A Study of Scale Economies in Saudi Arabian Banks

Economists have paid a great deal of attention to the topic of economies of scale in commercial banks because of the considerable effects economies of scale may have on the market structure of these banks and the policy implications that may follow therefrom .Such policy implications may either call for more consolidation of commercial banks if economies of scale are amply present, or for greater competition otherwise. Most of the studies that have been conducted in this regard- particularly in western and other countries – have indicated a rather limited existence of scale economies in small banks and its absence for the most part in large banks .In the case of the Kingdom Saudi Arabia, which is the focus of the present study, our findings indicate the existence of considerable scale economies in Saudi banks. These findings are generally consistent with the results reached elsewhere in the literature on the subject. It is therefore recommended that Saudi policymakers adopt a policy aimed at greater consolidation of banks through expansion or mergers to realize greater efficiency in commercial banks and reduce costs. Such a policy may also reflect positively on the competitive ability of Saudi banks in the event of large international banks entering the Saudi market as anticipated under WTO auspices.