Prospects and Challenges of the rules and regulations of the Saudi Capital Market - Research Paper Example

Order No: 184961 Ph.D. Proposal On Prospects and Challenges of the rules and regulations of the Saudi Capital Market Prepared by DR. ZULFIQUAR AHMED ID: 10131 Order No: 184961 28 September 2007 Introduction The capital market is a tag for economic laissez faire that explains government policies intended to endorse liberated competition between trade firms inside market, particularly liberalization and monetarism, which is distinct from Globalization, which generally refers to greater international cultural exchange, dissemination of multiculturalism, and enhanced individual access to cultural diversity. In broad spectrum, capital market corresponds to a back off from the Keynesian economics that were prevailing without more ado after World War II. More particularly, capital market encourages a stable currency, a free market capitalism, unbiased budget, and free trade. Distinguishing characteristics take account of spreading out of the market to a round the clock global trading cycle, pact animalization, and augmentation in the rate of recurrence of contracts, incessant evaluations, and imitative markets. Antagonists argue that neo-liberalism is the functioning of comprehensive capitalism through military or government interference to guard the interests of multinational conglomerates, over and above this free trade also casts influences on wages and social structures. The Saudi Arabia's Securities Exchange Commission1 and the Saudi Arabia's Stock Exchange (Tadawul)2 established by the enactment of the Capital Markets Law with authority to regulate all aspects of the capital market. The Government of Saudi Arabia has been making significant attempts to strengthen its regulatory and institutional infrastructure for capital markets since 2003. The Government of Saudi Arabia prepared and issued the Capital Market Law, which was concretizing in 2003, through the creation of the Supreme Economic Council and the Saudi Arabian General Investment Authority. These reforms should help galvanize the Saudi Capital market.3 Objectives of the Study The major objective of this study is to identify the prospect and challenges of the rules and regulations of the Saudi Arabia capital market. In order to reach this objective, the sub-objectives include: 1. An overview of the Capital Market Law of 2003; 2. An assessment of the contemporary equity market in the country; 3. To conduct a survey of the overall institutional, legal and regulatory framework for capital markets. Problem Statement Due to the number of banking and financial crises in the global capital markets, companies have created series of techniques in order to improve the market performance.4 The capital market of Saudi is not well diversified with such techniques as there exists a specialised securities regulator and the Saudi Arabian Monetary Authority (SAMA) that regulate the market and in this way restrict companies from many lucrative activities.5 Before enacting the Capital Market Law and other Regulations of Saudi Arabia, the capital market lacked some of the basic features of more advanced markets such as a designated supervisory authority and a stock exchange with well defined functions.6 With booming oil revenues, government bond issuance is likely to diminish, causing a contraction in the supply of government debt.7 'There are no controls on portfolio investment in Saudi Arabian government securitiesas well as there are other major problems with the Sauid Arabia capital markets that I will discuss in this dissertation. Since the enactment of the Capital Market Law of 2003, the Saudi Arabia Government has tried to promote reform programs in all sectors of capital market and these changes have been rapid. Among these measures has been the establishment of the modern Saudi capital market. The Saudi stock market is the largest in the region; and with the enactment of the Capital Market Law, the way is paved for a full-fledged securities market. There is a lack of transparency in the market, whether it relates to a company's expansion program or its profit and loss account.8 There are major problems from the authority of CMA whereby it is working as if independently while are governmental agencies and ministry should be involved. More specifically, the approach of bureaucracy whereby the CMA is left alone and other agency have almost only formal dealing from the Ministry of Commerce, the Saudi Central Bank or Saudi Arabia Monetary Agency (SAMA), Finance Ministry and others. Each working in a separate orbit and they like have nothing to do with each other. It is no exaggerations to say since the creating of CMA in year 2003 it is like all governmental agencies through the responsibility on this new child (CMA). All these and more from legations are going against any standard and the market is moving in a direction which is very difficult to steer. Definitely their will be sometimes better enhancements to some of the rules whether the mentioned above or other such corporate governance, social responsibilities, labor law, professional practice but when these will occur and at what price and what the priorities to handle these changes in order to bring authenticity to this madness of the capital market. Nonetheless, there are opportunities for those who understand the market manipulation and violation and without any prosecution or some punishments. Some major drawbacks of the current Saudi capital market are prevailing such as, one of the major is the small number of listed Saudi joint stock companies available for trading.9 The concept of Islamic banking system is developing over a period of couple of decades now. It could be mentioned that Islamic banking is a different approach to conventional banking and financial institutions. This is because the fundamentals of the Islamic banking and financial specifications that based on the religious norms and regulations. It could also be mentioned that behind the formulation of Islamic banking and financial institutions the major reasons were instrumented by demography, historical and political influences. The major financial instrument of the Islamic banking and financial institutions could be enumerated as Sukuks. The term Sukuk is an Arabic word that is identical to the aspects of a financial instrument and is an equivalent instrument such as a bond under Islamic perspective of banking. But contrary to the usual financial instrument Sukuk is different as there are no fixed incomes as under the laws of Islam interests are seen as a crime. Therefore as an alternative it has been instrumented to use such non tangible or tangible assets that are could be classified according to the basic non tradability or tradability. But once again, under the principals of Islam these formulations could only be used in the secondary market. Methodology A Qualitative method of study differs from the usual quantitative methods (used in the study of pure sciences) in the sense that it tends to be far more subjective. This is in sharp contrast to the methods used in pure sciences which are exclusively objective. The research methods for marketing are a combination of both quantitative and qualitative methods. Being open to qualitative methods of study also allows social scientists to incorporate non-quantitative data (i.e. non-numerical data, such as words, images, gestures, impressions etc.) in their study. Since human beings tend to operate in terms of such data and not in terms of the terminology used in ordinary sciences this broader outlook is far more applicable in the study of social sciences. In keeping with the methodology employed in marketing researches the theories too are formulated and used keeping in mind that they aren't necessarily applicable to all conditions. Be it psychology, history, political science or economics human events are most likely to influence the rules which define the basic theories of a marketing subject. Success in the field of marketing researches can therefore be achieved if and only if it is understood that the subject has no space or opportunity for water-tight methodologies or theories. It can always be stated that Qualitative research is a process that includes interpretative paradigm under the measures of theoretical assumptions and the entire approach is based on sustainability that is depended on people's experience in terms of communication. It can also be mentioned that the total approach is based on the fact that reality is created on the social formulations. It can also be mentioned that the basic target of qualitative research is instrumented towards social context under normal circumstances where it would be possible to interpret, decode and describe the significances of a phenomenon. The entire process is operational under the parameter of interpretative paradigm that can minimize illusion and share subjectivity under contextualization, authenticity and complexity of the investigation. The best statistical method would be to interview long well formulated day to day working procedure at a specific and well selected location and in this case it would be the three selected events mentioned. Throughout the procedure, it should be noticed whether there are specific variables within the testable population or not. These variables would be extremely important while evaluating the basic data in the final stages where the adjustments would be made to the formulated data in accordance to the observations. However, it is important to completely take into account the aspects of fundamental variables of an individual such as ethnicity, religious belief or positive support from the sales structure of the management and individual. Methodologically, the research will be based on the major case studies, each providing insights for different aspects of the analysis from capital market of Saudi Arabia. Interviews will be conducted with the CMA, SAMA, Commerce Minster and other companies related to the study. The study is empirical, comparative and at the same time it focuses on previous records and future possibilities. The research will be based on both primary and secondary data. The primary data shall be collected from field survey to the CMA, SAMA, Commerce Minster, others companies and laws and regulations related to the capital market. The secondary data will be collected from the literature on the capital market, Annual Reports of major national authorities of KSA and international capital market authorities. References Abdelnour, K Ziad, "Democratization of Capital in the Arab World." Middle East Intelligence Bulletin. Vol. 5 No. 5, June 2003. Batlay, Mueen. Grais, Wafik. and Semaan, Elias. "Capital Markets in Saudi Arabia and World Financial Trends", Paper to Be Presented at the Symposium on Future Vision for the Saudi Economy. Creane, Susan. Goyal, Rishi. A. 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"Expert Seeks Tighter Regulations for Tadawul", Arab News (Jeddah), 11 March,2006. http://www.planning.gov.sa/.../Grais%20paper-%20English.pdf IMF, "Global Financial Stability Report", September 2004. International Monetary Fund (IMF) (2005), "Annual Report on Exchange Arrangements and Exchange Restrictions 2005", International Monetary Fund, Washington DC. International Monetary Fund (IMF) (2005), "Annual Report on Exchange Arrangements and Exchange Restrictions 2005", International Monetary Fund, Washington DC. Market Conduct Regulations of 2004 MENA-OECD Investment Programme, "Challenges for Reform of Financial Markets in MENA Countries"Woking Paper-4, Jeddah, 2005. Available at http://www.oecd.org/dataoecd/56/18/36086881.pdf Michael Leahy, Sebastian Schich, Gert Wehinger, Florian Pelgrin and Thorstein Thorgelsson "Contributions of Financial Systems to Growth in OECD Countries." OECD Economics Department. Working Paper No 280. March 2001. Molyneux Philip. and Iqbal, Munawar. 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"Democratization of Capital in the Arab World." Middle East Intelligence Bulletin. Vol. 5 No. 5, June 2003. Read More