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Political & Economic Overview Legal Review
Growth Prospects

Commercial Dispute Settlement

Investment Issues

Sector Analyses

Political & Economic Overview

The optimism surrounding structural reforms in the Saudi economy in the mid-1990s has turned into pessimism by the eve of 2004. In November 2003, yet another explosion shook the Saudi capital exposing the searing undercurrents of Islamic fundamentalism and revealing the deep rifts within the Saudi Royal family, business elite and populace.

Just a few days before a huge bomb blast in the Saudi capital, Riyadh in November 2003, the Saudi investment chief, Prince Abdullah bin Faisal bin Turki warned that the slow pace of privatization poses a greater threat to the regime than any alleged terror threat. Alongside bin Turki, the governor of the Saudi Arabian Monetary Agency, Hamad al-Sayari warns that the increasing public debt, rapidly increasing population and growing unemployment is risking pushing the economy towards large scale social unrest.

Since the September 11 attacks, Saudi Arabia’s image has changed from that of a pro-Western, stable kingdom. While still offering immense economic potential, there are large question marks over the government's commitment or ability to enact necessary structural economic reforms.

The prospects for 2004 are dependent on the price of oil and the threat of terrorism. 2003 was a very successful year for the economy because oil prices were high and oil still accounts for 75% of national income. Despite highly publicized policies of privatization and 'Saudization', there has been little real progress. The head of the Saudi migrants still constitute 65% if the workforce and official unemployment hovers around 20% with unofficial unemployment, nearly twice that. Although Saudi telecom, the country’s biggest company has signed major deals with Ericsson and Nokia to expand the mobile phone network
On the democratic front, Saudi Arabia announced plans for its first elections by 2006 to fill one third of the seats in the Council (shur’a).

Population: 24 million (2003)
Religions: Islam
Government: Monarchy
Languages: Arabic (English is widely spoken)
Work Week: Private Sector:
Saturday - Wednesday
8:00 - 14:00; 17:00 - 20:00
Public Sector:
Saturday - Wednesday
8:00 - 14:30
Saturday - Thursday
9:00 - 12:30
Monetary Unit: Saudi Riyal (SR)
Exchange Rate: SR 3.75: US$ 1


Saudi Arabia Snapshot

Saudi Arabia is the largest oil exporter in the world

Largest oil reserves, 26% of the world's proven oil reserves, some 300 billion barrels

 Accounts for 25% of the GDP of all Arab states, some US$ 110 billion

 60% of the population is less than sixteen years of age

It is also believed that the Kingdom is probably using extra oil revenue (the result of a sharp increase in the price of oil) to build foreign reserves, estimated to have grown to US$ 11.8 billion in 1996 from US$ 8.6 billion in 1995, pay debts to contractors and reduce the need for domestic debt to help finance its deficit. The Saudis also intend to alter the foreign capital law in order to introduce more incentives that will lure foreign investors. There is also concern, however, that the oil revenue may diminish the perceived need for continued economic reform.






Growth Prospects


The privatization of Saudi telecom is considered a success but the private sector contributed only 3.5 percent to GDP. A new cabinet of young western educated technocrats, appointed by King Fahd in August of 1995 released its first budget on January 1 1996. It called for slightly lower revenues of US$ 35 billion in 1996, unchanged spending of US$ 40 billion and a deficit equal to about 3 percent of GDP.

Political Outlook

On the one hand, huge explosions in May and November have rocked the Kingdom. On the other hand, the arrest of some 600 militants in the second half of 2003 has heightened the already intense internal situation.

As these bombings indicate, the opposition movement in Saudi Arabia is gaining force, and measures taken by the government following the attack in Riyadh have not helped in curbing it. Key to stifling this opposition, if not at least quieting it, will be the success of many of the political and economic reforms the Kingdom is considering.
Of all the major players in the Arab world, Saudi Arabia's attitude towards the regional process has probably been the most ambivalent. On one hand, King Fahd was quick to endorse the December 1994 Alexandria declaration, which called on fellow Arab states to refrain from improving their relations with Israel, at least until a full Israeli peace accord with Syria had been reached. At the same time, the Saudi administration has made it clear that it fully supports recent steps towards Israeli-Palestinian reconciliation and in this spirit has expressed its willingness to jettison its long-standing position that Israel is an enemy state. The peace process, it seems, may not be in Saudi Arabia's immediate economic interest.



Sector Analyses



Major products of Saudi Arabia's manufacturing sector include refined petroleum, petrochemicals, plastics, processed food, clothing, fertilizer and cement. Manufacturing grew considerably during and after the Gulf War, as many firms took advantage of subsidies and soft loans from the government. The aim of the current Saudi Five-year Plan is to continue to help create a diversified economy, which is not so highly dependent on oil. According to a report from the Saudi government, incentives have led to the creation of over 2,400 manufacturing firms, mostly light manufacturing such as metal fabrication, woodworking, food processing and plastics. Under Saudi offset guidelines, several joint venture companies have been established with foreign technolopartners in more sophisticated areas, particularly related to defense and aviation. These include computer software, avionics, aircraft repair, aircraft engine repair, radios for military use and other electronic components. Joint stock companies have been particularly active in developing the downstream petrochemical base of the Kingdom, and consequently, a great deal of the petrochemical needs are nowmet domestically.



The current metal mining activity, at the gold mines, creates demand for imported mining equipment worth US$ 40 million a year.


The Saudi Ministry of Petroleum and Mineral Resources is spearheading an initiative to develop new mines to produce iron, phosphates, bauxites and precious metals. Once these major projects are underway in the next two to three years, importation of mining equipment should exceed US$ 200 million a year. The Ministry has started negotiating contracts with Western mining companies.


Food and Agriculture

Because Saudi Arabia has long been a food importer, agriculture is a key area of development. The lack of water has made less than 1 percent of the land area useful for farming. Irrigated lands near oases have been virtually the only sites of cultivation. Many of the foreign workers and technicians who have been brought in are engaged in agricultural projects.


Saudi Arabia's leading crops are wheat, watermelons, dates and tomatoes. Other major crops are barley, sorghum, onions, grapes and citrus fruit. Livestock includes sheep, goats, cattle and camels.


Saudi agriculture has shown rapid growth in production over the last several years, while food processing has only recently begun significant expansion. The growth in agricultural output has been led until recently by wheat, but notable increases have also taken place in livestock, vegetables and fruits. Much of the expansion has relied on imported technology and production inputs. Wheat production is now declining, but output continues upward for most other crops and livestock. Thus, the prospective demand for inputs is mixed, with a weak near term outlook for large machinery and irrigation equipment, but likely growth in demand for inputs related to the livestock or fruit and vegetable segments. Imports of most food and bulk agricultural products, other than a few items such as wheat, eggs and dates, are continuing at a strong pace.


Food processing has started significant growth, but remains modest. Investment in food processing, handling and storage equipment is continuing.



Saudi banks control approximately one third of total Arab capital. The largest Arab bank, the Saudi Al-Ahli Commercial Bank, is privately owned by the well-known Mahfouz family, which infused US$ 1.6 billion into the bank in 1993. Considered the largest private bank in the Arab world, it held shareholder equity of US$ 1,942 million in 1995. Bank profits totaled US$ 187 million in 1995, a 21 percent increase over 1994. During the first half of 1996 bank profits reached US$ 120 million, suggesting that 1996 profits will exceed 1995 figures.



The electric power needs of Saudi Arabia are large and growing fast. Demand has been rising at an average annual rate of 10.5 percent from 1985-1995, far exceeding the Kingdom's average GDP growth rate.

The lack of adequate investment in the electricity sector has caused the power generating capacity to rise by only 2.9 percent a year during the same period, and the electricity crunch is now beginning to bite various sectors of the Saudi economy, particularly the industrial sector. At a time when the Kingdom is seeking to diversify and to move away from dependency on oil, new industrial schemes are unable to get off the ground because they cannot secure an adequate power supply.


The gap between actual operating capacity and peak load is believed to have risen from 68 percent in 1985 to 97 percent in 1995. The excessive consumption of electricity has caused severe constraints on the ability of the electricity companies to meet demand at peak hours, especially during the summer resulting in power shortages in some areas.


The annual rate of growth of electricity consumption slowed down from 7.9 percent in 1991 to 4.5 percent in 1995, caused in large part the higher tariff rates introduced in 1995.


Demand for electricity is projected in the Sixth Development Plan (1995-2000) to rise at an annual rate of 6.4 percent reaching 5,081 kwh by the turn of the century. This necessitates an additional generating capacity of 9,000 MW in the next five years at a total cost of US$ 8.8 billion or US$ 1.6 billion annually.


The main challenge facing the electricity sector in Saudi Arabia is to put in place the required power generation capacity needed. Because of budgetary constraints and the ongoing public sector retrenchment, the government can no longer be expected to provide all the required investment. The private sector will be called upon to participate in financing power projects. For that to happen, the electricity sector needs to be restructured and electricity tariff rates to be adjusted further.



The Kingdom's trade surplus is expected to hit US$ 26.8 billion in 1997 compared to an estimated US$ 29.3 billion for 1996. After returning to surplus for the first time in 13 years in 1996, at US$ 187 million, the current account is expected to show a US$ 3.2 billion deficit.


Although exports other than oil and petrochemicals amount to only about 3 percent of Saudi Arabia's total overseas sales, such exports have grown fast, by 15 percent per year in 1989-1993. If the trend continues, Saudi Arabia may reach the government's goal of becoming a major industrial export center in the Middle East.


Saudi firms are now building export plans in their business strategies. They are driven by the need to reduce their dependence on the domestic market, which, though fundamentally strong, is prone to swing in response to periodic government spending cuts.


Although the Gulf states are the main foreign markets for Saudi goods, some Saudi exporters compete in the sophisticated European markets. Main destinations of exports outside the Gulf are Japan, the United States, South Korea, Singapore, France, the UK, Netherlands, Germany, Italy and India.



The total imports to the Kingdom during 1995 were US$ 28 billion, an increase of US$ 4.728 billion, or 20.3 percent compared to the previous year. The United States topped the list of countries exporting to the Kingdom, with US$ 6.04 billion in exports.


Total imports from ten major trading partners; the US, Japan, Britain, Germany, Switzerland, France, Italy, South Korea, China and the Netherlands reached US$ 19.24 billion.


In 1995 the Kingdom imported 97,350 cars, 6,347,838 heads of sheep, 12,760 heads of cattle, 41,268 heads of camel, 151,443 washing machines, 108,342 refrigerators and 343,852 television sets. Imports of foodstuffs reached US$ 4.58 billion during 1995, compared to US$ 3.02 billion during 1994. Apart from textiles and clothes, imports were US$ 2.1 billion in 1995 compared to US$ 1.71 billion in 1994.



Investment Issues


Foreign Investment

The total volume of foreign investment in Saudi Arabia reached US$ 22.5 billion in 1995, and the greatest number of investments came from the United States, Japan, France, Britain, South Korea, Taiwan, the Arabian Gulf countries, Syria and Lebanon. Most of the investments were made in the petrochemical, maintenance, airport services, electrical and electronic manufacturing, and the food and beverage industries.


Saudi Arabia is the world's seventh most popular country for foreign investment. By the end of 1995, there was a total of 1,306 joint-venture projects between Saudi and foreign firms in the Kingdom. The share capital of the projects totaled US$ 34.4 billion with US$ 14.93 billion coming from foreign firms. A total of 621 of these projects were in the industrial sector and represented a total share capital of US$ 31.46 billion.


The United States is the largest foreign investor in Saudi Arabia. American companies have invested US$ 11.94 billion in 229 joint projects, seventy-nine of which were in the industrsector and the remaining 150 in non-industrial projects.


The average flow of foreign investment has picked up steadily in recent years. Foreign investments rose 34 percent in 1995 from the preceding year and have averaged US$ 106 million per month.


In 1995 alone there was a total of 408 new joint-venture projects representing US$ 5.12 billion in share capital. Of these, 302 projects were in the industrial sand the remaining 106 in non-industrial projects, including services. After the US, Britain and Germany had the greatest amount of investments in joint-venture projects in the Kingdom.



As the Saudis have traditionally resisted privatization, they prefer to refer to this project as "private sector participation." Private finance mechanisms being considered include BOT and BOOT.

The recent US$ 700 million loan syndication raised for Saudi Petrochemical Company (Sadaf), the subsidiary of the majority government-owned Saudi Basic Industries Corporation (Sabot), was a milestone among corporate finance deals in the region. Also in the market is a US$ 500 million loan to finance Saudi Arabia's Ghuzlan Power Station expansion.



The Sixth Saudi Five Year Development Plan (1996-2000) aims to gain control over the Kingdom's heavy external debt and growing budget deficit by enhancing the private sector's role in the economy. The plan will accomplish this through two complementary strategies, "Saudiization" and privatization.


At the beginning of 1996, there were 6.25 million expatriates from 190 different nations in the Kingdom. These workers are concentrated in the construction trades, and as cashiers, accountants, purchase managers and warehouse officers.


Saudi Arabia's rapid development over the past two decades has been the main justification in allocating such a large number of jobs to non-Saudis. Huge infrastructure projects required extensive labor, but local work ethics made imported workers more desirable.


Traditionally, the Saudi private sector has been unwilling to pay Saudis the salaries they demand, preferring instead to hire expatriate labor. Even now, salary levels provide little or no incentive for Saudis to work in positions typically held by expatriates, a trend which is expected to continue.


The Saudi private sector employment constitutes only 16 percent of the total work force. The rate of Saudi employment in the industrial sector stands at 4 percent and in the services sector at 12 percent. In contrast, their share in the public sector stands at 79.2 percent.


To increase Saudi presence in the private sector, the Saudi authorities are considering establishing a minimum Saudi wage, limiting the work day to eight hours and creating social insurance and pension plans similar to those available in the public sector.


The al-Saud ruling family's push for "Saudiization" is motivated by a desire to eliminate possible threats from the Saudi middle class, a reality which has preoccupied the royal family in recent years. In the past, the Saudi middle class received public sector jobs and benefits and in return backed the al-Saud ruling family's monopoly over the Kingdom's economy, finances and politics. But over the last two years, budgetary constraints have left government ministries and agencies unable to provide the same level of jobs and benefits. It is estimated that 20 to 30 percent of Saudi Arabia's 1995 university graduates are unemployed. Bearing in mind that the middle class is the main target of opposition Islamic movements, the urgent need of the government to find employment alternatives for its traditional supporters is obvious.


This latest plan calls for the absorption of 659,900 Saudis into the private sector. 340,000 new jobs will be created and 319,000 expatriates will be replaced. Of these, about 178,000 expatriates will be replaced within the service sector; 115,700 in clerical jobs, 35,000 in sales, 15,900 in the construction industry and 11,800 in managerial posts.


Although the Sixth Plan is more forceful than previous plans in providing both incentives and mandatory measures to encourage "Saudiization," it seems that it will be impossible for the private sector to achieve all of the government's targets on its own. In spite of the early successes, especially in the banking, oil and petrochemicals sectors, the Kingdom has a long way to go. The greatest challenge may lie in the work ethic of young Saudis and their refusal to accept low wages or to become involved in intensive labor.


Stock Exchange

The Saudi securities market is the largest in the Middle East and there are several plans to reform it by creating an independent bourse. A new Securities Law and an independent Securities Supervisory Commission have been established with the intention of ending the current monopoly on stock trading held by local banks.  Thus new registered financial brokers will be able to buy and sell shares. The new bourse will also promote the public listing of joint stock companies.


Currently, under the Banking Control Law, trading in shares is conducted through a department in the Saudi Arabian Monetary Agency (SAMA). Joint stock companies are the vehicle permitting ownership by a large number of public shareholders, and the formation of such companies has been encouraged by the government through its privatization policy. Trading on the exchange is restricted to wholly-owned or majority-owned Saudi companies. In general, only Saudi nationals may own or deal in shares, but under certain circumstances GCC nationals may also deal in or own shares.


Buy Operate Transfer

Of the various options open for involving the private sector, BOOT scheme appears to be more suitable for further expansion of the power industry in the Kingdom. The private sector involvement in BOOT projects can be envisaged in terms of equity participation and lending by commercial banks. Advances made by the large customers like SABIC, ARAMCO and big private sector industrialists would have an added advantage in financing BOOT projects.


The Kingdom's first excursion into variations of BOT infrastructure finance was signaled in early February, 1996 when SCECO-West commissioned a US/Canadian consortium to prepare a feasibility study on the legal aspects of this type of finance. The consortium comprises project developers Group INC Strategy & Development of Canada, US lawyers White & Case and US oil and gas consultants EMT & Associates. It appears that the results of the study were positive and certain modifications were proposed which will allow private investors to operate in the power sector and to tackle the thorny issue of tariff structures.


SCECO-West has recently invited contractors to bid for the SR 7.5 billion (US$ 2 billion) contract to build a power station at Shuaiba with capacity of 1,500 MW. The Shuaiba power station has been planned since 1993 but was delayed due to lack of funds. The tender conditions require contractors to submit specific financing options including a BOT method. For the longer term, the government is studying the prospects of restructuring the SCECOs, with the poof merging them into a single company to have a national grid serving the whole country.



Franchising has become a popular and growing approach for local firms to establish additional consumer-oriented business in Saudi Arabia. The franchise market is rapidly expanding in several business sectors. Opportunities exist in fast-food, laundry and dry cleaning services, office temporary services, automotive pand servicing, mail and package service, printing and convenience stores.


Half of the Saudi population is under the age of fifteen and many have traveled to the United States and Europe and have acquired a taste for Western food. American fast food franchises alone account for nearly 20 percent of the fast food franchise market. Total sales stood at US$ 238 million in 1994, increasing to US$ 257 million in 1995 and are expected to have reached US$ 266 million in 1996. Sales by local outlets also expanded to US$ 42 million in 1996, an average 8 percent growth annually.


Success in the Saudi market is often attributed to finding the appropriate franchiser and location. Usually, fast food franchises are situated near shopping centers or areas of high traffic flow. Non-food franchises account for 55 percent to 65 percent of the franchise market.


The large expatriate work force in Saudi Arabia patronizes franchises as a way of obtaining the same quality and level of services received at home. Franchising has expanded in the Saudi market at a phenomenal rate, more than 10 percent annually, outpacing other industry sectors.


Franchisers should realize, however, that the culture and religious background of the Saudi people may make it necessary to modify some franchise concepts before they can be successfully introduced and operated in Saudi Arabia. These mores include the separation of the sexes and a general prohibition on photos or advertising that would be considered only mildly suggestive in the West.



Saudi Arabia is the largest advertising market in the region, accounting for 40 percent of all advertising expenditures in the GCC alone. The Saudis, with their relatively high per-capita income and market-oriented economy, have become the prime target of producers of consumer goods and thus, the prime targets of the best international advertising firms.


Print media assumes the bulk of advertising expenditures in the Kingdom, with newspapers accounting for 61 percent of the pie, magazines 23 percent and television just 16 percent. Television was not legalized until 1963 and faced stiff opposition from conservative Islamic forces who termed the medium a "device of the devil."

Expenditures in terrestrial broadcasting in Saudi Arabia decreased by US$ 10 million or 20 percent. In the first five months of 1996 alone, advertising expenditures in the Kingdom jumped from US$ 114 million to US$ 123 million over the same period in 1995.



Legal Review



The Saudi Arabian legal system is based on Islamic law, the Shari'a, with the Koran providing the most important source of law. Nonetheless, Royal and Ministerial Decrees are periodically issued to meet the complexities of modern life and commercialized business transactions. Such Decrees are only valid, however, if they do not conflict with Shari'a law. Also, the use of settlement or arbitration for deciding conflicts is becoming more common.



The main court is the Shari'a Court, which operates within the Ministry of Justice and deals with family, real estate and criminal matters. Appeals are made to the Shari'a Court of Appeals, and subsequently to the Custodian of the Two Holy Mosques.


Disputes regarding commercial and labor matters are addressed by the Ministry of Justice. All cases concerning commercial disputes are dealt with through the Ministry's Board of Grievances The Commission for the Settlement of Labor Disputes deals with labor disputes and criminal violations of the Labor Law. The Government Administrative Judicial Committees decide matters concerning insurance disputes, unlicensed foreign capital investment and violations of customs duties.


The Board of Grievances administers disputes between Saudi Arabian government bodies and private parties as well as other matters provided for by special codes such as bribery, forgery and trademarks. Most cases are decided on their individual merits, and judges are therefore not bound by legal precedent.


Commercial Dispute Settlement

Historically, Saudis have not used commercial contracts which provide for arbitration or adjudication mechanisms outside of such mechanisms within the Saudi government. Saudi Arabia, however, has recently enacted an Arbitration Law and Regulations. As a result, the arbitration of disputes is no longer uncommon in the Kingdom.

Prevailing procedures are more time consuming than those in Europe and United States and can cause personal inconvenience to foreigners. For example, a letter of no-objection is required from the Saudi sponsor of a foreign employee whose employment has terminated before an exit visa will be issued by the Government. Unfortunately, this requirement could be used to coerce or to intimidate people in certain business situations. Foreign business travelers traveling on a business visa do not require a letter of no-objection to leave the country.


The Saudis maintain, however, that they have made tremendous progress in resolving the backlog of commercial disputes, almost to the point of complete elimination. Moreover, the government no longer requires exclusive applicability of Saudi law in the resolution of private commercial disputes. In practice, however, Saudi courts tend to apply Saudi law in commercial disputes litigated in the Kingdom, even when the relevant contract contains a foreign choice of law provision and provides for a foreign forum to have jurisdiction. Business-to-business arbitration assistance, although expensive, is available from local chambers of commerce for some types of disputes.


Business Forms and Structures

Business associations are governed by the Regulations for Companies (issued in 1982, and amended in 1992). The Regulations list business forms and structures, of which joint stock companies and limited liability partnerships are the most attractive to foreign investors. Additionally, there are certain business forms and structures, such as liaison and technical/scientific offices, which are not specifically dealt with by the Regulations but are nevertheless subject to them.


Establishments, or sole proprietorships, although required to register with the Ministry of Commerce, are not subject to the Regulations. Such enterprises are of marginal interest to foreigners since a foreigner is not allowed to conduct business in Saudi Arabia as a sole proprietor. In addition, Saudi law forbids foreigners from engaging in business in the Kingdom under the name of a Saudi national.


Although not provided for in the Companies Law, the Ministry of Industry and Electricity and the Ministry of Commerce have issued administrative fiats that have allowed the creation of wholly foreign owned branches. Such branches do not require a local sponsor and may enter into and do business in Saudi Arabia under their own names.


Companies Law

The Regulations define a company as a joint undertaking to participate in an enterprise with a view to profit. Thus, a registered company is deemed to be a commercial entity, whatever its objectives may be. Upon registration, the company acquires legal personality. If it is not fully owned by Saudis, it may not enjoy certain rights but would still be as a Saudi company.


Every industrial or commercial establishment must be registered in the Commercial Register. Saudi participants in foreign companies and foreign branches need to obtain the consent of the Foreign Capital Investment Committee prior to registration.


Joint Stock Companies

A joint stock company is owned by five or more individuals or entities. Capital is apportioned into negotiable shares of an equal amount, and shareholders are liable only to the extent of the value of their holdings. The minimum capital requirement is two million Saudi Riyals (SR) or no less than ten million SR if its shares are offered for public subscription. The par value of each share cannot be less than SR 50, and upon incorporation, its issued paid-up capital must be no less than one-half of the authorized capital. A recent change to the Regulations allows a joint stock company to issue non-voting preferred shares in an amount up to 50 percent of its capital.


Prospective joint stock companies involving businesses such as minerals exploitation, administration of public utilities, banking and finance require authorization by Royal Decree prior to incorporation.


The management is composed of a board of directors. This board, appointed by the shareholders, must have a minimum of three members. Directors must own at least 200 shares of the joint stock company.


Limited Liability Companies

Generally, a company with foreign participation would incorporate as a limited liability company, meaning a privately held company used to set up industrial, agricultural, contracting or services projects having Saudi and foreign partners. Limited liability companies are specifically not permitted to conduct banking, insurance or savings operations. These entities may not offer subscriptions to the public to raise capital, and partners cannot transfer their interest without the unanimous consent of the other partners.


Limited liability companies may also be established in the form of partnerships limited by share, in which the limited partner is liable to the partnership's debts only to the extent of his capital contributions reflected in fully tradable share certificates. In practice, partnerships limited by shares are relatively rare.


A limited liability company must be registered under the Regulations for Companies as well as under the foreign capital investment regulatory regime. The various regulations do not specify minimum capital requirements for regular limited partnerships. A minimum capital of 1,000,000 SR, however, is required for the establishment of a partnership limited by shares. Contribution stipulations, as well as other mandatory information, must be registered with the Ministry of Commerce.



A general partnership is an association of two or more persons who are jointly liable for the debts of the partnership to the extent of their personal fortunes. As a separate legal entity it can transact business in its own name. Partners are forbidden to transfer interests without the unanimous consent of the other partners. No minimum capital is required, and contribution terms are set forth in the partnership agreement which must be registered with the Ministry of Commerce.


Limited Partnerships

Limited partnerships are composed of general partners who are liable for the partnership's debts to the extent of their personal fortunes and limited partners who are liable for partnership's debts only to the extent of their investment. Participation by limited partners in the management of the partnership might expose them to joint individual liability with the general partners. Registration requirements are the same as for general partnerships.


The name of the firm must include the name of at least one general partner. For reasons of liability, limited partners should avoid having their names included in the firm name.


Professional Partnerships

As of 1991, foreign 'free professionals' such as lawyers, engineers and medical practitioners, may establish joint practices with partnerships that are locally licensed. The establishment of a professional partnership requires approval from the Ministry of Commerce, which sets conditions that concern the reputation of the foreign firms, transfer of interests and minimum participation of Saudi partners (25 percent). Profits of foreign partners from such professional partnership will presumably be taxable, unlike salaries earned by foreign professionals working for local firms.


Joint Ventures

Foreign investment in joint ventures with Saudi partners has advantages. While foreign partners in a joint venture entity may hold 100 percent of the equity in some Gulf Cooperation Council (GCC) countries, there are advantages in having a local Saudi partner own 50 percent of the equity or more. For example, if a Saudi holds 50 percent of the equity in a joint venture company it enables the company to obtain an interest-free loan for up to 50 percent of the project cost, which is repayable over a period of ten years. In addition, majority Saudi-owned joint ventures are entitled to preference after wholly Saudi-owned companies in the allotment of government contracts. Trading and marketing activities aimed at Saudi individuals or wholly Saudi-owned companies, however, are forbidden to mixed Saudi-foreign joint ventures by Royal Decree M/11 of 1962.


Branch Offices

Foreign companies carrying out industrial or contracting works essential to the goals of economic development in Saudi Arabia may apply to the Foreign Capital Investment Committee for a license to establish a branch in the Kingdom. Upon receiving the license, the company may complete its registration process under the Regulation. It may be noted that, unlike a limited liability joint venture, a branch of a foreign entity is not entitled to a tax holiday. In practice, relatively few branch licenses have been issued, consistent with a general government policy of insulating the local market from direct competition by foreign companies.

In recent years, however, the concept of branches has been expanded to cover companies that are not involved in industrial and contracting works although the granting of such licenses is rare.


Saudi Service Agents

Foreign companies operating exclusively for the purpose of implementing government contracts are required to obtain temporary commercial registration. Such registration is available only to contractors operating in the public sector. If a foreign contractor is engaged in a governmental contract and does not have a Saudi partner, it must engage a Saudi national as an agent. In cases of certain military contracts an exception to this general rule may sometimes be made. Agents may receive compensation not exceeding 5 percent of the contract value. The agency agreement should be submitted to the Ministry of Commerce along with the application for temporary commercial registration within 30 days of signing the contract.


Banking & Currency

Foreign Currency Control


There are virtually no currency exchange restrictions in Saudi Arabia. Exchange for payments abroad may be obtained freely, and there are no taxes or subsidies on purchases or sales of foreign currency. Officially, the Saudi Riyal (SR) is pegged to the International Monetary Fund's Special Drawing Rights. Since 1981, however, the Saudi Arabian Monetary Authority has instead chosen to peg the SR to the dollar. In order to minimize exchange risks for the private sector, to facilitate long term planning and to encourage repatriation of capital from abroad, the Saudi Arabian Government has maintained the exchange rate at SR 3.75/US$ 1 since 1987.

The depreciation of the dollar relative to other world currencies suas the Yen and the Deutsch Mark have the effect of making U.S. imports even more competitive in the Saudi market. This depreciation has led to talks within the GCC countries concerning the possibility of moving their currencies to a trade weighted unit that would reflect Western European and Japanese imports. GCC finance officials met again in 1992 to discuss this issue, but have apparently postponed any changes.



Banking in Saudi Arabia is regulated by the Banking Control Law of 1966. The Saudi Arabia Monetary Agency (SAMA), established in 1952, is the country's central bank. Among other things, SAMA issues and controls currency, regulates the money supply, regulates and monitors commercial banks (including deposits, loans and investments) and manages foreign assets. The Banking Control Law provides for state owned and private banks.


Public Banks

Under the Banking Control Law there are nine public banks in addition to SAMA. The distribution of government subsidies and grants of loans to public and private sector projects are funneled through specialized public funds or banks.


For example, Saudi Industrial Development Fund, which is linked to the Ministry of Industry and Electricity, is aimed at encouraging Saudis to establish small and medium size industrial projects in the private sector. The funds provide loans and advice on marketing, technical and financial matters.

The Saudi Arabian Agricultural Bank, which is affiliated with the Ministry of Agriculture and Water, grants subsidies and makes loans to farmers for the purchase of machinery, feed and live stock. It also finances joint ventures in agricultural projects with foreign participation.


The Real Estate Development Fund offers loans to Saudi individuals and entities for private and commercial housing projects.


The Public Investment Fund, which is controlled by the Ministry of Finance is used as a medium to long-term financing vehicle for the petrochemical industry, and it acquires equity in companies and banks in order to subsequently sell the equity to low-income groups.


Private Banks

There are twelve commercial banks operating in Saudi Arabia, three of which are fully Saudi-owned and the remainder of which have a minimum 60 percent Saudi participation. Modern banking in the Kingdom began with branches of foreign banks. As of the mid-1970s, a process of "Saudiization" of foreign banks was undertaken that was completed in the early 1980s. Currently, foreign banks cannot operate directly through branches in the Kingdom and must rely on Saudi banks. Cooperation between foreign and Saudi banks may result in the foreign bank providing international offices, training and access to international networks. Under certain conditions, a foreign bank may issue bonds and guarantees certified by a Saudi bank.


Islamic Banking

Generally speaking, Islamic law forbids the charging of interest. Many Saudi business-persons, who conduct their activities in accordance with Islamic law, use profit-and-loss sharing arrangements allowed under Islamic law to finance commercial projects. Banks in the Kingdom, therefore, generally provide facilities enabling finance by way of such arrangements.


Financing Through Financial Institutions

Saudi banks finance Saudi as well as non-Saudi entities. Saudi entities may also borrow from non-Saudi banks and often employ the services of offshore banking units in Bahrain, which is a major banking center for financing countries in the Gulf.


Import Payment Process

Most Saudi imports are received on the basis of an irrevocable letter of credit (L/C), although other arrangements such as open account, cash in advance and documentary collection are also permitted. Imports do not require mandatory, maximum or minimum credit terms. Typical turnaround time in local credit transactions ranges from three to four months.

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