An agenda for the Middle East and North Africa
WASHINGTON, September 15, 2011 – Financial systems across the Middle East and North Africa (MENA) proved resilient during the global financial crisis and subsequent political shocks but have failed to provide access to finance, contributing to the region’s relatively weak growth performance and inability to generate jobs. This in turn has contributed to the deep-seated frustrations of the region’s large youth populations, say the findings of a new World Bank report.
“We began work on this report with our partners in the Arab Monetary Fund, the Islamic Development Bank and the Union of Arab Banks, well before the Arab Spring,” says Roberto R. Rocha, Senior Adviser and principal author of Financial Access and Stability: A Road Map for the Middle East and North Africa. “Many of our findings now have even sharper relevance in the light of the protests that have reflected popular discontent with systems where opportunities are few, competition limited and access to finance constrained.”
The report describes MENA’s financial sectors as dominated by large, well-capitalized banks, but largely undiversified and uncompetitive. Essential non-banking financial institutions such as insurance companies, mutual and pension funds, leasing, and factoring, are not well developed with few exceptions. Equity markets are large in many countries, but mainly dominated by financial institutions and infrastructure companies. Private fixed-income instruments and markets remain negligible.
And notably, the region’s banking systems have failed to provide broad, sound and equitable access to finance. They have very high loan concentration ratios, reflecting the focus of banks on providing loans to large and well-connected enterprises and industrial groups while only 20 percent of MENA’s small and medium enterprises have a bank loan or a line of credit, one of the lowest shares among emerging regions. This has constrained their capacity to grow and generate jobs.
The number of deposits and loan accounts per adult are also low by international standards and microfinance penetration remains disappointing. The lack of access to finance is also reflected in the low share of mortgage loans in loan portfolios.
“We see large numbers of university graduates who don’t have access to opportunities and jobs; we see young couples who can‘t get married because the housing finance market is almost non-existent,” says Loic Chiquier, Director of Finance at the World Bank. “All this just increases the sense of economic exclusion and political discontent.”
The lack of access to finance is due to weaknesses in financial infrastructure, insufficient competition in the banking sector, and gaps in the legal framework preventing the development of alternative sources of finance. The report recognizes that the structure of MENA’s banking systems is evolving in the right direction, but that levels of competition are still weak. The reduction in the share of state banks bodes well for the future, says Rocha but banking systems remain less competitive than those in other regions, due to a massive presence of the state in some countries, stricter entry requirements, weak credit information systems preventing a level playing field between small and large banks, weak regulation of large exposures and connected lending, and lack of competition from capital markets and non-banking institutions.
“We’ve had a fantastic working relationship with our partners in building the statistical and analytical basis for these findings and conclusions and I think there is wide acceptance that while the financial sector is now part of the problem, it needs to be – and can be – part of the solution,” says Rocha.
This would mean implementing a comprehensive and integrated agenda for improving access and preserving stability, he adds. The report examines how this agenda needs to include three sets of mutually reinforcing reforms to be successful: the strengthening of financial infrastructure, improvements in bank competition, and the development of non-banking institutions and financial instruments. Critical though is complementing these reforms with a financial stability agenda ensuring that financial systems remain resilient as access is expanded and new risks emerge. Experience from elsewhere, notably central Europe, had shown the dangers of quickly improving access to finance without shoring up stability.
