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Corporate Governance and Shareholders’ Rights in Saudi Arabia Sector Research Paper

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Updated: May 11th, 2022

Characteristics of Banking Sector in Saudi Arabia

Saudi Arabia’s banking sector is among the world’s fastest-growing markets. This development can be attributed to the sound government policies and the advancement of technology which has enabled the sector to boom during the global downturn that affected the globe. In the last couple of years, there have been several changes in the banking sector which include the introduction of more banks offering services such as Islamic banking, the emergence of foreign investors investing in the kingdom, and the introduction of new services and products to consumers. According to Wilson (1993), Saudi Arabian banks are considered to be among the most stable and safest as compared to the other sectors of the economy such as manufacturing, construction and agriculture. Uddin (2008) also emphasizes that “banking sector was found to have the highest level of corporate governance disclosure while the industry and service sectors have the lowest level about corporate governance” (p. 4).In this respect, the Saudi government should provide more effective solutions to liberalize the market in ways that resemble banking in Western countries.

Importance of corporate governance in the Banking Sector

Similar to Wilson (1999), Hopkins and Gross (2009) emphasize that the study of corporate governance is of great importance because it highlights checks and balances that are to be employed for the particular organization to grow. Due to the fact that the banking sector in Saudi Arabia is a critical component of the kingdom’s economy, it underscores the necessity for introducing effective corporate governance strategies. Along with this discussion, Tricker (1984) insists on the fact that corporate governance is aimed at assuring the investors that they get a return.

Good economic growth can only be realized if there are proper mechanisms’ that will ensure effective utilization of resources. With regard to this, Du Plessis et al. (2005) state that corporate governance should be directed at providing the standard operating procedures to carry out the established tasks. Secondly, the researchers believe that the banks provide inter-temporal risk aversions as well as insurance to depositors to guard against unexpected shocks that are controlled by the CMA.

It is the prerogative of the bank management to scrutinize the creditworthiness of an enterprise. Haspeslagh (2010) and Mallin (2007) point out that this can be achieved through ceiling loopholes that might lead to bad debts. In fact, corporate governance will prevent bank managers from coercing enterprise owners to default on repayments in terms of rules and regulations.

Saudi Arabian’s Bank Regulations Sources

Saudi Arabia’s banking sector law is benchmarked on Shariah law (and regulated by various laws such as the capital market laws (Choudhury & Hoque, 2006). It is also subject to the Saudi Arabian Banking Control Law and monitored by the Saudi Arabian Monetary Agency (Al-Amri, n.d., p. 9). In addition, Al-Amri (n. d.) discusses that there are no serious prohibitions on fund lending carried out by non-Saudi banks and, therefore, businesses are allowed to receive financial support from international banks.

Roles and Responsibilities of the Board of Directors

The main roles of the board of directors include maintaining the main objectives and approving the strategic plans of the bank, supervising the rules of internal control (Lee, 2007). This will include ensuring that control measures are implemented and reviewed annually. According to Al-Sayari (2007), the board of directors should also be responsible for drafting the corporate governance code and ensuring that the code remains effective. They should have communication channels for resolving any dispute that might arise between the bank and the customers. The board outlines policies that will regulate the relationship between the bank and stakeholders. The role of the bank towards the implementation of social corporate responsibilities activities in the community. A code of conduct for the company’s employees should be in line with professional ethical standards.

Regulatory Oversight and Transparency

Corporate governance of the Saudi banking sector is a very complicated issue because it affects greatly the whole economy of the country. In this regard, an effective application of corporate governance in the identified field can generate the establishment of a much healthier economic environment and steady economy growth because banks offer financial services to businesses, individual customers, as well as other banks that want to make a loan.

Importance of transparency in financial reporting

Significance of transparency should not be ignored because, specifically when it comes to financial reporting and investors’ business operations. According to Mohamed (2002), organization that strives to deliver the highest level of clarity and transparency of the date are more likely to succeed in investment. Such a strategy also contributes to the higher demands for the company’s shares that, in their turn, provide a favorable ground for increasing the company’s capital.

According to Shankar (1999), the corporate governance framework should be transparent, be efficient and corresponds with the rule of law. In this respect, the regulatory, supervisory and enforcement groups must be equipped with the necessary tools in order for them to carry out their mandate in a professional manner. The rule of authority should ensure that the laws are well elaborate in order to avoid ambiguity while discharging the duties.

Transparency in Saudi banking

The Saudi Arabian monetary agency observes that it has adhered to most of the.principles in the code of good practices on transparency in monetary policy. Rosser and Rosser (2004) state that the roles, objectives and responsibilities of the SAMA are clearly published according to the IMF’S code requires the provision of an audited balance sheet and a column for the profit and loss account. The researchers also believe that the publication is also done in good timing. As a result, there is no difference between convection and Sharia law banking formalities.

Shareholder rights

Shankar (1999) states that shareholders are entitled to share in the profits of the company; a shareholder also has the rights to share assets from a company that has undergone liquidation. They also have the right to participate and vote in a general assembly and access all information pertaining to the commercial bank (Shankar, 1999). Finally, shareholders are entitled to dispose his or her shares without being forced (Shankar, 1999). In addition, De Plessis et al. (2005) reveal that U.S has the most developed markets and, therefore, shareholders have their own rights protected by the system of governance through management supervision. Managers are punished by not being allowed to sell their shares because this role is carried out by that stat board that monitors external operations of the investors and the main stakeholders.

Ensuring the Basis for an Effective Corporate Governance Framework

In comparison with Saudi Arabia principles of corporate governance, U.S systems of operation are divided into certain functional components, namely, federal and state marketing strategies (Sri, 2010). The federal view on governance is majorly concerned with offering security to the markets through regulations.The states on the other side formulate laws to govern smooth flow of market activities in the state. The systems also take care of emerging financial crisis and communicating with company investors on how to improve quality and authority of stakeholders and shareholders. The establishment of Independent Federal Agency of 1934 is directed to market securities such as ensuring prompt disclosure of market information, fair market operations and ensuring that there is no fraud whatsoever (Sri, 2010). But this does not comply with the public information available in United States making it differ from the readily available information offered to the public in Saudi Arabia (Al-Sayari, 2007).

The Equitable Treatment of Shareholders

All shareholders taking identical position should be treated equally. Protection of the minority shareholders should also be arranged (Hussainey and Nobel, 2008). The market securities ensure that shareholders undertake fair market activities based on capital investment per shareholder, equality in voting rights and sharing of profits based on the classes to which shareholders belong.

Voting Rights

Voting is a basic right for the shareholder in a company. A shareholder must be accorded with assistance with the exercise of voting (Hussainey and Nobel, 2008). During the general assembly, voting is aimed electing the members of the commercial bank board. Every shareholder has the right to be nominated for any position. In addition, a shareholder has the choice of appointing any person to represent him/her to the general assembly, but this has to be officially fixed.


Al-Amri, M. (n. d.). Doing Business in Saudi Arabia. Web.

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Haspeslagh, P. (2010).Corporate governance and the current crisis. Corporate Governance. 10(4), pp. 375-377.

Hopkins, B. R., and Gross, V. (2009). Nonprofit Governance: Law, Practices, and Trends. US: Wiley.

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Lee, A.T (2007). Financial reporting and corporate governance, New Jersey: John Wiley and Sons.

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Sri, U. (2010).Corporate social responsibility for competitive edge in emerging markets. New Jersey: John Wiley and Sons.

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Uddin, S. (2008). Corporate Governance in Less Developed and Emerging Economies. US: Emerald Publishing Group.

Wilson, W.P. (1991). A question of interest the paralysis of Saudi banking. International Journal of Middle East Studies. 25, pp. 355-356.

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