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Banking: a timely shock to the system.

Gulf banks suffered a blow to their self-confidence when the Kuwait crisis erupted in 1990 and the Bank of Credit and Commerce International collapsed spectacularly. The rude shock of the two disasters should encourage banks in the region to become more competitive and efficient. Mushtak Parker wonders whether they are up to the challenge.

AFTER RECOVERING MOST of their poise and profitability almost two years after the liberation of Kuwait and the collapse of the Abu Dhabi-based Bank of Credit and Commerce International (BCCI), Arab Gulf banks are faced with new challenges in 1993 which could make or break a number of institutions. A recent report from the Arab Banking Union (ABU) suggests that state-ownership in banks, lack of training and an abundance of red tape are to blame for most of the problems in the sector.

From a supervisory point of view, Arab monetary agencies tend to drag their feet when it comes to taking collective decisions. For example, only four weeks away from 1993, when the new capital adequacy regulations set by the Bank of International Settlements (BIS) in Basle come into force, the Abu Dhabi-based Arab Monetary Fund (AMF) began drafting a timetable to force banks to maintain the minimum 8% capital adequacy ratio of capital against assets.

The rules are designed to minimise risks to creditors and depositors and to ensure that banks have enough funds to deal with crises. A number of the region's leading banks have increased their capitalisation for these reasons and to finance expansion plans. The Saudi British Bank, for instance, is seeking to double its capital to SR1bn to become the third largest private bank in the kingdom after Riyad Bank and Al Rajhi Banking and Investment Corporation (Arabic).

The eleventh hour moves meant that at least a few Gulf banks would not be adequately capitalised on New Year's Day, even though monetary authorities such as the Saudi Arabian Monetary Agency (Sama) and the UAE Central Bank have been stepping up the pressure on their banks to do so. Some central banks have even refused to approve the 1991 balance sheets on the grounds they were not satisfactory. Some banks, such as National Commercial Bank (NCB) of Saudi Arabia, one of the largest in the Gulf, have not published accounts since 1989.

The current BIS country rating of all Arab states except Saudi Arabia in the high-risk category (because their banks' capital adequacy levels - the ratio between shareholders' equity and assets - fell below the minimum 8% set by the Basle Concordat on Capital Adequacy Requirements) is causing more frustration and anger than concern. It means that the cost of banking to the five GCC countries will increase as banks from the BIS reporting states will be obliged to take extra provisioning measures when lending to banks from Kuwait, Qatar, Oman, UAE and Bahrain.

According to Abdullah al Quwaiz, assistant secretary-general for economic affairs at the GCC, most of the 100 or so banks in the GCC have capital adequacy ratios much higher than the minimum 8%, although some bankers do question this assessment.

Banks will also have to integrate more into the domestic economies and offer regional development financing, long-term credit and wider product choice including venture capital, leasing, equity finance, country funds, fixed and floating rate debt resources in various currencies. Saudi and Kuwaiti banks are already active in the government debt markets and are increasingly being called upon to provide a greater share of government budget deficit financing.

One encouraging sign is that an increasing number of banks in the region are making provision for bad debts. Indeed, since a number of banks have announced exposure to BCCI, provisioning against loan and other losses will continue for the next years. This will in turn eat into the profitability. Arabic, Doha Bank, Dubai Islamic Bank, Qatar Islamic Bank, Faisal Islamic Bank of Egypt have all made provisions against BCCI losses.

Kuwaiti banks have been getting help from the government to wipe their slates clean following the Gulf crisis. The latest to benefit from this help is the Islamic bank, Kuwait Finance House (KFH), which got government bonds worth $1.85m in exchange for doubtful debts made to Kuwait customers.

KFH becomes the ninth Kuwait bank to make a bonds-for-debt deal with the Kuwait Central Bank. The nine deals total a staggering $14.55bn in value and three investment companies have still to release their accounts. Despite this help and the fact that Kuwaiti banks are settling back into their former roles, it is likely that they will face formidable problems over the next few decades. Most important, for this period they will have to depend largely on one major customer - the government which pays only 5% interest on treasury bonds.

Those Kuwaiti banks with few current account holders and with a poor pre-invasion record will suffer most as they struggle to rebuild their capital and deposit base. The poor debt portfolio management of many Kuwaiti banks in the past raises doubts whether they can manage these in the future. Banking since the BCCI collapse has changed worldwide, and calls for stricter supervision and regulation are widely heard, especially in the Gulf where depositors have lost millions of dollars as a result of the BCCI scandal. Already there are reports that the Bank of England has recently refused a licence to a Bahrain-registered entity to set up a bank in London, because it did not have a licence from its home country.

Arab banking officials such as the ABU's secretary-general, Adnan al Hindi, have criticised banks for failing to respond to calls for mergers. In the case of Kuwait and the UAE analysts say that the only way some banks will survive in the competitive environment of 1993 will be either to find new capital or to merge. The most likely to merge in Kuwait are Burgan Bank and the Bank of Kuwait and the Middle East, which are both state-owned.

The chances are good that there will be several bank mergers in 1993. If not, a number of banks will close down. From a regional point of view, Saudi banks are performing the best. The Bahrain international offshore market has been badly hit, with two more banks, Kuwait Asia and Bahrain Arab International Bank, closing down. Kuwaiti banks are rallying and returning with a vengeance, with National Bank of Kuwait (NBK) quickly re-establishing itself alongside the Arab Banking Corporation (ABC) and Saudi American Bank (Samba) as one of the top three banks in the region.

Overall, Gulf banks are retrenching to their home and regional markets, which is probably a wise move and could strengthen the drive towards a single financial market in the GCC. The UAE Central Bank governor, Sultan al Suwaidi, has resisted the temptation to rush into quick-fix reforms of the sector. A deposit insurance scheme, an offshore banking unit, and greater monitoring of large institutions are all on the cards there.

According to Sheikh Suleiman Olayan, chairman of the Olayan Group and a director of the Saudi British Bank (SBB), the major challenge ahead for the banking sector in the GCC is to absorb the financial cost of the Gulf crisis, which some estimates have put as high as $620bn in direct losses. Commitments, increased defence spending and persistent budget deficits will undoubtedly affect economic growth, which could have an impact on the banking sector.

In Saudi Arabia, where capital flight is now stabilising, the market's liquidity is still capable of supporting large private share flotations. Sama, of course, has been issuing Treasury bills to help tap domestic liquidity in the Saudi riyal market and to smooth out short term cash flow problems.

In October the Saudi British Bank (SBB) announced that it will float two million shares in early 1993. Share offerings will continue to be buoyant in 1993 because as Abdullah Dabbagh, the secretary-general of the Council of Saudi Chambers of Commerce, explains: "The amount of liquidity in the market right now is tremendous. I have heard figures of around SR300bn of liquidity. In the banking system alone you have SR180bn. Money that comes from under the mattress is another SR100bn. The flotations to date have not exceeded SR12bn. We still have a long way to go before we absorb that kind of untapped liquidity."

Sama also is continuing to push for the development of the kingdom's financial sector. Sama's efforts, according to Andrew Dixon, managing director of the Saudi British Bank, to strengthen domestic bond markets by setting more competitive yields on government securities and developing a secondary bond market have largely been successful.

Sama has to show more urgency in supervision and reporting standards of banks, however. NCB, for instance, still has to publish accounts for the last three years. Sama has hinted that the delay is due to differences between the bank's two major shareholders and over its non-performing loan portfolio. There are rumours that NCB is preparing to transform itself into a joint stock company. NCB's estimated assets at the end of 1991 were around $22bn.

Western bankers in the kingdom such as Andrew Dixon see the development of Islamic banking as product-led, which could be offered by any bank. Why investors who want to invest in Islamic banking products should go to an Islamic banking window of a conventional bank is not clear. But perhaps choice is limited because of Sama's reluctance to give licences to Albaraka and to the Geneva-based Dar al Maal al Islami (DMI) Group. Developing Islamic banking side by side with conventional banking must be a challenge for Gulf central banks in 1993.


GDP: QR27.4bn; $7.5bn GDP per capita: $1,470 Population: 0.51m GDP growth: 1992 4.0%; 1993 6.0% Inflation: 1990 3.0%; 1991 3.0%

* The reshuffling of the cabinet last September and the reorganisation of the Qatar General Petroleum Corporation are an indication that Qatar is trying to make the decision-making process more efficient, especially in the oil and gas sector. The anomalous amalgamation of financial and oil affairs within a single ministry has been abolished with their separation into two portfolios. This is seen as an effort to release macroeconomic policy from the dominance of the hydrocarbons sector which will become even greater over the next few years as natural gas makes its impact on GDP.

* The biggest challenge to Qatar over the next few years will be its ability to handle the development of the North Field gas reservoir, the largest new field now being exploited in the world. It is vitally important that the hugely complex programme of exploiting the North Field and setting up downstream projects proceeds in an integrated fashion.


GDP: Dh123.6bn; $33.7bn GDP per capita: $17,371 Population: 1.94m GDP growth: 1992 3.5%; 1993 4.5% Inflation: 1992 6.5%; 1993 7.5%

* The UAE's overall financial situation is by far the strongest among the GCC countries, but it nonetheless faces serious constraints due to competing demands for government expenditure. Further development of the oil sector, expansion of the armed forces and investment in electricity and water desalination will all make significant calls on federal funds. The UAE is also highly dependant on external demand from its re-export business, especially to Iran. All of this complicates the planning outlook and increases pressure for a government stimulus to boost the economic growth rate.

* The non-oil sector will remain buoyant, largely due to trade with Iran (although commerce with Kuwait will decline as the latter rebuilds its import capacity). But because of its location as a regional transport and business centre, the contribution of non-oil activities to the GDP is likely to be permanent. Furthermore, the lower Gulf is widely perceived as more stable than the rest of the region.
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Title Annotation:Outlook 1993; includes related article
Author:Parker, Mushtak
Publication:The Middle East
Date:Jan 1, 1993
Previous Article:Gulf economies: just settling for mini-booms.
Next Article:Iran: falling into a financial quagmire.

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