Abu Dhabi, UAETuesday 11 December 2018

Side deals risk Gulf's reputation in global banking

Reports that the Saad Group has reached some sort of debt settlement with Saudi banks is a matter of hope, but also of concern for international banks.

Recent reports that the Saad Group owned by Maan Al Sanea has reached some sort of debt settlement with Saudi banks is a matter of hope, but also of concern for international banks. The fact that one of the parties in the massive dispute between two Saudi family groups is now beginning to reach some settlement on their debt is of course encouraging, as the dispute has cast a shadow on bank relationships with family-owned businesses and caused uncertainty in the vital financial sector of regional economies. However, the reports that only Saudi banks were participating, to the tune of about 3.1 billion riyals (Dh3.03bn) is worrisome, especially for foreign banks who are reportedly owed billions of dollars. While all banks have to bear the consequences of their folly in extending loans on a name-only basis, without a deeper scrutiny on the activities of such Gulf family businesses, the fact is that a level playing field has to be established for all parties involved in financial disputes, without favouring national institutions. This is what the US Federal Reserve did when it froze all outstanding settlement contracts when Lehman Brothers went bankrupt and a Fed settlement committee unwound Lehman's obligations, irrespective of their origin or ownership. It is not hard to assume that the two Saudi family businesses at the heart of the dispute, Al Gosaibi and Saad, might also be tempted to cut a settlement deal with banks nearer to home, specifically those from GCC countries. The fact that other Gulf regulators noted that their domestic banks were not part of the settlement provides some comfort that no such deals were cut. The consequences of doing such backyard deals have long-term negative consequences to the region. Globalisation comes with both benefits and costs. In the Gulf, we often cite a long list of perceived benefits: mobility of ideas and capital; unrestricted trade flows; the ability to attract investment; and ensuring a level playing field for developing nations striving to diversify their narrow resource based economies. And the world expects the same from the Gulf. There cannot be two sets rules at the same time - a globalised one when it suits us and a closed, nationalistic one when we want to protect ourselves. It could just be that the Saudi banks managed to cover themselves by having Saudi based collateral against their loans. From the dribs and drabs of information emerging, it does seem that Mr al Sanei's personal obligations were secured against local bank shares which is perfectly acceptable to international banks if this would be communicated more openly by the banks concerned. The problem lies with loans extended to the Saad corporates and what type of collateral they provided and if this collateral is somehow also pledged to the offshore entities that borrowed from international banks leaving them now exposed. Banks generally tend to follow each other in they extend loans to key clients, based on the simple promise that if they don't, then they lose out on the deal. In retrospect, many will be reassess how they deal with family businesses in the future and the quality of information that needs to be released by them. But for the time being, foreign banks are willing to absorb loan losses as long as all are treated the same. To argue that international banks with their larger capital bases and balance sheets can somehow "afford" to take greater hits compared to their smaller Saudi or Gulf counterparts is not an argument. Not adopting a level playing field policy and see it enforced by the GCC financial regulators, could come back to haunt the Gulf in the long run. Many GCC countries have aspired to establish international standard financial centres, hoping to attract the big boys of the financial world. There could be nothing worse than sending the world a message that you are welcome to invest and lend to national economies, but that a blind eye will be turned when there is discrimination between national and international banks. This is different from the so-called "too big to fail" syndrome, where national governments act, and have acted in the recent crises all around the world, to protect their key financial institutions to avoid panic and contagion to the wider financial sector. The Gulf did it. The Western world did it, as well. For international bank creditors there are several options. First they can argue quietly, firmly and persuasively with the local Gulf financial regulators that having local settlements to the exclusion of international or "foreign" banks, is detrimental to these countries in the long run when these turn to the international capital markets to fund their mega projects. A second option is to take the hit and lay low to avoid raising their profile. Another option, especially for those who have no physical presence or attachment to the Gulf, might be to go after the assets of the local banks who have reached bilateral settlements on the premise that their loans are pari-passu as the domestic banks and loan covenants have been breached. This is a last option of the desperate and the only winners will be lawyers and financial forensic investigators. The domestic banks which reportedly are making such bilateral deals might consider themselves lucky in the short run, but they will sour their relations with international banks in the long run when they call them to participate in local mandates in the future. Financial trust is an intangible commodity. After so many years of building up trust in the Gulf, let us now risk it for the sake of a few bilateral deals as the consequences could cost the region more. To its credit the Saudi Arabian Monetary Authority has announced that it was not involved in any local settlement. And while welcoming any such settlements, it pointedly noted that the Saad accounts were still frozen. Such announcements need to be more proactive and clear the air without having rumours take over and become de facto truths when the settlements already made could very well be perfectly legitimate. Dr Mohamed A Ramady is a former banker and a visiting associate professor, Finance and Economics Department at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia