Saudi Arabia’s announcement of its largest ever budget, which will leave the country with a SR65bn ($17bn) deficit this year, signals its commitment to spending public money on essential utilities and infrastructure projects that might otherwise have been delayed by the drying up of private finance in the region.

According to Gulf projects tracker MEED Projects, in January there were $608bn worth of projects planned or under way in Saudi Arabia. Funding these projects has become a priority for Riyadh given the financial crisis sapping international banks’ appetite for project financing.

But despite the assurances that the government will help finance developments, as set out in the 2009 budget, it is also seeking alternative ways of supporting the planned schemes. Part of that support will undoubtedly come from Alinma Bank, in which the government holds a 30 per cent stake.

Key facts

The flotation of Alinma in mid-2007 was one of the Saudi Arabia’s biggest initial public offerings and raised SR10.5bn from investors. Alinma has a capital base of SR15bn, which makes it the biggest bank in the country, in terms of capital. It plans to spend this on loans to major infrastructure projects in the kingdom.

Although run on commercial terms, the Islamic bank is expected to play a significant role in financing several upcoming projects in Saudi Arabia, with its lending to date a statement of its intent.

It has already agreed to lend $400m to the $5.5bn Ras al-Zour power and water project, and is working with the local Acwa Power on its bid for the $2.5bn power project at Rabigh.

“The primary concern for Alinma’s project finance team this year is Saudi Arabia, as there are a lot of projects coming up that require a lot of financing,” says one source close to the bank. “The Saudi market is expected to be big enough for Alinma not to have to look elsewhere for a while.”

In the current market, the bank’s lack of an investment history is also expected to be a significant boon. “Being a new bank, it has the obvious advantage of not carrying with it any bad assets, unlike a lot of banks,” says one regional project finance banker.

However, Alinma is still in the process of establishing its retail network. By 2010, the bank aims to have about 50 branches in the kingdom. When it starts to get a deposit base from retail customers, it will be able to play a more active role in financing the kingdom’s projects sector.

Although not explicitly mandated to spend its initial capital on key infrastructure projects, Alinma’s main focus will be supporting projects that are in need of finance to go ahead. As its branch network expands, it is expected to broaden its investment base, and has begun taking corporate deposits so that it has additional funding sources.

Many project finance commitments do not require immediate deployment of capital, with drawdown staggered over a period of years, meaning the bank should be able to start making commitments now, the majority of which will only be financed when it is more established.

In late 2008, Alinma began recruiting its project finance team, headed by David Smith, previously division head of project finance at the Saudi Industrial Development Fund, which holds a 10 per cent stake in Alinma.

Funding gap

While Alinma’s ability to offer large commitments is not in doubt, concerns have been raised over the ability of Islamic banks in general to fill the gap left by conventional banks as they become more risk averse. “We have heard a lot about the promise of Islamic banks in the past, but in practise it becomes so complicated,” says one Dubai-based head of project finance. “Each bank has its own sharia standards, so trying to get a group of Islamic banks together on a deal is always difficult.”

Another issue Alinma faces is that by the time it has a more established retail network and funding sources, the global economy is expected to be showing signs of recovery. By 2010, economic growth around the world is expected to resume, albeit sluggishly, meaning that competition to finance projects should also resume.

The source close to the bank refutes the idea that Alinma will be competing with international, or even local, banks. “There is a realisation in Saudi Arabia that with the size of some of the deals coming up, no single bank is able to finance that level of debt,” says the source. “International bank participation is expected to remain subdued over the next few years, so banks are not in competition at the moment. All banks have to work together on a club basis to get deals done now.”

The arrival of Alinma is a welcome addition to the kingdom’s relatively small domestic banking sector. Its large commitments to the Ras al-Zour and Rabigh power projects alone have been welcomed by developers. Over the next few years, it will have even more opportunities to prove its worth.