Introduction
Saudi banks were affected by the global economic crisis which was experienced in the year 2008. This affected most operations of the bank and resulted in a decline in its returns. Returns to the bank are sensitive to the economic performance of the country and thus this is one of the reasons why there was a decline in its returns. The bank is the most operative institution as it deals with the money in the financial sector. It’s through the bank that the economy of the country is influenced to attain a balanced or relevant operation within the country. The country really depends on the stability of the banks in its operations and hence advice from the bank would be of great importance in making appropriate economic policies.
Discussion
Saudi Arabia is a country that produces almost half of the world’s oil and hence its economy largely depends on the performance of the oil market in the world. When the prices are high, there is an increasing amount of money economically within the circulation. When the prices are decreasing, there is a decline in the bank’s operations and its returns. The bank’s declines in its return are large because of the falling prices of oil. The bank is the agent of most oil transactions both overseas and on the local scenes hence when there is a decline in the oil prices, the amount of money that the banks normally net is affected. The issue of the oil prices falling has been a great effect on the bank’s operation. The rate of return has shown a decline in the year 2008 to a negative figure which means that the bank operations have been affected so deeply (Brigham and Ehrhardt 245).
The bank also had a high rate of non-performing loans. This affected the bank’s operations and accounts for a percentage of the negative rate of return which was realized by the bank. Loans are the main assets to the bank and any downfall will be sharply reflected in the bank’s overall earnings. Loans account for a higher percentage of income to the bank annually. The interest which is normally paid on the loans is of great value and the higher the number of loans issued the higher the total income generated by the bank. The population is handicapped by the low performance of the economy hence their loan repayment is affected. On the other hand, there is no growth on the loan being issued, it has decreased. The bank also has reduced the loan issuing at the time of economic crisis as a measure of reducing the risks of non-payment. This is indicated by the increasing rate of risk in the year 2008 (Correia and Flynn 189).
The government also did reduce the infrastructure spending in the year which also has affected the bank’s performance. The bank has been at the center of receiving the money and issuing it as a loan to the government which in turn reflects that the loan interest is repaid by the government being huge. The government has been the largest customer to the banks and any transaction of the government especially the one for the infrastructure expansion is so profitable to the bank. This is because the loan which the bank issue is substantial, secure, and covers a long period. This always trickles down to the bank’s operations and greatly increases the bank’s returns. The banks are at the center of the financial crisis in Saudi Arabia since they are the main participants in all the transactions in the financial market (Brigham and Daves 178).
The bank’s stocks decline in the year 2008 due to the lack of confidence the investors had in the bank’s operations which lead to the fall of the stocks. The investors had no confirmation whether the bank would experience increase performance, especially on its annual returns as most banks had reported a decrease in the first-quarter net profits. This also led to a decline in the demand for the bank’s stocks which result in a decline in their performance. The bank also experienced a decline due to the fall of other companies’ performance and change of ownership. This relates to those companies whose shares had been used by the investors to secure loans in banks which have posed a high-risk f their repayment.
There are also the effects of the global credit crisis which has affected the bank’s overall performance. This is because there is increased cost and the funding has been reduced substantially. The bank is experiencing a great decline in its operations without any economic expectations of the rise since all markets and sectors have been affected. The oil exporters also have experienced a decline in their exports which greatly affects the bank operations. The exports are experiencing high costs in exporting making the exports to be very expensive hence there is a direct impact on the bank’s flow of cash. Any effect on the companies which operate in the Gulf region directly affects the bank as the companies are the main clients of the banks (Atrill 76).
Conclusion
The daily operations of the bank are largely determined by the number of transactions made. If the customer’s operations have declined, then the bank also will be experiencing a higher rate of decline in its daily operations, hence directly affecting the overall bank’s returns. In the year 2008, the bank speculated that the government will increase infrastructure spending. This accounts for the increase in the rate of return of the bank in the year 2009. There is also the bank recovery on the amount of loan being issued and the operations of the economy in general.
Works cited
Atrill, Peter. Financial Management for Decision Makers. New Jersey: Financial Times/Prentice Hall, 2008.
Brigham, Eugene, and Michael Ehrhardt. Financial management: theory and practice. New York: Cengage Learning, 2008.
Brigham, Eugene, and Philip Daves. Intermediate Financial Management. New York: Cengage Learning, 2010.
Correia, Carlos, and David Flynn. Financial Management. Pretoria: Juta and Company Ltd, 2007.