In Saudi Arabia, a Credit SqueezeBy
Majid al-Saadi's father and grandfather used to get bank loans simply by giving their names. Now the 31-year-old owner of Saudi technology company Vision Horizons needs detailed earnings statements and proof of collateral. "It has become more complicated, even if you had a good relationship with the bank," al-Saadi says. "Especially for small and medium-sized businesses, you have to have solid guarantees—land, real estate."
For borrowers in Europe and the U.S., documents and dates of birth are standard. In Saudi Arabia, where many older people don't have birth certificates, finance was often based on a handshake. But that tradition has come to an end in the wake of last year's defaults by two of the kingdom's best-known private companies, Saad Group and Ahmad Hamad Algosaibi & Brothers.
The two holding companies operate a variety of businesses and invest in stocks and real estate. Maan Al Sanea, the founder of Saad Group, ranked 62nd on the Forbes list of billionaires last year. In total, the businesses borrowed at least $15.7 billion from about 80 banks, according to documents provided by lenders. About $5 billion of that is owed to Saudi banks, Standard Chartered said in an Aug. 26 report; the rest is owed to foreign banks. Steelmaker Al-Tuwairqi Group, another Saudi Arabian family business, was forced to restructure $1.9 billion.
In response, Saudi banks have become much more careful about whom they lend to, raising concerns that their caution is hampering an economic revival. Bank lending to businesses in Saudi Arabia was flat last year after average annual growth of 27% from 2004 to 2008, according to Jadwa Investment in Riyadh. Lenders want "improved levels of disclosure, including release of audited financial statements," says Richard Groves, CEO of lender SABB in Riyadh.
Private companies account for almost half of the economy in the country. "The way it was done before is that you had many banks approaching us," said Aamir Al-Ghamdi, 30, marketing and business development manager at Quraish Trading, an importer of consumer goods. "Now, it's not that they come less. We don't see them at all."
Saudi Arabia is the world's largest exporter of oil, which represents 45% of its economic output. Crude now trades at about $85 a barrel, well above what the kingdom deems a "fair price." Yet if credit remains tight, economic growth will fall short of the 4% rate predicted by HSBC Holdings (HBC), Simon Williams, the Dubai-based chief economist at the British bank, said in a Mar. 4 report. The economy expanded by 0.2% in 2009. "We would have had a lot stronger recovery if the banks were lending," says Paul Gamble, head of research at Jadwa. "Until bank lending resumes to a reasonable pace, the private sector won't be able to fully participate in the recovery."
To augment the effects of a $400 billion government stimulus package, the Saudi central bank has trimmed a key interest rate to a six-year low of 2% and wants lenders "to get more serious about small and medium-scale lending," central bank governor Muhammad al-Jasser told Bloomberg in January. The Saudi government has increased funds at credit and savings banks to support smaller businesses and has established a program with banks to guarantee loans granted to local private companies.
So far, though, al-Saadi is not seeing any benefits. "It's a daily challenge, the process with banks, to let them understand what you're dealing with," he says. "I'm suffering."