The impact and challenges of Basel III implementation in Saudi Arabia

Abstract

This thesis is devoted to examining the legal framework for, and efficacy of, the implementation of the Basel III framework that governs capital, liquidity and market disclosure standards. It is set against the backdrop of the 2007 to 2008 financial crisis and attempts to unpack the myriad challenges associated with current efforts to harmonise international risk regulation standards in the context of legal diversity. These challenges are sharply illustrated in the context of Saudi Arabia’s Islamic legal system and its uneasy relationship with the government’s ongoing attempts to subject Saudi banks to the Basel III authored market and risk regulation disciplines. Paralleling the growth of Islamic (equity driven) finance markets worldwide, Islamic banks in Saudi Arabia now compete in the global market for conventional (debt centred) banking products. The growth of, and demand for, conventional financial services in Saudi Arabia highlights the duality of the Saudi legal system and its banking sector, despite apparent divergences between conventional and Islamic finance models, legally and normatively. These divergences manifest themselves, both in the differential treatment of Islamic and conventional banking customs and norms in the context of the overall Saudi legal system, and in respect of the general suitability of the conventional basis of the Basel regulatory model as applied to Islamic finance contexts and instruments. The thesis will challenge the convention that Islamic financial practices are self-evidently less risk averse, or more ethical, than their conventional alternatives. In a second step, this thesis will consider whether the national implementation of Basel III standards provides Saudi banks with sufficient protection against future threats to the stability of the country’s Saudi market-economy in periods of economic volatility. These aims will be synthesised to provide an overarching analysis of the ‘gaps’ in Saudi banking institutions and applicable law. Comparing the Saudi banking regime with the dual banking sector in Malaysia, this thesis will conclude with a defence of strengthened corporate governance regulation, transparency and ‘rule of law’ reforms in Saudi Arabia’s legal system. These recommendations should be further accompanied by concrete efforts to formulate, and, more effectively, reconcile, local and Islamic disclosure and accountability related standards with Basel III-approved technical measures on risk-mitigation and measurement.