
purchased by foreigners and make possible for foreign portfolio investment and
increases the volume and other activity in the Saudi capital market
Capital market in Saudi Arabia continued suffering from unregulated broker trading and
insufficient technological infrastructure so in 1990 the government established the share
market traded through an electronic securities information system (ESIS)
This system was not designed to handle trading in corporate bonds, mutual funds and
new investment products
3-Growth period since 2001 which put the country of Saudi Arabia capital market on the
regional map. Tadawal stock exchange was established on October 2001 with modern
infrastructure to facilitate trading , clearing , statement and provide an efficient
secondary market platform for equities and for trading of capital market products .
In 2003 under the capital market low , capital market authority (CMA) was established
to regulate and supervise the capital market, and In 2008 the market opened up to
foreign investors through swap agreement.
Saudi Arabian Money Market Repos
Saudi Arabian monetary agency has been successful in employing SGDBs (Saudi
Government Development Bonds), Floating Rate Notes (FRNs) and Treasury Bills for
managing the money market in line with the US Fed since pegging the Saudi official
currency, the Riyal, to the dollar in 1986. Saudi Arabian monetary agency manages bank
reserves by engaging in short-dated repurchase agreements (mostly overnight repos)
with banks. The purpose is to inject reserves for a regular withdrawal when repurchase
mature to strengthen banks in order to facilitate liquidity for the private sector.
As most of Saudi Arabia exports in addition to its independent reserve assets are in
dollars, interest rates, fixed exchange rates and the currency policy are essential issues of
monetary and fiscal dominion to rouse growth and attract Foreign Direct Investments
(FDI)
Saudi Arabian monetary agency monetary strategy has been established to be successful
in dealing with the market liquidity over the last twenty years. When there is a
temporary need to engage, rather than provide liquidity, bank reserves, and to stability
inflation, Saudi Arabian monetary agency engages in overnight reverse repos with banks
This circuitous mechanism by Saudi Arabian monetary agency is preferred for liquidity
management via reverse repo rate which steers deposit rates for lending to the private
sector.
Saudi Arabia set the interest rate by the Saudi Inter-bank Offered Rate (SIBOR) and it
is affected by two factors.
First, as Saudi Arabia is an open economy, there are no restrictions on currency
exchange.
Second the Saudi Arabia has utilized a Riyal/Dollar pegged currency exchange rate
since 1986, it plays a critical role in monetary policy, inflation stability and the balance
of payments. The consequences of a pegging imply that Saudi Arabias financial market
is highly joined, with the US market.
Therefore, the concentrations of foreign exchange outflow and US dollar/riyal interest
rates distinctions about 1.5percent have some affect in shaping the Riyal interest rates.
For monetary policy objectives, like the effect on Saudi Arabias foreign exchange
reserves, this practice has benefits compared with a guaranteed achievement of
financial securities which may be subject to being reversible at short notice.
The repo transactions process does not affect the prices in the bond market but just the
standardizes the money market rates. The Riyal peg with the dollar offers some
macroeconomic stability which equalizers its role in short-term inflationary pressures,
which however remains a major challenge to the Saudi arabia monetary policy.
In 2006 and 2007, the Saudi economy and the money supply increased which forced
SAMA to crush its monetary policy to hold inflation. That is why SAMA raised the
official repo rate and reverse repo rate several times. So SAMA practically monetary
policy drove some confidence into the economy by pushing the interest rate on Saudi
riyal deposits to decline to levels lower than the interest rate on the US dollar deposits.
Conclusion
As innovation of financial market in Saudi Arabia report I have tried to explain the
history of financial markets during the last 30 years and the changes in the Saudi
Arabian stock market.
Also I tried to explain the capital market authority as one of the Saudi financial control
and the objectives and goals of the capital market authority and the role of Saudi Arabia
monetary Agency in the financial market and the monetary policies taken.
References
 WWW. Aljaziracapital. Com.sa
 Saudi Arabia Monetary Agency. Different Reports
 Tadawul 2009
 www.Arabianbusiness. Com/sa