CHALLENGING TIMES AHEAD.Recent banking history in the Middle East has been characterised by rapid change and innovation in response to the demands of a sophisticated regional and international market place. Arab banks The modern system of Arab banks was created in Egypt in the late 19th century, with the campaign of modernizing the country. Today Arab banks are among the most pioneering in Developing Countries, and some are competitors to major international banks. enjoyed steady earnings in both 1996 and 1997 as economic growth and business confidence were boosted by firmer oil prices, averaging $19.82 barrel. Despite thriving private sectors across the Gulf, government spending Government spending or government expenditure consists of government purchases, which can be financed by seigniorage, taxes, or government borrowing. It is considered to be one of the major components of gross domestic product. exerts a powerful multiplier-effect on real economy. Higher liquidity leads to increasing private consumption and business spending. The collapsing oil prices, if sustained, and spill-overs from Asia's economic woes, pose serious risks. Real GDP Real GDP This inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices. Often referred to as "constant-price", "inflation-corrected" GDP or "constant dollar GDP". growth and export earnings in the GCC GCC: see Gulf Cooperation Council. (compiler, programming) GCC - The GNU Compiler Collection, which currently contains front ends for C, C++, Objective-C, Fortran, Java, and Ada, as well as libraries for these languages (libstdc++, libgcj, etc). region, which represents the most important of Middle Eastern markets are contracting. The plunge in government oil revenues of between 30-40 per cent will lead to a reduction in public sector contracts and slower payments or even arrears, as seen in Saudi Arabia Saudi Arabia (sä  `dē ərā`bēə, sou`–, sô–), officially Kingdom of Saudi Arabia, kingdom (2005 est. pop. during 1993-94. Deposit growth,
after the surge during 1995-97, could slow, but overall lending levels
to government agencies and the private sector could rise.
Interestingly, corporate lending frequently rises during a downturn in the oil market; this pattern has been particularly noticeable in Saudi Arabia. Higher government revenues, as seen in 1996-97, generally boost corporate liquidity and reduce the need for bank credit. Therefore, a plunge in government finances will generally increase demand on banks' liquidity. The US Moody's Investors Service Moody's Investors Service A leading global credit rating, research and risk analysis firm. Moody's Investors Service A leading firm engaged in credit rating, risk analysis, and research of fixed-income securities and their issuers. explains: "When the government delays payments to its contractors, those contractors have to increase their loan and overdraft facilities to keep themselves going. Private sector credit increases." The GCC governments will resort to higher borrowing from domestic banks for financing budget deficits this year and next. But increasing deficit financing deficit financing In government, the practice of spending more money than is received as revenue, the difference being made up by borrowing or minting new funds. The term usually refers to a conscious attempt to stimulate the economy by lowering tax rates or increasing through purchases of Treasury bills and development bonds could curtail lending to the private sector. However, the Arab banking Arab Banking Corporation was incorporated as a Bahrain joint stock company on January 17, 1980 through a special decree by the Amir of Bahrain. It obtained an offshore banking unit licence from the Bahrain Monetary Agency on April 7, 1980, and began operations in the same month. industry faces systemic risk Systemic Risk Risk common to a particular sector or country. Often refers to a risk resulting from a particular "system" that is in place, such as the regulator framework for monitoring of financial_institutions. because of its high exposures to the hydrocarbon industry and government deposits and projects. As oil revenues decline, business activity and opportunities contract in sympathy and as a result the asset quality of banks suffer. A recent US Moody's report has cautioned about the impact of a prolonged oil market recession on asset quality of Saudi banks by early 1999. Despite the risk of profit downgrading several Arab banks enjoy investment-grade ratings from international credit agencies. The Gulf banks are net creditors to the international banking community. Their foreign assets total over $61 billion, of which Saudi Arabia constitutes $26.42 billion and the UAE (Uninterruptible Application Error) The name given to a crash in Windows 3.0. In subsequent versions of Windows, a crash was called a "General Protection Fault," "Application Error" or "Illegal Operation." See crash in Windows and abend. $19.68 billion. The Asian contagion Contagion The likelihood of significant economic changes in one country spreading to other countries. This can refer to either economic booms or economic crises. Notes: An infamous example is the "Asian Contagion" that occurred in 1997 and started in Thailand. is already being felt in the Middle East, hitting demand for oil and petroleum products. There could also be reduced business for banks in Qatar and Oman, which have partly financed their natural gas development against guaranteed purchases by utility companies in South Korea, Japan and Thailand. Judging by the first-half results of most Arab banks, 1998 full-year net profits are likely to exceed 1997's results. But full effects of lower government capital spending capital spending Spending for long-term assets such as factories, equipment, machinery, and buildings that permits the production of more goods and services in future years. and reduced private sector's liquidity across the GCC region will more likely be manifested in the first or second-quarter earnings of 1999. A report by the National Commercial Bank (NCB (Network Control Block) A packet structure used by the NetBIOS communications protocol. ) shows net profits of the Saudi banks rose 12.78 per cent to $861.6 million in the first-half. But profits of the Arab world's biggest bank, the Arab Banking Corp; (ABC ABC in full American Broadcasting Co. Major U.S. television network. It began when the expanding national radio network NBC split into the separate Red and Blue networks in 1928. ) declined by 29 per cent to $49 million, largely due to hefty bad debt provisions on Asian exposures. The share prices of many banks are currently at an all-time low, resulting in expectations of future bearish Bearish Words used to describe investor attitude. A bearish investor believes that a particular asset or the market as a whole will decline in value. bearish earnings. The US capital market, a major outlet for Arab overseas private investments has also contributed to improved earnings in recent years. The steep corrections on the US stock market since mid-July has eroded capital gains, though valuation of banks' fixed income assets (US Treasury bonds) is benefiting from lower long-term interest rates. In addition, the bearish performance of regional stock markets this year will hit investment-earnings. Omani banks in particular are exposed to the Muscat Muscat, Maskat, or Masqat (all: mŭs`kăt, mŭs`kət), city (1993 pop. 533,774), capital of Oman, SE Arabia, on the Gulf of Oman. It is flanked by rugged mountains. bourse bourse (b  rs), term applied to a European stock exchange. The first international bourse was established in Antwerp in the 16th cent. .
The GCC-based banks accounted for 55 of the top 100 Arab banks in 1996, and represented 70 per cent of total capitalisation and two-thirds of assets. The Saudi banking sector, with $94 billion in assets, remains the Arab world's largest, followed by the UAE ($48.15 billion) and Kuwait ($36.25 billion). Generally, the quality of banking supervision is on par with OECD OECD: see Organization for Economic Cooperation and Development. countries. The 25 core principles of the Basle committee on capital adequacy and supervision are absorbed by Gulf central banks This is a list of central banks. Contents A B C D E F G H I J K L M N O P Q R S T U V W Y Z . The capital-adequacy ratios of Saudi banks averaging 21 per cent are among the highest in the world, well above the eight per cent (BIS) minimum. Management systems and controls have been strengthened in compliance with international accounting standards. Gulf banks are obliged o·blige v. o·bliged, o·blig·ing, o·blig·es v.tr. 1. To constrain by physical, legal, social, or moral means. 2. to conform with international norms on loan classification, risk-weighting, bad debt provisions and the treatment of principal roll-overs. Therefore, most Arab banks are not saddled with bad debts, unlike Asian banks, where non-performing loans constitute on average 29 per cent of total credit in the system. However, higher capitalisation is necessary since most banks are over-reliant on short-term deposits to fund their lending businesses. In Saudi Arabia one third of aggregate deposits are based on the Islamic interest-free concept. This enables banks to develop their asset bases and makes liabilities less sensitive to interest rate fluctuations. Clients, both institutional and individual, are increasingly demanding a wide range of financial services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. such as money market funds, securities funds, investment trusts, commodity-based and real estate funds. Leading banks are offering high-tech products and services, such as internet-telephone banking, automated telling machines (ATMS) and electronic funds transfer See EFT. (application, communications) electronic funds transfer - (EFT, EFTS, - system) Transfer of money initiated through electronic terminal, automated teller machine, computer, telephone, or magnetic tape. at point of sale (EFTPOS EFTPOS - Electronic Funds Transfer Point of Sale ) operations. In Saudi Arabia there are over 1539 ATMs and 2.8 million electronic cards in circulation. Major banks have developed expertise in futures and options FX trading. Saudi banks, including NCB, AI-Rajhi Banking & Investment Corp. (ARBIC), and Saudi American Bank are offering insurance products and Islamic acceptable credit cards, and mortgages, based on a 10 years Ijara (leasing) agreement Top-tier banks have diversified from traditional business of retail banking and trade finance into niche areas such as investment and Islamic banking Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. , project finance, and participation in global syndications. A GROWING CALL FOR BANK MERGERS Arab banks even collectively do not form a major force in the global market. The combined $595 billion assets of the 350 Arab banks at end 1996, slightly exceeded Deutsche Bank's ($582 billion), but fell below Bank Tokyo Mitsubishi's ($653.4 billion). Of the top 100 Arab banks assets of only seven exceed $10 billion. Dr A El-Hindi, Secretary General of the Union of Arab Banks, says the region remains overbanked. The small capital base of most banks deters them from participating in project loan syndications Loan Syndication The process of involving numerous different lenders in providing various portions of a loan. Notes: Mainly used in extremely large loan situations, syndication allows any one lender to provide a large loan while maintaining a more prudent and manageable , or undertaking funding of hydrocarbon development projects in Qatar or Oman. Global competitive pressures, the high cost of new information technology and the need for achieving economies of scale and expertise in lucrative areas of international portfolio management, and structured project financing Project financing A form of asset-based financing in which a firm finances a discrete set of assets on a stand-alone basis. should push Arab banks towards consolidation, via mergers and acquisitions (M&As). But the region remains slow in following the global trend towards M&As. The newly merged banks so far are, United Saudi Bank and the Commercial Bank of Oman. The NCB is considering strategic alliances with National Bank of Kuwait The National Bank of Kuwait first opened in Kuwait in 1952 to become the first national bank in the Gulf Region. NBK was founded by Khaled Zaid Al-Khaled. NBK is currently the largest financial institution in Kuwait and one of the leading banks in the middle east with branches in , the emirate's largest, and the National Bank of Bahrain is contemplating a similar move. The formation of a Gulf single market on the model of European Economic & Monetary Union (EMU emu or emeu (both: ē`my ), common name for a large, flightless bird of Australia, related to the cassowary and the ostrich. ) would facilitate more M&As. The
creation of two or three super-intra-regional banks, with vastly
enhanced capital and lending capacity, could serve as an engine of
development. The emergence of Arab banking giants can compete with major
international players, like CITIBANK, or HSBC HSBC Hongkong and Shanghai Banking CorporationHSBC Humane Society of Broward County (Florida) HSBC Humane Society of Bay County (Bay County, Michigan) on equal terms and can provide for a more cost-efficient delivery of services. But internal organisational politics and family ownership of banks are a determent to much needed M&As in the region. OPPORTUNITIES AND CHALLENGES IN NICHE MARKETS Looking beyond the present downturn, the medium-term prospects for Arab banks are not discouraging provided that institutions can adapt to new niche opportunities in investment and Islamic banking and project finance, as Gulf governments are delegating more responsibility for industrial development to the private sector. The GCC region offers exceptionally rich pickings for tapping the private wealth of high net worth individuals (HNWIs). Bankers estimate Arab offshore assets Oil and gas facilities, mining and industrial installations, ocean thermal energy conversion facilities, deep water ports, aids to navigation, and nuclear power plants located or in operation seaward of the coastline. at $800 billion, equivalent to 151 per cent of regional GDP GDP (guanosine diphosphate): see guanine. . There are about 120,000 (HNWIs) in Saudi Arabia, and 59,000 in the UAE, holding foreign assets of $400 billion, and $160 billion respectively. Major Arab banks would be better positioned to channel and manage the region's outward portfolio investments if they acquire prime western investment houses. At present, foreign banks such as Goldman Sachs The Goldman Sachs Group, Inc., or simply Goldman Sachs (NYSE: GS) is one of the world's largest global investment banks. Goldman Sachs was founded in 1869, and is headquartered in the Lower Manhattan area of New York City at 85 Broad Street. , J.P. Morgan and CITIBANK dominate asset management business. Fixed investment is set to increase, thus providing scope for medium/long-term project financing in areas of gas developments in Qatar and Oman, as well as petrochemicals expansion projects, refinery upgrades and the expansion of aluminium production in Dubai, and Bahrain. Basic infrastructure requirements are estimated at between $65-$165 billion over the next decade. Therefore, sophisticated and sizeable financing packages will be required. Islamic banking, a rapidly expanding niche market, growing at an annual rate of 10-15 per cent, is attracting the interest of both conventional Arab and foreign banks. The market size (currently $80 billion) is projected to exceed $100 billion by 2000. The major challenge facing Arab banks operating within the current competitive, high-tech climate will be to increase their capital and asset base, with a view to competing with foreign banks in new product niches. If they are able to strengthen their position in this area, further market consolidation will undoubtedly ensue en·sue intr.v. en·sued, en·su·ing, en·sues 1. To follow as a consequence or result. See Synonyms at follow. 2. To take place subsequently. .
MAJOR ARAB BANKS
December 1997 $ Million
Total Tier-1
Assets Capital CAR%
Ratio%
Arab Banking Corp, Bahrain 23,582 2,046 8.7
National Commercial Bank,
Saudi Arabia 23,049 2,076 9.0
Arab Bank Jordan 16,808 1,260 7.5
Riyad Bank Saudi Arabia 15,426 2,013 13.05
National Bank of Kuwait 13,502 1,215 9.0
Saudi American Bank 12,168 1,222 10.0
Gulf Investment Corp, Kuwait 12,131 1,123 9.2
Gulf International Bank, Bahrain 9,524 694 7.3
Saudi British Bank 9,426 787 8.34
Al Rajhi Banking & Investment
Corp, Saudi Arabia 9,369 1,376 14.7
Arab National Bank, Saudi Arabia 9,198 773 8.4
National Bank of Abu Ohabt 8,481 629 7.4
Al Bank Al Saudi Al Fransi 8,351 782 9.3
United Saudi Bank 7,093 848 12.0
National Bank of Dubai 6,281 990 15.76
Gulf Bank Kuwait 5,707 550 9.64
Kuwait Finance House 5,190 459 8.84
Abu Dhabi Commercial Bank 5,062 693 13.70
Qatar National Bank 5,027 797 16.0
Saudi Hollandi Bank 4,853 352 7.25
Return %
Net
Profits Equity Assets
Ratio%
Arab Banking Corp, Bahrain 196 9.6 0.83
National Commercial Bank,
Saudi Arabia 278 13.4 1.21
Arab Bank Jordan 295 23.41 1.75
Riyad Bank Saudi Arabia 259 13.0 1.70
National Bank of Kuwait 241 20.0 1.80
Saudi American Bank 278 22.75 2.30
Gulf Investment Corp, Kuwait 127 11.3 1.04
Gulf International Bank, Bahrain 87 12.5 0.9
Saudi British Bank 144 18.3 1.53
Al Rajhi Banking & Investment
Corp, Saudi Arabia 356 26.0 3.80
Arab National Bank, Saudi Arabia 132 17.0 1.43
National Bank of Abu Ohabt 114 18.12 1.34
Al Bank Al Saudi Al Fransi 107 13.7 1.30
United Saudi Bank 108 12.73 1.52
National Bank of Dubai 105 10.60 1.67
Gulf Bank Kuwait 116 21.0 2.0
Kuwait Finance House 121 26.36 2.33
Abu Dhabi Commercial Bank 123 17.75 2.43
Qatar National Bank 104 13.0 2.07
Saudi Hollandi Bank 56 16.0 1.15
BIS*
Ratio%
Arab Banking Corp, Bahrain 13.8
National Commercial Bank,
Saudi Arabia 20.3
Arab Bank Jordan 16.3
Riyad Bank Saudi Arabia na
National Bank of Kuwait na
Saudi American Bank na
Gulf Investment Corp, Kuwait 15.1
Gulf International Bank, Bahrain 12.0
Saudi British Bank 18.6
Al Rajhi Banking & Investment
Corp, Saudi Arabia 28.
Arab National Bank, Saudi Arabia 24.6
National Bank of Abu Ohabt na
Al Bank Al Saudi Al Fransi 16.0
United Saudi Bank 25.0
National Bank of Dubai
Gulf Bank Kuwait na
Kuwait Finance House na
Abu Dhabi Commercial Bank 18.8
Qatar National Bank 50.0
Saudi Hollandi Bank na
CAR-Capital adequacy ratio; BIS %-includes tier 1 and 2 capital, relative to total assets Source: The Bankers' Almanac almanac, originally, a calendar with notations of astronomical and other data. Almanacs have been known in simple form almost since the invention of writing, for they served to record religious feasts, seasonal changes, and the like.
MOODY'S INVESTORS SERVICE Rating: GULF BANKS
Long Term Short Term
Deposit-Rating Deposit-Rating
Arab Banking Corp. Baa3 Prime 3
National Commercial Bank Baa3 Prime 3
Riyad Bank Baa3 Prime 3
National Bank of Kuwait Baa1 Prime 2
Saudi American Bank Baa3 Prime 3
Gulf International Bank Baa2 Prime 3
National Bank of Abu Dhabi A2 Prime 2
Qatar National Bank Baa2 Prime 2
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