Sukuk Defaults in the Kingdom: A Case Study in Saudi Arabia’s Opaque Bankruptcy Process.

Brian Sturgess - March 2013

Key Points
  • The World Bank ranks Saudi Arabia 23rd globally for ease of doing business, but in 123rd position for enforcing contracts and in 90th for the resolution of insolvency.
  • A dispute between two Saudi family run business groups that started in 2009 has left international banks owed US$20 billion although Saudi creditors have been largely satisfied after government intervention.
  • Corruption, close government links with family run corporations and preferential treatments for domestic creditors in bankruptcy are all hallmarks of crony capitalism.
  • Cronyism holds back Saudi Arabia’s ability to attract FDI to fund its infrastructure needs, but the unresolved dispute will also deter bank foreign bank lending and the ability of the Kingdom to raise finance through innovative means of Islamic finance such as sukuk bonds.

Doing Business in Saudi Arabia

Saudi Arabia has been ranked 22nd out of 185 countries in the world in terms of ease of doing business. [1] This relatively high overall global position is based on an assessment of a number of indicators and it reflects the economic and commercial reforms the Kingdom has been carrying out for more than a decade. In sharp contrast, Saudi Arabia has a very poor reputation for enforcing legal contracts and is currently ranked in 123rd place by the same high profile survey published annually by the World Bank. This low ranking will frustrate the Kingdom’s avowed ambition to attract foreign investment to diversify its economy away from an overdependence on petroleum.

The World Bank reports that it takes an average of 635 days to enforce a contract in Saudi Arabia compared to 370 days in the USA. In cases of insolvency, Saudi Arabia was also ranked well below its average ranking in 90th position showing an imbalance in the country’s progress to put in place the judicial reforms necessary to create a business-friendly environment. The World Bank found that it took an average of 2.8 years to resolve a bankruptcy (close to Senegal’s 3 years), but well below the 1.5 years in the United States which itself was only ranked in 16th position in this category. However, in terms of recovery rates following insolvency the report stated that creditors gained an average of 81.5 cents on the dollar in the US compared with only 28.0 cents in Saudi Arabia.  Aside from the statistics Saudi Arabia’s legal system, particularly in cases of bankruptcy where the assets pledged are within the Kingdom,, provides a system of commercial justice that is not blind. Instead in some insolvency cases it gives preferential treatment to domestic over foreign investors and creditors.

The uneven playing-field between Saudi and international creditors in cases of bankruptcy has been demonstrated in recent years by the failure to resolve an extremely large case of financial default by a number of interrelated Saudi entities to the satisfaction of foreign banks. The defaults were consequential on a dispute between the executives of two high-profile indebted Saudi business groups – Ahmad Hamad Algosaibi & Brothers (AHAB) and Saad Group. The complicated events in 2009 entangling these two groups has generated a dispute which is now entering its fifth year, but it has left the global banking system owed a total of US$20 billion with no resolution in sight. There has been a government approved settlement to provide some satisfaction for Saudi Arabian banks and other creditors, but the inadequacies of the country’s legal system means that foreign creditors are still fighting for redress in courts outside the country. This dispute between two Saudi Arabian business families both with close government connections demonstrates the extent to which crony capitalism is still a prevalent feature of business life in this autocratic Gulf Kingdom.


A Saudi Family Dispute

Recent events have shown that crony capitalism is alive and well in Saudi Arabia. A dispute between two of Saudi Arabia’s richest and most prominent families and their highly indebted conglomerates – Saad Group and Ahmad Hamad Algosaibi & Brothers (AHAB) - bears all the hallmarks of cronyism with a heady cocktail of defaults, opaque judicial procedures, government intervention and preferential treatment of domestic creditors. The dispute, which falls closely in line with Wei’s definition of crony capitalism, has had far-reaching consequences for international banks and for the reputation of the Kingdom.

The dispute surfaced at the end of May 2009 when the Saudi Arabian Monetary Agency (SAMA), the Kingdom’s central bank, unexpectedly froze the bank accounts of Maan al-Sanea, chairman of the Saad Group, and an investment company with interests ranging from real estate to health care and education, whose group assets were over US$30 billion at the end of 2008. No reason was given by SAMA, but the Saad Group’s credit rating was reduced from investment grade and was subsequently withdrawn. This prompted a liquidity crisis and the company began selling off its assets.

The cause of SAMA’s action anticipated an impending lawsuit filed by a Saudi leading family, the al-Gosaibis, against al-Sanea for unpaid loans and fraud. The central bank’s drastic action, taken before any legal hearing, would have needed the approval of King Abdullah. The connections between the al Saud royal family and the al-Gosaibi clan are very close and predate the founding of the modern state.  Al-Sanea is related to the al-Gosaibi family by marriage and his wife is the niece of Sulaiman Hamad Al Gosaibi, who headed the conglomerate Ahmad Hamad Algosaibi & Brothers (AHAB) prior to his death in February 2009.

Al-Sanea, who has his own political connections including the former Emir of the Eastern Province (EP), Prince Mohammed bin Fahd and Crown Prince Sultan [2] , founded Saad Group after his marriage and it has expanded rapidly in the last decade from its basis in real estate and is now a diversified conglomerate involved in construction, private education, hospitals and banking. In 2007, he acquired a 3.1% stake in HSBC Holding PLC for US$6.6 billion. In 2008 Forbes had listed him as the 62nd-richest person in the world.

After his marriage al-Sanea became a senior executive of an AHAB company - Money Exchange - but in July 2009 the al-Gosaibi family accused him in a legal action in New York of fraud with a potential total value of US$10 billion. It was alleged that he frequently falsified documents to divert funds for his own use. In a defence against an action by Masreq, a Dubai based bank seeking to recover debts from AHAB, it was alleged that al-Sanea had overseen 52 transactions totalling US$4.7 billion between Mashreq and AHAB involving the use of an account at Bank of America in New York. In 2009, both groups defaulted on loans made by scores of regional and international banks in the region totalling just under US$20 billion. The narrative of the dispute in the following years between the two groups is complex and the Al-Sanea and Al-Gosaibi businesses are so entangled that it is difficult to establish who is owed what and who is responsible. The impact of the dispute on the credit position of the international banks has followed the lines predicted by Wei as one of the consequences of crony capitalism.

Saudi creditors harmed by the dispute have received preferential treatment - another feature of a crony state. In September 2009 Muhammad al-Jassar, the governor of SAMA confirmed that the Saad Group had reached an agreement to settle with its Saudi creditors. Llocal banks owed as much as US$7 billion, agreed to take a haircut of around 15%. [3] The settlement and subsequent asset transfers demonstrated that SAMA allowed a lift on the asset freeze of Al Sanea and his companies. The dispute had tightened lending across the Gulf, particularly to Saudis. However, while Saudi creditors appear to be satisfied by the restructuring, international banks have been forced to seek redress in foreign and Saudi courts. For example, [4] in October 2011 French bank Societe Generale won a case in a London court to force one of Saad Groups subsidiaries to repay a US$50 million loan on which it had defaulted in July 2009.

This case highlights a disturbing element of the external impact of this dispute, namely the preferential treatment awarded to Saudi over international creditors. More worryingly, this conduct receives the implicit approval of the Saudi state. In an early move to resolve the dispute between the two families a Royal Committee was established in 2009. Its membership included the Saudi attorney general, judges, high-ranking officials and representatives of the central bank, the Saudi Arabian Monetary Agency and the financial regulator, the Capital Market Authority. There were also representatives of the ministries of the interior, commerce and justice.[5] The deliberations of the committee have never been published, but an indication of its final recommendations can be gleaned from filings made in Los Angeles by al Gosaibi lawyers against an American executive of The International Banking Corporation, a Bahraini bank which collapsed in 2009.  

The Royal Committee is reported to have recommended that the dispute was a private affair between the al-Gosaibi family and al-Sanea, which must be settled by Saudi law. Al-Sanea was to complete the restructuring agreed at the end of 2009 with Saudi banks, but no mention was made of foreign creditors. It is reported that the committee only ‘allows creditors "operating in the Kingdom" the right to bring legal action against both parties to get their money back.[6]


The Economic Impact of Crony Capitalism

Those who study the economic impact of cronyism would not be surprised by this dispute and the damage it is causing both to unsatisfied creditors – the international banks that had extended loans to the two groups – and to the image of Saudi Arabia itself. Crony capitalism is not only ethically dubious and anachronistic, it is also inefficient.  It has been defined as:

“…an economic system in which the adjudication of commercial disputes as well as the allocation of resources are generally made to favour those who have a close relationship with political leaders or government officials (by blood or by bribes). It is a system in which connection trumps competence, and money supersedes merit.”[7]


Apart from the lack of transparency of its legal system in cases of insolvency noted in the World Bank’s Doing Business league table further evidence of the existence of crony capitalism is suggested by the Kingdom’s international position in terms of perceptions of corruption. Transparency International ranked Saudi Arabia in 66th position in the world out of 176 countries surveyed. Shang-Jin Wei carried out an in-depth multinational empirical study of crony capitalism with data from 103 countries over a twenty year period and suggested that the existence of cronyism and corruption are highly correlated since:

“…crony capitalism almost always implies a widespread corruption as private firms and citizens in such an environment would find compelled to pay bribes to government officials in order to achieve anything.”[8]


-Wei also found that cronyism has a negative impact on sustained and balanced development since it discourages long-term and productive direct foreign investment. He also found, however, that there was a positive correlation between cronyism and international bank lending implying that the companies and citizens of more corrupt countries tend to finance investment more through bank debt than other forms of funding. This can affect the composition of the capital stock in ways that are not favourable to a country and the money borrowed is often used either channelled abroad or used for speculative investments in real estate and commodity trading.

In Saudi Arabia perceived cronyism holds back the country’s economic development hampering attempts to diversify the economy away from its overreliance on the petroleum sector. Although the country had a GDP per capita of US$21,200 in 2011, petroleum activities still accounted for around 80% of government income, 45% of GDP and 90% of export earnings. This imbalance is being imperfectly addressed as long as the country does not treat foreign creditors fairly. Indeed, there is also evidence that crony capitalism discourages the influx of foreign investment that will be needed in Saudi Arabia to create employment in the medium-term.

Saudi Arabia has been undertaking reforms for more than a decade to move the country towards having a more open, market-focused economy. The Saudi Arabian General Investment Authority (SAGIA) was established in April 2000 to provide services and facilities to promote investment and economic development in the Kingdom. The pattern of FDI shown in Chart 1 demonstrates the success of Saudi Arabia in attracting FDI after the creation of SAGIA, but continuing uncertainty about Saudi Arabia’s commercial judicial system appears to be counteracting the initial successes. Although Foreign Direct Investment (FDI) in Saudi Arabia rose strongly from 2005 onwards the most recent report from SAGIA shows that annual inward FDI declined from a peak of US$38.2 billion  in 2008 falling to US$28.1 billion in 2010. More recent data from the United Nations Conference on Trade and Development estimates that FDI into Saudi Arabia fell sharply by 42% to reach US$16. 4 billion in 2011 According to Saudi sources in 2010, the largest single country source of investment was the USA with 14.7% of the total followed by France and Kuwait accounting for 13.6% and 8.7% respectively.[9]



Neither is the imbalance of inward capital into a country which is weighted towards bank loans necessarily favourable to the lenders themselves who may be chasing short-term business since as Wei argues:

“…there is a limit on how much international arbitration or court proceedings can help to recover the assets, as there is a limit on how much collateral the foreign creditors …can seize as compensation.7


This is exactly what has happened in the Saad Group- AHAB case. A significant aggregate value in loans has been extended by international banks to the two Saudi based family run conglomerates, but after their default whereas the claims of some domestic creditors have been addressed following government intervention, not a judicial ruling those of non-Saudi creditors have been completely ignored. This is an unsatisfactory situation. A country wishing to take advantage of the benefits of belonging to multinational organisations like the WTO must meet its obligations. Furthermore, if international banks are holding back from extending credit to Saudi companies as a result of the financial mess following the defaults, this is providing an opportunity for domestic lenders who are assured a greater level of security by the Saudi legal system. Data published by SAMA, the Saudi central bank, show that total bank credit extended to the private sector in local currency has soared from 701.7 billion riyals in 2009 to 951.0 billion (US$253.6 billion) by the end of 2012.[10]


Funding Development through Islamic Finance

It has been estimated that Saudi Arabia will need to spend around US$400 billion on infrastructure over a five year period and the government’s officials have been looking for foreign partners to provide funding. [11] Membership of the WTO was also seen as part of a programme to attract foreign investment. As part of this initiative six "economic cities" were established as focal points in different regions of the country. On the country’s accession to the WTO the Saudi Arabian Minister for Commerce and Industry, Mr Hashim Yamani, stressed the importance of the WTO in the context of a reform programme instituted to improve the business climate for foreign and domestic business.  He said:

This is a high point in the programme of economic and structural reform that Saudi Arabia undertook…The accession will enhance the business environment in Saudi Arabia by adding more transparency and predictability. This we expect to lead to more investment and job creation." [12]

The government’s reforms have been aimed at job creation for Saudi nationals, mainly for reasons of political stability. If the official statistics are to be believed while nearly 8 million foreign nationals provide an essential role in the Saudi economy, unemployment among Saudi nationals (males only) was 10.5% last year, but unofficial estimates place the figure higher at nearly 25%, what is more unemployment among young people is likely to be higher. [13]

Finding employment for its relatively young population, the median age is only 25.7 years [14], is a government priority in Saudi Arabia... Many young Saudis lack the education and technical skills the private sector needs, so the government has substantially boosted spending on job training and education. At present since nearly 90% of Saudis in employment work for the government, an expansion of the private sector is essential to absorb those trained without leading to social disaffection. A similar trend can be witnessed in Abu Dhabi which has achieved some success in diversifying its economy (See Boyfield (2012). [15]

One source of finance is to tap into the growing market in Islamic finance particularly sukuk debt securities. In January, 2012 the General Authority of Civil Aviation (GACA) in the Kingdom raised US$4 billion sukuk in sovereign debt, although Saudi banks have been selling sukuk securities through Saudi British Bank for some years. The GCC sukuk and a number of smaller issues allowed the Kingdom to take second place after Malaysia in terms of global sukuk issues in the first half of 2012 as shown in Chart 2.


Sukuk bonds are a relatively new form of financial security. The Islamic Fiqh Academy at a conference meeting in February, 1988, legitimized the concept of a sukuk, by ruling that subject to proper legal documentation:

 ‘.. any collection of assets can be represented in a written note or bond; and  that this bond or note can be sold at a market price provided that the composition of the group of assets, represented by the security, consists of a majority of physical assets and financial rights, with only a minority being cash and interpersonal debts.’[16]


The first Sukuk originated from a non-Islamic company, Shell MDS, although it raised RM 125 million in Malaysia. From its small beginnings in 1990 the sukuk sovereign and corporate debt market now stands at a market value of well over US$100 billion.  Since then the sukuk market has grown rapidly after shaking off a downturn associated with the global financial crisis. In 2001, US$1,172 million of sovereign and corporate sukuk were issued according to the Islamic International Financial Market[17]. In fact, the value of sukuk issues grew to US$48.8 billion in 2007 before falling to US$18.6 billion in 2008. Growth in the market returned strongly in 2009, with a 38’% increase in issuance to US$25.7 billion. By 2012 new issues in the market were estimated to have topped US$121 billion as shown in Chart 3.



The market’s revival was led by Malaysian domestic issues, accounting for 72% of sukuk issuance by value by 2011 with the remainder split between Sudan, Pakistan, Indonesia, Brunei, Bahrain, the UAE and Saudi Arabia.[18] However, despite the robust growth in this market and the Saudi state’s ability to tap into it relatively successfully, investor appetite, particularly from non-Saudi’s for corporate sukuk’s may well be limited as a result of the opaque Saudi legal system in cases of insolvency and its preferential treatment of foreign creditors. The uncertainties arise from a US$650 million sukuk default in 2009 which stems from the same dispute between Saad Group and AHAB that has left international banks with a US$20 billion deficit in their balance sheets.


Sukuk Defaults

The question of the nature of relevant assets is essential to Islamic finance. Sukuk securities are based on shari’ah compliant structures which avoid the payment of a coupon or interest which is forbidden. Furthermore, pure financial instruments cannot be traded under shari’ah, so sukuk securities have relevant assets of either real estate, capital equipment or a commodity which are held in a Special Purpose Vehicle (SPV) which issues the debt securities. The asset must be specified in the contractual documentation so that  when investors buy and sell sukuk securities in a secondary market they are, in effect, trading their rights to receive income from a real underlying assets and not a stream of income specified by the coupon. There is, therefore, a subtle difference between conventional bonds which may be asset backed with the assets as collateral and sukuk, where the bond holder has a right to a share of the services provided by the asset. Over the full term to maturity sukuk securities can effectively mimic the main characteristics of similar length conventional bonds and price comparisons can be made with yields reflecting for both types of security the risk weighting of the issuer based on the probability of default. However, it is in the actual eventuality of default that significant differences occur.


The sukuk market, because of its relative youth, is particularly vulnerable to information shocks:  the limited number of defaults so far and the immaturity of rating systems means that cases where investors are treated unfairly will have a magnified impact on the future growth in the market. So far, there is no global standardized contract and documentation process relevant for this product, consequently   there is no consensus of countries abiding by one set of rules and this is causing uncertainty. While Malaysia’s legal system provides protection to sukuk investors a series of high profile sukuk defaults in the Gulf such as Investment Dar, Saad Group (Golden Belt) and Dubai World’s Nakheel Sukuk in 2009, as well a s the East Cameron Sukuk in the US provoked a debate on investors’ protection and rights. In Saudi Arabia, the subsequent history of the Saad Group default illustrates another example of the impact of crony capitalism in Saudi Arabia where legal uncertainty could damage the sukuk market.

The Golden Belt 1 case will prove a test case of the impact of a default event (a dissolution event in a sukuk trust) on a sukuk security within the Kingdom. In May 2007, a subsidiary of Saad Group raised US$650 million through the sale of Islamic securities which were subsequently traded on the Bahrain Stock Exchange. The notes were structured around real estate in Saudi Arabia that was leased to the Bahrain-based Golden Belt 1 Sukuk Co,. a special purpose vehicle, with a Declaration of Trust over the leased assets made on 15 May. In turn, the leased assets were parcels of land in Saudi Arabia all under the unencumbered legal ownership of Mr Mann Al Sanea, the chairman of Saad Group. A series of Promissory Notes were signed by al-Sanea as chairman of Saad Group at the time of the issue in order to guarantee the rental payments from the parcels of real estate. Although it was noted that  the calculation of the payable rental amounts were not directly linked to the value of the land parcels and that this involved a risk that the amount of the payments could be challenged in a Saudi courts apply the principles of equity, this risk is mitigated by the existence of the Promissory Note. Finally, the issue document stated that although the security was issued in Bahrain that The Promissory Note will be governed by the laws of Saudi Arabia and that the Negotiable Committee of Saudi Arabia has jurisdiction to hear all disputes relating to the Promissory Notes. These assets were vulnerable to the asset freeze resulting from the dispute with AHAB. Saad Group was rated at BBB+ by Standard & Poor’s and baa1 by Moody’s rating agencies and the bond certificates received the same ratings.



Saudi Arabia’s Economic and Investment climate

A lack of resolution for international creditors in the Saad and Al Gosaibi dispute would be extremely harmful to the country’s proclaimed investor-friendly image and set back the progress achieved by those reforms already enabled.

The broader dispute and the outstanding sums still owed to international banks shows that Saudi Arabia’s domestic economy has been effectively captured by rent seeking individuals and families who are nurtured by the autocratic political system. This creates an impasse because in the short-term real reform which would create a level playing field internationally is hampered by the need to keep these groups in business instead of facing the employment consequences of a real default and a seizure of their assets. In the longer-term, the resultant cronyism hampers the ability of Saudi Arabia to attract the investment necessary to address its severe and growing social problems.

The existence of family dominated business conglomerates based on concessions, government and corporate patronage and corruption reduce competition in the Kingdom and hold back the creation of a dynamic private sector. It has been noted that unemployment among Saudis is high and probably higher than revealed by official figures. An indication of this is provided by estimates of the incidence of poverty in the Kingdom where the lack of accurate figures and official statistics makes it a controversial issue. According to recent statistics, the government announced that the social security services have helped around 800,000 cases where a case is a unit indicating one Saudi family, with the average family size in Saudi Arabia being between six to eight people. [19] The Ministry of Social Affairs announced later on that its services would include families of up to 15 persons. This means that the number of poor people in Saudi Arabia exceeds six million out of an estimated population of 20 million. The sukuk market and international lending could be an important means of helping to fund the over US$219 billion of announced 2013 expenditures on social welfare and infrastructure projects the Saudi state estimates to be necessary. 




International Islamic Financial Market (IIFM), (2011), Sukuk Report (second Edition)

Wei, Shang-Jin (2001) Domestic Crony Capitalism and International Fickle Capital: Is There a Connection? International Finance, 4:1 pp 15-45.

Doing Business (2013), Smarter Regulations for Small and Medium-Sized Enterprises, World Bank,

Wilson, R (2004) Overview of the Sukuk Market’ in Adam, N.J. and Thomas A Your Guide to Issuing, Structuring and Investing in Sukuk, Euromoney.




[1] The World Bank’s Doing Business Report which assesses the strength of a country’s business friendly climate across 185 countries in terms of a large number of relevant variables including the legal protection for investors ranked Saudi Arabia in 22nd position in 2012 before Macedonia FYR and after Estonia.  This was little changed from 2008 when the country was ranked in 23rd position. See World Bank Doing Business Report (2013)


[2] See



[5] See


[7] See Wei (2001)

[8] See Wei (2001).

[9] Source SAGIA 2011

[10] See SAMA, Quarterly Bulletin Q4, 2012.

[11] See US-Saudi Forum, Chicago, 2010.

[12] See


[13] The unemployment Rate in Saudi Arabia is reported by the Central Department of Statistics and Information. Historically, from 1999 until 2010, Saudi Arabia Unemployment Rate averaged 10.1% reaching an all time high of 12.0 Percent in December 2006 and a record low of 8.1% in December of 1999. The unemployment rate measures the number of people actively looking for a job as a percentage of the labour force.

[14] See CIA World Factbook,

[15] See Abu Dhabi: Real Progress Achieving a Diversified Econmy -

[16] See Wilson (2004)

[17] See IIFM (2011)


[18] See