Banking Systems in MENA - Dissertation Example

Banking Systems in MENA Introduction There are wide array of developing and developed countries that have been deregulating their banking systems over the past few years. The major objective of this deregulation was to enhance profitability, efficiency and productivity of banking systems. It has enabled MENA countries to improve upon their international competitiveness. Those developing countries that are following guidelines of World Bank or International Monetary Fund initiated programs are likely to improve overall performance efficiency of financial sectors. Financial development can be stated as a multifaceted concept which comprises of interest rates and monetary aggregates. In MENA region there are few countries which are well advanced but some regions still possesses a scope for further improvement. Government of certain countries in MENA region have emphasized on market-based financial sector in order to improve foreign participation and minimize the approach of state ownership. There are some long-term solutions adopted by this region such as modernization of regulatory and legal environment, privatization of banks, integration into widespread global financial sector, etc. Banking sector in MENA region encompasses certain similarities but there are differences linked with this region. These differences are mainly in terms of financial development, per capita GDP and size. There exist some specific indicators of banking sector like total assets or overheads, net interest margin, return on assets, cost-income ratio, concentration, Z-score and return on equity. In this study some specific characteristics of banking sector in MENA shall be outlined. The entire study has been divided into various sub-sections like main changes witnessed in banking systems of MENA, distinctive banking features observed in MENA and ways in which these features prove to be strength and weakness. Discussion Main changes in MENA banking systems There are certain changes observed in MENA countries in recent years. These changes have occurred in context of financial openness, supervision and regulation. MENA countries like Jordan, Tunisia, Morocco and Lebanon are focused more on improving banking regulation and supervision. These regions have set forth up-to-date procedures so as to collect prudential information. Information is gathered on a regular basis and inclination is also towards auditing and inspecting banks. Efforts have been made by this region to be aligned with International Basel standards (Chami, Espinoza and Hesse, 2010). This is usually done through reducing non-performing loans and enhancing capital adequacy ratios. Majority of the countries possesses non-performing loans within a range of 20 percent amongst total loans. Financial openness can also be considered as another change which was incorporated in MENA banking systems (Huang and Shu-Chin, 2009). Capital and current accounts have been opened up significantly by MENA countries. Financial sectors have been opened up by many countries but there are restrictions imposed upon earning repatriation and asset’s foreign ownership. There are some countries in MENA region who are sustaining multiple currency rates and parallel exchange markets. Some common driving forces are present which tends to regulate overall financial landscape. These forces have been outlined in figure1. Figure 1: Driving forces in financial landscape (Source: Barth, Caprio and Levine, 2004) External forces as stated in figure1 are responsible for developing certain major trends in banking industry like globalization, disintermediation, institutions adaptation and modernization. Financial liberalization in MENA region has initiated certain changes in banking sector. This form of liberalization has highlighted some emerging markets like Morocco, Turkey, Jordan, Egypt, Tunisia and Lebanon. Transitional markets had been identified with Iran, Algeria and Syria (Turk-Ariss, 2008). On the other hand, Gulf Council Countries represent mature markets, Iraq and Libya reflected closed markets and Djibouti or Yemen highlights early development markets. In MENA region, financial liberalization which proved to be basis of such changes is represented in figure2. Figure 2: Financial Liberalization (Source: Beck, Demirgüç-Kunt and Levine, 2000) In the current decade, MENA region can be considered as a fast growing sector in terms of wealth and population. Banking sector is at the initial stage with some newly established banks. Financial sector in this region has encompassed three main changes. Firstly monetary authorities are more concerned about adopting international accounting standards and be aligned with international regulatory requirements (Chami, Espinoza and Hesse, 2010). Highly concentrated markets in this region simply mean that it has less competition. Leading banks in Kuwait and Jordan are investing more in cross-border functionality so as to enhance growth potential. There is emergence in governance structure of banks and a higher degree of commitment towards financial liberalization. Since last few decades, share ownership of banking systems are transformed to foreign control from domestic and to private control from government (Beck, Demirgüç-Kunt and Levine, 2000). This change was mainly due to government privatizing state-owned banks, along with barrier reduction following accession requirements of WTO. Domestic banks are usually forced by foreign investors to include structural reforms so as to remain competitive. Foreign investors usually bring in innovative risk management techniques, advanced technology and productive human capital. Financial development is basically high in comparison to other regions. This kind of financial development enables MENA region to compete effectively across the globe. The changes in financial sector can be categorized in better utilization of instruments dealing with indirect monetary policy. There is even reduced percentage in MENA region in context of financial institution’s public ownership. MENA region’s banking system encompasses stronger prudential supervision and regulation. This sector comprise of efficient legal environment along with high quality financial and managerial skills (Chami, Espinoza and Hesse, 2010). New information technology has penetrated across the region and enhanced level of connectivity amongst people. Micro finance industry has developed in recent years in MENA region. There are approximately 44 branches present who convey micro finance lending program to its target client. The value of loans being disbursed in recent years has gradually increased. Some steps have been taken towards small exchange integration within regions that facilitates sector transparency and liquidity. Credit scoring and reporting can be stated as a financial development in banking sector of MENA region. This change has benefitted customers and small businesses (Chami, Espinoza and Hesse, 2010). It has enabled reduction in processing loan applicants cost, financial products commoditizing, intermediation process restructuring and unbundling of financial services. Credit reporting systems are an innovative phenomenon which was introduced in MENA region. Technological development has brought forth significant changes within banking sector. This is mainly in fields of delivery channels, information disseminations and information processing. In overall context consolidations and mergers has enhanced the growth percentage of banking sector of MENA region. Main distinctive features of banking in MENA Banks plays a major role in financial system of MENA countries. Many state owned banks are present in these countries. The banking sector of MENA has several distinctive features. Countries of MENA have moderate to high concentration of banks. Different types of financial service are provided by banks. They are the main source of external finance. Current rules and regulation of these countries prevent banks to hold large number of shares in different companies. Many commercial banks of MENA hold many shares in different non finical companies. The banks mainly concentrate on allocation of credit for investing it productively (Farazi, Feyen & Rocha, 2011). This is an important feature of MENA bank. But governments of these countries sometime interfere in credit allocation process of banks. Public sector banks have a major contribution in channeling and providing soft financial service to its target customers. A large number of MENA banks are family owned. These banks have their own ownership structures. This structure of banks influences rise of many conflicts which hampers corporate governance of banks. Banking system of MENA is also featured by the present of many state owned commercial banks. Many of the MENA banks are under the ownership of state. These banks extend different loans for providing soft credit to the borrowers on non commercial basis. Private banking system of MENA is influenced by various industrial policies. The employees of state owned banks are accountable to government or government agencies. People deposit their money in the banks which is offered to the borrowers as loans (Farazi, Feyen & Rocha, 2011). Therefore depositor becomes the shareholders of different banks. MENA banks protect and look after the interest of shareholders. Board of directors of MENA bank establishes different rules and regulations of banks. They approve different strategies for overall development of these banks. Special boards or committees are present which play a significant role in the decision making process of banks. The banking system of MENA is also featured with the presence of different risk management committee for handling financial activities and offering high return on investment. The banks of MENA have strong internal and external control. Among the top five shareholders of banks one of the shareholders must be family member of Bank owner. That member holds a very high position in the bank. Shareholders and family person influences different decision of banks directly or indirectly. The shareholders who are not family members of Bank owner hold low number of shares. In MENA banks there prevails the system of buying shares by existing shareholders before the shares are made public. This system is implementing through the process of raising equity by issuing rights (Farazi, Feyen & Rocha, 2011). For this feature ownership level are maintained by these banks. In few states owned banks of MENA foreign participation is increased by relaxing different limits and restriction on foreign investments. Various state owned banks are being privatized in many countries of MENA. Nonperforming loans of MENA banks are significantly high. Privatization process of banks faced many problems for nonperforming loans (Honohan and Beck, 2007) Therefore, it can be stated that MENA’s banking system exhibit resilience and are well capitalized in context of global crisis. Capital lending is primarily offered by financial institutions of MENA region. This form of capital lending is provided to production process and focus is on enhancing capital conditions of company. To certain extent MENA region do not comprise of interest elements which is an added advantage for customers. The banking system has also included moral and ethical values in different financing modes. Most of the countries in MENA region are not inclined towards financing companies manufacturing harmful substances like tobacco, alcoholic beverages, etc (Farazi, Feyen & Rocha, 2011). Profit maximization is not a major objective of financial institutions but inclination is also towards social activities and commitment. Banking sector of MENA region is regarded as the major credit suppliers to public and private investment projects. They are even responsible for financing various government deficit initiatives. MENA region comprises of such features in context of banking system which differentiates them from other countries. Zero interest rate in investment sector is a unique characteristic and this leads to major strength of MENA region’s banking sector (Farazi, Feyen & Rocha, 2011). This initiates availability of more resources for investment projects. Interest rate of zero is applicable across banking system of MENA region and this generates more funds for all customers. In needy scenario zero interest credits is offered to wide array of household. How the distinctive features are a source of strength and /or weakness? Different features of MENA bank have become its strength factor. The countries of Middle East and North Africa are experiencing financial growth for its banking system. Board of Directors of MENA banks develops rules and regulation of banking system according to the countries and its financial policies. The features of bank provide economic stability to its banking system of MENA as its interest rates are more efficient than other interest rates of banks in other countries. The Board of Director of MENA banks and government of MENA countries decide this factor. It helps theses countries to fix a positive value for money (Warde, 2000). As a result people invest more money in the banking and financial sector which leads in economic development of these countries. This feature helps MENA countries to prevent all types of speculation activities which are associated with interest rate. Monitory policies of these banks are freely determined by the government and shareholders of bank. This process creates a weakness in MENA’s banking system. It limits the development of open market operations of these countries. These countries do not follow a framework for designing monitory policies which weaken its banking system. Some family owned banks of MENA countries are small in size. Those banks face the problem of limited resource. Structure of those banks is established as per the wish or interest of owner. No definite rules are followed for developing banking structure which generates conflicts among its employees (Iqbal and Mirakhor, 2007). Bank operations and performances often get hampered for this reason. The whole business process of family owned banks are focused on increasing the advantages of family members associated with banks. This system creates a gap between the normal employees and employees who are family member of bank owner. Theses family members get different types of advantages from bank owners and hold a very high position in the organization. Other employees get de-motivated by this (Farazi, Feyen & Rocha, 2011). In spite of their good performance ordinary employees of family owned banks don’t get promoted to high level of the organization. Banking system of MENA faces major problem for different favorable lending terms of family owned banks. Related lending is one of the problems of this business which weaken banking system of MENA (Huang and Shu-Chin, 2009). In this process resources of minority shareholders are taken away from them for determining deposit and insuring them. Big family owned banks does not face the problem of resources or funds. These banks have sufficient financial resources which contributes a lot in strengthening banking system of MENA. State owned commercial banks have some weakness in their features. In many cases these banks extends their loan durations and amount on different non commercial grounds. This creates an adverse impact on economic condition of the countries. It tunnels resources from taxpaying people and helps the bank to increase their loan offerings. As a result corruption and various illegal activities have developed in MENA countries (Ali, 2011). Employees of these banks are always accountable to different government bodies for their job functions. As a result they get a very less freedom in their work. Moreover they have to wait for getting approval from government agencies for performing any task or function. This sometimes slower the operational process of bank and it hamper banking system of MENA. Strength of this feature is governments are aware of different banking activities and policies performed by these countries. It approves different banking process as per the needs and development of the countries. But in many cases government interfere in day to day activities of these commercial banks. This complicates the business process of banks and the management of MENA bank gets affected. Strength of this banking feature is depositors can become the shareholder of MENA banks as they deposit money there. For this reason interest of the depositor are protected which strengthen the customer base of these banks (Chami, Espinoza and Hesse, 2010). Directors of bank are appointed for determining bank objectives. It strengthens the banking system in stabilizing the financial condition of its depositors. Special committees help to make its banking system very strong. These committee analysis and deals with several financial problems which contributes a lot in improving the banking system of the country. Features of privatized bank have helped the MENA countries to open its economy in front of foreign investors (OECD, 2009). Different rules, regulation and policies are implemented by different banks of MENA countries which for enhancing its business process. This attracts many foreign companies to invest in these countries. Conclusion According to this study it has been indentified that banking system of MENA countries is experiencing a development for past few years. There are different types of banking institution present in these countries. It contributes a lot in economic development of many countries of MENA. These countries have deregulated its banking system. The main objectives of deregulation are to enhance efficiency, productivity and profitability of banks. Features of this banking system improved the competitiveness of MENA countries. Many developing countries are present in MENA. Financial developments of these countries are very much important. For this reason various rules and regulations are implemented by government of MENA countries in its banking system. Government plays a vital role in its banking system. Different financial regulations are implemented by different government bodies for opening up the economy of MENA countries. Mainly three types of banks are present here. They are family owned bank, state owned commercial bank and private bank. In this study different features of these banks are mentions which highlight business functions of various banks. In family owned bank the entire operational process is conducted under the guidance of a family. Different members of that particular family hold a very vital position in the bank. In state owned commercial bank government looks after its business operations. Employees of these banks are accountable to government. In privatized bank many foreign investors invest their money for enhancing their business. Various features of different types of banks in MENA countries have certain strengths and weaknesses which influences its entire banking system. There are some features which increases complexities in banking system. They are considered as weakness. Some features of banking system have increases its strength and have contributed a lot in economic growth of MENA countries. References Ali, S.S., 2011. Islamic Banking In The Mena Region. [online]. 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