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If nature abhors a vacuum, so too does banking. That’s become apparent over the past few years as banks from the Middle East and North Africa have been expanding outside their home markets in order to grow and diversify their asset bases as well as their revenue streams.
Interestingly enough, the expansion has been taking place in both an easterly direction toward Egypt and the Mediterranean rim as well as Southeast Asia where the demand for Islamic Finance products is steadily increasing. The impetus for the expansion is two-fold.
In the first instance, GCC banks find themselves with a surplus of liquidity in relatively small markets. It is estimated that between 2008 and 2013, combined assets of the GCC banks grew by more than $600 billion and Standard & Poor’s calculates that by the end of this year those assets could total $2 trillion. Armed with that kind of a war chest and under pressure to expand their lending and capital markets businesses, they are looking at countries where cultural similarities and financing needs combine for much easier expansion.
At the same time, these banks are taking advantage of the pull back by major Western financial services firms that are retrenching from their emerging market operations due to the regulatory pressure on capital.
Earlier this year, Qatar National Bank (QNB), the region’s largest lender, announced the opening of an office in Ho Chin Min City, Vietnam, arguably one of the most aggressive expansionary steps taken by a MENA bank.
QNB CEO Ali Ahmed Al Kuwari said Vietnam was “strategically important,” and that increasing the flow of “East-West” trade between Qatar and Asia is very much part of the bank’s future plans.
What makes the Vietnamese announcement slightly unusual is that represents a departure from the more traditional Asian expansion route through countries such as Malaysia and Indonesia where the Islamic connection paves the way for entry into the market.
In line with remarks from QNB’s Chief Financial Officer Ramzi Mari that it wants to be one of the largest banks in the region by 2017, QNB over the past several years has bought interests in banking operations in Egypt, Libya and Tunisia. Its total footprint now includes 615 branches in 27 countries around the world.
The action in Egypt
For a variety of reasons, one of the favorite countries in which MENA banks have been seeking to expand is Egypt.
With higher operating margins and a relatively untapped retail lending market, banks are also drawn to the country by Egypt’s relatively low bank penetration rate. Unlike the UAE where there are more than 50 banks, Egypt’s four major banks hold 50 percent of the country’s total lending exposure.
But Egypt is not without its challenges. Although earlier this year Moody’s upgraded the country’s credit rating to B3 from Caa1, it has a higher-than-normal rate of non-performing loans, at 9 percent.
How then are the Egyptians responding to this encroachment on their home market?
Commercial International Bank, the largest private sector bank in the country, has undertaken its own expansion plans both within and outside the country. Having recently agreed to buy the retail and credit card business of Citibank Egypt, it has its own plans for expansion in Asia. Last month CIB announced that it has been selected by the Bank of China as the leading bank in the African market to join the ‘One Belt One Road’ initiative. This is China’s ambitious land-based and maritime trade routes across Asia, Europe and Africa to create closer economic and trade links among 65 countries, with an anticipated trade volume exceeding $2.5 trillion over the next decade.
The role of Islamic Finance
No discussion of banking in MENA would be complete without looking at the role of Islamic Finance. Although there is an ongoing debate within the world of Islamic finance over whether too much recent innovation degrades the integrity of the sector’s products, there has still been a huge upturn in the issuance of Sukuk bonds. The upturn plays to the strengths of the banks in the MENA region, particularly since the larger Western banks have pared down their presence in the Islamic Finance world.
Within the last twelve months, there have been some notable deals in the Sukuk market, including the first sovereign deal from a non-Muslim country (the UK) and the first sub-Saharan African deal (South Africa). Local bankers say the market is moving from the periphery into the capital markets mainstream.
Another phenomenon that should serve to increase Islamic Finance activity among the banks in MENA is the need for such financing for small and medium enterprises (SMEs), which up to now have been largely ignored in favor of the larger sovereign deals.
The International Finance Corporation estimates that approximately 32 percent of such businesses in the region remain excluded from the formal banking sector because of a shortage of Shariah-compliant products. The IFC has also found there is a potential gap of $8.63 billion to $13.20 billion for Islamic SME financing within unserved and underserved SMEs categories, with a corresponding deposit potential of $9.71 billion to $15.05 billion across these countries. This is due to the fact these SMEs do not borrow from conventional banks due to religious reasons, according to the IFC.
The oil pricing factor
Despite their expansion plans and their comfortable liquidity cushions, the MENA banks are not immune to the effects of the ever-declining price of oil. The lower oil price has a particularly negative impact on countries such as Saudi Arabia where it is estimated oil prices need to be around $100 a barrel in order to balance the budget. That’s a long way from the $43 a barrel price in late August. In countries such as the United Arab Emirates, where oil represents only 31 percent of revenues, the price drop is much less onerous.
There is a positive factors to be considered in light of oil prices. The demand for energy in the MENA markets, with rapidly growing populations, has seen a marked increase in interest in alternative forms of energy, particularly solar. That will create financing needs that will play to the strengths of the local banks.
So what does the future hold for the MENA banks?
The regional expansion will have a self-fulfilling positive effect not only on the banks, but the regions they serve as well. The allocation of credit to individual households and the structuring of Islamic Finance products to mid-sized companies will have direct effect on GDP and will in many instances accelerate the growth of manufacturing and service sectors--needed to offset the declining revenues from the oil and gas sector.
At the same time, the pull back by major Western banks will allow the MENA financial firms to increase their market share across a variety of wholesale banking sectors, including cash management where new advances in technology will make the banks competitive enough to ultimately act on a global scale.
By John M. Anderson