MENA’s Banking sector and monetary policy

The MENA region is classified as a bank-based financial system, where banks control most financial flows and possess most financial assets (Sourial , 2004: Ben Naceur and Omran, 2010). Although, there are over 600 banks with a widespread network of thousands of branches in the MENA countries, the World Bank (2009) suggests that there are fewer bank branches in MENA than in other emerging economies.

The commercial, specialised and Islamic banks are the major components of the financial sector, providing a wide range of services such as deposits, loans, leases, credit cards and ATM networks. Islamic banks operate on Islamic legislations and have a growing share in the overall financial sector averaged by 20 per cent annually over the last five years (AMF, 2009). The presence of family-controlled and company groups banks characterises the region with moderate to high level of concentration (OECD, 2009a). The highest concentration of banks exist in countries like Lebanon with more than 63 banks, UAE with 62 banks, Turkey with 45 Banks, Bahrain with 28 banks, Iran with 28 banks and Egypt with 40 banks (AMF, 2009; IMF 2009). In many countries, assets of the three largest banks accounting for over 79 per cent of total commercial bank assets, and the entry of new banks is difficult (Kobeissi, 2004; Creane et al., 2007).

In over half of the MENA countries, including the GCC countries, Israel, Turkey, Lebanon, Egypt, Morocco and Jordan, the banking sector is stable, well developed,  adequately capitalized, profitable, and resilient to shocks. However, the degree of efficiency in managing differs between the region’s countries based on ownership, size and legal entities (Sabri, 2008, p. 68).

Nonetheless, average banking assets in the region amount to about 60 per cent of GDP. The GCC countries’ large size of bank assets is consistent with their high per capita income, but there are also several non-GCC countries which have larger banking systems than would be predicted by their income levels (World Bank, 2009). Arab banks assets account for approximately 66 per cent of the USD 3 trillion total assets of the MENA banks reached in 2008.[1] These figures indicate that the banking industry in the MENA region has expanded by more than three-fold  from USD 934,477 to 3 trillion between 2000 and 2008 (Turk-Ariss, 2009).

Figure 7: Bank Deposits as percentage of GDP for selected MENA Countries in 2008

Source: World Bank Financial Development and Structure Data Base (2009) 

The entry of foreign competitors in the banking sector has meant state-owned banks no longer account for a significant proportion of the banking sector in the region.  State-owned banks still play an important role in countries such as Syria and Egypt especially in issues of credit allocation, non-performing loans, and liquidity problems (OECD, 2009a). The state-owned banks have historically been characterised with high levels of non-performing loans in the MENA region, with recent figures showing non-performing loans to be estimated at over 16 per cent in Egypt and Tunisia and around 5 per cent in Turkey, Syria and GCC countries (AMF, 2009; IMF, 2009). Nonetheless, lending activities for the region banks are constantly growing with more than 25 per cent in 2007 and 27 percent in 2008, with the highest level in Bahrain with more than 48 per cent (AMF, 2009).

However, as investment-climate assessments in the region reveal, only a few private sector firms use bank credit to finance investment, relying instead primarily on retained earnings. At the same time, 39 percent of firms outside the GCC identify access to finance as a major constraint to business, higher than for all other regions but Sub-Saharan Africa (World Bank, 2009 b, p. 113).

Monetary policy in MENA countries is managed by central banks. All these banks, with the exception of Turkey, were established after the second half of the last century, with the main aim being to work as the sole authorised entity to issue national currencies. The majority of MENA country currencies are pegged to a single currency, mostly the USD. In addition, MENA countries have employed indirect monetary policy tools, liberalised their interest rates, and developed government securities. However, as Creane et al. (2007) state:

the limited development or nonexistence of secondary markets for government securities hinders the broad use of open market operations by central banks. In addition, a few countries do not follow a comprehensive framework for designing and conducting monetary policy (p. 10).

-This is an excerpt from my PhD thesis 2012

Leave a Reply

Your email address will not be published. Required fields are marked *