The banking sector development in the GCC

The banking sector development in the GCC

Banking sector development in Saudi Arabia 1.1

Early banking in Saudi Arabia was confined to involving a few foreign-based commercial firms, such as the branch of Algemene Bank Nederland, and numerous moneychangers. Their primary activity was to provide financial services both domestically and by pilgrimage. After the oil exploration in 1939, the more structured and centralized type of banking system developed, and as soon as World War II ended, the Saudi sector drew leading foreign banks to establish branches. The French Banque de l’Indochine and Arab Bank Limited then established their branches in Jeddah in 1948; while three major banks established their branches in 1950, which are the British Middle East Bank, the National Bank of Pakistan, and Bank Misr (of Egypt).

Until 1952, a year that witnessed the establishment of the Saudi Arabia Monetary Agency (SAMA), Saudi Arabia had no national currency .SAMA introduced a paper money in the form of pilgrim receipts during 1950-6, which were covered by foreign currencies and precious metals. In 1960, the arrival of Saudi national currency, named Riyal, has arrived.

In the 1990’s the Saudi banking industry grew. Banking credit increased by 147 per cent with an average annual growth rate of 11 per cent, to $46.2 billion by 2000. Deposits have rose by 73 per cent, to about $71.2 billion. By the year 2000, total banking assets stood at about $121.1 billion. Saudi Arabia had 11 commercial banks operating, four of which were joint ventures with foreign banks. No new foreign banks were allowed to enter the Saudi banking system from mid 1975. Nonetheless, new licences to establish subsidiaries on Saudi soil have been given to the International Gulf Bank of Bahrain and the UAE’s Abu Dhabi National Bank in pushing towards the convergence of the GCC financial sector

1.2- Banking in the UAE

The Middle East British Bank was the first bank to be founded in 1946, in Dubai, in the area now known as the UAE. After oil discovery this bank opened its second branch in Abu Dhabi. In 1961 and 1962, respectively, the Eastern Bank and the Ottoman Bank opened their branches in Abu Dhabi. The year 1963 saw the discovery of the first national bank, the Dubai National Bank, accompanied by the founding of Abu Dhabi National Bank in 1968. Clearly, the beauty of these two UAE cities derives largely from the concentration of trading operations (mainly in Dubai) and production of oil (mainly in Abu Dhabi). The UAE released a Federal Law creating the UAE Central Bank in 1980, with comprehensive powers to act as the central bank of the world. The central bank was officially responsible for releasing and regulating the Dirham’s supply and holding gold and foreign currency to sustain its interest. The UAE Central in 1981 temporarily abolished the suspension on new bank institutions but again explicitly placed it on the registration of new foreign banks. It also told the established foreign banks not to have more than eight branches throughout the UAE from 1984. The UAE Central Bank introduced various regulations during the 1990s, aimed at improving the soundness of the banking sector. By 1993, banks had a capital ratio of 10 per cent to assets. In fact, banks had to accumulate funds by transferring 10 percent of their annual net earnings to reserve assets until the reserve accounts were equivalent to SO percent of their paid-up debt.Banks were encouraged to move towards the implementation of International Accounting Standards in 1994. These directions improved the capitalisation of the UAE banking system to some extent.

There are currently 19 local banks with four locations in Abu Dhabi, six in Dubai, four in Sharjah, two in Ras al-Kheimah and one each in Fujeirah, Umm al-Quwain and Ajman. Abu Dhabian interests control three of the four Abu Dhabi-based banks: the National Bank, Commercial Bank and Union National Bank (the latter being the new name for Bank of Credit and Commerce International’s local operations-BCCI). Libyan Arab Foreign Bank holds the Arab Fund for Development and Foreign Trade (known as Arbift).The six banks in Dubai comprise two that are owned by the state: National Bank and International Bank of Emirates. The United Arab Bank has its headquarters and general manager in Abu Dhabi, but operates as a Sharjah bank because that’s where its owners come from and because the UAE Central Bank views it as a Sharjah bank. The other two Sharjah banks are Sharjah Finance, which is regulated by Banque Paribas, and Investbank. The other Emirates ‘ National Banks are owned by their respective ruling families.

At the end of 2000, the reserves of commercial banks totalled $54,532 billion, comprising 25% of all financial assets in the GCC.

1.3- Banking business in Bahrain

Banking business in Bahrain started when an Eastern Bank branch opened in 1921 according to the Bahrain Monetary Agency (1994). The bank was the only bank in Bahrain until two decades later in 1944, when the British Bank of the Middle East opened its branch. The first local bank, the National Bank of Bahrain, opened in 1957 and the Arab Bank Limited in 1960, which was the Jordanian bank.

The Gulf Rupee was the main currency of common local acceptance within the emerging financial system5. Meanwhile, the Bahrain has been negotiating the development of a shared Gulf currency with the neighboring emirates (Qatar, Dubai, and Abu Dabi). Nevertheless, Bahrain maintained its relations with Gulf Rupee when talks were not effective until it was superseded in 1965 by the Bahraini dinar (Bahrain Monetary Agency, 1994). The Bahrain Currency Council was responsible for the issuing and administration of Bahraini dinar supplies. The growth of the financial system, driven by rapid growth in oil revenues, revealed the need for a well-equipped institution to manage, oversee and control the financial system.

Bahrain was one of the first GCC countries to take steps aimed at diversifying the oil economy as a consequence of its recognition of its diminishing oil reservations (Bahrain Monetary Agency, 1994). In order to attract oil revenues from neighbouring Gulf countries Bahrain focussed on developing itself as a financial services centre in the Gulf Region.

a major financial centre in the Gulf region. The country aims to provide an environment conducive to banking and financial activity, and has recently made various moves to establish itself as the major Islamic finance centre in the region. While there is increasing competitive pressure from Dubai, Bahrain remains one of the world’s premier financial centres. Given its role as an offshore centre, the domestic banking sector remains relatively small, in fact the smallest in the GCC; nevertheless, the domestic banks continue to provide an important role in mobilizing domestic savings and financing economic development within the country.