Have you ever wondered why governance in banks and financial institutions is considered a critical necessity? Because it is the true safeguard for the stability of the financial sector, enhancing transparency, and managing risks with confidence.

In this article, we will thoroughly explore the state of governance in the Saudi financial sector, its importance, the main challenges it faces, and the best recommendations to ensure its effective implementation.

 

Introduction to The Special Nature of Governance in the Financial Sector

What makes governance in the financial sector stand out from other economic sectors is its unique nature. Financial institutions—especially banks—manage clients’ and depositors’ funds and bear significant responsibilities toward the national economy as a whole.

That’s why governance in this sector goes beyond managing the relationship between the board of directors and executive management. It also encompasses strict compliance with regulations, efficient risk management, and striking a balance between profitability and transparency.

Governance in the financial sector takes on a distinct character due to:

• The high level of risk associated with financial services.
• The critical role that banks play in economic stability.
• The evolution of international regulations like the Basel Principles.
• The need for precise and effective oversight to prevent corruption and fraud.

This introduction to the special nature of governance in the financial sector highlights the importance of understanding the full framework of governance before diving into its details—something we’ll explore in the following sections of this article.

 

What is the Importance of Governance in Banks and Financial Institutions in Saudi Arabia?

Governance in banks and financial institutions contributes to improving performance efficiency, ensuring financial sustainability, and protecting the funds of depositors and shareholders.

Promoting governance is one of the pillars of Saudi Arabia’s Vision 2030, which aims to develop a more transparent financial sector.
Major banks such as the Saudi National Bank and Al Rajhi Bank have adopted advanced governance practices, which helped elevate their credit ratings and strengthen their reputation in global markets.

The importance of governance in banks and financial institutions in Saudi Arabia includes:

• Enhancing investor confidence and global market credibility.
• Ensuring compliance with local and international regulations.
• Reducing improper financial practices.
• Supporting the transition to digital governance and the use of AI in decision-making, which highlights the role of digital transformation in governance.

Regulations Governing Governance in the Saudi Financial Sector

The regulations governing governance in the Saudi financial sector are subject to close oversight by multiple regulatory bodies, most notably the Saudi Central Bank (SAMA) and the Capital Market Authority (CMA).

These entities have issued several regulatory frameworks, such as the “Bank Governance Rules” and the “Corporate Governance Regulations for Listed Companies,” which aim to structure the relationship between boards of directors and executive management while reinforcing accountability.

These regulations are also closely aligned with Saudi Vision 2030, which aspires to build a strong and transparent financial sector.
Understanding the regulations governing governance in the Saudi financial sector is a critical element in assessing how well institutions adhere to international standards.

 

What is Role of the Board of Directors and Oversight Committees in Banks?

The role of the board of directors and oversight committees in banks is central to the governance system. The board forms the backbone of the governance structure.
It is responsible for setting general policies, approving strategies, and monitoring financial performance. Oversight committees—such as the audit committee and risk committee—ensure that the bank adheres to legal and ethical standards.
Banks that rigorously apply these practices are better equipped to handle crises and maintain financial stability.

 

Risk Management and Compliance in Financial Institutions

Risk management and compliance in financial institutions are not merely preventive measures—they are a foundational part of governance in banks and financial institutions.

This function ensures adherence to both local and global standards, such as the Basel III framework. It also works to reduce risks related to liquidity, credit, and operations.
Saudi banks have increasingly focused on establishing dedicated risk departments and developing advanced analytical tools to monitor and proactively manage risks, thus supporting overall financial stability.

Effective risk management and compliance improve the institution’s ability to respond to sudden changes and reduce exposure to market risks.

 

What are the Challenges Facing Governance in the Financial Sector?

Despite significant progress in implementing governance frameworks, the challenges facing governance in the financial sector remain present and pressing. Some of the most prominent of these challenges include

1-Complex Regulations and Overlapping Regulatory Bodies

The financial sector is overseen by multiple authorities, including the Central Bank, the Capital Market Authority, and the Zakat, Tax and Customs Authority, among others.
This diversity can lead to duplication of requirements or conflicting directives, complicating compliance and slowing down decision-making.

 

2-Difficulty in Balancing Profitability and Transparency

Banks aim to maximize profits, which is legitimate, but sometimes this goal clashes with transparency requirements.
Disclosing sensitive information may affect competitive advantage, leading some institutions to hesitate in revealing all the details.

 

3-Weak Organizational Culture in Some Institutions

Even with policies in place, the real challenge lies in the lack of actual commitment to governance culture within the organization.
Some employees or leaders may view governance as a formality, reducing its practical effectiveness.

 

4-Shortage of Qualified Personnel in Governance and Risk Fields

With the increasing complexity of regulatory demands and operational risks, financial institutions need highly skilled professionals in governance, risk management, and compliance.
However, the Saudi market faces a shortage of such talents, which creates an obstacle to the ideal implementation of governance practices.

Recommendations to enhance Governance in Financial Institutions

Key recommendations to enhance governance in financial institutions include:

• Training and qualifying board members and committees.
• Developing internal control and compliance systems.
• Embracing digital transformation technologies in governance.
• Upholding principles of transparency and disclosure.
• Activating independent oversight and regularly reviewing policies.
• Involving stakeholders in the decision-making process.
• Using performance indicators to measure governance effectiveness.
• Updating internal policies to match new regulations.
• Building a corporate culture based on integrity and accountability.

FAQ

Q: What is governance in banks?

A: It refers to a set of rules and practices that govern the relationship between the board of directors, executive management, and shareholders to ensure transparency, efficiency, and risk reduction.

Q: Why is governance important in financial institutions?
A: Because it protects client and investor funds, reduces the risk of financial misconduct, and supports the stability of the banking system.

 

Q: How does governance help entrepreneurs reduce financial risks?
A: Governance provides a transparent framework for oversight and decision-making, which minimizes financial errors, ensures compliance, and protects entrepreneurs’ investments from unnecessary risks.

 

Q: Does Saudi Arabia follow international governance standards?
A: Yes, including the Basel Committee principles and the OECD’s corporate governance frameworks.

 

Q: What are the biggest challenges in financial sector governance?
A: They include regulatory complexity, resistance to institutional change, and the lack of qualified professionals in governance-related roles.

 

Conclusion

Governance in banks and financial institutions reflects a company’s commitment to transparency, accountability, and protecting stakeholders’ interests.
In a rapidly changing economic landscape, governance remains a core pillar for achieving sustainability and leadership in the financial market.

If your financial institution is seeking to enhance its governance and achieve organizational excellence, Eamak offers comprehensive solutions for building and developing effective governance systems—from policy creation and committee structuring to risk management and compliance.

Get in touch now with Eamak’s experts to design a governance framework that fits your institution and earns your clients’ trust.

Get in touch now with Eamak’s experts to design a governance framework that fits your institution and earns your clients’ trust.

By:Fatma Abu El-Ela