Investigating bank structure of an open petroleum economy: the case of Saudi Arabia

This article investigates concentration, efficiency, and profitability of commercial banks operating in Saudi Arabia, which is considering acceding to the World Trade Organisation whose rules on financial services liberalisation could pose a competitive challenge to local banks. We use regression analysis to investigate the underlying determinants of Saudi bank concentration, efficiency, and profitability. The significance of the study stems from the conventional premise that highly concentrated banking or credit market introduces inefficiencies that would harm firms’ access to credit thus hindering economic growth. If banks were found to be highly concentrated and hence inefficient, then the relevant policy question that should be addressed by Saudi Arabian policy makers is what should be done to alleviate the situation. Empirical results show that Saudi banking market is highly concentrated, and healthy competition through the Saudi adoption of corrective measures would ease the problem. The Saudi government may like to consider concurrently joining the WTO, and allow non‐banking institutions to enter into brokerage business, offer financial products and services (investment banking, brokerage, and portfolio management), and compete with commercial banks through fair participation in auctioning of government securities.