The Kingdom of Saudi Arabia is a key subject when considering the state of the world’s economy. It is the world’s largest petroleum exporter and the heart of the Islamic nations. Multiple political structures and international relations emerge from its blatant economic, geographic, as well as religious status. This has resulted in the Kingdom becoming a bridge between the Islamic nations and the western civilization. Given its strategic position in the OPEC, it dictates to some extent major trends in the world’s economy by having a strong influence over oil prices, its production capacity and its political agreements. For many decades, oil production was the kingdom’s main economic pillar with a selling price of approximately $85 a barrel and a cost of production below $2. Even such a lucrative industry would hardly support a country indefinitely, considering their finite amount of resources. Today, Saudi Arabia is aware of such a mild threat and is now assessing its options in embracing new visions of growth that do not rely exclusively on oil. First, the government applies the legal code of Islam in its banking system, and second, opens its stock market to foreign countries to optimize its financial puissance.
Many factors contribute to the rapid economic expansion of Saudi Arabia. On one end of the spectrum, having 18% of the world’s proven oil reserves puts Saudi Arabia directly on a pedestal. 50% of the Saudi’s Gross Domestic Profit comes from the oil and gas sector, which represent 85% of export earnings. By world standards, the kingdom is intensely influential. According to the Organization of the Petroleum Exporting Countries’ 2013 report, Saudi Arabia would be in possession of approximately 266 Billion Barrels and an extra 2.5 Billion shared in the Saudi-Kuwaiti Zone. The continuous growing demand for oil products and oil-based machinery in the United States and other major oil consumers fosters the already-established strength of being a major player in the OPEC.
On the other end, the Islamic influence has greatly impacted financial structures by prohibiting usurious practices. In the Islamic laws, money is perceived as a mere measure of value and is not considered an asset itself. Therefore, any earnings based on the “value” of money would not be in accordance with the rules of Shariah (Islamic laws). Financial engineering came up with what is now more commonly known as “Islamic Banking”; A form of finance that involves both lender and borrower in a profit-loss-sharing system aiming at suppressing the favoritism towards the lender. Islamic Banking in Saudi Arabia is a $217 Billion industry worth of assets, the world’s largest Islamic finance concentration.
In 2007, when subprime mortgages started to heavily default showing the weak spot of interest based practices such as teaser rates or predatory lending, Islamic banking on the other hand presented aggressive growth. “… Islamic banks, on average, showed stronger resilience during the global financial crisis.” IMF. It is heavily argued that Islamic banking might be the solution to prevent future credit crises. Today, most of the largest multinational-consultancy firms such as Deloitte and Ernst & Young are welcoming Islamic Finance with open arms as it appeals to a growing group of international investors. Financial assets in Islamic banks have grown at a 17.6% rate annually (on average) since 2009 and are expected to attain 19.7% before 2018.
Though Saudi Arabia has long been relying on its natural resources to affirm its economic presence amongst the wealthiest nations, it is now embracing a new vision of growth by opening its doors to foreign investors. The policies regarding investments in Saudi’s stocks have long been restricted to domestic investors. As the practicality of globalization spreads exponentially, the kingdom is now considering alternative ways for expanding its market. Recently it has been discussed that foreign firms would have access to a $580 Billion investment capacity in the first half of 2015. QFFIs (Qualified Foreign Financial Institutions) will have the opportunity to enter one the world’s most restricted exchanges. Tadawul Exchange (Saudi stock market) stresses the importance of keeping the market safe and protecting itself from being exposed to risky investors. Therefore, only QFIs with a minimum of $5 billion worth of assets under management and a minimum of 5-year experience in the investment field would be eligible to participate in the market offering. In addition, multiple market caps have been put in place to lessen the risk of monopoly of stock ownership. Despite the challenges facing the marketability of its stock market due to the recent plummeting of oil prices, Tadawul Exchange is still a robust market that offers a considerable diversification to QFFIs. Amid several propitious economic impacts, it will ultimately boost the credibility of the Middle-Eastern region for both oil and non-oil based industries.
It is not a secret; Saudi Arabia owes its fortune mainly to its oil industry. For many decades, its growth has been sustainable and steady. However, Saudi Arabia’s future is less certain. Today, in other countries, billions of dollars are being spent in Research & Development to explore alternative forms of energy less harmful to the environment. To what extent does alternative energy represent a threat to the Kingdom’s current strategic position as the world’s top oil exporter? How can Islamic banking contribute to the world’s financial stability? These are some questions that need further considerations.
Sarmad Khan, Nikolaj Gammelto, and Arif Sahrif. “Saudi Arabia Drafts Foreign Limits for $580 Billion Bourse.” Bloomberg.com. Bloomberg, 21 Aug. 2014. Web. 08 Feb. 2015.
IMF Team. “IMF Survey: Islamic Banks: More Resilient to Crisis?” IMF Survey: Islamic Banks: More Resilient to Crisis? 4 Oct. 2010. Web. 08 Feb. 2015.
Heritage.org “Saudi Arabia.” Economy: Population, GDP, Inflation, Business, Trade, FDI, Corruption. Web. 08 Feb. 2015.
“Big Interest, No Interest.” The Economist. The Economist Newspaper, 13 Sept. 2014. Web. 08 Feb. 2015.
Islamic banking performance benchmarked against conventional banking