With the Party of Petroleum Profits Waning Arab Banks Face Challenge of World Finance
Frenchman, Michael, American Banker
Making profits for some Arab banks in the Gulf states was "as easy as taking candy from a baby," commented Sheikh Ali Khalifah al Sabah, Kuwait's minister of finance and petroleum, in London this fall. He was speaking about the weakness of the Arab banking system, which had had it so good in the oil boom days, and the challenges that it now faced.
Lower oil revenue, which declined to about $160 billion last year, has been one of the factors that has led to greater cooperation and integration for the Arab banks in the Gulf states and Saudi Arabia. As the oil wealth continues to fall steadily current account deficits among some of the Arab oil producers are mounting and development budgets are being cut back.
Last year Saudi Arabia alone drew at least $10 billion from its reserve funds, although total Arab surpluses are estimated at about $275 billion for the six principal states that form the Gulf Cooperation Council (GCC). These consist of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
Such trends and pressures are finally having a direct effect on some of the banking operations in the Gulf region that, in addition, have suffered from over exposure and unwise investment operations in certain instances. This has been caused partly by weak supervision as in the United Arab Emirates where tougher controls are being introduced by the central bank.
There has also been a need for greater professionalism in banking as a whole rather than a strengthening of capital base. Some banks have grown too big, too fast, and with too little perception of the future.
Commenting on their future, Sheikh Khalifah told members of the Arab Bankers Association in London that the key to their future was "management."
He added: "Sophisticated management aware of international developments, able to adapt itself and its institutions profitably to these developments, and able to efficiently absorb and adapt technology to its purposes is just as important, if not more so, than a strong capital base."
He went on to say that unfortunately many of the Gulf banks had started when national economies in the region had been "growing at a back-breaking rate fueled...by the high income from the region's petroleum resources." Furthermore, governments were more than happy to provide protection from outside competition and "to pamper banks with special favors such as treasury deposits rolled over automatically and central bank funds at favorable rates."
The ease with which profits could be generated had removed every incentive to develop good, sophisticated, broadly based management. He took banks in his own country, Kuwait, as an example. These, he stressed, were by no means the less sophisticated, yet he said that there were few Kuwait professionals who had any real taste for international competition.
"Even when they go after international business they are a small part of large consortiums in the least profitable of the international banking activities -- lending syndication of sovereign risks," said Sheikh Khalifah. Also their directors denied staff any opportunities to make decisions -- a mild rebuke at expatriate managements.
Whether due to lack of expertise or the general economic recession in the Middle East, syndicated loans from Arab banks have been falling throughout the year. In 1983 placements dropped nearly one-third to $6.98 billion compared to $9.79 billion in 1982.
During the first half of this year the trend continued with a total of only $2.9 billion, 28% less than the same period last year. According to the Nicosia-based Middle East Economic Survey, lending to the Arab countries was only 37.5% compared to 55.4% previously, and 13% to Western Europe compared to 25.4%
But there was a significant leap in lending to Latin America, which went up from only $19 million to $219 million during the first half of this year. …