The GCC countries have ran important structural reforms aiming to diversify economic activities and providing job opportunities in the private sector. In this context, the banking sector will be one of the main concerned parties by sponsoring small businesses and easing the process of structural transformation in the Gulf.
Thus, the financial reform should remain on the top of economic policies lists; and while it’s still unclear whether the building of national leading entities will increase productivity and drop price rates, encouraging competition in markets according to a sound institutional and organizational frame should be among priorities too.
Over the past months, the World Bank has allocated a space to publish opinion articles by its managers and experts on the important role of the banking sector in the Gulf to overcome the crisis of oil prices drop.
In an article by Pietro Calice, senior financial sector specialist with the Finance & Markets Global Practice of the World Bank Group, on banks’ merging in GCC countries and competitiveness, the writer said the monetary markets in the Gulf have entered an important phase of merging operations that may comprise a possible reformation of this industry and its capacity on implementing big brokering activities.
This article came to highlight merging agreement hammered between two of the biggest banks in the Gulf, the National Bank of Abu Dhabi and the First Gulf Bank to establish a leading national entity and a regional banking central power with total assets worth USD170 billion.
In the Sultanate of Oman, talks between Sohar Bank and Zafar Bank on a possible merging operation reached an advanced stage. Merging operations are also expected in Qatar and Bahrain.
In fact, the constant drop in oil prices represents an obstacle for economic growth and the continuance of public financial conditions in the region, which affects banking systems.
Banks have faced increasing pressure on liquidity versus the flow of private and public deposits out of GCC countries, which has led interest rates to drop and the profit margins to erode; the capital reserves are considered strong but the quality of assets may collapse if oil prices continued their decrease for a long term.
The economic growth has witnessed more regression; therefore, merging operations may help in achieving profits in the fields of competence and eventually maintaining financial stability.
Calice pointed that merging operations in Gulf should not be implemented on the expense of competitiveness, saying that the global experiences have showed that the sound banking competitiveness generally enhance capacity of receiving funds and improving the level of financial brokering without affecting the stability of the banking system.
World Bank will issue a report soon on an analysis done regarding the expected damages on competitiveness in the GCC countries. The report will also cite many sectors that may require the concerned authorities to carry out investigative studies on this subject to provide needed solutions.
The World Bank carried out a study, in which it examined 23 sectors of manufacturing industries in 2002-2010, and has found evidences on how much competitiveness in the banking system of the GCC countries can affect the economic growth of industries that depend on external funding.
The main conclusions of these evidences have showed that industries that mostly depend on exterior funding achieve the best performance concerning its growth, and that sectors controlled by small companies are more damaged when the banking system is less competitive.
Evidences have also showed that reducing restrictions on banks activities, improving the environment of credit query, and implementing an efficient law for competitiveness may play an important role in enhancing growth in sectors that depend on the exterior funding.
These results have significant reflections on policymakers in the GCC, who seek to diversify economic activities and find options to improve the possibility of receiving fund for companies, particularly small and medium enterprises.
The study also concludes that competitiveness among banks is considered an important aspect in developing the financial sector and the non-oil economic growth in the GCC countries.
A report issued by the Global Investment House has showed that the total assets in Gulf banks have jumped by 5.6% in the Q1 of 2016 to reach USD1.3 trillions. Qatar banks have also witnessed the strongest growth in assets development by 11.8% followed by the UAE with 6.8%, Saudi Arabia banks by 2.2%, and Kuwait banks by 0.7%.
The House’s report has also showed that banks of Gulf region witnessed a healthy growth in loans by 8.7% and that Qatar is the leading country by 16%. Saudi Arabia has also authorized the establishment of 25 commercial banks, 12 banks out of them are national.