Banking & Cash Managament in Saudi Arabia and the United Arab Emirates

Commentary

Saudi Arabia and the United Arab Emirates. These two countries draw a lively and enthusiastic participation every time we discuss them: they are important markets, due to their wealth, but they have historically been quite challenging. Despite their strong financial position and stable currencies, their regulations can be difficult to manage – and their position at the heart of a region of massive geopolitical tension adds to the complexities.

Saudi Arabia, while sitting on massive oil reserves, has always been very conservative. It only began allowing 100% foreign ownership of companies in many sectors in 2019: most MNCs worked via distributors, joint ventures and representative offices. So the economy is relatively open, but MNCs often have a weaker presence than would normally be expected. With recent political changes, many rules have been relaxed. Tourism and inward investment are encouraged and there are some truly massive infrastructure investments. As companies establish their onshore presence in the country, they are even required to establish a regional headquarters.

The UAE has always been more open, though this varies amongst the seven emirates which compose it. The two main ones are Dubai, which has always been a major port and trading centre, especially between India and East Africa, and Abu Dhabi. Dubai is the most open, and has traditionally welcomed foreigners and foreign investment: it is where most of our peers have operations – often managing the region - and where it is easiest for them to work.

Saudi Arabia

Most of our peers are setting up RHQs in Saudi, as required by the legislation. Many of the challenges they face are part of the process of transitioning from an offshore mode of operations using distributors and representative offices, to being fully onshore. To some extent, the same can be said of the international banks.

Though the currency is pegged to the US dollar, and freely convertible, there are challenges:

• Cash pooling is only allowed with official ‘non objection’ provided by the regulator following a rigorous assessment process. There are two banks providing cross-border cash pooling : BNP Paribas and JP Morgan.
• Bank service levels were generally viewed as disappointing, though JPMorgan did receive more favourable comments than most. HSBC came in for a lot of criticism: they divested the majority of their bank to comply with the old foreign ownership rules. They now find themselves in a joint venture with a local bank: although this bank offers all the HSBC on-line banking tools, peers felt it did not respect HSBC’s global relationships, and one had been required to set up a separate instance. One peer, however, did find that, with sufficient persistence, they were able to make some headway.
• Though most international banks are present, few of them are able to provide full service networks. Most peers operate a system where they have an international bank and one or two local banks: SBN (Saudi National Bank), SAB (Saudi Alawwal Bank – the HSBC affiliate) and Bank AlBilad (an Islamic bank) were mentioned.
• One problem experienced with cross-border cash pooling was the different weekend: in these countries, the weekend is Friday and Saturday, with Sunday being a working day. This complicates sweeping and value dating with countries which use the western week. One peer instead left cash onshore, and negotiated a (low) interest rate locally. One peer’s bank could still handle SAR in Europe on Fridays and Sundays, though cutoff times were sometimes missed.
• Given the operations, there was not much discussion of onshore sweeping. However, one peer’s company had recently established several different local entities: JPMorgan was able to set up automated ZBA sweeping domestically, and then on to London.
• Peers generally expressed disappointment at the low rates of interest available onshore. It should be recalled that Islamic principles are opposed to interest payments, so this should not be a major surprise – one peer commented that better SAR rates are available on deposits in London.
• Local funding is available, though often not used because intercompany loans work. The requirement for collateral (a promissory note signed by the parent) was viewed as a deal breaker, though one peer has managed to negotiate this away with one foreign bank.
• Under Saudi law, signatory authority is limited to Saudi nationals or residents with valid work permits. This can complicate treasury management from outside the country, though it does not impact transactions executed via bank portals or host to host payment systems.
• More than one peer had established relationships with Standard Chartered Bank: though these worked, there was concern that some of the capabilities which were promised do not yet exist, as the bank itself negotiates with the authorities.
• One peer had an issue with credit cards for corporate travel: in Saudi, these cannot be issued under the company’s name with settlement by the employee.

The United Arab Emirates

All peers on this call have their operations in Dubai. Many find that this satisfies all their needs in the region, so there is no need for onshore presence elsewhere in the Gulf.

Here, the situation is very different: all the international banks are present, and provide the service levels their MNC customers expect. HSBC has a fully owned entity, and the service level was praised.

Many run their treasury for the region from Dubai, though there is some expectation that Saudi’s RHQ rules may have an impact on this.

• Peers are able to do most things they require with their international banks. Some also use local banks, but these do not always provide full MT940 and MT101 service.
• Local banks often offer better interest rates, and more creative solutions
• Banks in Dubai often provide deeper liquidity and better solutions for managing FX with African currencies. This is partly because they have their regional centres there.

Bottom line: the whole Gulf region is of great interest to many MNCs, who view it as a growth market. Traditionally, many businesses have placed their regional centres in Dubai, which has always been the most open economy.

However, significant changes are taking place in Saudi Arabia, which is aggressively opening its market and seeking to attract foreign investment and even tourism. Many of the regulations foreign companies faced are being eased.

So – most things can be done. But this does not mean they are easy – at least, not yet.