Banking & Capital Markets

The Middle East is one of the world's fastest growing markets in the banking and capital markets sector. The region's financial services sector is in the midst of a massive overhaul. With populations getting younger, better educated and more demanding; increasing diversity in financial products and services; and growing regulatory requirements for better monitoring of processes and developing secure financial systems, banks and financial institutions across the region are investing heavily to match or outstrip their international peers.

The banking sector captures the development of commercial bank markets and the ease of access to bank credit. The choice of variables also reflects the assumption that commercial banks that operate in competitive environments (with less direct government intervention, low market concentration, and where foreign banks are allowed entry) are likely to be more efficient. In a few countries, such as many of the GCC countries, the banking sector is well developed, profitable, and efficient. In many of the other countries, the banking sector is dominated by public sector banks, which are characterised by government intervention in credit allocation, losses and liquidity issues, and wide interest rate spreads (or spreads in rates of returns). In more than half the countries, the banking sector is highly concentrated, with assets of the three largest banks accounting for over 65 percent of total commercial bank assets, and the entry of new banks is slow.

While the role of the financial sector in promoting growth may have been contested in the past, it is now widely recognised. The evidence is that a large and competitive banking sector, and liquid and active equity and debt markets, operating according to market principles and intermediating savings (domestic and foreign) for market-based investment, are strongly associated with higher growth rates. In addition, developed financial markets tend to promote efficiency in allocating investments, and hence contributing to the productivity growth by:

• Improving the management of risk
• Identifying productive projects and efficient firms
• Promoting corporate governance
• Mobilising savings, and
• Mitigating the adverse effects of financial shocks.

More companies are seeing the advantages of flotation while some Arab investors, who had until recently automatically looked to the United States and Europe, are now putting a portion of their money into local stock exchanges.

This trend is being helped by the readiness of most Middle East governments to allow foreign investors to buy shares and the replacement of the traditional over-the-counter markets with formal exchanges, which are independently and more rigorously regulated. A further boost has come from a new generation of investment bankers, who have opened a series of funds specialising in Arab markets and the readiness of more Gulf countries to accept these instruments.