Saudi Arabia dominates the Middle East with vast wealth derived from its huge oil reserves, which account for around 90% of export earnings and 80% of Government revenues.
With half a trillion dollars in reserves, the Government’s only financial predicament is how best to spend its wealth. In practice it focuses on defence to guard against the unpredictability of nearby Iran and the threat of local terrorism.
This is in stark contrast to the issues currently faced by austerity-pressured Western democracies, as is the fact that Saudi Arabia is an absolute monarchy ruled by King Abdullah bin Abdulaziz Al Saud. The branches of the king’s family embrace 20,000 people – the über-wealthy top tier. The merchant families come next, while the mass market is massively underdeveloped and relatively uneducated.
The honeypot also extends to the high salaries paid to expats as part of the price they have to pay for living in what is considered to be a hardship posting. All women have to cover up in public and are banned from driving, and the religious police are ever watchful.
The potential to give financial planning advice at all levels of society is amazing, yet for independent financial advisers it remains an elusive market which is extremely difficult to access.
The number of IFAs in Saudi Arabia is remarkably small in comparison to the size of its economy. Most of the financial advice given comes remotely from the UAE, big-name private banks such as Goldman Sachs or JPMorgan, which have offices in Riyadh, or the local banks.
Advice ban
Some commentators argue that foreigners have in effect been banned from providing financial advice for years, citing as evidence the warning notice issued by the Capital Market Auth¬ority (CMA) last September to those who do not have a licence or physical presence there.
The notice appeared in Saudi Arabia’s national newspaper and announced: “Conducting securities business without a licence shall be considered violating the relevant provisions of the capital market law and its implementing regulations and shall be subject to sanctions.”
Others argue that the CMA wants to encourage the financial sector but insists entrants must have the right licences.
The CMA exists to regulate and develop the Saudi Arabian capital market by issuing rules and regulations. The basic objectives are to create an appropriate investment environment, to boost confidence, and to reinforce transparency and disclosure standards in all listed companies. It also exists to protect investors and dealers from illegal acts in the market, according to its website.
SAMA supervision
The other key authority in the country, the Saudi Arabian Monetary Agency (SAMA), is the central bank, which also supervises commercial banks and “promotes the growth and ensures the soundness of the financial system”.
Sean Kelleher, chief executive of Mondiale Dubai, says SAMA took an aggressive stance a few years ago on anything not legal: “They made utterances about clampdowns and those trying to fly under the radar fled. Since then, the banks have taken the upper hand on financial advice to the detriment of offshore outlets and independents. With Saudi having such a large percentage of Gulf GDP, it would be a valuable market to penetrate.”
The reality is that UAE advisers may have clients who move to Saudi Arabia, raising the question of how to continue the relationship in a country that does not permit unlicensed face-to-face discussion inside the country.
Simon Naylor, managing director of Dubai-based Lime Financial Planning, says one of his clients moved to Saudi. “Ongoing advice is provided via phone, email, and our weekly newsletter,” he says. “In my experience, expats in Saudi Arabia access independent financial planning by contacting firms in Dubai or Qatar.”
Peter Duke, sales director at Fidelity Investments International, is based in its Dubai office and makes regular visits to Saudi. “It’s a more conservative place than elsewhere in the region,” he says, pointing out that restaurants reserve one section for men and another for families.
Social changes
Duke believes Saudi society will become more open and highlights the country’s young demographics as one feature that gives it “lots of potential”. He adds: “Everyone based in the Middle East will see it as a good opportunity if they can find a way to access it.”
Fidelity accesses the wholesale market through Riyad Capital. Parent company Riyad Bank is one of the largest financial institutions in Saudi with more than 200 branches offering retail and corporate banking.
However, the types of mutual funds sold in Saudi tell a very different story from the typical Western investor profile.
William Wells, Schroders director – Middle East, who works from the company’s office in Dubai International Finance Centre (DIFC), explains: “The local mutual funds market in Saudi Arabia is around $22bn. However, the bulk of these assets, around 60%, are in money market funds with a further 32% in equity funds, highlighting limited levels of diversification.”
Equity funds big
He adds: “While money market funds hold the largest pool of assets, the most popular asset class, by number of investors, is equity funds with 77% of all investors. The retail nature of the equity investor is emphasised by the average holding per equity investor of just over $30,000.”
Digging deeper into equity mutual funds, Wells says there is a predominance of investments in local equities with less than 30% in funds investing internationally (US, Europe and global), perhaps limiting opportunities for international asset managers.
Real estate growth
By 2011, assets in the Saudi mutual funds industry had fallen by 13%, while the number of investors shrank by 8%. The one area that has witnessed growth in terms of assets and number of investors is real estate funds, highlighting the ongoing interest in property of investors in Saudi and more broadly in the region.[image_library_tag 270afdae-dd6d-4bf1-a931-4f777ad1895e 200×238 ?width=200&height=238″ style=”width: 200px; height: 238px; border-width: 10px; border-style: solid; border-color: rgb(255, 255, 255); float: right;” alt=”” ]
So while Saudi is an important market with a population dwarfing that of all other GCC countries combined, accessing affluent or high net worth individuals has proved difficult for local and international asset managers as mutual funds do not make up a significant part of the savings pool.
Islamic finance is a big part of the financial sector and Saudi wealth manager NCB Capital lays claim to having the world’s largest Shariah-compliant fund with $3.93bn under management.
Tim Plews, a Clifford Chance partner who has been working in Riyadh for three years, highlights how the complex Saudi justice system gives frequent judgements with Shariah reasoning, which adds to the challenge for expats of trying to understand how the country works.
“It’s only when you live in a society like this that you realise how restricted it is,” says Plews, who adds that rules are rigorously enforced in a raft of areas. Western women who forget to cover their heads outside are promptly told to do so by the religious police, he says.
He also paints a picture of restricted facilities in the capital, which has no cinemas or theatres although “there are a growing number of hotels with half-decent restaurants”.
Plews puts the sprawling infrastructure down to local government having “failed big time here”. On the other side of the coin, the Saudi Arabia Investment Authority’s development programme through to 2020 is expected to account for almost half of all infrastructure and construction work in the MENA region.
The overriding issue of diversifying away from oil is not easy and, as the IMF has pointed out, a protracted period of weaker global demand could lead to a large dip in oil prices and “significant challenges to the Saudi economy”.
Against this backdrop, the opportunities for IFAs remain restricted at a number of levels. The Saudi regulator even lacks an explicit IFA category as it is geared towards banks, and obtaining a licence to practice can take two years, though it is possible to partner with a local authorised person.
Fines for foreigners
There is also the matter of fines on foreign workers as a strategy to encourage more of the local population into work. Under controversial laws which came into force last November, any private sector firm that employs more expats than locals has to pay an annual fine of SAR2,400 (£400) for each excess worker.
That has not deterred AES International setting up its first office in Saudi Arabia from the beginning of this month (see page 3) and other IFAs may enter the market later in the year.
After all, there is a view that Saudi society will become more open, the regulatory environment will mature, and the King Abdullah Economic City on the outskirts of Riyadh, due for completion in 2020, will create a shiny new financial district in which to do business.
