Bad debts mounting in Islamic Saudi Arabia

Press, 17 December 1985, Page 12

Bad debts mounting in Islamic Saudi Arabia

By

STEPHEN FIDLER

of Reuter, in Bahrain

Banks lending money in Saudi Arabia are facing a mountain of bad debts because of the conflict between Western-style banking and Islamic laws, according to banking and legal sources in the Gulf. Saudi courts will not back bank claims for interest, forbidden by Islam, and often offset the interest already paid by a borrower against the principal he owes. Bankers say borrowers well able to pay debts often hide behind such judgments. Even when banks get court orders for debt repayment they have found it practically - impossible to win an order for seizure of assets. The head of the country’s fourth largest bank, al-Bank al-Saudi alFransi, complains of a “deterioration of financial morality in the kingdom”. The bank’s managing director, Yves Max, called for modern financial laws in keeping with Saudi Arabia’s industrialisation drive, now placing emphasis on the private sector. “If you want to develop a large and modern economy, you need a large and modern banking system,” he told the “Saudi Gazette.” “Banks are a keystone to that

development.” Saudi authorities, which have so far resisted an Islamic-style banking system, are aware of the problems. According to official figures, Saudi banks have set aside SUSI.S billion (SNZ2.B billion) in loan-loss provisions since 1982 on loans of about SUSI 6 billion (SNZ3O billion). Bankers and lawyers doubt that the political climate exists for changes in the law so fundamental as to allow banks to win judgments in the courts for interest. “The economic environment and the ambiguous legal framework in which they operate, in terms of collecting interest and foreclosing on creditors, is plaguing all the banks,” said one senior Bahrainbased banker. Bankers say the ambiguity was always there, but it has only become important as government spending — and thus Saudi economic activity — has dramatically slowed, causing a slump which has led to billions of dollars of bad debts. Saudi Arabia has borne the brunt of a weak oil market which has more than halved the Government’s revenues to ?US47 billion (SNZBB.3 billion) in 1984-5 from

more than ?USIOO billion (?NZIBB billion) three years earlier. Government income this year is expected to be even lower. The Interior Ministry last month issued guidelines to streamline commercial debt collection procedures, making it more difficult to imprison debtors. They also made it easier to get someone out of prison who has no means to repay his debts, but increased the power of courts to stop a debtor from leaving the country. Since orders to seize assets are practically impossible to obtain/ the only legal censure against a debtor is prison — often enough' of a threat to achieve some settlement — but legal and banking sources said that in practice only poorer debtors are imprisoned. Lawyers say that loan agreements with Saudi borrowers often cite English law or the law of the State of New York. However, they say this has proved practically useless unless the borrower holds assets overseas which can be seized. They say that while procedures exist to enforce foreign court judgments in Saudi Arabia, this in practice has never been done for rulings from non-Arab courts.