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Economics & Development | Global Arab Network
A name is no longer enough to bank on
Global Arab Network - Dr Mohamed Ramady
Sunday, 09 August 2009 18:16
Ahmad_Hamad_Al_Gosaibi_and_Broth
The fallout from the troubles of two prominent Saudi family businesses, the Saad Group and Ahmad Hamad Al Gosaibi and Brothers, brings nearer the demise of the long-established practice of doing things based on a family name and a handshake.

Gulf families have long prided themselves on the value of their names. But in today’s world, it will take more than a name and a handshake to secure funding, especially for family businesses with global interests.

The old ways might still work for some family businesses that are cash rich, domestically focused and which deal with like-minded family businesses. But the Al Gosaibi and Saad saga has made both banks and family businesses nervous in the Gulf. The implications for such groups is that bank borrowing will get tougher; and the quality of information that family businesses provide will rise. In a perverse way, the higher the profile and business interests of a Gulf family group, the more stringent will be the banking relation terms and the more intrusive the required information.

What has caught bankers off guard in the current Saudi business saga is the sheer size of the outstanding debt and the number of banks that were willing to lend based on family names. Bankers in the region and around the world are now asking how they got into this mess and why they never asked the most basic questions. The problem is partly history and partly fear of being left behind. The historical element comes from a collective belief that “name lending” to blue-chip family businesses was the acceptable method of doing business. No bank dared to question the integrity and word of family businesses, some of which go back many generations and were the founders of the modern Gulf economies long before the era of oil.

The jokes that have long circulated in the Gulf about family businesses’ financial and accounting transparency are instructional. They go like this. Some family groups have three sets of accounts. One was produced by international accounting firms. They are for bankers’ consumption, and did not reveal much. Another set is for the government and show the businesses barely making money. The third set, though, is the most jealously guarded: the handwritten accounts that set out the true financial picture and which are kept in the family safe and not shared with outsiders.

The Saudi business problems have now made banks clamour for these handwritten records. The only other alternatives facing Gulf family businesses is for them to go public or remain as family groups on a much reduced scale in terms of operations and geographical interests.

There will still be many financial institutions that will be willing to deal with family businesses that are focused on specific business lines in which they have excelled. The family groups that will be the most under pressure will be those that have moved out of their specialisation, such as Saad in construction and Al Gosaibi in trading.

The implication for the Gulf economies could be damaging in the short term if there is no speedy resolution and some form of partial settlement of the Saudi family disputes. Because of concerns about the health of family businesses and their own exposures, banks have become more cautious in extending credit to the whole of the private sector. Banks are panicking and pulling down the shutters just when regional governments are encouraging them to lend to the private sector.

Transparency works both ways, though. The Al Gosaibi group has acknowledged that it owes US$9.2 billion (Dh33.79bn) to 120 banks across the world, and it would be mind-boggling if Saudi bank exposure were small, given the longer-standing relationships that family businesses have had with their local financial institutions.

What is going to happen is a return to basics in banks’ lending policies in the Gulf, with a reform of lending practices at commercial banks. “Name lending”, where banks extend loans on the strength of a personal guarantee from the borrower, will become a thing of the past.

Global Arab Network

Dr Mohamed A Ramady is a former banker and visiting associate professor at the department of finance and economics, King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia this article originally appeared in The National (August 08. 2009)
 

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