Kingdom of Saudi Arabia

Saudi Arabian Monetary Agency

SAGIA ANNUAL RETREAT, THE PROGRESS OF PRIVATISATION

Session Three: The implications of the new capital market law on the future of investment opportunities

14th & 15th October 2003, Rome

By

Jammaz Al Suhaimi, Deputy Governor, SAMA

 It is my pleasure to welcome you to this session on "The implications of the new capital market law on the future of investment opportunities" in Saudi Arabia.  This provides me an opportunity to recap the achievements of the capital market and to share with you my views on the implications of the implementation of Saudi Arabia�s capital market law.

The equity market has witnessed tremendous growth over recent years.  This has been most pronounced following the introduction in October 2001 of TADAWUL, the infrastructure underpinning the market.  The TADAWUL All Share Index has gained 70% so far this year.  This follows four years of positive returns, averaging 17% per year.  Market volumes have also increased dramatically.  The average daily value of trades has increased by 430% over 2002, consistently reaching over 500 million US dollars per day.  

Market Capitalisation as of end of 3rd quarter 2003 reached over 150 billion US dollars.  According to the World Federation of Stock Exchanges, the Saudi Arabian stock market now ranks 23 out of the 50 largest equity markets in the world, in terms of capitalisation, and the 13th largest non-G10 market.

The capitalisation and performance of the equity market has been significantly boosted by the inclusion of the Saudi Telecom Company.  As part of the Kingdom�s ongoing privatisation process, 60 million shares in the Saudi Telecom Company were offered to the public.  Almost 1 million individuals subscribed for over 219 million shares with a value of almost 10 billion US dollars.  The IPO was 3.7 times oversubscribed.  From the opening of the subscription period to commencement of trading took less than 6 weeks to complete.

The infrastructure of the capital market allowed subscribers to subscribe via any branch of any bank, reaching out to every point in the Kingdom and encompassing the widest possible number of investors, in line with our aim of nurturing an investment culture throughout the populous.

The Saudi Telecom IPO process not only demonstrated the markets ability to absorb such a large issue, it also highlighted the technological capability of the market to handle future privatisations effectively and in a timely manner.

In 1990 Saudi Arabia became the world�s first fully electronic equity market.  From the very beginning, we have focused on the needs of the investor.  We consider these as being:

First    Accessibility: Orders can be delivered to the central order book via multiple channels, including the Internet and bank branches.  Investors enjoy equal access to the market, irrespective of their physical geographical location.

Second    Efficiency: Straight-through-processing means that orders placed by investors can be executed, settled, cleared and registered without the need for human intervention.  This has greatly reduced the cost of processing transactions and negated errors.

Third    Certainty: Transfer of ownership occurs immediately following execution.  Funds are cleared through the national Real-Time-Gross-System � SARIE � which is recognised as one of the most sophisticated payments systems in the world.  It is noteworthy that in Saudi Arabia we have no failed trades � therefore a 100% settlement rate.  Internationally it is estimated that the cost of failed trades to the market is equivalent to 3% of the traded value.

Fourth    Transparency: Full market depth is available real-time to all participants.  Issuers are required to publish all material announcements and financial statements.  These are made available instantaneously, again via multiple channels, including the Internet, international news vendors, and television.

Our focus on investor needs has resulted in increased private investor participation.  Over 1.6 million individuals are shareholders of joint stock companies.  At present Tadawul processes over 500 new accounts per day.  It is interesting to note that significant portions of those entering the market for the first time are relatively young.

Growth has not only been limited to the equity market.  Saudi Arabian banks offer 154 open-end mutual funds.  The numbers of unit-holders in these funds and assets under management have grown at annual rates of 20% and 14% respectively over the last ten years. 

Turning to the Capital Market Law.  

The law was enacted with the broad objective of repositioning the Saudi Arabian capital market as a major propellant of the nation�s economic development.  

The law establishes a strong government regulatory body, the Saudi Arabian Capital Market Authority, which has rule making authority and enforcement powers necessary to assure a fair, efficient and vibrant securities markets for the Kingdom.  

The Law also establishes the Saudi Arabian Stock Exchange.  The Exchange will be the exclusive securities market in the Kingdom providing support for the primary and secondary markets for all traded financial instruments and conduct settlement, clearing and registration via its depository centre.  The Exchange will be incorporated as a joint stock company, with shareholders initially drawn from market participants.  

SAMA and the other concerned government authorities have been working for sometime in preparation for the enactment of the Capital Market Law.  A great deal of work remains, but I am confident that this can be achieved within four (4) months. 

Time does not permit me to present a full discussion of all the implications of the implementation of the Capital Market Law but I would like to highlight some of the more important ones:    

• A well organized, appropriately staffed Capital Market Authority will ensure that the highest standards of investor protection are maintained and promote accountability, transparency and good corporate governance in the private sector.
  
• The move from merit to disclosure-based regulation removes any possibility of subjectivity; issuers therefore will have greater access to the Capital Market.  Savings can be directly channelled into productive projects.  This will lead to greater participation by citizens in the capital market and thus the national economy.  
  
• The projected capital demands from sectors such as electricity, water, gas and mining, must be met from a combination of financing via the capital market and bank lending.  New instruments are required such as the securitisation of physical assets or revenue flows, and most importantly the ability for companies to raise debt, whether in the form of convertibles, sukook or bonds.
  
• The Capital Market Authority will also encourage and support the incorporation of family owned companies, and where suitable obtain a public listing.  An important part of the CMA will be to mentor and guide family owned companies, ensuring that these companies are aware of the opportunities that the capital market provides.
  
• The ability to raise capital, whether equity or debt or simply obtain a public listing to reflect the value of an investment is of vital importance to foreign participants in the economy.  An efficient capital market will reduce capital costs and also provide those wishing to do so, with an exit mechanism.  The latter is important when foreign investors are pricing a potential investment in Saudi Arabia.  The ability to raise capital easily will enhance Saudi Arabia�s attractiveness for foreign direct investment and strengthen its position as the regional hub for companies.  The ability for foreign companies to have majority stakes in ventures in Saudi Arabia, allows the parent company to consolidate financial statements.  Thus the parent will view the Saudi Arabian subsidiary as being part of the parent encouraging investment in research and development and human resources locally.
  
• A capital market that is functioning well complements the role of banks and thus rounds out the financial system.  A World Bank study of 74 developed and developing economies, found that the licensing of non-bank financial institutions had a substantial and significant impact on economic growth.  According to their estimates, the creation of financial intermediation along the lines of the developed economies could have resulted in private sector GDP growth increases of between 0.6 per cent and 1 per cent per annum in certain countries.
  
• A number of different types of licenses will be available, based largely on the functions of the licensee.  For example, there will be firms that will specialise in corporate advisory, whereas others will offer full service investment banking including brokerage, asset management, underwriting etc.  The CMA has full authority to determine the most appropriate licensing criteria.
  
• It is important to note that only licensed institutions, and those qualified, fit and proper individuals, will be permitted to engage in investment business activities in the Kingdom.  One of the primary roles of the CMA is to ensure that investors are properly protected and this can only be achieved by regulating the institutions and individuals operating within the capital market.
  
• A major priority for the government has been the training, development and utilization of the indigenous human resources. Studies conducted by the United Nations have shown that the employment in the financial sector and related industries in developed countries accounts for close to 12% of the total workforce, whereas in developing countries it is as low as 1%.  By licensing new entrants and providing increased access to the capital market, job opportunities for Saudi nationals in the financial sector and the private sector as a whole will increase.
  
• While encouraging domestic and regional direct investment, we recognise that foreign portfolio investment has a role to play.  The Capital Market Authority will as a priority study the issue with the aim of overcoming current impediments.
  

There are some things that will not change.  SAMA remains committed to its role in providing a favourable and attractive environment for growth by ensuring the soundness of the financial system and maintaining the stability of domestic prices and exchange rates. 

 In conclusion, the implementation of the Capital Market Law creates significant opportunities for domestic, regional and international financial companies to participate in the Saudi Arabian financial system.  Given that it is the largest financial market within the GCC and Arab world, there are tremendous opportunities for those wishing to raise capital and those wishing to invest.  The Law is not a panacea for ills but, combined with a clear understanding on the part of the Government and the private sector of its role, we will ensure that the capital market plays its role in the economy. 

 Thank you for your attention.