Banks in Saudi Arabia have traditionally enjoyed a cozy relationship with prominent family-owned businesses in the country. The practice of so-called name lending — extending credit based on the reputation and standing of a company’s owners rather than on a rigorous examination of its financial health — is prevalent, not surprising for a culture that prizes deference and discretion over transparency. Bankers were only too happy to do business on such an informal basis while the economy was booming and global liquidity was abundant.
Today, however, a stunning corporate scandal involving two of the country’s most prominent family-owned conglomerates — Saad Group and Ahmad Hamad Algosaibi & Brothers — has shattered the industry’s complacency. The two companies have traded stinging allegations of financial misconduct in dueling lawsuits in Western courts, with AHAB accusing Saad and its chairman, Maan al-Sanea, of defrauding it of $10 billion. Both companies have defaulted on debts, which bankers estimate total as much as $22 billion, and the Central Bank of Bahrain has placed their Bahraini banking subsidiaries into administration. The Saudi Arabian Monetary Agency, the country’s central bank, has frozen the personal bank accounts of al-Sanea.
This unprecedented airing of financial allegations involving onetime pillars of the Saudi business establishment has sent shock waves throughout the country and across the Gulf region and prompted calls for radical reform of the way business is conducted. Dramatic improvements are needed in corporate governance and transparency to give investors a true ....