Download Banking System in Saudi Arabia

Running head: MACRO PROJECT
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Section:
201
Second assignment:
Monetary policy
Done by:
Raghda mamdooh al saif 201100425
Basmah Emsharah Emsharah 200800423
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Monetary policy
Implementation
In Saudi Arabia, the monetary policy is implemented by SAMA (Saudi Arabian Monetary
Agency). This implementation is based on its fixed exchange-rate policy. Saudi Arabia’s
currency is called Saudi Riyal and is pegged on the US Dollar (Ramady, 2012, p. 99). This is
based on the country’s pattern with regard to external payments and receipts most of which are in
US Dollars. In the implementation of the policy; SAMA’s operational target is to manage the
system liquidity by use of the repurchase window (p. 100). Its intermediate target is for Riyal to
be stable against the US Dollar as the intervention and anchor currency.
General Description of the SAMA, Management, Functions
The Saudi Arabian Monetary Agency (SAMA) was created in 1952 and was aimed at
serving as the central bank, and had to be confined to Islamic law. SAMA was expected to help
the country in coping with the rapidly increasing government expenditure, the spending of the
foreign oil company, and to regulate the private banking systems that had been newly created
(p.105). Over the years, with the financial system’s expansion, growth of the economy, and the
government’s fiscal operations increase, the responsibilities of SAMA have also increased. The
monetary policy, which is managed alongside the government’s fiscal policy, has enhanced the
stability of the exchange rate and domestic price (p.114). As a result, it has largely contributed to
the development and consolidation of the country’s economy.
With regard to SAMA’s management, it is headed by a Governor called Dr. Fahad
AlMubarak. Under him is a Vice Governor called Dr. Abdulrahman A. Al-Hamidy. Under him is
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the Deputy Governor for Technical Affairs and Deputy Governor for Administration and
Finance. The board of Directors comprises of; Governor, Chairman of the Board (an Ex-officio),
Vice Governor, and Vice Chairman together with Ex-officio member. Also included are 3
nominated members who belong to the private sector.
SAMA’s functions can be described briefly as follows; it is responsible for issuing
national currency, it serves as the government’s banker, supervises commercial banks, advises
the government on matters concerning public debt, and manages the foreign exchange reserves
of the Kingdom (p. 112). It also conducts monetary policy which is aimed at promoting the
exchange rate and price stability, and promotes the growth in addition to ensuring that the
financial system is sound.
Banking System in Saudi Arabia
Saudi Arabia’s banking system is governed by SAMA and this banking system is also one
of the safest, globally. The banking regulation is headed towards international standards. It also
has underwriting standards lending practices that are adequate (Niblock, 2011, p. 211). The track
record is also good in terms being able to maintain asset quality indicators that are strong.
Domestic banking is at a high level owing to the high support from the government. Even if the
profits are healthy, deposits are growing and loans are up, only a few people own homes. This
means that the banking system still has more areas that are lucrative for it to exploit.
Money Functions
Money has three main roles; pricing (unit of account), investment (store of value, and
payment (means of exchange). With regard to money as a unit of account, it means that it
provides a measure of value that is common for both goods and services that are being
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exchanged. As a store of value, it means that money is capable of holding its value over time.
Therefore, people can store it for some time and yet it will not lose its value in exchange. Money
is a means of exchange and therefore it facilitates transactions (p. 233). This means that in order
to receive goods or services, one needs to give up money.
Exchange rates and factors that Influence the Exchange Rate
Exchange rates can be defined as the price belonging to the currency of a country when
expressed in the currency of another country (the rate that a currency is exchanged for another).
There are several factors that influence exchange rate; for example differentials in inflation.
Countries with lower inflation rate that is consistent enjoy a currency value that is on the rise
because purchasing power tends to increase when compared to other currencies. Secondly,
differentials in interest rates also contribute in that; when interest rates are higher the lenders are
provided with a higher return rate when compared to other countries. Consequently, higher
interest rates tend to attract foreign capital, causing the exchange rate to go up. Current account
deficits means that a country more foreign currently that what it is receiving (p. 245). This excess
demand for the foreign currency makes a country’s exchange rate to go lower, until the country’s
goods and services can be cheap enough to attract foreigners.
Relationship between the Dollar and Saudi Riyal
There is a bond that has existed for more than 20 years, between the US Dollar, and the
Saudi Riyal. Owing to this bond, as the US dollar loses its value, the effect is extended to the
Saudi Riyal (Malak, 2012, p. 56). The crude oil from Saudi Arabia is paid for in Dollars.
Therefore, it has continued to affect the value of the Kingdom’s currency. Basically, when the
Federal Reserve lowers or increases the interest rates, Saudi Arabia experiences it through the
value of its currency. The implication here is that the Saudi Riyal is not dependent on the falling
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and the rising of oil prices in the country. Instead, it is determined by the performance of the
Dollar.
Inflation in Saudi Arabia
According to a recent study by National Commercial Bank, there is the likelihood of the
year ending with an inflation rate that is below 4%. The reason is that earlier in the year, there
was a rapid increase in terms of the prices for tobacco and food (p. 78). This was further
moderated by the rents being decreased. The tobacco prices were raised in order to reduce
smoking. The rents declined owing to mortgage laws that were introduced in order to encourage
more people to own homes.
Historically, since 2003 until this year, the average inflation rate has 3.81%. However, in
July, 2008, it was the highest at 11.08%. In September 2004, it was 0% percent, which was a
record low (p. 89). The Inflation rate is measured by paying attention to a broad fall or rise in
prices of a certain basket of goods which is standard.
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Reference
Malak, R. E. (2012). Doing Business in Saudi Arabia. London: Oxford Business Group .
Niblock, T. (2011). State, Society, and Economy in Saudi Arabia. Florida: Taylor & Francis.
Ramady, M. A. (2012). the Saudi Arabian Economy: Policies, Achievements, and Challenges.
Berlin: Springer.