Banks in the region are starting to return to the age-old practice of "name lending" despite lenders' balance sheets being dented by exposure to the Saad and al Gosaibi family conglomerates. A desire to maximise profits is expected to encourage lenders to extend finance to companies based on their reputation once again, say bankers.
It comes as bank lending to businesses in Saudi Arabia is rising at its fastest pace in nine months. The return of name lending would have seemed unlikely until recently as most analysts agreed that the US$10 billion (Dh36.72bn) exposure of Gulf banks' to Ahmad Hamad Al Gosaibi and Brothers and the Saad Group would effectively signal the death knell of the practice that has long been part and parcel of the Gulf banking industry.
In the UAE, banks including ADCB and Mashreqbank are understood to be exposed to the two conglomerates. But a little more than a year after both groups defaulted on financial obligations, sparking financial turmoil stretching from the region to US courts, some within the industry remain sceptical about how much the banks have learned. Official data does not contradict that belief. Lending by Saudi banks grew by 3.9 per cent in May, compared with May last year, the quickest pace in nine months.
"Banks have short-term memories and strong fundamentals [of companies] will affect lending decisions," said Dolan Hinch, a director at Deutsche Bank in Dubai. "There was a period of cooling off in the approach to name lending, but banks are recovering their appetite." Both international and local banks were happy to offer finance to the Saudi groups, two of the most prominent names in the kingdom, believing they would never be hit by financial problems.
The position of Maan al Sanea, the head of the Saad Group, as one of Saudi's richest businessmen reinforced the perception of Saad's financial strength. The units borrowed at least $15.7bn from about 80 banks, according to documents provided by lenders. Banks have since filed a string of lawsuits in the Gulf and overseas in an attempt to recover funds from the groups. The financial pain caused by the troubles at Saad and Al Gosaibi has still to work its way through the region's banking system.
With banks still weighed down by the need to make provisions to cover exposure to the groups, as well as to Dubai World, credit growth in the region has remained largely sluggish. The outlook among businesses for bank lending in Saudi Arabia deteriorated for the quarter that begins today from the previous one, according to Banque Saudi Fransi's business confidence index. Yet despite the lingering impact of the crisis, banks may return to old lending practices.
"Rumours that name lending is dead are exaggerated," said a banker at a Saudi-based lender, who spoke on condition of anonymity. "There's a competitive advantage in breaking ranks as all banks are chasing assets." Guidelines setting out how banks should tighten lending requirements by more closely scrutinising the balance sheets of corporate customers are under preparation by the Saudi Arabian Monetary Agency (SAMA).
Muhammad al Jasser, the governor of SAMA, earlier this year called for lenders to increase their checks on small and medium-scale lending, but said he recognised many companies did not have sufficiently transparent accounting systems. Shahid Kazi, the general manager at the business consultancy ValuStrat Consulting in Dubai, said: "The whole aspect of name lending needs looking at. "Banks need to realise that no matter how big a company is they must not forget the fundamental principles of lending criteria."
tarnold@thenational.ae
