"How do you assess the role of Saudi banks within the international Islamic finance sector, and how do they compare to their Asian counterparts?"

PATRICE COUVEGNES: On a micro level, the GCC financial industry has witnessed a major shift in the last 10 years, from conventional to Islamic banking on both the equity and debt sides of financing. This is clearly evident in the uptake in the number of sukuk (Islamic bond) being floated in the GCC markets, as well as the exponential growth of tawarroq/murabaha and ijara (Islamic mortgage) financing. As the largest GCC economy, Saudi Arabia has been contributing to this change.

The drivers of change in GCC banking behaviour, both on the corporate and retail sides, can be attributed to the perception that Islamic banking is the next growth catalyst for banks, fuelled on the consumer banking side by the increasing appetites for socially and religiously responsible banking and on the corporate side by the ambitions of organisations for successful initial public offerings and positive momentum on trading volumes on the stock exchange.

On macro level, although the Asian countries (i.e. Malaysia, Indonesia and Pakistan) made an earlier entrance into this domain and continue to command a sizeable portion of the Islamic banking industry, future growth is likely come from the Middle East region, mostly due to sustainable market demand forces, market availability, and faster economic expansion fuelled by higher oil prices and increasing population growth.

To what extent do Saudi corporates understand the benefits of issuing debt versus equity, and how can the uptake of debt instruments be developed?

PATRICE COUVEGNES: As reflected in the balance sheet of most listed companies, corporate debts have been increasing. However, most of these debts are borrowed from the banks mainly due to convenience and availability of cheaper funds, given higher liquidity and banks being able to lend due to their favourable debt to equity ratio.

During the last decade, Saudi Arabia has seen rapid growth, mainly stimulated by strong government spending. This has led to huge financing requirements for both the semi-government and private sectors. The increasing requirements of long-term financing and sizeable investor appetite provided an excellent opportunity to develop the Islamic debt capital market. Some semigovernment entities, such as Saudi Electric Company and Sabic, along with a few large corporations have also resorted to the debt capital market by issuing sukuk. These debt issues have been largely oversubscribed, creating more interest, which may result in growth in sukuk in the next few years. However, the number of local currency issues listed on the Saudi stock exchange remains limited. Moreover, the trading volumes are negligible, as most of the investors have kept their investment until maturity. Considering the Kingdom’s financing needs and the tighter regulations on lending, sukuk and debt capital markets have a key role to play. The latter, which is today de facto limited to large financial investors, will have to be developed toward individuals, thus widening the scope and capacity of the market.

With per capita income on the rise, will the retail sector dominate competition between banks?

PATRICE COUVEGNES: Saudi Arabia has the fastest-growing population in the Middle East and North Africa region, with most of the country below the age of 25. This provides a tremendous opportunity for banks to expand the number of branches, accounts and deposits. At the same time, the competition between the banks for deposit and consumer finance has been growing. The days of free deposit will soon be over, and banks providing better and innovative services and higher returns will attract larger deposits. Expanding branch and ATM networks, developing technology and introducing attractive financing products to encourage young customers should help to maintain growth levels in retail banking.8u