GCC Central Bank and European Central Bank - Case Study Example

GCC central Bank Contents Executive Summary 3 Introduction 3 Discussion 4 Recommended Structure of the Central Bank for GCC 4 Comparison between GCC Central Bank & European Central Bank 5 Arguments for GCC Central Bank 6 Objectives and functions for GCC central Bank 7 Conclusion 8 References 9 Executive Summary The project discusses the proposal of forming a Central Bank in the Gulf region that regulates the economy of the Gulf member countries. The formation of the Central Bank includes a study of the probable form or structure of the Central Bank in GCC. The operations of the Central Bank in GCC have been compared to the operations of the European Central bank based in Frankfurt, Germany. The arguments in favour and opposing the formation of the Central Bank have been provided in this piece of work. The objectives of the Central bank and the proposed functions of the Central Bank in GCC have been proposed to uphold the best interest of the Gulf economy. Introduction The banking industry of Gulf Cooperation Council is based on then six main GCC countries- Saudi Arabia, Kuwait, Bahrain, Oman, Qatar and the United Arab Emirates. The GCC central bank is likely to face new opportunities and challenges as the Gulf countries experience major changes in the economic and demographic sectors. The banking industry in the Gulf countries is majorly evolving with the market being majorly transformed and driven by consumer demands. A major shift is noted in the industry creating a diverse customer base for the banks which will include an increasing number of women and youth. The central bank should shift to more customer centric approach to create value for the customers and implement a model which provides a higher level of service for the customers. The global banking industry encourages the banks in GCC to achieve high performance levels by implementing new strategies like: Capturing the growth opportunity in the changing regulatory environment, strengthening the existing distribution network and creating new distribution networks using up to date technologies, develop and nurture talent to retain good talent within the organizations, use customer analytics based in predictive analysis models and streamline the operating model with the strategic objectives of the organization. The GCC central banks are likely to gain more by focusing on the retail segments and strengthening their distribution networks. In the light of globalization, it is critical for the GCC banks to re-evaluate their operating models so as to ensure sustainable profitability and increasing operational performance. Discussion Recommended Structure of the Central Bank for GCC The structure of the Central bank for GCC should be based on a more market oriented approach than an organization oriented approach. There exists a high degree of concentration in the GCC baking industry and there are strict restrictions on the entry of foreign banks in the GCC market. The banking system prevalent in GCC vary based on the size and operations of the banks (Berger, 1995, p.444). Also, the operating environment for commercial banks and Islamic banks is different due to different financial and institutional conditions prevailing in the area. The major structural factors that drive the prospects of development of the GCC bank are the increasing competitiveness in the domestic banking markets, efficient corporate debt markets, use of compliant financing as an important strategy, efficient local equity markets, increasing investments from private institutions and increased use of derivatives and other financial instruments. The structure of the GCC central bank should be heterogeneous based on banking, equity and debt. As the industry is largely concentrated, a greater control on the banking assets is required by the GCC central bank. The bank has to formulate policies with reference to the fact that the liquidity factors the lending rates are majorly influenced by the oil prices (Rousseau, 1998, p.1162). The banking institution should be primarily dominated by the investors demonstrating interest in the key banking enterprises. Both the private and public investors play a critical role in designing the structure of the GCC central bank. Public investors, government investment options and domestic investors are key elements in the structural capability of the GCC central bank. The structure of these banks is also characterized by concentrated levels of risk and low borrowings in the public sector. The financing system in the GCC follows a dual mode in which all the participants of the market can compete. The dual modes involve both the conventional financing modes and the Islamic Financial modes. The structure of the GCC central bank should be based on proper customer management, marketing, strong distribution channels, back office support and strategic cost reduction, effective governance to steer the GCC bank and the development of an extensive value chain. Comparison between GCC Central Bank & European Central Bank The Central Bank in the Gulf Council of Cooperation has to be set up in such a way that it retains the crucial functions of a central bank like the European Central Bank and the at the same time retains its uniqueness which are the areas of differences with the European Central Bank. The area of operation of the Central Bank of GCC regulates the banking and financial structure of the Gulf countries. The European Central Bank on the other hand regulates the financial structure of the Euro-zone. The functions of the European Central Bank are aimed at regulating the movements of Euro currency that is used by the European members. The central bank of GCC would establish a common currency in the Arab countries and control the movements of that currency. The European Central bank has the exclusive rights to issue bank notes in the currency of Euro while the Central Bank of GCC would issue bank note in a common currency for the Arab countries in the Gulf region. Along with the differences, the areas of similarity of the Central bank of GCC and the European Central Bank have been explained as follows. The Central Bank is supposed to design monetary as well as fiscal policies like the European Central Bank. The policies of the Central bank would be on the same line with the strategies of the European Central Bank. The Central bank of GCC would be responsible to ensure price stability in the Gulf region similar to the functions of European Central Bank for attaining price stability in the Euro-zone (Al-Suwaidi, 1994, p.28). Arguments for GCC Central Bank The arguments in favour as well as against the formation of Central Bank in GCC have been given as follows. The Central Bank in GCC is expected to establish a common currency in the Gulf region. This would result in the harmony of trade transactions carried out between the Gulf countries. The common currency would also help to maintain a stability of the prices of goods and services in the region. The dual financing system adopted by the Central Bank in GCC would help to function for the welfare of the economy of the Gulf region. The monetary and the fiscal policies of the Central Bank of GCC would ensure the sustenance of optimum level of liquidity in the economy of the Gulf region (Rousseau, 1998, p.1170). This would help to maintain the parity in economic status of the Gulf countries. The formation of the Central Bank of GCC could, however, be viewed against the economic interests of the region. The Central Bank in GCC would need to be located in a particular Gulf country. In case of any crisis in the region, there could be possible bias of the Central in granting funds to the members of the GCC. The Gulf countries would no longer be able to print bank notes after the formation of the Central Bank of GCC. This would lead to problems for the Gulf countries in meeting any debt crisis in the region. Objectives and functions for GCC central Bank The increase of volatilities, uncertainty and regulatory standards in the financial market has highlighted the objective of the GCC central bank to focus on competitiveness. The bank should aim at building up on the strengths of the existing market and implement the favourable economic environment into the organizational processes. The bank should concentrate on focusing on the market participants as well as the main policy regulators in the domestic market. Also, the GCC central bank should maintain compliance to the regulations and adhere to the international rules and policies to create safe havens in the market (Hannan, 1989, p.291) One of the main objectives of the GCC central bank is promoting diversification in the economic activities of the bank (International Monetary Fund, 2012, p.3-6). The main objectives of the GCC central bank should be to substitute the product centric approach by a customer oriented approach. In keeping with the global scenario, the bank should aim towards adopting cost cutting strategies while delivering more value to the customers through effective services, transparency and improved risk management processes. The bank needs to create a robust network and distribution system. The GCC central bank should aim at combining multichannel services with personalized customer service experience. The GCC bank has to fulfil another main objective of implementing the latest information systems in the banking processes. The GCC central bank should position themselves to adapt to the regulatory policies and thus, they should implement effective strategies for financial and risk management (Al-Suwaidi, 1994, p.61). To position themselves to prepare for regulatory changes, banks should focus on allowing space for the finance and risk department at the strategy table. The risk department will need to move away from its traditional support service provider role toward being a true business partner. In this capacity, they can drive real value and support in taking advantage of regulatory change. Conclusion The formation of the Central Bank of GCC has been proposed in order to integrate the economy of the Gulf region under the one regulatory body. The structure of the Central bank of GCC would support the operations of dual mode of financing in the region which consists of traditional financing and another method of financing without any cost to the borrower countries. Although the area of operation of the Central Bank of GCC, the currency of the Gulf region would be different from that of the European Central bank, there would be similarity in the monetary and fiscal policies and the objective of attaining price stability. The formation of Central Bank in GCC could adversely affect the Gulf members as there is a possibility of bias in financing the Gulf members. However, the objectives and the operations of the Central Bank are expected to bring about parity in trade transactions between the countries. The Central Bank would also be able to achieve price stability in the economy of Gulf region. References Rousseau, P. 1998. Financial Instruments and Economic Performance.Journal of Money banking and Finance. Vol. 30(4), pp. 1161-1171. International Monetary Fund. 2012. Economic Prospects and Policy Challenges for the GCC Countries.[Pdf].Available at http://www.imf.org/external/np/pp/eng/2012/100512.pdf.[Accessed on 11 December 2013]. Al-Suwaidi, A. 1994. Finance of International Trade in the Gulf. Leiden: Brill. Berger, A. 1995.The Relationship Between Capital and Earnings in Banking.Journal of Money, Credit and Banking. Vol. 27(2), pp. 432-456. Hannan, T. 1989.The Price-Concentration Relationship in Banking.Review of Economics and Statistics. Vol. 71(2), pp. 291-299. Read More