The year also saw a sharp rise in demand for loans after two slow years - driving impressive loan-to-deposits ratio growth among most of the banks.

Although the aggregate rate of profit growth for the year was only 1 per cent - with NCB excluded - the figure was skewed by Samba's 18-per cent fall in profits to SR 1,857 million ($495.2 million), which it attributed to an increase in loan-loss reserves. For Al-Rajhi, 2002 was the second consecutive year of falling profits. In 2001, it suffered from a $100 million exposure to the Enron bankruptcy. Last year, the bank's 8 per cent fall in profits to SR 1,413 million ($376.8 million) was attributed to a difficult international financial climate. Among the big three, Riyad Bank had the best performance in 2002, with profits growing by 5 per cent to SR 1,416 million ($377.6 million).

NCB registered profit growth of 25 per cent to SR 2,400 million ($640 million) in 2002, and asset growth of 9 per cent to SR 107,000 million ($28,500 million). For NCB, the year culminated with the December sale of the remaining 30 per cent of shares held by the Bin Mahfouz family to the government's Pensions Fund.

Among the smaller banks, Banque Saudi Fransi (BSF), Saudi Investment Bank (SIB) and Arab National Bank (ANB)each recorded profit growth of more than 20 per cent, while the profits of Saudi British Bank (SABB)grew by 17 per cent, Bank Al-Jazira (BAJ)by 15 per cent and Saudi Hollandi Bank (SHB) 13 per cent.

The aggregate loans-to-deposits ratio, excluding Al-Rajhi, climbed sharply by 6 per cent to 58 per cent in 2002. BSF led the improvement, with a 16 per cent rise in its loans-to-deposits ratio to 58 per cent, based mainly on a 25 per cent rise in loans and advances to SR 21,034 million ($5,609 million). Samba, Riyad Bank, SABB and ANB also developed aggressive loans-to-deposits ratios. SHB's ratio fell slightly, BAJ's by 3 per cent and SIB's by 8 per cent.

The improvement in results last year will be especially welcome as the sector becomes broader. Emirates Bank International, National Bank of Bahrainand National Bank of Kuwaitwere awarded licences by the Saudi Arabian Monetary Authority (SAMA - central bank) in 2002, suggesting that more Gulf banks will be admitted to the kingdom over the medium term.

Banking is not included in the negative list of activities barred to direct foreign investment and within the GCC there are supposed to be no trade barriers. However, given the slow rate at which SAMA has opened up the sector to Gulf banks, it would be unwise to expect internationals to enter the market soon - particularly while negotiations to accede to the World Trade Organisation remain unpromising.

For 2003, all eyes will be on the coming capital markets and insurance laws, which will abolish the banks' monopoly on share trading and reduce their insurance activities. Both laws have been anticipated for nearly two years and are now set to emerge in the first half. The insurance law, which is expected first, will liberalise the market, where banks now offer de facto insurance products disguised as mutual funds. The capital markets law, which is designed to streamline the market, will force banks to separate their brokerage arms from other operations.