The Development of Saudi Stock Market

Chapter 3

The Development of

Saudi Stock Market

By

DR. ABDULAZIZ M. AL-DUKHEIL

THE DEVELOPMENT OF THE SAUDI STOCK MARKET

By

DR. ABDULAZIZ M. AL-DUKHEIL*1

The stock market is the market place where buyers and sellers of shares and bonds can meet their desires and preferences. The development of the exchange market and its progress and sophistication is an indication of the degree of maturity of the capital market and the economy in general. The gradual development by which companies secured incorporation and limited liability not only freed companies from a restrictive legal environment but had far reaching economic consequences. It became possible to take an interest in an enterprise without the risk of the whole of one’s fortune being at stake. It also became relatively easy to withdraw one’s money merely by finding a buyer for the shares – a very different matter from fining someone to take over a share in a partnership. The development of a large and well organized stock market, the savings of the community at large are readily available for productive enterprises either individually or channeled through the savings institutions*2.

Stock markets existed earlier in the non-oil Arab countries, such as Lebanon, Jordon, and Tunis. Kuwait’s stock market was the oldest and more developed in the GCC countries.

Stock markets dealing with shares and bonds in a regulated environment and serving to attract savings to raise capital for investment purposes have flourished in many parts of the world for a long time. For example, the London exchange, the oldest, was established in 1695.

The extraordinary growth in the demand for oil in the early 1970’s, resulted in significant increases in the price of that commodity which led to accumulations, in a relatively short span of time, of vast wealth which needed to be channeled and commuted into the development of the infrastructure of industry, agriculture and commerce of region as a whole. It is against this back-drop of immense liquidity, and the general lack of other viable investment opportunities in the Gulf, with the notable exception of real estate, that the development of the stock market in Saudi Arabia is considered below.

Stock markets existed earlier in the non-oil Arab countries, such as Lebanon, Jordon, and Tunis. Kuwait's stock market was the oldest and more developed in the GCC countries.

Stock markets dealing with shares and bonds in a regulated environment and serving to attract savings to raise capital for investment purposes have flourished in many parts of the world for a long time. For ex- ample, the London exchange, the oldest, was established in 1695.

The extraordinary growth in the demand for oil in the early 1970's, resulted in significant increases in the price of that commodity which led to accumulations, in a relatively short span of time, of vast wealth which needed to be channeled and commuted into the development of the infrastructure of industry, agriculture and commerce of the region as a whole. It is against this back-drop of immense liquidity, and the general lack of other viable investment opportunities in the Gulf, with the notable exception of real estate, that the development of the stock market in Saudi Arabia is considered below.

Within Saudi Arabia, only shares of Saudi Arabian companies can be transacted, which may normally only be acquired by Saudi citizens or in special circumstances, such as the 1984 Saudi Basic Industries Corporation (SABIC) issue, specified portions may be made available to Gulf Cooperation Council (GCC) citizens. There has at no time been any provision for the shares of Gulf companies to be officially traded in the Kingdom.

As a consequence of this policy, Saudi Arabia has suffered none of the problems of for example, Bahrain, as none of the major set-backs of the Gulf, principally originating in Kuwait, have been directly imported into the Kingdom. To the contrary, the movements of shares prices in the Kingdom have generally been reflective of the economic conditions endemic to the economy. To the extent that share prices have fallen this has generally been governed by the decline in the level of demand for oil, together with the restraints voluntarily imposed by the OPEC community, which have led to a contraction of government revenues and which have, in turn, produced a considerably reduced level of domestic liquidity.

In this paper we trace the development of shares trading in the Kingdom, analyze present conditions and present what we see are the challenges for the future development of the Saudi stock market.

THE HISTORY OF PUBLICLY TRADED COMPANIES

IN SAUDI ARABIA

At present there are 61 joint-stock companies in the Kingdom. Of these 10 are companies whose shares are not negotiable: one being a Saudi company, four being companies whose shares are exclusively held by other companies and five being companies whose shares are held by various Arab governments. Of the remaining 51 companies whose shares are tradable, 12 are companies whose shares are also owned by foreign entities and 39 are 100 percent Saudi companies. Of these 39 wholly Saudi companies, shares of 3 are not traded at all. Thus at present there are 48 companies 12 partly foreign owned and 36 wholly Saudi, whose shares are traded on the Saudi stock market. In any given week however, shares of only between 30 and 35 companies are usually traded.

The first company to go public in the Kingdom was the Arabian Automobile Company which was established in 1935. It was later liquidated. Of the companies that are presently traded, the oldest is the Arab Cement Company which was made public in 1954. The earlier companies whose shares were offered publicly were the cement companies and the regional electricity companies, reflecting the phase of the development of the infrastructure in the Kingdom. Until 1975, as can be seen in Table 1, only 14 of the 48 companies presently traded had been established and their total paid in capital was about SR 2 billion.

TABLE 1
Year	Primary Flotations	Capital Expansions	Total Paid in Capital
UPTO 1960	5	-	141,000,000
1961 – 70	3	4	315,000,000
1971 – 75	9	4	1,559,510,542
1976 – 80	19	17	19,193,899,458
1981 – 86	15	6	21,290,472,825
Total	48	31	42,499,882,825
Source: Consulting Center for Finance and Investment Database

The biggest jump in the number of joint stock companies occurred in the period 1976 to 1980, corresponding to the period of economic boom in the country. During this period 19 new companies were floated, with a total paid-in capital of SR 19 billion. The most significant flotations in this period were those of the banks. Seven foreign joint venture banks were Saudized and their shares were offered to the public. An important feature of these flotations was the fact that the government insisted that these shares be offered at par value, much below the actual value of the shares, perhaps as a form of distributing to the Saudi public the newly acquired economic gains of the Kingdom.

These flotations resulted in tremendous shareholder interest in the Saudi stock market and resulted in a large segment of the population becoming involved in buying and selling shares. Demand for the limited number of shares available increased and prices rose.

The next phase, 1981 to 1986 also saw a burst of new offerings, with 15 new companies in a variety of business activities, and with total paid in capital of SR 21 billion becoming public.

Thus, at present the number of publicly traded companies stands at 48. As can be seen in Table 2, 10 of these are in banking and finance, 17 are industrial companies, 15 are service companies and 6 are agricultural companies. A list of the publicly traded companies is provided in Table 3.

TABLE 2
Sectors	Primary Flotations	Capital Expansions	Number of Shares Issued	Total Paid in Capital
Financial…..	10	7	17,550,000	1,800,000,000
Industrial…..	17	20	87,110,000	11,191,000,000
Services and Utility…	15	4	297,513,623	28,334,711,100
Agricultural….	6	-	16,966,769	1,174,171,725
Total	48	31	419,140,392	42,499,882,825
Source: Consulting Center for Finance and Investment Database

TABLE 3

SAUDI COMPANIES WHOSE SHARES ARE TRADED

FINANCIAL SECTOR Arab National Bank Saudi American Bank Saudi British Bank Saudi Cairo Bank Bank AI-Saudi Al-Hollandi United Saudi Commercial Bank Riyadh Bank Saudi Investment Bank Bank AI-Saudi Al-Fransi Al-Jazira Bank SERVICES AND UTILITY SECTOR Central Electricity Company Western Electricity Company Eastern Electricity Company Southern Electricity Company Tabuk Electricity Company Tiema and Dhouhiya Electricity Co. National Gas and Industrialization Co. Saudi Public Transport Co. National Shipping Company (Old) National Shipping Company (New) Saudi Livestock Trad. & Transport Co. Saudi Automotive Service Co. Saudi Hotels and Resorts Co. Saudi Real Estate Co. Tiharna for Advertising and P.R.

INDUSTRIAL SECTOR Saudi Basic Industries Corp Saudi Fertilizer Saudi Edible & Vegetable oil Saudi Ceramics Co. Aseer for Trade and Industry Arab Cement Co. Saudi Cement Co. Saudi Bahraini Cement Company Saudi Kuwaiti Cement Company Yanbu Cement Co.  Southern Cement Company Gassim Cement Co. Yamamah Cement Company Saudi Refineries National Industrialization Co. Saudi Pharmaceutical Industries National Gypsum AGRICULTURAL SECTOR National Agricultural Development Co. Hail Agricultural Development Co. Gassim Agricultural Development Co. Tabuk Agricultural Development Co. Saudi Fisheries Eastern Agricultural Company

NEW ISSUE ACTIVITIES

As we will read in later sections, the regulatory authorities have provided a structured code for dealing with shares trading and the transfer of shares in the secondary market. However, the question of the operating procedures to apply in the primary market in which fresh capital is raised for investment purposes has been largely unaddressed.

The Consulting Center for Finance and Investment (CCFI) has directed its activities to this need and become the major new issue house in the Kingdom. It was CCFI which handled the biggest public flotation of shares in the Middle East, the offering of shares of the Saudi Basic Industries Corporation. This innovatively incorporated for the first time the extension of part of the offer to citizens of other Gulf countries.

Details of some of the recent issues handled by CCFI are shown in Table 4. As can be seen, in this period the number of applicants was always high and the subscribed amount usually far exceeded the amount called for.

TABLE 4 RECENT PUBLIC FLOTATIONS IN SAUDI ARABIA HANDLED BY CCFI
Year of Flotation	Name of Company	Total Number of Applicants	Total Amount Subscribed SR. (MILL)	Over/Under Subscription
1983	Saudi Livestock Trading and Transport Co.	331,040	716.8	Over 2.9 time
1983	Tabuk Agricultural Development Co.	297,513	437.9	Over 2.2 time
1984	Qaseem Agricultural Development Co.	352,924	552.9	Over 4.4 time
1984	Saudi Basic Industries Corporation (SABIC)	373,303	3,701.1	Over 2.5 time
1984	Saudi Pharmaceutical Company (SPIMACO)	71,541	271.8	Over 1.4 time
1985	Eastern Agricultural Company	29,912	49.2	Under
1987	Saudi Cable Company	N.A.	N.A.	N.A.
1987	Saudi Cairo Bank	N.A.	N.A.	N.A.
Source: Consulting Center for Finance and Investment (CCFI) Database

Since 1985, new issue activity in Saudi Arabia has been dormant. No new companies have been floated to the public since the lukewarm response to the shares of the Eastern Agricultural Company. The overall fall in share prices and the desire of the authorities to protect the investments of Saudi shareholders were the most important factor behind this lull.

Beginning in 1987, following the steady overall in- crease in share prices, however, there has been some movement towards new joint stock companies being floated publicly. A number of companies are planning to expand their capitals. In addition, some new companies are to be made public. The Taiba Investment and Real Estate Company with an authorized capital of SR three billion will soon offer 60 percent of its shares to public investors. The Saudi Cable Company, one of the largest Saudi industrial enterprises, is offering 30 percent of its capital to the public. It is also likely that shares of the Al Rajhi Company for Currency and Exchange may finally be offered for public subscription.

SAUDI SHARES REGISTRATION COMPANY

Once a transaction has been made in a share, the transfer of ownership has to be registered and new share certificate have to be prepared. This administrative function is of immense importance to the shares trading process because delays in effecting the transfers reduces the liquidity of shares and hampers investor confidence.

Until 1980 process of shares registration used to be conducted by the company whose shares were transacted. Most of the transfer was done manually. In 1980, the Consulting Center for Finance and Investment (CCFI) alongwith other institutions, embarked on the formation of a private limited liability company to be the Central Registrar for the Joint Stock Companies. Almost all banks have agreed to join in this company.

The Bye-laws of the proposed company were drafted and sent to the Ministry of Commerce for approval and registration and from here the project took another route. The Ministry of Commerce sent the project to the Ministry of Finance for its approval and the latter referred it to SAMA for comments.

SAMA, though has supported the idea, opposed its ownership, Sheikh Abdulaziz Al-Qureshi, the then Governor of SAMA told Dr. Al-Dukheil, President of CCFI during a meeting to discuss the finds of the committee established by SAMA to look into the matter – that SAMA does support the formation of the company, but its ownership should be limited to the banks only – and thus CCFI had to forego its share as a major founder and confine itself to the role of a system designer and management consultant. Saudi Shares Registration Company (SSRC) finally was formed in 1985. The delay was attributed partly to the reluctance of some banks to centralize their share registration after they have invested in computerization and perfecting their own operation. SAMA however, has a different view to the whole issue than that of the Registration efficiency. To SAMA the Saudi Shares Registration Company (SSRC) is an important base and tool for the development of the Saudi Stock Market.

SSRC’s share capital is SR 11 million. This has been provided in equal proportion by the Kingdom’s 11 commercial banks and significant investments have already been made to track and register the stocks. CCFI has developed for SSRC a multi-company share registration computerized system. The system was installed and tested in May, 1987. When the ultimate objective of forming an integrated central registry is achieved, this will provide an important mechanism by which the regulatory authorities can control the market. Indeed, since May 1987 as we will see later, the new stock trading regulations specify that SSRC will playa bigger role in the shares trading process.

TRENDS IN SHARE PRICES AND TRADING ACTIVITY

Price trends in the Saudi stock market have generally paralleled the stock of the economy. An index of Saudi stock market prices has been prepared by CCFI. The CCFI index, using the methodology of the Standards and Poor index of the US stock market, presents the weighted average of changes in stock prices. The CCFI index from November 1981 to May 1987 is shown in Table 5. Prices increased more than three times from June 1982 to June 1983 but fell after October 1983, reflecting weaknesses in the economy resulting from lower oil prices, and lower government revenue and spending.

The fall in prices bottomed out at the end of December, 1986 and share prices have been rising gradually since then, consistent with increased vitality in the economy and the boost to investor confidence resulting from higher oil prices and the announcement of the long-delayed government budget and renewed government spending.

The level of activity in the Saudi stock market has also varied with the health of the economy. In the period of high liquidity of late 1981 as many as 150,000 transactions were carried out every month. During the year 1984 to 1985 when the market was declining, the number of transactions averaged only 750 per month. In the begining of 1987, with stock prices rising, the number of transactions averaged about 1600 per month, trading still being quite thin by international standards.

The depth of the market, the value of shares traded as a percentage of the market value of the stock of com- panies, has been very small. During 1984 to 1985 this measure, averaged less than 1% of the market value of the shares, also quite low by international standards.

The reasons for the thinness of trading and the shallowness of the market are varied. For one thing, as can be seen n Table 6, only 38 percent of the shares of joint stock companies are held by individuals and are freely available for trading. The rest are held mostly by the government and are not traded.

TABLE 6 ESTIMATED OWNERSHIP OF SHARES OF SAUDI JOINT STOCK COMPANIES 1986
Sectors	Government	Banks and Retirement Fund	Foreigners	Individuals	Others
Banking	0.1	3.4	39.4	57.1	0.0
Industrials	15.0	7.5	5.8	70.5	1.2
Services	71.3	3.6	-	25.1	0.0
Agricultural	6.3	6.7	-	86.7	0.3
Total Market	54.1	4.5	2.9	38.2	0.3
Source: SAMA unweighted by value

Another important reason has been the concentration of ownership of shares in a few hands. A feature of the Saudi stock market is that the number of shareholders of Saudi companies declines sharply soon after the stock becomes available in the secondary market. The concentration of ownership is reflected in Table 7. Shareholders with substantial shareholdings have been reluctant to sell, especially in declining markets.

TABLE 7

CONCENTRATION OF SHAREHOLDERSHIP OF SECELECTED COMPANIES

Company	Number of Shareholders
	1981	1986
Arab National Bank	5	-
Saudi Cairo Bank	3	4
Saudi British Bank	9	4
Saudi American Bank	19	17
Source: Consulting Center For Finance And Investment Database

SHARES TRADING PROCESS PRIOR TO DECEMBER 1984

The process by which shares have been bought and sold in Saudi Arabia has varied over the years.

Until December 23, 1984, willing buyers and sellers of stock were generally informally put in touch by individuals exercising the profession of stockbroking, for which neither license, capital nor credentials were required. From the earlier, less formal days in 1978, when there used to be some 45 firms of brokers in Riyadh, the number practising in that city had diminished to only six by early 1984. At that time there were approximately four brokers in Jeddah and 30 in the Dammam region. The reduction in the number of brokers occurred generally in reaction to the following three factors:

·         The lower volumes of trading resulting from reduced liquidity.

·         The increase in size and sophistication of the brokers remaining in the market.

·         SAMA's well-heralded intention to transfer the business of broking, at least on a caretaker basis, to the banks, in order to provide an effective method of regulation for share dealing.

SHARES TRADING SYSTEM:

DECEMBER 1984 - MAY 1987

The informal system of shares trading, the lack of regulation affecting brokers and the absence of a formal legal environment in which shares trading was taking place were matters of concern to government authorities.

However, government authorities chose the more con- servative approach and decided not to create a separate body for regulating the emerging stock market. It was considered that as a mature financial regulatory authority already existed in the form of the Saudi Arabia Monetary Agency (SAMA), it was most practicable, at least initially, to require the business of stock trading to be under its supervision. This system is reflective of the structure of the stock markets operating in Germany and switzerland.

To determine the specifics of the arrangements a joint committee was formed under Royal Decree in April, 1983. This committee, drawn from delegates of the Ministry of Finance and National Economy, the Ministry of Commerce and SAMA, studied how secondary market activity could be carried out by the Saudi banks. Based on the deliberations of this committee, a circular was issued by SAMA to the banks in June 1984, laying down the basic ground rules to be followed. The most important features of the arrangement (illustrated in Figure 1) were as follows:

-        all shares trading activity would be supervised by a Supervision Committee comprising delegates from the Ministries of Finance and Commerce and from SAMA; day to day control would be under a Shares Control Division to be established in the Banking Control Department of SAMA.

-        brokerage activities would be confined to the 11 commercial banks and A1 Rajhi Company for Currency and Exchange which would each create a centa1 coordinating unit in one of their branches in Riyadh to coordinate buy and sell orders between their branches and with each other.

-        those wishing to buy or sell shares would approach a bank branch, complete an application form indicating amount and preferred prices; buyers would have to make the payment in advance.

-        banks would try to match buyers and sellers first with their own branch networks and then with the central coordinating unit of other banks through a clearance office at SAMA.

-        forward dealings and the acceptance of post dated checks would be prohibited.

-        the banks would be responsible for both the settlement and re-registration of shares.

-        publicly traded companies would have to publish quarterly financial statements in the local press.

-        banks could charge the buyer(not the seller) a maximum of 1 percent of the value of the shares traded.

This new system was implemented with effect from December 23, 1984 and continued in force (with some modifications, for example, allowing banks to split the 1 percent commission between both the buyer and the seller) until May, 1987.

APPRAISAL OF SHARES TRADING SYSTEM:

DECEMBER 1984 – MAY 1987

This new shaers trading system increased the control of the authorities over the stock market and attempted to remove from the picture the independent and unregistered borkers who had played a big role in market making in the past. It was designed to curb speculation and reduce the volatility of the stock market.

But the general consensus is that the new system had several weaknesses.

·         The procedures were arduous and time consuming and often weeks would go by before a buy or sell ordred was executed. Even after the execution of the sale, registration of transfers and issuance of new certificates often took up to a couple of months.

·         The market become segmented. The degree of coordinatin anticipated between the banks did not occur. To maximize commissions and to minimize chances of losing customers, each of the banks handled almost all transaction by themselves without cooridnating with the other banks. The number of transactions cleared through the SAMA clearing office resulting from deals involving two banks were therefore quite small, as can be seen in Table 8 on the next page:

TABLE 8

MARKET SHARE BY, TYPE OF TRANSACTIONS

DECEMBER ’84 TO DECEMBER ‘85

	Number of Transactions	%	Value of Shares Traded (SR mi)	%
THROUGH ONE BANK	5,678	(62.5)	386.7	(47.8)
THROUGH TWO BANKS	460	(5.1)	37.1	(4.6)
NO MEDIATION BY BANKS	2,940	(32.4)	384.9	(47.6)
	9,078	(100.0)	808.7	(100.0)
Source: Based on Information from SAMA

One result of this segmentation was that information on prices and quantities was quite imperfect and even for transactions completed on the same day, prices varied excessively.

·         A large number of transactions about a third in terms of number of transaction and almost half in terms of overall value, (as can be seen in Table 8) did not go through the banking system at all. A loophole in the new regulation was Regulation 19 (B) of the new trading rules. This rule permitted the share registration offices of companies to complete transfer procedures without the transaction going through banks if the company was sure that the transaction was direct between buyer and seller without mediator and without payment to third parties.

In practice, this option was used for bigger value transactions to avoid paying commission. It also became one of the options for completing transactions where buyers and sellers were matched by the traditional brokers who continued to operate. Some shareholders who had an aversion to the banking system because of religious beliefs also chose to effect their trades directly at the company share registration offices.

·         The new regulations officially eliminated the role of brokers but actually increased the need for them. The long delays often occuring to complete transactions through banks forced investors to continue to go to the traditional brokers who continued to offer advice and take positions in stocks, providing quick liquidity to sellers.

·         Banks were not allowed to take position in stocks and there were no other official market makers, often causing delays in completing transactions.

·         Commission levels were too low for banks to make shares trading a profitable activity and to devote more resources to improving services.

·         Confidence in the shares trading system was reduced. One reason for this was that brokers, who held a position of confidence and trust, were eliminated. Also central to the lack of investor confidence was the ambiguous position held by banks in Saudi society.

The months following the implementation of the new system saw a steady decline in both share prices and in trading activity. As few as 50 or 60 transactions would take place per week, with the value of shares traded sometimes dropping as low as SR 2.3 million per week and individual share prices dropping as much as 80 percent. The drop was somewhat slower in 1986 but even then bank shares, for example, dropped by an average of about 45 percent during the year. Trading activity averaged about SR 3.5 million per week. This decline in share prices was a reflection more of the overall decline in economic activity and problems of liquidity than of the new system of trading shares. In fact, some would argue that share prices would have fallen even further in the absence of the time consuming procedures involved in the new system.

SHARES TRADING SYSTEM SINCE MAY 1987

Alternatives to the system implemented in December 1984 were studied. In general, two options stood out. The first was to establish a common floor or a trading room where all traders would be physically present and where all trading activity would take place. The second was to introduce a system of electronic trading, with all brokers linked by computer networks, similar for example, to the NASDAQ system in place for over-the- counter trading in the united States.

The cost of implementing an electronic trading system was perhaps prohibitionly high. At 1986 levels of trading, the annual commission income to all banks from shares trading totalled about SR 1.75 million. A capital expenditure perhaps ten times that amount would have been necessary to implement even a limited facilities electronic trading system linking all the banks. Besides, the cooperation of all the banks to participate in such levels of investment was essential for the success of the electronic trading option and was difficult to achieve at prevailing levels of trading.

Thus on May 11, 1987 a new system of shares trading was introduced in Saudi Arabia. This involved bringing all the bank brokers to one trading floor and effecting all transactions by an auction system at one physical location. SAMA would continue to play the supervisory role and the Superviory Committee comprising delegates from the Ministries of Finance, Commerce and from SAMA would monitor the process. The essential features of the new system were as follows:

-        While broking continued to be the sole domain of banks, the shares trading function was taken from t,he individual banks and trading activities were to be conducted in a Central Trading Hall to be administered under the supervision of the Shares Control Department of SAMA.

-        Each bank would send two of its representatives every day to this Central Hall with all the buy and sell orders received at the various branches of the banks.

-        For the shares of each company, offers to buy or sell would be posted on a large board and shares would be traded by auction.

-        The Saudi Shares Registration Company (SSRC) would playa bigger role in facilitating the documentation of transfers and the issuance of new certificates. An SSRC office would be located next to the Trading Hall to ensure the smooth completion of formalities.

-        Joint stock companies would not be allowed to register tansfers directly at their offices except in cases of transfer for inheritance or between spouses, thus eliminating the loophole that existed under Regulation 19 (B) of the old system.

-        Joint stock companies were required to effect transfers of ownership within one week of the sale.

-        Commissions continued to be a maximum of 1 percent of the value of the transaction, to be split equally between the buyer and the seller brokers.

APPRAISAL OF SHARES TRADING SYSTEM:

MAY 1987 -PRESENT

This new system has just been implemented and it is yet to be seen how it will function. In the first few days of its operations as few as three to five transactions were effected during a single day. However, the new system certainly addresses some of the problems that were encountered during the period 1984 to 1987:

·         By having traders deal with each other across the floor, the delays caused by dealing through telephone and over the telex were eliminated. Prices were made more perfect and the big variation in prices for a single stock traded at different banks was reduced. In that sense the market was made more fair for the investor.

·         The segmentation of the market was dealt with by eliminating the option of investors to avoid trading through banks and for buyers and sellers to go directly to the shares transfer offices of the joint stock companies. This more finally brought all share transactions under the regulatory control of the Supervision Committee.

Yet, some of the major issues that needed to be dealt with still need attention:

·         Banks would still not be allowed to take positions in shares, to act as market makers and to hold shares in their own account even for limited periods. The provision to carry out this function was mentioned in the draft regulation circulated prior to the implementation of the new system but was thought to be too radical to be introduced just yet.

·         Brokers other than the banks were not allowed to function. Independent brokers had been the traditional source of vitality to the market because of their role as market makers and position takers. They also added to the liquidity of the market and improved investor confidence in the system.

CHALLENGES FOR THE FUTURE

A stock market is not a luxury but an essential feature of the capital market of any country, especially of one where the private sector is being encouraged to take on additional economic responsibilities. Savings have to be mobilized and efficient markets have to develop to channel the savings of investors to domestic investment opportunities.

The opportunities are there in Saudi Arabia for the emergence of a stock market with greater vitality. The foundation has already been laid. A substantial number of companies have gone public and the total capialization of the market is quite significant at about SR 65 billion. The number of shareholders, perhaps about half a million, is also quite healthy relative to the population of the country. A large amount of private capital is still available and can be diverted to domestic investment opportunities. Some quite large and profitable public as well as private sector ventures are yet to go public. Overall, the political environment is stable, there is low inflation and the government is committed to encourage the growth of the private sector, one of the major aims of the current Fourth Five Year Plan.

The challenges ahead are also quite significant. A number of changes have to come about to increase investor confidence in the stock market, to improve liquidity and to encourage greater participation both of investors and of companies. Among the major issues that need to be tackled are the following:

·         The regulatory environment for shares trading has to be further developed. Shares trading is an activity distinct from banking and the Saudi stock market should be overseen by an organization unconnected with banks. Because of the important lind between liquidity interest rate and shares trading, SAMA could be given an important role in the supervision and regulation of the Stock Market. In addition, regulations need to be developed to deal with such issues as insider trading and concentration of holdings.

·         Serious consideration should be given to the role of independent brokers who could take positions, act as market makers and generally facilitate trading. Regulation could be enforced to license these brokers and to ensure that they carry out their activities within permitted norms.

·         Steps have to be taken to increase the supply of shares available for investment. Primary market activity has to be encouraged and procedures for companies wishing to go public have to be streamlined. Presently it can take as long as two years to bring an issue to the market. Companies have to be encouraged to go public. One means of this is by more strictly enforcing the requirements of the Saudi Industrial Development Fund that all companies that have borrowed over SR 100 million of its soft industrial development loans have to offer their shares to the public.

·         The Saudi stock market has to be seen in the context of increasing cooperation between the countries of the Gulf Cooperation Council. Measures should be takes to bring the stock markets of the GCC countries towards greater unity. GCC citizens should be allowed to buy shares of more Saudi publicly-held companies and GCC companies should be allowed to be traded on the Saudi stock market. Moreover, the introduction of international stocks to be traded in the Saudi Stock Market should not be eliminated from the drawing board.

·         To encourage investors to invest in the stock market and to increase investor confidence in the market, steps have to be taken to improve both the quantity and the quality of information that is publicly available about Saudi stock companies. Currently companies are required to publish quarterly statements but the information provided in these is generally quite sketchy and it is difficult to analayze the performance of the companies and the quality of investments in them.

·         The commission structure for banks has to be reconsidered. If banks are to be asked to playa major role in providing vitality to the stock market it should be ensured that the returns to them are adequate enough to enable them to allocate the needed quality of resoures to shares trading activity.

·         Steps have to be taken to speed up the transfer of ownership, the registration of transfers and the issuance of new certificates. These steps will increase the liquidity of investments in the stock market and attract more money into domestic investments.

·         The time for making important decisions regarding the Saudi stock market is now. For too long the authorities have lived in the shadows of the recent crises in the stock markets of other Gulf countries and have adopted a slow and gradual approach to developing the Saudi market for shares. But the lessons to be learned from these crises is that sound foundations have to be laid as soon as possible. An appropriate regulatory and institutional infrastructure has to be developed immediately. Only then can private savings be mobilized for economic development and only then can the private sector play the important role that is its due.

 

Source: The Gulf Financial Markets, Gulf international Bank, Chapter 3 , Bahrain, Januray, 1988 .

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*1 The views expressed in this paper reflect my personal opinion. However, I would like to thank all those who helped in preparing this paper, specially Mr. Anzar Ahmed – Vice President of the CCFI.

*2 DENIS WEAVER         Investment Analysis   – Longman

                                           Grow Limited, London –  1971