Page 165 - Aamir Rehman - Dubai & Co Global Strategies for Doing Business in the Gulf States-McGraw-Hill (2007)

A Piece of the Action: Strategies for Entering the GCC Market 149

financing the Kingdom’s increased commercial activity, and provided
retail customers the basic financial products they needed. The sector
included a mix of foreign and local banking institutions.
The oil boom of the 1970s changed the game fundamentally.
As wealth flowed in at an unprecedented rate, the Saudi banking
market became much more attractive. The level of cash in the econ-
omy called for new products, deeper branch networks, and larger
banking institutions. At the same time, the politics of the oil crises
of the 1970s created some strain between Saudi Arabia and the
West. In 1976, the Saudi government decreed that all banks in the
country would need to be owned by a majority of Saudi nationals.
Foreign banks could participate, but as minority shareholders in
Saudi-owned institutions. One explanation given for this new pol-
icy was that foreign banks were not investing enough and were
underserving the market. A more plausible explanation is that the
banking sector became too attractive, profitable, and strategically
important for the Saudi establishment to leave in the control of for-
eigners. To multinational banks, the dramatic change was a shock.
The change also created a dilemma for the foreign banks:
should they stay in the market as minority shareholders, or exit
entirely? Ownership of the business had slipped away, but the fun-
damental attractiveness of the banking market was higher than
ever. Also, while Saudi investors and institutions had a regulatory
edge, they generally lacked the organizational capabilities to take
over management of the institutions. A natural bargain was struck:
international banks would remain as minority shareholders, but be
awarded management agreements that gave them day-to-day con-
trol of bank operations. Saudi investors would have control of the
boards of directors, but would not interfere in operational matters.
Another implicit part of the deal was that the JV banks would
actively work to develop Saudi talent and groom them for positions
of leadership. And as a reward to all parties, the JVs would be listed
on the Saudi stock exchange, creating equity value and liquidity for
both the international banks and the local investors. The interna-
tional bank might own less of the total venture, but its share of
the venture could be worth more than the equity value of their
previously fully owned business.
Since the 1970s, the JV banks have struck a delicate balance by
which they use both their “local” status and their global affiliation