Banking and Financial Systems in the Arab World

Transcription

1 Banking and Financial Systems in the Arab World

2 Also by Philip Molyneux and Munawar Iqbal THIRTY YEARS OF ISLAMIC BANKING

3 Banking and Financial Systems in the Arab World Philip Molyneux Professor of Banking and Finance University of Wales Bangor and Munawar Iqbal Chief, Islamic Banking and Finance Division Islamic Research and Training Institute Islamic Development Bank jeddah palgrave macmillan

4 * Philip Molyneux and Munawar Iqbal 2005 Softcover reprint of the hardcover 1st edtion 2005 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act First published 2005 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin's Press, LLC and of Palgrave Macmillan Ltd. Macmillan is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN ISBN (ebook) DOI / This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Molyneux, Philip. Banking and financial systems in the Arab world I Philip Molyneux & Munawar Iqbal. p. em. Includes bibliographical references and index. ISBN Banks and banking, Arab countries. 2. Financial institutions-arab countries. 3. Banks and banking-religious aspects-islam. 4. Finance-Arab countries. 5. Banking law (Islamic law) I. Iqbal, Munawar. II. Title. HG3366.A6M '0917' 4927-dc Transferred to Digital Printing 20 II

5 Contents List of Tables List of Figures Preface About the Authors ix xii xiii XV 1 Introduction 2 An Overview of Arabian Economies Introduction Economic, social and demographic trends Role of the state Constraints to growth Economic reforms and the globalization process Oil and non-oil economies- a comparison of Jordan, Egypt, Saudi Arabia and Bahrain Select comparative analysis Financial liberalization and intermediation processes Conclusion 3 Economic Performance of Arabian Countries during the 1990s Introduction Drivers of economic growth in the Arab world International trade and the liberalization process Inflation trends during the 1990s External indebtedness and reserves of Arab countries Domestic investment and FDI in the Arab world Recent economic performance in the Gulf region Evidence on financial sector development in Arab economies Conclusion v

6 vi Contents 4 Banking and Financial Systems in Non-Gulf Arab Countries 74 Introduction 74 An overview of the financial systems in non-gulf Arab countries 74 Financial system of Egypt 74 Egypt's capital market 79 Financial system of Jordan 80 Jordan's capital market 83 Comparison of]ordan and Egypt's banking system 84 Banking and finance in Maghreb countries 86 Brief history of the Maghreb financial systems 87 Algeria 87 Morocco 90 Tunisia 92 Financial liberalization in Algeria, Morocco and Tunisia 93 Structural and financial features of Maghreb banking systems 98 Banking sector structure 98 Bank ownership features 105 Balance sheet characteristics 107 Profitability 108 Financial markets 110 Other non-gulf financial systems 111 Conclusion Banking and Financial Systems in Gulf Cooperation Council (GCC) Countries 113 Introduction 113 Banking sector development in Saudi Arabia 114 Saudi Arabian financial markets 116 Banking in the UAE 119 UAE financial markets 121 Banking business in Bahrain 122 Bahrain's financial markets 124 Banking sector development in Kuwait 126 Kuwaiti financial markets 128 Banking in Oman 129 Omani financial markets 132 Banking sector development in Qatar 133 Qatari financial markets 136 Recent performance of GCC banking systems 136 Prospects for financial sector development 143 Conclusion 144

7 Contents vii 6 Islamic Banking 146 Introduction 146 History of Islamic banking 147 Distinguishing features of Islamic banking 151 Risk-sharing 151 Emphasis on productivity as compared to creditworthiness 151 Moral dimension 151 Wider set of products 152 Closer link between monetary and real sectors 153 Islamic banking in the Arab world 153 Islamic investment funds and insurance products 157 Regulating Islamic banks 161 Prospects for Islamic banking 164 Conclusion 167 Appendix: main Islamic banking and finance contracts Financial System Efficiency 174 Introduction 174 Why should we be concerned about the efficiency of the financial system? 174 Defining financial system efficiency 176 Aspects of efficiency as applied to the financial system 177 Informational efficiency 177 Symmetric information efficiency 178 Fundamental efficiency- efficient stock markets 181 Operational efficiency 182 Other aspects of operational efficiency 185 Structural efficiency 186 Regulatory efficiency 187 Measuring banking sector efficiency - theory and empirical evidence 189 Importance of bank efficiency studies 190 What do banks produce? Defining the bank production process 191 Economies of scale in banking 194 Scope economies 197 X-efficiency in banking 199 Non-parametric approaches 201 Parametric approaches 202 Estimating efficient frontiers and the choice of functional forms 205 Empirical evidence on X-efficiency in banking 207 Bank X-efficiency in emerging and developing countries 211 Conclusion 216

8 viii Contents 8 Efficiency in Arab Banking 217 Introduction 217 Why study Arab bank efficiency? 217 Measuring the efficiency of Arab banks 218 Bank efficiency in Egypt, jordan, Saudi Arabia and Bahrain 229 Efficiency in GCC banking systems 234 Scale economies in Gulf banking 239 Scale inefficiency in Gulf banking 239 Determinants of Gulf bank efficiency 242 Banking sector efficiency in Algeria, Morocco and Tunisia 245 Conclusion Current Developments and Prospects for Arab Banks 256 Introduction 256 Trends in the structural features of Arab banking 257 Developments in retail banking 258 Private banking 260 Corporate and investment banking 262 Technological developments impacting on Arab banks 265 Regulatory trends 267 BIS core principles on effective banking supervision 267 Impact of Basel 2 on Arab banks 269 FATF' s anti-money-laundering and anti-terrorist-financing recommendations 273 GCC single market and other Arab trading blocs 277 Conclusion 279 Notes 280 References 28 7 fu~ ~

9 List of Tables 2.1 Members of Arabian countries Oil and non-oil Arabian countries Area of Arabian countries Population and population density of Arabian countries over Poverty in Arabian countries (mid-1997) Trends in human development of Arabian countries for Credit ratings of Arabian countries for General indicators for Jordan, Egypt, Saudi Arabia and Bahrain Major economic reforms in Jordan over the last decade GDP indictors for Jordan, Egypt, Saudi Arabia and Bahrain over the last decade Distribution of GDP (current prices) to economic sectors for Jordan, Egypt, Saudi Arabia and Bahrain Trade indicators for Jordan, Egypt, Saudi Arabia and Bahrain over the last decade External debt indicators for Jordan and Egypt over the last decade International reserves (excluding gold) of Jordan, Egypt, Saudi Arabia and Bahrain over Investment activity in Jordan, Egypt, Saudi Arabia and Bahrain over Real GDP growth, annual percentage change of Arabian countries, Per capita GDP for Arabian countries Composition of GDP in Arabian countries Exports of Arabian countries, Imports of Arabian countries, so 3.6 Balance of trade of Arabian countries, Inflation in Arabian countries over External debt of Arabian countries External debt of Arabia as a per cent of GDP Monetary reserves (excluding gold) of Arabian countries, Gross domestic investment of Arabian countries as percentage of GDP 56 ix

10 X List of Tables 3.12 Foreign direct investment in Arabian countries Oil and gas production and reserves of the GCC in GCC GDP annual growth over the period Summary of financial deepening ratios Currency ratios in Jordan, Egypt, Saudi Arabia and Bahrain over Monetary ratios in Jordan, Egypt, Saudi Arabia and Bahrain over Financial development indicators for Jordan, Egypt, Saudi Arabia and Bahrain over Growth of credit to the private sector in Jordan, Egypt, Saudi Arabia and Bahrain over the last decade Measures undertaken to enhance bank competition and performance in the Egyptian banking market since Structure of the Egyptian banking system as at 31 December Liberalization of foreign exchange in Jordan during the 1990s Market share of commercial banks in Jordan and Egypt Average annual growth(%) of the main banking sector indicators (nominal values) for Jordan and Egyptover Distribution of credit to economic sectors in Jordan and Egypt Selected interest rates in Algeria, Morocco and Tunisia from 1990 to Comparative size characteristics in commercial banking in Algeria, Morocco and Tunisia Comparative commercial banking characteristics in Algeria, Morocco and Tunisia Banks in Algeria Banks in Morocco Banks in Tunisia Saudi share market indicators over the period from 1990 to Size of commercial banking sector across GCC states, GCC commercial banks: credit structure Indicators of GCC countries' commercial banks' performance and soundness Islamic banks by regions Assets of Islamic banks by regions Salient features of regulation and supervision for Islamic banks in some Arab countries Bank efficiency in emerging and developing countries 212

11 ListofTab/es xi 8.1 Size of the study sample relative to the banking sectors of Jordan, Egypt, Saudi Arabia and Bahrain over Specialization of banks under study, Distribution of banks' assets in Jordan, Egypt, Saudi Arabia and Bahrain, Descriptive statistics of the banks' inputs and outputs for Jordan, Egypt, Saudi Arabia and Bahrain over Cost efficiency in Jordan, Egypt, Saudi Arabia and Bahrain banking over Standard profit efficiency in Jordan, Egypt, Saudi Arabia and Bahrain banking over Alternative profit efficiency in Jordan, Egypt, Saudi Arabia and Bahrain banking over Scale economies in the GCC banking industry, by country Determinants of GCC bank cost inefficiency Determinants of GCC bank profit inefficiency Maghreb banking sample Cost efficiency in Algeria, Morocco, and Tunisia banking over Alternative profit efficiency in Algeria, Morocco, and Tunisia banking over Corporate banking products for multinational Arab corporations Eight distinct winning formulas emerging in corporate banking Potential winners and losers under Basel 2? Summary of the principal recommendations of the Financial Actions Task Force on anti-money-laundering Summary of the FATF special recommendations on terrorist-financing 278

12 List of Figures 2.1 Geographical map of Arabian countries Gulf Cooperation Council (GCC) countries Distribution of GCC GDP at current prices, GDP and oil growth rates of individual GCC countries over the period External debts as a share of GDP, (a and b) Share of oil revenues in GCC GDP, exports, and total government revenues, Credits and deposits of Kuwaiti commercial banks, Degree of monetization in the GCC countries' banking systems, GCC commercial bank assets relative to GCC countries' GDPs, Share of commercial banks' credits to the economic sectors, s.s Three largest and the largest banks' assets relative to total banking sector assets, Aspects of financial system efficiency Translog, kernel, spline, and Fourier cost function estimates Cost and profit inefficiencies across GCC banking systems, Foreign and national bank inefficiencies in the GCC, Cost and profit inefficiencies across bank size in the GCC, Comparisons between scale and X-inefficiency in GCC banking GCC private banking market size 2005 forecast Global private banking market size Number of middle-market business banking products offered by commercial banks 263 xii

13 Preface This text provides state-of-the-art analysis of banking and financial systems in the Arab world. The early chapters of the text present an overview of Arab economies, linking this to banking and financial sector trends in the Arab world over the last twenty years. Major contemporary themes relating to the structure and performance of Arab and Gulf Cooperation Council (GCC) banking systems including financial liberalization and the efficiency features of banking systems are analyzed in detail. Specific attention is paid to the recent empirical work on banking sector efficiency in various countries including Egypt, Jordan, the Gulf and Maghreb banking systems. Developments in retail, corporate and investment banking as well as the growth of Islamic banking are also noted throughout the text. In addition, regulatory developments impacting on banks in the Arab world, including the impact of Basel 2 and the OECD's Financial Action Task Force initiatives, are also discussed. We believe that this text will be the first to provide a rigorous analytical evaluation of banking sector developments in the Arab world. Throughout the text, particular attention is paid to the changing performance features of Arab banking and financial systems in the light of global, regional and local economic developments. An attempt is also made to provide insights into comparative banking sector developments in the main GCC and non-gcc banking markets. This text could not have been completed without the support and work of many individuals. It is not possible to list all involved but particular thanks go to Idries Al-Jarrah, Khalid Shams Mohamed, Sari Al-Shammari and Abderazak Bakhouche, all excellent PhD students at the University of Wales, Bangor, who provided outstanding research support without which this text could never have been completed. Thanks also go to Hessa Al-Khalifa, Abdulla Khaled Al-Attiya and Mohamed Hamid for the insights they provided to us. Thanks also due to Ali Almmari, Yener Altunbas, Ted Gardener, Jon Williams and Keith Williams who have also made helpful comments on various aspects of Arab banking issues. We are thankful to Dr Umar Chapra, Senior Adviser, Islamic Research and Training Institute of the Islamic Development Bank, for providing useful insights on the subject. We are grateful to all who gave useful comments on earlier drafts of each chapter. Thanks are due to Mr Aman al-hoque for secretarial assistance for preparing some chapters of this book. xiii

14 xiv Preface Finally, thanks to our families and loved ones for their usual forbearance with projects of this kind. The authors and publishers are grateful to Abderazak Bakhouche,!dries Al-Jarrah and Khalid Shams Mohamed for permission to the material from their Phd theses. Every effort has been made to contact all copyright-holders for copyright material in this book. If any have been inadvertently omitted, the publishers will be pleased to make the necessary arrangement at the earliest opportunity. PHILIP MOLYNEUX MUNAWAR IQBAL

15 About the Authors Philip Molyneux is Professor in Banking and Finance and Director of the Institute of European Finance at the University of Wales, Bangor. He also has a chair at Erasmus University, Rotterdam, Netherlands. His main area of research is on the economics of the banking and financial services industry and he has published widely in this area including recent publications in the foumal of Banking and Finance and foumal of Money, Credit and Banking. Recent texts include: Efficiency in European Banking (Wiley 1998), Private Banking (Euromoney) and the latest, European Banking: Efficiency, Growth & Technology (Wiley, 2001). Professor Molyneux has acted as a consultant to New York Federal Reserve Bank, World Bank, European Commission, UK Treasury, Citibank Private Bank, Bermuda Commercial Bank, McKinsey's and various other international banks and consulting firms. In November 2001 he was the Visiting Bertill Daniellson Research Fellow at the Stockholm School of Economics and University of Gothenburg. Professor Molyneux has recently been appointed as one of eight expert financial sector advisers to the European Union's Economic and Monetary Affairs Committee that implements financial services regulations for the European Community. Munawar Iqbal is Chief of Research in Islamic Banking and Finance at the Islamic Research and Training Institute of the Islamic Development Bank, Jeddah, Saudi Arabia (the largest Islamic financial institution in the world with an authorized capital of US dollars 20.5 billion). Professor Iqbal has also served as Economic Adviser to Al-Rajhi Banking and Investment Corporation, Saudi Arabia (the largest Islamic commercial bank in the world). Earlier, he served as the Director, International Institute of Islamic Economics, Islamic University, Islamabad, Pakistan. He has taught at the International Islamic University, Islamabad, McMaster University, Canada, and Simon Fraser University, Canada. He has published/edited more than ten books and published more than thirty papers in the field of Islamic Banking and Finance. Recent publications include Islamic Banking and Finance: New Perspectives on Profit-Sharing Risk (Edward Elgar, 2002) and Islamic Banking and Finance: Current Developments in Theory and Practice (The Islamic Foundation, UK, 2001). He was the founding Editor of the Review of Islamic Economics, the Professional Journal of the International Association for Islamic Economics, and also founding Editor (and continues to date) of the Islamic Economic Studies, the professional journal of the Islamic Development Bank. He has lectured extensively in the field of Islamic Banking and Finance throughout the world. XV