Three Financial Products Available In Saudi Arabia - Case Study Example

Three Financial Products Available In Saudi Arabia Executive Summary The paper analyses three financial products that are available in Saudi Arabia, which is a country among the seven GCC counties. The three financial products that are analyzed are insurance product, investment in stock and decisions on real estate. The paper has focused on the competitive advantage that enables the country to provide the three products better than the other countries of GCC and has offered an analysis of each of the three products. Table of contents Introduction……………………………………………………………….page 4 Analysis and evaluation of the three products…………………………….page 4 Recommendations………………………………………………………….page 11 Conclusion…………………………………………………………………..page 11 Reference……………………………………………………………………..page 12 Introduction The focus of the definition of financial products and services is on the three main functions that are provided by the issuers which are managing financial risks, making non cash payments and making financial investments. A financial product therefore is defined as an item through whose acquisition a person is able to manage financial risk, make a non - cash payment or makes a financial investment. All the products that can be traded in the financial market fall under financial products. They help individual to save, get mortgages or even to invest. Their providers are insurance agencies, banks, financial institutions, agents of credit cards and stock brokerages. These products include investments in shares and bonds, options, certificates of deposits, mutual funds, insurance, pensions, savings plans and credit cards. Financial institutions have a crucial role in any economy since they offer the financial products to individuals and institutions and have a contribution to the economic growth. The paper focuses on three financial products that are provided in Saudi Arabia and the considered products are investment in stocks, insurance and decisions on real estate. (Solé et al, 2007). Analysis and evaluation of the three products There is a significant economic growth in Saudi Arabia, which is facilitated by the control that the government has over economic activities. It also has a percentage of proven petroleum reserve in the world and is the highest petroleum exporter in the entire world. It also has a great contribution in the operation of OPEC and the petroleum industry has over the years contributed to a large extent in the growth of the economy. The industry has contributed 80 percent of revenues of the budget, to the GDP by 45 percent and to export earnings by 90 percent. The growth has also been facilitated by effective monetary and fiscal policies. The first financial product offered by the country is investment in stocks. The market for financial exchange in the country, Saudi all share index, Tadawul was established in the year 2001, though even before the establishment of the market stock exchange still used to take place over the counter. Since then, it has experienced a continuous growth and currently it is the largest financial exchange market among the countries of Gulf Cooperation Council (GCC). It doubled the capitalization of the market by listing Saudi Telecommunication Company in 2003. The market therefore has a top rank of 23 out of 50 largest world’s equity market. It has therefore offered many investment opportunities to individuals as well as to companies (Fund, 2007). The equity market has enabled investments by individuals, family owned and closed joint stock companies. It has enabled them to recognize the need for involvement in the stock markets and given them an opportunity for participating in the market. It has also benefited them by offering them with an access to a wider scope and better funding arrangements and instruments. The market is experiencing a continuous growth and being the largest equity market among the GCC countries it has been able to acquire a competitive advantage over the other countries. The individuals and companies listed have been able to acquire a broader knowledge base concerning the operations of the stock exchange and have been enabled to make wise and beneficial investment decisions. The Saudi stock market has expanded and has succeeded in offering investment in the stock by many local individuals and companies and is currently extending to offering foreign investments. Lately, it has issued new rules and regulations governing operations of the market through the Capital Market Authority (CMA) of Saudi, following the introduction of foreign investor. This move is aimed at increasing the transparency among the operators of the market. The market has also appointed a former executive of the World Bank as its CMA head and this is aimed at attracting more foreign investors into the market (Solé et al, 2007). Foreign investors from GCC countries are allowed to invest in the market through funds that are exchange traded and through equity swaps with trading in Tadawul representing 80 percent in the GCC countries. Tadawul majorly relies on finance industry and petrochemical industry which is attributed to 70 percent of market cap on index. Other main contributors are real estate, insurance, retail and construction. The interest of investors has been increasing since Saudi Arabia made a move towards improving its economy other than the oil economy. The market with introduction of foreign investment has therefore improved and has largely resulted to developing of the individual investors as they are guided by the CMA regulation. It has also enabled the listing of many companies locally operating and those that are foreign, enabling them to participate in the market and to derive the benefits that accrue from them being listed. The benefits of the investment do not only occur to the investors but to the government of Saudi Arabia as well. Non restriction of the foreign investors into the market as well has ensured that the government is able to derive the benefits that accrue from foreign investment (Nair, 2013). Another financial product offered by Saudi Arabia is insurance. Saudi Arabia started offering the insurance product in 2008 where it started growing significantly and in 2012, it acquired the second ranking in offering the insurance product among the GCC countries. The growth in Saudi Arabia’s insurance was facilitated by efficient economic growth, favorable regulations and demographics and structural reforms. The economic growth of Saudi Arabia is due to the increasing exportation if petroleum, sustainable spending by the government that is focused on infrastructure and focusing on the growth of non - oil areas (Legrenzi & Momani, 2011). The favorable demographics which has facilitated insurance in Saudi Arabia is the presence of a large population of young and growing individuals who are below the age of 30 years facilitating the function of insurance. The favorable regulation is also ensured by Saudi Arabia Monetary Agency (SAMA) by ensuring efficient operation of the firms offering the insurance product. These factors therefore have offered Saudi Arabia a competitive advantage in offering insurance products to the individuals in the country. Saudi Arabia government has also maintained it as a compulsory requirement for individuals to obtain policies in health and motor insurance. The government has also ensured efficiency in providing this product by its effort to increase the awareness concerning the available insurance products and the benefits anticipated from these products (Colombo, 2014). The health insurance product has been the fastest growing of the other insurance products in Saudi Arabia. The high population of young and growing individuals has facilitated this. Favorable regulations in the country have also facilitated the growth. The country has also made efforts of increasing the firms that offer this type of insurance product. Many programs have also come up to facility efficiency in offering the product and these include the requirement of employers to provide employees with health insurance covers. It is also a compulsory requirement for all the citizens in Saudi and an important requirement for expatriates. Motor insurance acquires the second ranking as being the second largest growing of other insurance products in Saudi Arabia (Nair, 2013). This growth is facilitated by the high rate of car ownership by the citizens of Saudi Arabia and by the fact that the government has made it a basic requirement for all the citizens who own cars in the country. This product is aimed at offering security to the drivers in the occurrence of accident. Due to the rising concern about the large number of people who died in road accidents, the department of traffic in 2010 implemented a program which involved use of digital cameras to locate the traffic violators. Another program that was implemented in 2013 is Najm and this was aimed at drivers who contributed in causing accidents ensuring that they paid higher premiums (Colombo, 2014). The two programs implemented in line with motor insurance are aimed at reducing the level of accidents as well as the amount of the premiums paid. The other type of insurance product offered in Saudi Arabia is Takaful, which is also referred to as Islamic insurance. It is founded on cooperative and mutual models and is usually formed for the benefit of the Muslims. The principles of this policy are that there is cooperation of all the policy holders for their common good, there is a subscription paid by all policy holders to help those in need and that liabilities should be spread and losses shared according to the policy system. The other principle is that elimination of uncertainty is done by subscription and compensation and that there is no attainment of advantage at the cost of others. The three are types of the insurance product that are offered to the citizens in Saudi Arabia. All the three types will require the policy holders to pay a certain amount of premiums that are predetermined by the specific company. This will then act as a cover for the policy holder and will act as security in the occurrence of the covered risk. The covered risk must be an unpredictable event upon whose occurrence the insurance company will be expected to pay compensation to the insured who is the policy holder. Payment of premiums will depend on the type of insurance product covering the policy holder and the terms that agreeable with the insurance company in question. The basis for determination of compensation in the occurrence of risk will be dependent on factors which vary from depending on the involved insurance company (Legrenzi & Momani, 2011). The third financial product offered in Saudi Arabia is decisions on real estate. This is a financial product offered in the real estate sector by the involved professionals. Real estate is defined as the land and any foxed structures that are found on the land. White land is the land that has not yet been exploited and which does not contain any services of infrastructure. There is an anticipated growth in the real estate sector in Saudi Arabia. The growth in the sector is predicted as a result of the increasing economic growth and the favorable demographic factors. The country has a competitive advantage in the real estate operation and in offering decisions concerning real estate to its citizens. This is because Saudi Arabia has the largest real estate market among the other countries of the GCC (Levine, 2004). Urbanization in the country is taking place at a faster rate and therefore resulting to a high rate of growth of the cities. There is also a shortage in the available residential property as well as in the hotel accommodation. The shortage in the hotel accommodation is related to the growing and expanding numbers of tourists who are on religious missions. There is therefore a high possibility of growth in the real estate sector and there is an anticipated vast business opportunity in the sector. Offering assistance concerning real estate decisions is therefore a crucial financial product that is offered to the citizens concerning aspects such as buying property (Sultan, 2012). Concerning property buying, a property law was passed in the year 2000 and this allows foreigners to be able to acquire property in Saudi Arabia. This is however applicable to the foreigners from GCC countries and for other foreigners who are not members of the GCC they will only be able to acquire property only if they are residents in Saudi Arabia and if they have the intention of buying the land for their own. Foreigner who wish to buy property as part of their business undertakings are also covered under this law and allowed to do so. International companies are also allowed to purchase employee housing in order to undertake their licensed projects. Another aspect in relation to ownership of land by foreign investors is that permission must be obtained from the investment authority of Saudi Arabia (Sultan 2012). There are also decisions concerning projects of property development which in this case need to be valued at around 30 million Saudi Riyals. An additional requirement for this is that the money should be invested within five years from the date that the land is acquired. Though the entire real estate sector of Saudi Arabia is anticipated to continue expanding in the future, the areas that have been over the years been observed to have a strong growth are housing in Riyadh and Jeddah, commercial developments that take place in Riyadh and apartments and hotels found in Makkah and Jeddah (Levine, 2004). Another aspect that will be addressed in the real estate decisions is the challenges that are likely to be encountered in the sector are issues on how the sector should operate in order to benefit from the proposed injections by the government into the sector. There also the consideration of the efforts that the government has made in order to see performance improvement in the sector. Consideration for factors that are aimed at improving the sector include the anticipated mortgage provision that is aimed at ensuring that many citizens ate able to own homes and property. Ranking highest in the real estate performance therefore, real estate decisions will be an important financial product in Saudi Arabia whose benefits will arise to the citizens as well as to the government and to the contribution of economic growth (Sultan, 2012). Recommendations Saudi Arabia has been analyzed as a country that is characterized by a high rate of economic growth, which results from the favorable control of the government over the economic activities and a growing young population. The country should therefore aim at utilizing the government control in order to ensure that they fully acquire complete competitive advantage among the other GCC countries. Conclusion In conclusion, financial products and services are beneficial to the individuals as well as to the contribution of the economic growth of any economy. Their function is to offer investment opportunities, management of financial risks and ensuring that individuals are able to make non cash payment. The three financial products that have been analyzed in relation to Saudi Arabia are investment in the stock markets, insurance and decisions on real estate. In all the three financial products, Saudi Arabia has a competitive advantage compared to the other countries of GCC. References Fund, I. M. (2007). IPO Behavior in GCC Countries. Washington: International Monetary Fund. Solé, J., Sensenbrenner, G., Tahari, A., De, V. J. E. J., Moretti, M., Brenner, P. D., & Senhadji, S. A. (2007). Financial Sector Reforms and Prospects for Financial Integration in Maghreb Countries. Washington: International Monetary Fund. Nair, N. J. (2013). What foreign investors might expect from Saudi Arabia’s $400 billion stock market. Retrieved from: http://qz.com/118663/what-foreign-investors-might-expect- from-saudi-arabias-400-billion-stock-market/ Colombo, S. (2014). Bridging the Gulf: EU-GCC relations at a crossroads. Roma: Nuova cultura. Legrenzi, M., & Momani, B. (2011). Shifting geo-economic power of the Gulf: Oil, finance and institutions. Farnham, Surrey, England: Ashgate Pub. Sultan, N., Weir, D., & Karake-Shalhoub, Z. (2012). The New Post-Oil Arab Gulf: Managing People and Wealth. New York: Saqi. Levine, M. L. (2004). International real estate: A comparative approach. Chicago, Ill: Dearborn Real Estate Education. Read More