Analysing the Impact of Government Policy on Derivatives (Treasury Bills and Bonds) in the Banking Sector (Saudi Arabia)

Abstract

This dissertation examines the effect of governmental policies on derivatives, particularly treasury bills and bonds, in the banking industry of the Kingdom of Saudi Arabia (KSA). This study is motivated by the lack of knowledge on how the governance structures affect these products' trading, use, and efficiency in the context of Saudi Arabia’s Vision 2030, with its focus on developing the financial sector. Following a qualitative secondary research methodology, this dissertation uses a systematic literature review to review the current literature and reports. The study shows that the policies are formulated by Saudi Arabia’s Central Bank (SAMA) and the Capital Market Authority (CMA) and are Sharia-compliant for ethical risk management. The following regulations have affected how Saudi banks operate and their financial outcomes by incurring compliance costs and flexibility in using derivatives. The challenges that are revealed during the study include the restrictions on certain sorts of activities and the rise of operating costs because of compliance. On the other hand, it also shows that more specific areas for banks’ development are related to the improvement of risk management and the usage of more sophisticated financial instruments, while realizing the existing legislation. The findings also show that while high standards of regulation and ethicality are attained by the regulations, such a system requires tactical adaptations to maintain the synergy between compliance and profit. Implications for the utilization of derivatives and improvement of the regulatory setting are also offered to encourage the sustainable development of Saudi Arabia’s banking industry.