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Arab Banking Systems: Towards a Common Model?

19.06.2011Estelle Brack

Despite their differences and heterogeneity, Arab countries have much in common: Arabic as official language and dominant culture, as well as political, economic and legal influence from neighboring Western European countries and the United States. Another common feature is their banking systems which, although deep, are still vulnerable and play an insignificant role in financing the local economy. The political changes underway in some Arab countries could provide a justification for in-depth reform.

The region’s countries embarked on banking and financial sector modernization almost at the same time, firstly, following the opening up of trade for natural resource-exporting countries or at the time of their independence. This was followed, in the 80s and 90s, by macroeconomic and structural reform programs implemented within the framework of the Washington Consensus. Their gradual integration and adherence to international rules (such as those of the Basel Committee) also contributed to the modernization and development of banking sectors in Arab countries, to the extent where, today, we are talking of a convergence towards global systems. The extension of banking services, governance, risk management, development of retail banking and the financing of SME are today the primary concerns, and solutions are derived not only from the West, but also from within the region. The regional and international expansion of Arab banks, especially towards the African continent, illustrates this, with Moroccan and Lebanese banks serving as examples.

In many countries, the public sector still plays a dominant role within the banking sector, be it in terms of banking institutions or businesses that are beneficiaries of bank financing. And, even in countries where most institutions are privately-owned, competition remains low. As a result, even when stable, the financial system performs poorly, with high rates of bad debts compared to countries with similar income levels, with a large proportion of the population having limited or no access to banking services.

Furthermore, the demand for and supply of finance for small and medium-sized enterprises are not in equilibrium, and this is due, in part, to a lack of trust between the banker who does not have reliable information on the company’s health and the SMEs that are not always able to present a coherent business plan and are not always inclined to seek external financing. These are some of the priority areas that are common to countries within the region. Major initiatives have been taken to bring bankers closer to SMEs, which represents over 90% of local production.

The subprime crisis has led Gulf States to redefine the global distribution of their investments in favor of the Mediterranean region whose recent gains are higher than potential losses, with real risk estimated at only 2%. Since 2007, the Maghreb region is once more benefiting from a surge in investments from Gulf States. A testimony to this is a listing of investment projects in Maghreb countries by financial and banking institutions of Gulf States.

Arab banking systems are today still heterogeneous, but they have more in common than with other regions of the world. Bank financing is very much geared towards affluent businesses and segments of the population, concentrating the majority of their assets in countries where a significant proportion of the population lives below the poverty line. Islamic financing represents a small proportion of the financial assets; rather developed in Gulf countries, it accounts for 34%, at the most, in Saudi Arabia, and it is still marginal throughout the Mediterranean region. Given its size, it serves as a “proximity solution”, alongside microcredit which, for its part, serves very small businesses on more expensive terms and with fewer guarantees for the client, compared to the banking sector. There should therefore be a “mesocredit” solution there are many initiatives to find a solution to this dilemma; extending banking services to capture savings, refocusing credit decisions on the cash flow potential of the project to be financed in the first place and, if guarantees are needed, building a public guarantee system.

However, we should certainly not copy models tested in the West and apply them to distinctly different development goals and economic fabrics, half of which fall within the informal sector. We need to innovate, indeed re-invent, certain aspects of banking.

Handicapped by restrictive offers and a lack of confidence, the full potential of banking in the Arab region is yet to be attained in order to properly allocate considerable resources for projects that are likely to ensure the pursuit of economic and social development.

Considering that it follows a relatively homogeneous trend gives development policies a regional dimension potential, including across the entire African continent.

Systèmes bancaires des pays arabes

Estelle Brack, Assistant delegate in charge of international affairs & Senior economist for the French Banking Federation / Professor at Université Paris 2 - Panthéon Assas in the LLM in Arab Business Law.

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