Dispute signals new era of transparency - economist

One of the region’s leading economists has described the public dispute between two of Saudi Arabia's most prominent family firms as “extremely remarkable”, and said it is likely to usher in a new era of transparency in the region.

The practice of “name lending” has been widespread in the Gulf, where companies have been able to borrow money based solely on their name recognition and reputation.

But as the dispute between Saudi’s Algosaibi Group and billionaire Maan Al-Sanea moved to a New York state court and banks braced themselves for losses on significant exposure to the two companies, analysts said private firms are going to have to become more open or have their financing cut off.

“It’s not the only family business out there that has thrived on name lending. Quite a few banks are worried now about how safe their lending transactions are,” said Eckart Woertz, programme manager of economics at the Gulf Research Center.

“I don’t know how bad it is, but it’s really bad when they start to sue each other. The big question is: is it an exception?”

The two month-dispute between industrial conglomerate Algosaibi and billionaire Al-Sanea on Friday went public as the former filed a suit against Al-Sanea in New York state’s supreme court, charging him with embezzling $10 billion from the company, which is controlled by his wife’s family.

Friday’s move by Algosaibi marks a departure from the private culture of the region’s family-owned companies, who rarely settle disputes through the courts.

“It’s extremely remarkable. Either it’s because it’s so bad or there’s an increasing trend towards a more corporate structure and a more professionalized approach by the second management generation. They’re saying: now we need to take care of our own company and we do that by ensuring our legal rights,” said Woertz.

Local and international banks are estimated to have around $10bn in exposure to the beleaguered Algosaibi Group and Al-Sanea controlled Saad Group, who deny having any business links with each other. However, Maan Al-Sanea until recently headed Algosaibi’s workers remittance unit and is married to the daughter of one of the group’s founders.

“Going ahead, banks will be more inclined to demand safeguards and securities for their lending operations,” Woertz said.

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