Hamad Al-Sayari: Corporate governance for banks in the Kingdom of
Saudi Arabia
Speech by His Excellency Hamad Al-Sayari, Governor of the Saudi Arabian Monetary
Agency, at the High-Level Roundtable Discussion for Bank Executives on Corporate
Governance for Banks in Saudi Arabia, Institute of Banking, Riyadh, 22-23 May 2007.
* * *
Dear Distinguished Audience
It is a great pleasure for me to welcome you, and I am delighted by your participation at this
important conference on "Corporate Governance" organized jointly by the Institute of
Banking and the IFC.
Corporate Governance is popularly defined as a structural organization and executive
procedures used to direct and manage business to achieve the objectives of the company
and ensure its financial stability. In the past decade, this subject has taken increasing
worldwide prominence because of its importance and relevance for the enhancement of
macro-economic development and growth and the stability of the national financial systems
in particular.
In spite of the scarcity of books issued in Arabic on this subject, it is worth referring to two
books; the first entitled "Corporate Governance" issued by Mr. Abdulmajeed Al-Bastati in
2004 and the second entitled "The Way towards a Governing System for Corporations"
issued by Dr. Ibraheem AL-Muneef in 2006. The latter refers to a third book, which I have not
read, issued by Mr. Saleh Ali Husein in 2003 under the title "Practicing and Managing the
Authority in Business Organizations".
Dear Distinguished Audience,
Effective Board and management leadership in any financial institution is the key pillar that
would enable the institution to achieve its objectives and guarantee its development and
growth for the service of all parties including shareholders and staff. Effective leadership
stems from sound corporate governance practiced by competent and highly experienced
officials and directors at the various levels, setting a comprehensive strategy and elaborate
business plans with appropriate mechanisms of responsibility, transparency and
accountability in the financial institution.
In this regard, the board of directors plays a prominent role in overseeing the development of
a comprehensive strategy of the financial institution and in monitoring the decisions made by
senior management for achieving these objectives. This requires having necessary skills and
competencies for realizing the objectives set by the Board. In addition, the board should
establish clear guidelines regarding the independence of all departments and businesses in
the organization and should ensure their compliance with established policies and approved
procedures. Therefore, special committees of the Board such as the Audit, Compliance,
Compensation and other special committees, can play extremely important roles in this
respect.
The senior management should set a comprehensive business strategy; oversee day-to-day
decisions that support the long-term objectives and policies determined by the board. To
ensure financial stability, the execution of the overall objectives of the firm must be supported
by rigorous internal supervisory controls and effective risk management. An effective internal
control system is critical for providing reasonable assurance and producing appropriate
timely information by the organization that would help in discovering and correcting errors
promptly. Such a system will also promote the organization's operational efficiency and
ensure compliance with managerial policies, laws, regulations, and other prescribed
mechanisms.
Effective risk management is based on a foundation of good corporate governance and
rigorous internal controls. Risk identification in all activities is a core function of any financial
institution. At the same time, the institution must have in place the technical systems and
management processes necessary to effectively measure, monitor, and control risks.
An effective risk management and control structure must be supported by an institutional
culture that ensures that written policies and procedures are actually translated into practice.
The institution's culture is determined by the philosophy and the behaviour of its board of
directors and the senior management. In particular, the actions of senior management and
consistency of their decisions and behavior with the values and principles they articulate are
critical in shaping the institution's culture. It is vital that senior managers should emphasize
their commitment to ethical behaviour, effective risk management and rigorous controls and
that these principles should be continuously applied to all levels of the organization.
The other important factor that supports financial stability is effective market discipline, which
also contributes significantly to good corporate governance. When market participants obtain
timely, accurate, realistic and latest information about the institution's performance, their
investment and credit decisions can be a means of pressure and incentives for managers
and boards of directors for managing their risks soundly. Equally important, the same market
participants can penalize firms that fail to manage their risks soundly.
Therefore, market discipline must be supported by adequate public disclosure and
compliance with sound accounting standards. Knowing a company's risk appetite and its
approach and methodologies for managing risk is essential to assessing the institution's
future.
Progress in the disclosure area, however, requires that accounting standards are enhanced
to ensure proper valuation and to reflect innovations, in terms of both new products and
modern risk management techniques. Accounting systems serve a variety of purposes, the
most prominent of which is helping creditors and investors make rigorous and informed
decisions as to which enterprises meet the market needs in terms of efficiency,
competitiveness, and profitability. Sound accounting systems also enable investors in
assessing the real financial value of enterprises. The systems also assist in attracting capital,
both foreign and domestic.
Looking ahead, I believe that a major challenge for directors and executive management is to
find directors who are sufficiently independent but still knowledgeable about the business of
the financial institution. Independence reflects qualities of objectivity, experience, insight, and
force of character. The need for directors to possess this blend of technical knowledge plus
independence is critical, given the increased complexity of most banking activities and the
rapid pace of change in financial markets and practices. Getting the right balance of
expertise and independence so that the board does not rubber-stamp the decisions of top
management is a major challenge.
Now, turning to Saudi Arabia, as the Central Bank and the Banking Supervisory Authority,
SAMA has played a leadership role in strengthening corporate governance in the banking
industry in Saudi Arabia since its establishment. You may be surprised to learn that as early
as 1981, SAMA issued a document entitled "Powers and Responsibilities of the Board of
Directors of Commercial Banks in Saudi Arabia". This document, in a comprehensive
manner, guided the Board members on compliance to Banking Control and Company Laws,
required the implementation of a system of accounting and internal controls and assigned the
Board the responsibility for monitoring the assets and liabilities, investments and profitability
of the bank. This was followed by a guidance document in 1996 on the role of the Audit
Committee of the Board. This document in substantial detail provided guidance to the Banks
on the composition, mandate, role and responsibilities of their Audit Committees.
In 2004, SAMA issued another important circular affecting the Bank Directors and Senior
Managers entitled: "Qualifications and Requirements for Appointments to Senior Positions in
Banks licensed in Saudi Arabia". The circular is aimed at ensuring that directors and senior
managers have sound reputation and are persons of integrity and honesty.
Furthermore, over the past two decades, SAMA has issued additional governance related
regulations and guidance to banks operating in Saudi Arabia. These include circulars on
Internal Controls; Know Your Customers rules, Anti-Money Laundering and Combating
Terrorism Financing and Prevention of Fraud. Also, there are specific regulations on the Role
of the External Auditors and on the Internal Audit function. SAMA also requires the Board of
Directors to establish a specialized Compliance Function that monitors the compliance of the
organization with regulations and standards, and has a reporting line to the Board or one of
its committees. Moreover, SAMA requires all banks to apply the International Financial
Reporting Standards, and that two firms of external auditors are to conduct an annual audit.
Furthermore, SAMA has required banks in Saudi Arabia to meet the corporate governance
guidance emanating from the Basle Committee on Banking Supervision and more recently
from the Islamic Financial Services Board. In this regard, I should mention that SAMA is
participating in the IFSB Technical Committee and in various working groups that are
developing standards of corporate governance for Shari'ah compliant financial institutions.
The leadership role played by SAMA, over the past decades, in promulgating corporate
governance standards and in promoting a governance culture has been reflected in the
emergence of strong financial institutions and a credible banking system. Thanks to these
efforts, the institutions and the system have remained stable and steady, despite global
economic crises and oil price volatilities.
Dear Audience,
We should not rest on these past successes. We must remain vigilant and continue to
monitor changes in regional and global markets. We must continuously ensure adopting and
implementing best international standards and principles. In this context, I wish to draw to
your attention that SAMA is currently directing the banks in the Kingdom towards the
adoption of Basle II Capital Adequacy standard by 1st January 2008. I expect all banks to
easily meet the required capital requirements; and this will be positively reflected on fostering
the risk management and corporate governance culture that is deemed essential for meeting
the challenges of the forthcoming stage.
In conclusion, I wish you a good stay in the Kingdom, and wish all success to your
conference. Thank you for your attention.