The Financial Impact of Lending: Case Study of the Al Sanea and Al Gosaibi Loans

Introduction

The current global financial crisis has affected the lending and performance of businesses in various ways. Banking institutions have been affected in varying degrees; depending on their lending policies and also on their future strategies. The financial crisis has hit the financial institutions in three areas which include dollar exchange, operation, and real estate development arm, private and public income has also been affected. But this effect will gradually disappear if the other side of the recession is considered i.e. the falling trend in inflation. It is very much important to reduce the level of inflation in a nation to bring stability to the economy. The reduced price of construction material leads to a lower price of real estate. Again recession will cause a reduction in the price of almost all products. As the dollar will recover, it will lead to an increase in the value of the currency. It will definitely improve the standard of living of the citizens. Mainly fluctuation in the dollar is the main reason behind the increase in inflation rates in nations. Many Banks also invested in foreign assets with the expectation of increased profits. But with the financial crisis, many banks withdraw their money, caused a severe crisis. Another major area affected by it was the tourism sector as people have reduced their travel and entertainment expenditure due to the crisis. As markets are closely attached it leads to a decrease in the total and the personal level of income rates, which in turn reduces spending rates including both consumptions as well as investment (Atlantic Trust, 2007).

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One of the very famous banks of Kuwait stopped trading and is almost in a position of bankruptcy. Then also the country has adopted various strategies to rebuild the economy, investment opportunities, and various other important economic sectors (Naseer al, 2009).

The present recession was started with the subprime crisis. Actually, banks and the financial institutions were mainly responsible for the current recession. It was mismanagement of lending and borrowing and playing with the unreal money. The banks had loaned 10 times of what they had with them. Banks found an easy way by pooling in all the loans in to securities and selling it to other institutions. This process continued since it was an easy way to offload risk. Banks took loans from other institutions and increased the lending. There were institutions which bought these securities and sold further. These measures have increased speculation. Even people those who are subprime are given loan without considering their repaying capacity. These loans were given on highly speculated real-estate. When the real estate prices have collapsed worldwide people stopped the repayment of highly devaluated asset. The job loss also resulted in default of loans. This was the starting point of the financial crisis. Mainly banks were responsible for the mishap. The problems in the banking sector have spread to other industries as well (Hall and Carely, 2009). To see the impact of financial crisis it will be better to see what was behind the present turmoil.

  • Lack of financial discipline
  • Greed
  • High spending and low saving
  • Betting on unreal asset

Area of Crisis

Crisis has affected all banks in almost similar way. It has increased the Non Performing Assets, reduced the liquidity, and reduced the value of security kept with the bank. When prices of security had fallen banks had no way other than selling all these securities. This has further reduced the prices of stocks available with the bank. Banks were not in position to lend. Many have appealed the help of Government to bail them out from the crisis (Economics Help, 2008).

Impact of Financial Crisis on Islamic banking

Islamic Banks have remained largely insulated to this crisis. No Islamic banks including the banks in Kuwait and Saudi have become vulnerable to the crisis. But problems like falling share prices and falling prices of crude and commodity prices have caused recession in all parts of the world and Islamic banks too have faced these crisis. The share price of Islamic banks also has come down to 10 to 50 % but that was part of the crisis in the world. Falling share prices is not a yardstick to measure the stability of a bank. When the speculation is out of the share market the share price will come down. But it is not the indication of the stability of the bank or the intrinsic value of the bank. So it should not be taken in to account; the share prices of Islamic banks also were down in the current crisis (Hall and Carely, 2009).

A bank’s strength should be taken on its liquidity positions and the position of NPA (Non Performing Asset). Islamic banks are strong with these parameters. There was no crisis on liquidity or bad debt. This was mainly because of the policies these banks have adopted prior to crisis. The Islamic banks gained popularity only in the last two decades. Till the crisis these banks did not gain importance since these were not operated in the principles of banking set up by modern economists. When the crisis had shaken the conventional banking system people started looking at the Islamic banking system and how it reacted to the crisis (Hall and Carely, 2009).

Due to crisis at first, the inflation has gone substantially up around the world, and then it has come down drastically when the prices of commodity and crude oil have come down. Demand for steel and related commodities also came down. The slowdown in the real estate was too sharp. Due to globalization it is not possible to isolate the crisis to a particular region. The current crisis has stated in US and it has spread to other part of the world in lightning speed. As a result the Middle East Countries are also suffering from economical slow down. However the positive factor is the slowdown in these countries are not led by the banking system. Usually banks come out to rescue the financial system in time of emergency. This time things happened, the opposite. Banks increased the pace of recession (The New York Times, 2008).

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The fact that the Islamic Banks were not affected by the sow down was a surprise to many people, observing the global economy. While the recession was a threat to many banks the recession was an opportunity for Islamic banking. The world has recognized the fundamental and operating principles of Islamic Banking. Till these days the Islamic banking was not recognized by leading financial experts and institutions. “International institutions, such as the Basel Committee on Banking Supervision [BCBS] and the International Accounting Standards Board [IASB] that is concerned with financial regulation did not take into account the differences between Islamic banking, and traditional banking, in the setting of these regulations.” (Naseer L)When an Islamic bank funds a business it is considered as an investment than a loan. The banker gets the rights to the business. If the business flourishes then the banker is rewarded otherwise not. Islam does not permit to accept interest but the person who is giving money should be benefitted if the purpose is to start a business. This way of lending was not accepted by the modern and western thinkers. But this was proved to be an effective mechanism to prevent a bank from collapsing (Hall and Carely, 2009).

Recession was an opportunity for Islamic Banking. It was protected from riskier assets and derivatives. It was said the base of this crisis was over leveraging and going after derivatives. Instead of hedging the derivatives has become an instrument for investment. On the other hand by the law of Shariah the Islamic Banks are not supposed to use derivatives and other similar instruments. This prevented these banks from the recent fall out. American banks have collapsed basically on their lack of financial discipline and high leverage on derivative instruments. Since there is no interest system even in tough times banks do not have to pay interest rates to its customers. This also keeps the obligation of the banks low. Investors put their money as if they are buying the shares of the bank. So if the bank makes a profit investors will get their profit. If the bank is not performing due to the underperformance of their asset, the investors are to lose. This gives stability to the bank. The growth of Islamic bank shows the investors are getting better return on their money and at the same time the bank is also making profits. In this system of banking all are benefited. In bad times all involved in the process will take equal share (Marshall,1965).

Scrutiny of Lending

In the past year, the changing economic situation has had a considerable effect on the financial institutions especially in Saudi Arabia. Many financial institutions were put in financial positions which left them struggling to manage their interest rates effectively. This was brought about due to high reduced rates of interest the financial institutions were receiving. Another factor was high competition in the industry, general market transformation, changing industry trends, economic fluctuations and worse of all credit crunches. The past year was a big challenger for financial institutions particularly the banks to efficiently set their growth and expansion plans in an economic environment that continues to be witnessed (Naseer al, 2009).

The biggest concern in the financial sector has been the high number of financial institutions which have been collapsing due to failing to recover their dates and thus balance their operations. The way the financial assets portfolio are being management also remains a major challenge that the financial institutions have continued to undergo from last year to the present moment. (Shaw, 2007)

Loans are the main asset of banks, and other financial asset class, however, when this key asset becomes suspect, the very basis of a bank is upset to the bank to its very center, and this has been the situation over the past year. In addition the past year saw a decline in assert quality in many financial institutions. This can be attributed to the laxity in many banks of the previous success they enjoyed in earlier years (Comptroller of the Currency Administrator of National Banks, 2001).

The demand for money in the society is very high. Due to such a high demand, the reasons for people’s charity is never thought of or clearly known to many. Demand in economics means effective demand, which can be defined as a desire backed by willingness and ability to pay for a particular product. Thus, in order for a demand to be effective, three important factors namely the desire to buy, willingness to buy and ability to buy are the important factors “(ICFAI Centre for Management Research (ICMR), 2003).”

Recession in the economy will lead to liquidation of bank loans, fall in prices, and decline in the demand for capital goods and cancellation of new projects. Initially, the demand for consumer goods will remain the same, but slowly it will diminish. The most visible sign of the advent of recession is the weakening stock market as it reveals the sensitive pulse of the industrial and financial segments (Comptroller of the Currency Administrator of National Banks, 2001).

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Integration of financial markets involves the freedom and opportunity to raise funds from and to invest anywhere in the world, through any type of instrument. Though the degree of freedom differs from country to country, the trend is towards having a reducing control over these markets. According to the view of many economists, fair competition brings consumers the best products and prices. Fair competition can be defined as the markets which are open and in which anyone who has a better product or service, or who can provide goods more cheaply, should be free to serve customers in the market “(Rooy, 1995).”

Banks and financial institutions and financial institutions are in the business of lending and taking deposits. In effect the funds they take as deposits are channeled through to those who are perceived to be the optimal users of those funds in the form of lending made by the banks and financial institutions. However as banks and financial institutions evolved in their managerial practices and efficiencies, the lending expertise allowed them to lend at higher rates and in many unconventional market segments to generate returns for themselves. The lower interest rates scenarios in most of the developed economies also allowed banks and financial institutions and finance companies to free their hands and to lend generously. Thus the excess liquidity in the market coupled with low interest rates allows finance companies to tap the areas where the return is extremely high. Personal Lending is one such area where the lending rates are higher as compared to other conventional users of banking thus finance companies tend to bet more on them and in the process sometimes violate their own lending criterion(Marshall,1965).

Credit is the mainstay for any financial institution particularly banks and financial institutions. Almost 60% of the assets side o a bank’s balance sheet is credit. It is the key contributor to a bank’s profitability. A bank’s credit management exercise is aimed at accomplishing its mission of retaining its position as a premier financial institution (Dornbusch , Fischer and Begg, 2008).

The effect of credit policy on banks and financial institutions is so phenomenal (Naseer al, 2009) that the implications of this activity are critical and must for the survival and success of the banks and financial institutions, but also for the economic stability of a country. At the macro level, the collective operations of the Banks and financial institutions affect the debt capital available to the industry while at the same time; the spreads resulting from the credit operations of the bank will have a bearing on its long-term sustenance (Comptroller of the Currency Administrator of National Banks, 2001).

When there is a shortage in the number of individuals that are eligible to obtain loans or if the conditions for obtaining loans are tightened then it can be termed as Credit crunch. When people lose their confidence in securitized mortgages then it would lead to a liquidity crisis (Dornbusch , Fischer and Begg, 2008). Facts about liquidity of a bank:

  • The more liquid a bank, the less profitable the bank
  • Liquid assets earn less than illiquid assets.
  • The shorter the maturity, the lower the yield.
  • The highest yielding loans are loans with the highest default or interest rate risk and are therefore the least liquid.

Asset liquidity is influenced by the composition and maturity of funds i.e. the ease with which a bank can convert assets to cash with a minimum loss. Large holdings of cash assets evidently decrease profits because of the opportunity loss of interest income. In terms of investment portfolio, short-term securities yield lower returns compared to long-term securities. As investors value price stability and therefore long-term securities pay a yield premium over short term securities, to induce the investors to extend their holding period (Dornbusch , Fischer and Begg, 2008).

Impact on Credit

Subprime mortgage crises have become an ongoing economic problem in various parts of the globe. The basic reasons behind these crises may be described as contracted liquidity in the banking systems across the globe and also in the credit markets. Risky lending, excess of corporate and individual debt levels, risky practices of borrowing also can be added to the list of reasons for subprime crisis to occur.

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The above situation of reduced spending of consumer is very surprising as the people of the Saudi Arabia economy never decreased their spending even in the past wherein situations like recession etc. took place. The economy has never experienced this kind of slump during which the Saudi Arabia economy was experiencing a double-digit inflation.

Government’s commerce policies have a direct impact on the stock market performance. For instance, any directive by the government on lending policies or policies on company governance, price control issues, bi-lateral trade decisions between governments, unilateral trade embargos and such have direct impact on the stock market and their performance. This is possibly one of the extreme impacts of governmental policies on the stock market performance (Dornbusch , Fischer and Begg, 2008).

Yet as trees do not grow to the sky, economic fundamentals always win out in the end. In the short run, the broad market’s share-price gains may outpace the economy’s growth rate. But unless investors are willing to pay higher and higher price/earnings multiples for stocks, it cannot last forever. Home prices can climb faster than household incomes, but this can’t be sustained in the long run.Volatility can represent opportunity rather than risk, as this type of security tends to provide higher returns than more placid ones. In dealing with volatility, such an approach would definitely help. In the long run, it can be your friend, not your enemy.

Another reason as felt by market analysts was illiquidity. Due to the economic conditions and various other relevant reasons, the Saudi Arabia became desperate and hiked its interest rates to a booming price. According to theoretical beliefs, hike in interest rates would attract hot money inflow into the economy. However, this theory did not work in favors of the Saudi Arabia as it was believed that the hike in interest rates was a mere desperate action made by the government.

Apart from balances with the central bank, the bank’s reserve are used for the purpose of earning interest, in such away, however, that a sufficient proportion of the assets is in a form in which they can easily and speedily realised. A commercial bank’s investment policy is in effect a compromise between liquidity and profitability (Dornbusch , Fischer and Begg, 2008).

The total amount which banks lend at any time is determined by the ratio of their cash reserves to their liabilities. The experience of bankers teaches them that of the total amounts deposited by customers, only a small proportion is likely to be demanded at any given time, and every net increase in deposits will thus enable the banks to grant loans or overdrafts of considerable larger amount. In this regard, banks may be regarded as creators of credit, since they are able to build up vast superstructure of credit on the basis of much smaller cash resources.

It is open secret that like other business, the banks also operate with the aim of making profit. Income is earned by investing and lending the money deposited by people with the bank. A bank receives additional income from the charge it makes for some of its services, but the greater part of a bank’s earning arise from lending its deposit.

Out of its income a bank has to pay interest to its depositors, salaries to its staff and various other business expenses. From the net profit remaining, the bank’s shareholders receive a dividend.

Clearly, the greater the amount of money lent the higher will be a bank’s earnings and profit. On the other hand, a bank must always have sufficient notes and coins in its tills or in reserve, to meet customer’s demand for cash. Customers are constantly drawings cash from their accounts to spend and to pay wages and salaries to employees but this money is soon returned by those who receive it. Cash earns nothing for a bank and it is costly to store and transport, so as little as possible is kept.

How does a bank decide, therefore, the amount of cash to keep available? It must be remembered that although bank deposits are subject to withdrawals in cash, the extensive use of the cheque system transfer the ownership of bank deposits, means that only a small portion of a bank’s total deposits is actually converted into cash. From long experience the bank found they needed to keep only a proportion of their total deposits either in notes and coin or in accounts at the central Bank. The banks can quickly obtain more cash from these accounts should they require it (Dornbusch , Fischer and Begg, 2008).

The term credit creation implies, in the words of Benham, a situation when a bank may receive interest simply by permitting customers to draw their accounts or by purchasing securities and paying for them with its own cheques, thus increasing the total of bank deposits’

From the aforesaid, it is clear that there are two ways in which a bank creates credit:

  1. By advancing loans on the cash-credit basis or by overdraft agreement.
  2. By purchasing securities and paying for them with cash cheques.

The process of creating credit may be illustrated. The bank has to pay him interest; therefore, the bank must seek a safe and profitable investment for this amount. It must lend it to somebody. But this amount is not actually paid out to the borrower; it is retained by the bank to meet its obligations, i.e. to pay those of its depositors who need cash and draw cheques for this purpose (Arnold, 2003).

The banker’s experience tells him that for this purpose only certain percentage of cash reserve to total liabilities need to be kept. In countries like Britain, they keep nearly 7 per cent. The ratio of cash to liabilities is higher in countries like ours where banking habit has yet to develop (Dornbusch , Fischer and Begg, 2008).

Limitations of credit creation

From the account of credit creation given above, it would seem that the banks reap where they have sown’. They advance loans to buy securities without actually paying any cash. This is very tempting. They would of course, like to make as much profit like this as they can. But they cannot go on expanding credit indefinitely. In their own interest, they will have to apply the Benham has mentioned three such limitations on the power of the banks to create credit (Dornbusch , Fischer and Begg, 2008):

  1. The total amount of cash in the country.
  2. The amount of cash which the public wishes to hold
  3. The minimum percentage of cash to deposit which the banks consider safe.

It may be said that credit can be created only on the basis of cash. But the amount of cash that the banks have is under control of the central bank. The power of the central bank to control currency is the controlling influence on the extent of the credit that the banks have the power to create (Dornbusch , Fischer and Begg, 2008).

The second limitation arises from the habit of the people regarding the using of cash. If the people are in the habit of using cash and not cheques as is the case in Africa, then soon as credit is granted by the bank, the borrower will draw the cheque and get the cash. When bank’s cash reserve is thus reduced, its power to create credit is correspondingly curtailed. On the other hand, if the people use cash only for small and odd transaction then cash reserve of the bank is not much drawn upon, and their power of creating credit remains unimpaired (Arnold, 2003).

The third limitation is the most important. It arises from traditional reserve ratio of cash which every bank considers its duty to maintain to ensure safety of the banks and to retain the degree of liquidity that is desirable.

The balance sheet of commercial bank

The illustration of the balance sheet of a commercial bank shows how a bank distributes its assets and compromises between the competing aims of liquidity and profitability. The item ‘special deposits’ refers to the extra deposits which the central bank sometimes require from the commercial banks They earn interest at the current Treasury bill rate(Dornbusch , Fischer and Begg, 2008). Calling special deposits has the effect of reducing the banks’ cash and liquid assets, and they have to reduce their total deposits to maintain the minimum reserve assets ratio.

Common Size Balance Sheet

Balance Sheet Items (in % Terms) 2008 2007
Cash & balances with central bank 10.1% 16.94%
Due from other banks 4.06% 1.75%
Investments 28.12% 15.13%
Loans and advances, net 54.99% 63.13%
Investment in associates 0.1% 0.11%
Net Property, Plant & Equipment 0.7% 0.56%
Other Assets 1.93% 2.37%
Total Assets 100% 100%
Due to banks and other financial institutions 8.19% 2.81%
Customers deposits 73.16% 76.77%
Debt securities in issue 4.11% 4.99%
Borrowings 0.19% 0.24%
Other liabilities 3.74% 3%
Share capital 3.82% 4.86%
Statutory reserve 3.82% 4.86%
Other reserves -0.02% 0.09%
Retained earnings 2.09% 1.22%
Proposed earnings 0.91% 1.15%
Total liabilities and shareholders equity 100% 100%

Of the above items included in the Balance sheet some are self-explanatory and the others need some explanation. These are:

Money at call and short notice: – This represents loans to bill broker on the security of first class of bills of exchange, and to stock-brokers on the security of marketable securities. Some of these advances are payable at any time, on demand, i.e. ‘at call’ others at a few notice (Arnold, 2003.

The discount houses usually have special arrangements with the bank to assist them in the finance of their bill-broking business. By these agreements they can borrow up to a certain maximum, no matter how difficult credit conditions may be. Such loans are very short ones, being repayable the first thing on the following morning and are known as Day to day money’ (Arnold, 2003)

Treasury bills: They are instruments issued by the government payable 91 days after date. They are issued by the Central bank, which offers them by tender to the discount houses and approved financial institutions (Arnold, 2003).

How To You Evaluate Bank Performance

Ratios: The ratios used in performance evaluation of a bank include; Total deposit: total capital, Loans: total deposits, Capital funds to total assets, Interest margin to average total assets, Earnings assets to total assets, Interest margin to average earnings, Loans loss coverage ratio, Equity to total assets, Deposits x capital, Loans to capital, Operating ratio, Long term debt to operating property and Operating revenue to operating property (Billing, 2009).

Saad group Balance sheet

Saad is a company formed by Al-Sanea ea who was born in Kuwait and married a daughter of a founding member of Algosaibi. Saad company invested heavily in sewage and storm water system, really estate, banking sector and is the largest alter of HSBC one of the largest European Banks. This group of companies has been performing well in the market in various stock exchanges in and outside Saudi Arabia, however the financial crisis brought in a new dimension in the operations of this group.

The performance of this company was envied by many as it used to be among the best company that were lending out the money. The company was among the companies dominating a city with 165 people in Saudi Arabia (Billing, 2009).

Al Gosaibi Balance sheet

Al Gosaibi is one of the richest companies in Saudi Arabia owned by Al Gosaibi and brothers. The company operates a hotel, shopping mall, hospital, residential village, a soft drink brands, real estate and other investment. The company has been performing well before the global financial crisis which reduced the value of the assets (Billing, 2009).

The Conflict between Al-Sanea and Algosaibi

Al-Sanea and Algosaibi are two families which are related, and these families are now engaged in a dispute relating to misappropriation of $ 10 billion using money exchange arm of Algosaibi business. According to Algosaibi, Al-Sanea falsified the documents to embezzle the $ 10 billion which was earned from a ten party system. The argument was that Al-Sanea used various techniques and connections to embezzle the money (Billing, 2009).

The subject has both the actus Reus and mens rea which is the intent to commit the crime and the actual act of doing it in reality. Al-Sanea is in an actual guilty state of mind when he aggressively maneuvered the records of the Algosaibi that he handled as the most blatant offense to the public. It definitely requires planning and forethought for him to order his employees to commit this crime in a family business. There has to be awareness of the situation for him to be able to plan ahead. It is a confirmation of the fact that he has the intention indeed to commit the crime of defrauding his employer who happens to be in family business. He definitely did so and made thousands of people suffer as a result of his crimes. He did not waver in his malicious intent and went ahead to do it. There is no other way to be able to do it without the evil intent (Dornbusch , Fischer and Begg, 2008).

The behavior of Al-Sanea is not understandable even by the standards of business of any type. The level of risks that he takes as well as the opulent and that he makes that he leads is not exactly the kind of behavior that business leaders lead. In addition to that, all other business leaders pamper themselves only after they have achieved a certain level of financial success. They know that they need the money to invest in the growth and expansion of their companies. They do not exactly engage in lavish spending right away especially when they are just starting. Almost all successful business leader and owners especially do not spend more than they can afford. Al-Sanea was banking on the possibility that his investments will become super profitable (Billing, 2009).

There is no accountability in his actions. He lets other people take the fall when the consequences for his actions inevitably come around. There is a big difference in being aggressive and in making decisions that will only serve one’s self interest without regards to the effect it will have on other people’s financial well being.

Even the decision making by Al-Sanea in terms of his business investments and projects tend to be more on the lavish side. Instead of waiting for the market forces to dictate the number and the type of product that he can sell, he goes ahead and launches what he thinks will sell despite contrary evidence (Billing, 2009).

The legacy of the case is for the common people to be aware of any kind of lavish investment that business leaders engage in. If there is no matching accomplishment for their lavish bonuses received, it can be expected that they are not leaders who serve the interest of their recipients and stockholders. There never will be the same level of trust that the people will have again on big companies. The previous era where financial institutions were looked upon as pillars of strength would never be the same again. People are now painfully aware that they are at risk the same way that they are at risk with everything else in this world (ICFAI University Press, 2003).

The kind of trust that was so easily given by people to business leaders before will never be the same way again. The degree of regulation that the government does on the financial activities of business entities should also increase dramatically to ensure a repeat of this magnitude will never happen again. The kind of actual limits and danger signs needs to be pointed out by financially astute personnel in order to prevent future mishaps (ICFAI University Press, 2003).

There should be more proactive actions on the part of the government as they are the only strong means of guarding the interest of the people. The best thing that could be done to prevent this is to set up limits on the kind of risks that the top management firms can do with their investors or depositors if they happen to run financial institutions that deal with a large number of people. The exact types of investment that they could deal with should be set out (Billing, 2009).

There must be absolutely no form of excessive speculation on the part of the management. Sound business practices which are already well known to exist should be followed. While this may not necessarily mean controlling the rights of a business owner the prerogative of deciding on what type of actions to take, the government should set rules on what actions are to be considered as preemptive to fraud already (ICFAI University Press, 2003). If such actions are noted to happen within a financial institution, the SEC and other appropriate government agencies should monitor the situation closely.

The general public too should be made more aware that any frivolous lifestyles led by any top executives are sure signs of trouble in the future. A prudent and wise leader does not need to flaunt his power nor consume in excess. The kind of actions done by these types of leaders will usually be of no good. The extravagant lifestyle will sooner or later need to be paid and there is no way that it can be supported by empty ideas without real success. The financial hold they have over the stockholder’s money should be closely guarded. Only those that have the true interests of their stockholder’s at heart will be careful in using the capital entrusted to them. It only follows that the leaders who have everyone’s interest in their hearts will not behave in such outlandish ways.

If the majority of the public is only aware of reading the signs of corruption, then there will be lesser chances of them being cheated from their money by unscrupulous executives. There are also other signs that people should watch out for in the making of any financial scam. There is always the lure of greater gains and big income from very little efforts. This is not always true and most likely to be a scam indeed (Billing, 2009).

The idea sounds a bit common sense for some but it is hard to guard against another’s deception when the judgment becomes clouded with greed. It is good to always remember the saying that there is no such thing as “free lunch”. In the world of business, this saying is particularly true. The best solution for everyone is still to be vigilant and be very discerning in any kind of offer placed in front of them.

The accountability of the executive should be enforced by the SEC by making the personal assets of the executives liable to any mistakes and malicious usage of funds of his company. This will ensure that those who make use of other people’s money will be responsible in using it. It will also act as a sort of pre-emptive measure to guard against the possibility of having financial scandals destroy the company and innocent stockholders again.

It is true that there is already the SEC for monitoring the practices of the businesses but the problem is that they are more of a reactive agency rather than an active one. They do minimize the number of fraud that can be committed but never fully eliminate it. There has to be a variety of means set in place to make sure that the detection of such wrongdoings are easier and faster to recognize. There should be a bigger reward for all corporate whistleblowers. There should be a reward system firmly put in place (Billing, 2009).

This is to make sure that the kind of criminal actions done by top management are detected earlier as usual. The punishment for this kind of crime definitely has to be several times more severe. It is a shame that the punishment in the case of Al-Sanea was only up to ten years with a bail. There should be no bail and the punishment should be more than a lifetime. This is commensurate with the kind of damage that they have done to thousands of innocent lives. The fact that thousands of people will suffer because they have lost their life savings should mean a harsher penalty for the financial crime committed (Billing, 2009).

Settlements and the Local and International Banks involved

To settle the above dispute the two families agreed on a restructuring method where Saad group deaths were to be refinanced by various international institution. The banks involved in settling the disputes include, The bank of America, Awal bank of Berlin, Abu Dhabi commercial bank, HSBC bank and Frankfurt-based in Deutsche bank. Al-Sanea also sold stakes in homeowners (Billing, 2009).

Conclusion

The unethical behavior that the subject engaged in was indulging in excessively aggressive financial practices. He invested a lot in the financial instruments that are very risky like housing sector as well as equity positions. Although his investments in real estate and equity positions can’t exactly be determined to be risky, the amount and scale by which he invests in them has reached levels that the government considers to be illegal(Freiberg and Freiberg, 2005).

Since the government insures these savings deposits, it is natural for them to be concerned with the safety of the investments that the holding company makes. On a smaller scale, he also interfered with the decision making in some of the newspapers that his company was controlling. This was already a tell tale sign that he was a man of self-serving interests. He uses his power to provide for his own benefits and not necessarily the interests of his stockholder (Dornbusch , Fischer and Begg, 2008). He also made his customers in real estate buy his high yield investment bonds in order to fund his speculative investments. The buyers or the customers had no idea that they were holding uninsured bonds.

Al-Sanea was accused of fraud racketeering and illegal wire transactions. These were the only crimes that stated but there were numerous other charges brought against him if he actually falsified documents. He managed to swindle his victim with their money. The victims were aggressively took him to court. The first time that he engaged in such fraudulent practice noticeable to the public was when he first joined the Algosaibi (Billing, 2009).

The Saad Company that he controlled committed unreported losses that were due to financial crisis. Bankers agreed to settle the dispute among the two families. Al-Sanea asked that his business be allowed to survive by being given a credit and be allowed to go to the home mortgage business as it was not deemed risky (Billing, 2009).

The momentary reliefs from government sanctions made Al-Sanea grow even bolder and he continued on his risky ventures. He created his own downfall when he started the Saad which was very profitability. It might have been a spectacular success if the real estate market did not bottom out and left him dry.

Lessons learned

The ultimate success of business does not depend on one person but on the team work and cooperation that exists in the daily business practices. For the business to be successful there must be cooperation in the organizational structure from the top management down to the subordinate staff. Cooperation helps in managing the affairs of the business because everybody is willing to take part. On the other hand if the business is individually run cooperation and a good relationship must exist between the owner on one hand and the suppliers and the customers on the other ( Dornbusch, Fischer,Begg. 2008).

In orders for cooperation in the business environment to be achieved some conditions are needed. One of such conditions is to have a manager or a leader who is able to evaluate the success of the team, the relationship that exists in the organization and then match the talent of each individual to the task for instance in a group project. Next the business environment must appreciate the diversities in personalities and culture among the workers and the customers such that every person is handled with respect to his culture. For instance where workers or customers are Christian and Muslim it is prudent for the company to treat these people’ needs with respect to their religious diversities. However diversified as employees may be they must be unified by a clear set of rules that depicts what is expected of them, the organization norms in such a way that there in no conflict of roles so that maximum efficiency is obtained(Freiberg and Freiberg, 2005). Additionally, if a member is aware that his role in business is appreciated, then his morale is enhanced and productivity is increased (IPC’sIntelligent Investor, 2007).

Good leadership in the workplace is a pillar of success in business. The success of any business venture is inconceivable in absence of effective leadership that guides and encourages the workers and in the process reveals individual potential. Such effective leaders must have the appropriate leadership qualities like charisma, diplomacy and boldness as well as the professional managerial qualities (Freiberg & Freiberg, 2005). Theses leaders should be people who lead by example through diligence, and personal accountability.

Leaders in a business setting have unique roles that they should play for the business to be successful. One of such roles is equipping the workers to think and to act like the owners. When the employees treat the business like their personal property they will explicitly play their roles and the production will be improved. Similarly they will tend to treat the customers with professionalism which in turn creates customer loyalty. The way forward in achieving this involves offering attractive remuneration packages to the employees, listening to their complaints and responding to them. Most importantly the administration should provide the correct and enough working equipment so that work is made easier and efficient. It is also the role of the leaders to ensure that the employees are being educated such that the business language is demystified and the importance of every step in business illustrated. In so doing the employees understands the economic value creation, how profit is computed form revenues and expenditure and the contribution of the investors and their return on investment (IPC’sIntelligent Investor, 2007).

Leadership should also create awareness to the employees that they are the people who make the business to flourish. In that way the employees discards the attitude of only taking care of their functional area and leaving the seniors worry about other issues of the company. In the same way the leaders should put trust on the employees to work with the business’ interests at heart. This trust boosts the self confidence of the employees and encourages them to take up more responsibilities. Finally the leadership should liberate talent and make the working environment one where the employees act without fear in order to encourage initiative (Freiberg and Freiberg, 2005).

The extent to which a business flourishes is also a subject of the balance in association between people and lifestyle. Every individual wants to be happy in life and this involves being relaxed, confident and calm. When the mind is peaceful there is always an inner feeling that guides one on the correct action to take in the midst of a dilemma. This balance in life creates optimism in life and daily undertakings. This balance can be achieved by eating well, exercising, getting enough time to relax and planning events in advance. Further balance can be achieved by deciding one’s values with regards to the work, relationship and health and then eliminating behaviors that are inconsistent with innermost convictions ( Dornbusch, Fischer,Begg. 2008).

Lack of balance in life, just like poor leadership, may contribute to business failure. This balanced management approach facilitates a productive performance and a positive organizational culture. Numerous business organizations fail because they strive to maximize profits without considering some other important factors that contribute to profit making. The inner balance is one such factor of which if ignored the ripple effect created may undermine the positive relationship in the organization leading to low performance. A balanced working environment fosters business success. Moreover such a balance should be both internal and external whereby the internal operations of the business should be in balance with the business relations with customers and partners (IPC’sIntelligent Investor, 2007).

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