Saudi Arabia's Ripple effect could lead to $400m savings

Cost of remittances also set to fall with the use of distributed ledger technology, according to Moody's
Saudi Arabia's Ripple effect could lead to $400m savings
By Staff writer
Wed 21 Feb 2018 09:58 AM

The agreement signed by Saudi Arabia’s central bank to enable local banks to deploy xCurrent for cross-border payments could lead to savings of up to $400 million, according to Moody’s Investor Services.

Ripple signed an agreement with the Saudi Arabian Monetary Authority (SAMA) to create the pilot programme for cross-border payments.

The pilot programme, the first of its kind to be launched by a central bank, allows participating Saudi banks can explore a solution for cross-border transactions using distributed ledger technology (DLT, or blockchain). SAMA and Ripple will also provide programme management, training and other support to banks.

The pilot programme will test the system with a small number of banks and transactions, and allow banks, regulators and technology incubators to learn and adjust before ultimately adopting the technology for a wider use.

“A successful pilot likely will lead Saudi banks to integrate DLT into their existing payment infrastructure, improving payment transparency and efficiency,” Moody’s said in its Credit Outlook, written for research clients.

“Saudi banks will potentially improve their profitability on cross-border transactions by reducing the cost of each transaction, while gaining revenue with higher volume as the customer experience improves with the saving of money and time.”

Moody’s estimates that even a 10% reduction in the cost of completing and managing a cross-border transaction will translate to savings of roughly $200 to $400 million per year system-wide.

Savings on remittances

Saudi Arabia, like other GCC countries, has a large number of migrant workers who make a large number of low-value transactions when sending remittances to their home countries. Moody’s said the user of DLT could be of particular value in such situations.

“The World Bank estimates that fees on remittances average a high 7.1% of the transaction volume, and we estimate that cost could fall 50% with DLT,” Moody’s said.

Even with a successful pilot, Moody’s does not expect an imminent widespread use of DLT in cross-border payments, either in Saudi Arabia or globally.

“SAMA is not looking to shake up its financial system, but rather expect DLT solution to act as an intermediary between Saudi Arabia’s banks and global banks in the completion of transactions,” said Moody’s.

It added that last year the Bank of England completed a proof of concept with Ripple, broadly concluding that DLT showed promise at enabling two separate real time gross settlement systems (the infrastructure that allows real time payments within a country or a currency block) to communicate and achieve seamless global interoperability.

“The pilot program will test the system with a small number of banks and transactions, and allow banks, regulators and the technology incubators to learn and adjust before ultimately adopting the technology for a wider use,” it said.

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Last Updated: Wed 21 Feb 2018 09:27 AM GST

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