The beginning of the modern banking system began in October 1952 with the creation of the Saudi Arabian Monetary Agency (SAMA) the principle agency responsible for management of monetary matters. Paper money was first introduced in the early years of the 1950s decade. Banking problems in the late 1950s decade resulted in regulatory framework being strengthened in Saudi Arabia during the middle 1960s decade in which broad supervisory capacity was given to SAMA in a legal environment that upheld the concept of a Universal Banking Model allowing banks to make provision of a wide range of financial services “including banking, investments, securities, etc. through their branches.” (Saudi Arabian Monetary Agency, 2004, p.3) There were 12 operating banks by 1979 only three of which, were non-Saudi banks and branches had doubled by that year to 140.
II. Lending Institutions in Saudi Arabia
Five major lending institutions were introduced in the decade of the 1970s: (1) Saudi Credit Bank; (2) Saudi Agricultural Bank; (3) Public Investment Fund; (4) Saudi Development Fund; and (5) the Real Estate Fund. (Saudi Arabian Monetary Agency, 2004, p.3) Restructuring was accomplished arising from encouragement by the Saudi Government and by 1975 there was a reported “10 international bank”…including “29 branches present.” (Saudi Arabian Monetary Agency, 2004, p.3) There was a rise and fall in the economy and SAMA faced a critical challenge for supervision in 1982 “when irregularities appeared in Saudi Cairo Bank’s operations. Two senior managers were involved in unauthorized trading in bullion during the 1979-81 period, and had concealed accumulated losses that exceeded the Bank’s share capital.” (Saudi Arabian Monetary Agency, 2004, p.3) It is reported that SAMA required the Bank to issue new shares and double its capital in 1986. SAMA arranged this increase to be taken up entirely by the Public Investment Fund (PIF). The Bank also benefited from “low-cost” deposits from the Public Investment Fund. These measures helped the Bank with liquidity and rescued it back to a healthy position.” (Saudi Arabian Monetary Agency, 2004, p. 4-5
III. Regulatory Framework of Banking System in Saudi Arabia
SAMA in collaboration with Saudi Arabia Ministry of Finance ensured the financial system’s stability and assisted banks in clearing the hurdles of economic downturn. Included in this collaborative initiative were the following actions: (1) Banks were required to seek SAMA’s approval prior to announcing their dividends. The Banking Control Law required all banks to build their statutory reserves equal to their share capital. SAMA further encouraged Saudi banks to build additional reserves to strengthen their capital base. (2) Most foreign shareholders in Saudi banks enjoyed a tax holiday for the first five years of their ownership. To encourage retention of profits, the tax holiday was extended in most cases by another 5 years after which a deferred tax scheme was permitted; (3) In 1986, SAMA obtained a ruling from the Tax Department that permitted the tax deduction of loan loss provisions on an accrual basis. This encouraged banks to increase their loan loss provisions for doubtful accounts; (4) To encourage Saudi banks to increase their inter-bank dealings and to support the development of a riyal inter-bank market, a tax ruling was obtained which exempted foreign banks from withholding taxes when carrying out inter-bank transactions with Saudi banks; (5) Corporate Governance. SAMA recognized the need to encourage banks to take strong steps to improve their risk management and control procedures. Consequently, it took major initiatives in the area of corporate governance. Firstly, it required all banks to develop and strengthen their internal audit departments, and secondly it issued minimum internal control guidelines. In addition, SAMA issued accounting standards for Commercial Banks in Saudi Arabia which were in line with International Accounting Standards; (6) Creation of Banking Disputes Committee. In 1987, Saudi authorities established a Banking Dispute Committee by the order of the Council of Ministers. The creation of this Committee as the only relevant quasicourt to handle dispute between banks and their customers significantly strengthened the legal system. By law, all banking disputes had to be referred to this Committee and the rulings of this Committee were given the same enforcement support as decisions from any other court; (7) Exchange of Information on Large Borrowers and on Delinquent Loans. In the early 1980’s, SAMA established a credit information service that provided information to Saudi banks on all large exposures of the Banking System. This enabled banks to better assess the credit position and risk of big borrowers. Also in 1986, SAMA permitted banks to exchange information on delinquent borrowers as a means of applying collective pressure on them. These measures have proved quite effective in resolving problems of delinquent loans.” (Saudi Arabian Monetary Agency, 2004, p. 5-6)
IV. Improvement of Banking Services
Banking and financial services were improved during the early decade of the 1980s by technological advances and SAMA had acknowledged a decade earlier that there was not only a potential but as well as need to “enhance and strengthen the Saudi financial markets through greater investment in modern technology. It is reported that the primary objectives of this strategy were: (1) elimination of duplication of efforts and waste; and (2) development of a national infrastructure. (Saudi Arabian Monetary Agency, 2004, p. 7) Technology enhanced business services introduced included: (1) automated Cheque Clearing System (1986); (2) linking of Saudi Arabia with the SWIFT payment network; (3) introduction of a national Automated Teller Machine System enabling customers to access accounts from any machine in Saudi Arabia and from the major financial markets; (4) introduction of debit, credit and charge cards; and (5) introduction of Point-of-Sale terminals that link customers, traders and banks. (Saudi Arabian Monetary Agency, 2004, p.7)
International Islamic Financial Institutions
It is reported that International Islamic Financial Institutions are reported in the work of Memon (2007) entitled “Islamic Banking: Present and Future Challenges” to be making provision of “a wide range of services in accordance with the basic principles of Shariah. The products are reported to include: (1) Mudaraba; (2) Murabaha; (3) Musharaka; (4) Ijarah; (5) Isstina; and (6) Salam. (Memon, 2007, p.4) Conventional banks are reported to operate under the concept “of lender-borrower relationship where interest is considered as the rental income on capital. The depositors are assumed to be capital providers.” (Memon, 2007, p.4) Bank customers are reported to be divided into three broad categories as follows: (1) religiously motivated customers; (2) high profit customers; and (3) customers who are religiously motivated but also expect returns at least similar to conventional banks. (Memon, 2007, p.6) It is reported as follows in regards to the Islamic economic system: “Islamic economics is a system, which not only fulfils our moral, ethical, and religious obligations but also demonstrates to be economically feasible and financially rewarding. Islamic banking is based on asset-based transactions for the purpose of income generation, and prohibits financing in all forms of economic activities, which are normally and/or socially injurious to the society.” (Memon, 2007, p.6) Additionally stated is that the Islamic field of Banking operations “is unlimited. It is under continuous process of evolving and Islamic financial modes instruments have been developed to cover nearly all kinds of businesses including consumer financing, project financing, house financing, working capital financing, import and export financing, venture capital, etc.” (Memon, 2007, p.6) A survey conducted in the United States indicates that U.S. banker perception of Islamic Banking includes that 10 out of 20 Islamic Banking practices are viewed as acceptable. Those ten include: (1) investment accounts; (2) transfer of funds; (3) cost plus finance; (4) profit and loss; (5) sharing, (6) trust financing, (7) leasing, (8) lease purchase, (9) letters of guarantee, and (10) flexible investment of deposit and role as trustees. (Memon, 2007, p.8)
VI. Service Quality in Saudi Arabian Banks
The work of Al-Fawzan (2005) entitled “Assessing Service Quality in a Saudi Bank” states that service quality is defined as “the degree of alignment between customers’ expectations and their perceptions of the service received.” (Al-Fawzan, 2005, p.1) Al-Fawzan (2005) states that the move to “…managed service has increased demands for outcome-based accountability, cost containment, and attention to customer-focused quality in order to remain competitive in a rapidly changing environment. This dual focus on driving down costs while increasing quality has intensified pressures to understand, measure, and manage quality from a customer perspective.” (p.101) While banking systems are stated to provide services that are the same they are differentiated by the quality of services provided. In addition, today’s customers are “…more aware of the alternatives and their expectations of service have increased. Service quality can, therefore, be used as a strategic tool to build a distinctive advantage over competitors. Banks are striving for zero defection and retaining every customer that the company can profitably serve in order to achieve service excellence.” (Al-Fawzan, 2005) Zero defections makes a requirement of ongoing efforts for improving service quality. It is reported that while quality “can not be improved unless it is measured, it can be defined from several perspectives, e.g., the ability to satisfy the needs and expectations of the customer, or the totality of features and characteristics of a product or service that bears on its ability to satisfy given needs.” (Al-Fawzan, 2005) There is a growing acknowledgement of quality importance in banking services although “its conceptualization and empirical assessment have remained limited.” (Al-Fawzan, 2005) Al-Fawzan (2005) reports that the “central tenet of the quality paradigm is the importance of understanding and utilizing customer data to drive operational and strategic decisions, defining quality from the outside-in based on customer information is critical. This shift in defining quality often necessitates a fundamental change in the way professionals, managers, staff, and policy makers think about and identify those who “buy” or “use” products and service.” (Al-Fawzan, 2005)
Those who use banking services are not generally refers to as ‘customers’ but instead are referred to as ‘client” suggesting “…a passive voice in the service delivery process, which is reflected by professionals in the field who question the credibility of client evaluation of services. On the other hand, customer carries an image of an active participant with more input in determining choices and decisions. Clients of human service organizations who follow directions from professionals and make few demands on the system are labeled as “cooperative.” In contrast, customers in the business sector who are loyal to the service, interact with the staff, and are willing to show their preferences are viewed as “desirable customer.” (Al-Fawzan, 2005) Al-Fawzan states that customers have difficulty in the articulation of “banking service quality” therefore “the recipient of the service can only really assess it, thereby making its measurement more subjective than exact. Hence, the measurement of banking service quality has to be based on perceived quality rather than objective quality because services are intangible, heterogeneous and their consumption and production occur simultaneously.” (2005) It is reported that service quality “… is a measure of how well the service level matches customers’ expectations.” (Al-Fawzan, 2005) It is reported that Parasuraman et al. “…defined service quality as perceived by customers and items from a comparison on their expectations of the services they will receive with their perceptions of the performance of the service provider.” (Al-Fawzan, 2005) The study reported by Al-Fawzan (2005) summarizes the results stated the following findings: (1) the most important dimension determined by Saudi Bank customers is that of ‘assurance dimension’; (2) a service gap exists in service quality provided by Saudi Banks with the most notable gap being the accessibility dimension; (3) Saudi Bank customers, on average, rated Saudi Banks service quality to be overall good; (4) the expectations of Saudi Banks by customers are “highest in reliability dimension; (5) 67.8% of SB customers rated the overall service quality as good and very good; (5) SB employees dress nicely and they are polite when talking to customers; (6) SB has exceeded customers’ expectations in performing the service right from the beginning and in instilling the confidence in customers that their transactions are complete and safe.” (Al-Fawzan, 2005)
The work of Sohail and Shaikh (2008) entitled “Internet Banking and Quality of Service: Perspectives from a Developing Nation in the Middle East” reports a study that had as its objective the measurement of the quality of service from the perspective of the customer on internet banking in Saudi Arabia. The study was conducted via a questionnaire survey and an extensive review of literature. Findings in the study report that upon the basis of a factor analysis three factors were found to influence the evaluation of quality of internet banking services by users. Those three factors identified are stated to include: (1) efficiency and security; (2) fulfillment; and (3) responsiveness. (Sohail and Shaikh, 2008) In 2010 Jasimuddin reported in the work entitled “Saudi Arabian Banks on the Web” reports that commercial transactions via the Internet began in 1995 and that online banking is an application with much promise. However, while many banks in developed countries have made provision of banking services via the Internet, Saudi Arabia is “lagging behind.” (Jasimuddin, 2010, p.1) The environment in the Kingdom of Saudi Arabia’s environment is very conducive to Internet banking service provision. Jasimuddin reports that as of 2000 there were 11 banks and 1201 branches operating in Saudi Arabia.
As of the middle of 2000, there are 11 banks with 1201 branches operating across Saudi Arabia. Eight banks are reported to have established a web site presence which is a rate of 73% of banks with a web site presence although only two of these offer Internet Banking Services. When the Saudi banks web sites are compared there is not major difference noted in the content of the bank web sites. The contents of the websites are stated to be inclusive of information about the bank, the addresses of branches and ATMs, phone and fax numbers, press releases, newsletters, news about the site and welcome letters, hot links, job opportunities, publications, contact and email, feedback, sitemap, site search, online forms and so forth. (Jasimuddin, 2010, paraphrased) Practically all of the banks provide information relating to customer services that “incorporate financial market, retail and corporate banking, investment treasury service, telephone and PC banking.” (Jasimuddin, 2010) It is reported that online banking in Saudi Arabia is still a “very marginal activity” and that internet is presently being used by Saudi banks primarily for “brand awareness and promotion.” (Jasimuddin, 2010) Saudi banks will be driven by “the dynamic and imperatives of e-finance…to build web site and to start Internet banking.” (Jasimuddin, 2010) In other words, since this is a banking service that is increasingly familiar customers will be requesting these services from banks in the future in Saudi Arabia.
VII. Technology Use in Banking Service Provision
It was reported in 2007 that the National Commercial Bank of Saudi Arabia was established in Saudi Arabia prior to any other banks being established. This bank has 300 branches throughout the Kingdom of Saudi Arabia with some branches stated to be “dedicated exclusively to Islamic Banking Services. The National Commercial bank reports having implemented use of a digital signage system which is reported to make provision of a “better platform for NCB to better communicate with its employees, educating them about the banks products and services and enhancing the service they provide to their customers.” (Jasimuddin, 2010)
Summary of Literature Reviewed
It is clear that banks in Saudi Arabia are faced with a diverse customer-base and this makes a requirement of diversification of banking services offered by banks in the Kingdom. While internet banking services provision is somewhat behind the development in the rest of the world, it is certain that Saudi Arabian banking customers will clearly see the benefits to Internet banking and that the push will soon be on for provision of this banking service by Saudi Arabian banks. Internet banking as well as other technological advanced service possibilities are presently being explored by Saudi Arabian banks including such technologies as a digital signage system among others. While the banking sector is quite developed in the Kingdom of Saudi Arabia there does appear to be a general mistrust of Internet banking technology and not just on the part of customers but in the view of the banking industry in Saudi Arabia as well.
Arising from this study is a recommendation for research to be conducted examining the quality of banking service provision by banks in the Kingdom of Saudi Arabia with a focus on technology use.
Memon, N.A. (2007) Islamic Banking: Present and Future Challenges. Journal of Management and Social Sciences. Vol. 3, No. 1, (Spring 2007) 01-10. Institute of Business and Technology (BIZTEK). Retrieved from: http://www.biztek.edu.pk/downloads/research/jmss_v3_n1/1-islamic%20banking.pdf
A Case Study On Globalization and the Role of Institution Building in the Financial Sector Saudi Arabian Monetary Agency. February 2004. Retrieved from:
Al-Fawzan, MA (2005) Assessing Service Quality in a Saudi Bank. J. King Saud Univ., Vol. 18, Eng. Sci. (1), pp. 101-115, Riyadh (1426H./2005).
Sohail, M.S. and Shaikh, N.M. (2008) Internet banking and quality of service: Perspectives from a developing nation in the Middle East. “, Online Information Review, Vol. 32 Iss: 1, pp.58 – 72
Jasimuddin, Sajjad M. (2010) Saudi Arabianu Banks on the Web. Array Development. Retrieved from: http://www.tenso.fr/emarketing/wp-content/uploads/2010/05/Aper%C3%A7u-de-%C2%AB%C2%A0Saudi-Arabian-Banks-on-the-Web%C2%A0%C2%BB.pdf