A year after the global financial crisis erupted, is it business as usual for banks in the Middle East? Their counterparts in the West have been battered and otherwise have gone through a lot. As Western bankers marked the first anniversary of the collapse of investment bank Lehman Brothers in September 2008, which triggered the crisis and bank failures around America continue. At the same time, the authorities in the US warn that in some cases the bad old ways that led to major problems are still there. A recent twist in the changed Western financial scene is the seeming tilt in attitudes away from banking secrecy, with the Swiss financial giant UBS turning over client records to the American government. More such changes are no doubt on the way; otherwise, we may be in for another unpleasant greed-driven episode of financial collapse a few years down the road.
So are there nasty surprises still in store for the region’s banking sector? The answer seems to be that while there have certainly been problems in the region’s financial sector, the worst is over. With the United Arab Emirates issuing $20 billion in bonds to boost banks’ liquidity last year, the Saudis injecting cash into their financial system and the Qatari government buying loan portfolios in each of the country’s banks, the banking system has largely stabilized in Gulf Cooperation Council countries. The exception seems to be Kuwait, where the government has already stepped in and taken over two banks, with other financial firms currently waiting on a $5 billion rescue package from the state to counter the effects of the crisis.
Effectively, the reason the Gulf banking sector has not been decimated in the wake of the global financial crisis is because the governments have used their petro-dollar surpluses to keep the sector afloat. Though proportionally, liquidity injections into Western banks compared to the regional ones were lower, the GCC region’s cash-rich governments have helped cushion the magnitude of the downturn in the Gulf.
A particular bright spot has been Islamic banks, which as a whole have managed to expand in a turbulent year. Assets held by the world’s 100 largest Islamic banks increased 66 percent in 2008 from the previous twelve months despite the global financial turmoil. The top 100 Islamic financial institutions — mostly in Asia, the GCC states and Iran — held assets totaling $580 billion last year, up from $350 billion in 2007. In the same period, the 300 largest Asian banks of all types saw their assets rise by a much lower 13 percent. The blot in this picture came from Islamic banks in the UAE that were heavily exposed to the property market which, especially in Dubai, had crashed. Islamic banks in the Gulf have also been exposed to the sub-prime mortgage meltdown in the US, but due to lack of transparency, it is difficult to determine the extent of total losses.
Iranian banks were the biggest players in the global Islamic banking sector, with seven out of the largest ten such institutions headquartered in Tehran, but Saudi Arabian Islamic lenders were generally more profitable. Not that the Saudi financial sector hasn’t had its share of problems in the past few months, as banks in the kingdom cope with the fallout from debt restructuring at two family-owned Saudi conglomerates — Saad Group and Ahmad Hamad Algosaibi & Brothers. These problems came to light in May when the Saudi Arabian Monetary Agency, the kingdom’s central bank, froze the accounts of the chairman of Saad Group.
Banks in the UAE also have significant exposure to the faltering groups: Mashreqbank is suing the Algosaibi organization, and the Abu Dhabi Commercial Bank is suing a unit of the Saad group. In July, the UAE central bank directed banks to take provisions of 50 to 75 percent of their exposure to the troubled conglomerates. In fact, the problem transcends the region, as several regional and international banks, including Citigroup and BNP-Paribas, are also exposed.
At the same time, Middle East banks are profiting from business associated with large government-driven infrastructure projects. In Saudi Arabia, the locomotive that spurs the GCC economy, as it does with the rest of the region, the 2009 budget projects a 16% increase in spending to reach a record $126 billion equivalent. Several projects, in areas including power generation, desalination and transport will provide good business for Saudi banks that have cut back on lending to the private sector. The bottom line is that, unlike the West, banking in Saudi Arabia and much of the rest of the region looks to remain strong due to adequate liquidity to cover for the hits taken so far.
RIAD EL-KHOURI is the senior associate consultant at the William Davidson Institute of the University of Michigan in Ann Arbor, and dean of the business school at the Lebanese French University in Erbil.
