The banking industry play an important role in an economy; it forms the backbone of world economies thus when a country has a strong banking industry, it is more likely to have sustained development. The United States banking industry plays a major role in the world’s greatest/strongest economy; the industry is more inclined to conventional baking model and is regulated by federal and state governments.
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Saudi Arabia is one of the fast growing world economies with the largest Muslim population; the country’s banking sector is inclined more to Islamic banking system. Saudi Arabian Monetary Agency (SAMA) in collaboration with the country’s central bank controls the sector.
Banks, like any other business are affected by external influences and operations of the economy (Dalvinder 34-56). This paper undertakes an external strategic comparison of the United States and Saudi Arabian banking sector. To undertake this role, the paper will discuss various issues in the sector as guided by subtitles.
Alongside the core line of business, the main product that banks require is money of different currencies. According to banking act both countries, the central bank is supposed to offer some finances to the bank under the system of reserve policy. In the United States, the loan is offered to the bank at an interest payable after a certain period. It is the interests and the required reserve that the central bank uses to control inflation in the country.
According to SAMA policy of operation this is in line with Islamic banking policy, the central bank advances some funds to the banks after a certain reserve has been kept with the bank. After the commercial bank has invested the money, then it shares some gains with the central bank; ion the case of a loss, then the central bank is also a party that suffers.
Other than the central bank, both economies allow for mobilization of funds from the public then use the money for trading; in United States, money mobilized from the public attracts some interests while in Saudi Arabia there is sharing of profit depending with the kind of saving that a person has engaged in. Both countries are enjoying increasing corporate and individual depositors thus money is not a challenges despite the growing number of national and international banks.
In modern era of globalization, both countries are facing an increasing number of new entrants in the banking sector; in Saudi Arabia, the sector is growing faster than that of the United States because of the past global financial sector that was believed to have started in the United States. The fast growth of Saudi Arabian economy is attracting an increasing number of investors who are willing to comply with Islamic banking rules.
In the United States, since the global financial crisis the banking industry is seen to be growing in the line of micro-finances and self-help groups, people have realized the need to pool their resources together and start some lending companies. Some of these investments are controlled by the countries Sacco policy while others operates behind scenes.
The main source of funds for the banking sector are individual and corporate operating in an economy; in Saudi Arabia and the United States, the economies are having an increasing number of borrowers both corporate and individuals. The booming of the economies is offering the sectors an increasing demand for their services that is offered at a beneficial rate.
In the United states, the influx of micro finances and international banks has reduced the margin of interest that the banks offer coupled with some of the monetary policies that the government enacted to cure the dangers of global financial crisis.
On the other hand, the Saudi Arabian government, with the guidance of SAMA has reduced license barriers that have for long hindered the establishment of international banks in the economy; however, despite the removal, the conditions of Islamic banking has seen a number of international banks shy from investing in the economy.
The banking sector faces some substitutes from efforts of the government, and non-government organizations that are registered and mandated with the role of providing financial service in the economy. In the United states, one of the main substitutes that buyers of banking sector has is government grants and advances; they are funds that the government through various ministries offer to finances some projects in a company; in most cases the finances are meant for giant projects that will benefit the entire economy.
Another area that people get funds is from some multinational companies that have diversified their business to offer financial support; they include Toyota Motor Company with alongside the provision of financial services. Although SACCO’s can be argued as either player in the banking sector or otherwise, they are taking, a form that is offering substitutes to trader.
Companies are mobilizing their employees and starting a self-help SACCO society that is competing with the banking sector. The benefit of the SACCO’s is even higher as they offer loans through the co-guarantee method and they have recorded high dividends that the interests paid by conventional banks.
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In Saudi Arabia, SAMA has locked a number of substitutes in the economy, however the government has some funds for different developments of groups within the economy; for example there are some funds meant for the youth (Youth Fund) and others meant for women (Women funds). They are money that does not pass through the “normal” banking system but they offer substitutes to the service of the bank (Battilossi and Jaime 23-34).
The American banking system follows the conventional banking system where the bank gets money from the central banks at an interest, offers services at a fee and offer loan facilities at an interest higher than that charged by the central bank.
The majority of the Americans adapt to the system which seems to be supported by the cultural believe in the economy other than the religious believe of the Muslims. To cover the minority citizens who have subscribe to Muslim religion, the economy has some Islamic banking companies that are used by the Islam’s in the country.
In Saudi Arabia that happens to have over 95% of the population as Muslims, the support the Islamic banking system that seems made in line with the religious and cultural believe of the people. Other than of late where there has been minimal introduction of conventional banking, non-Muslims in the economy had been forced to adapt to the system (SAMA).
The United States has the world largest economy in GDP of $14.7 trillion in 2010; the economy has been maintaining an increasing rate of economic growth until the global financial crisis. In the economy, the improvement has resulted to an increased demand for banking services to both corporate and individual borrowers.
This has lead to an increase in business for the sector of the economy. In 2006, Saudi Arabia had a GDP of SR799.9 -13824 and a nominal GDP of SR1.30trillion. This was a 12.4% increase in nominal GDP and 4.2% increase on GDP (Saudi Arabia Economic Statistics and Indicators).
SAMA was a major participant in the move as banks savings and loans were increased accordingly. The bank maintained a peg of the country’s currency with United States Dollar and only changed the rate twice; it raised it by 25 basis points, from 4.75 by the end of 2005 to 5.0 at the start of first quarter of 2006.
By the second quarter, the repo rates were increased by 20 basis points to 5.20 (SAMA). In 2006, using the Consumer Price Index the inflation of the country had increased to 1.6% with money supply increase of 14.9 percent over the same period.
Of late there has been a fast growth in peoples living standards as well as an increase in investments in the economy; this has created a need for the banking services thus the future of the industry is promising in both countries (Suleman 23-78).
The growth in technology has made some business changes in the banking sector; both the conventional banking and Islamic banking system in the Unites states and Saudi Arabia respectively have adjusted to the changes.
In the United States, there has been an increasing move to automated banking system where banks are competing to have service offered via technology. For instance, there has been the growth of ATM (Automated Terror Machines), Internet banking, and mobile banking.
In the Saudi Arabian, technology has been adopted to a certain extent in the economy, the banking industry is using technology to monitor the performance of advances made by the industry and is working hard to have customer get the service off the banks.
There are growing number of ATM, mobile banking and e-banking systems. SAMA has of late being in the forefront advising the banks to adopt technology as a cost reduction measure and ensure that they are working in line with the regulations of the Islamic banking despite the adoption of technology (Schoon 12-34).
Political and regulation driver
The operation of the banking sector does not escape some political influences; they have been used to settle some political goals positively and sometimes negatively. In Saudi Arabia, SAMA is the main body that controls the operations of the banking sector, it is seen to have the upper hand and final say in the sector but there are some consultations with the central bank on policies that can benefit the economy.
In the United States, the banking sector is controlled by federal and state governments where they are expected to operate under the frameworks of the country is banking act of 1933; however, the act has been mended to fit changes in the sector.
External environments prevailing in an economy affect the banking sector; in the United States, the sector (conventional system) is gradually recovering from global financial crisis of 2007 and benefiting from increasing economic strength in the economy.
The Saudi Arabian banking system (Islamic banking) is growing strong as the economy grows stronger; the country is opening its boundaries to attract foreign banks, this move is likely to increase competition in the sector.
Battilossi, Stefano, and Jaime Reis. State and financial systems in Europe and the USA: historical perspectives on regulation and supervision in the nineteenth and twentieth centuries. Ashgate Publishing, Ltd., 2010. Print.
Dalvinder, Singh. Banking regulation of UK and US financial markets. New York: Ashgate Publishing, Ltd., 2007. Print.
SAMA. Saudi Arabian Monetary Agency. Saudi Arabian Monetary Agency, 2010. Web.
Schoon, Natalie. Islamic Banking and Finance. London: Spiramus Press Ltd, 2009.Print.
Suleman, Hamdan. Banking system in Islamic countries: Saudi Arabia and Egypt. Stanford: Stanford University, 2006.Print.