GCC currency union may spur bank mergers

The creation of the Middle East's first monetary union in the Gulf could trigger cross-border mergers among regional banks and encourage acquisitions by large Gulf companies, a top Arab banker said.

Adnan Yousuf, Chairman of Beirut-based Union of Arab Banks (UAB), said the recent announcement of the Gulf Monetary Council (GMC) would pave way for the region's first joint central bank and allow its four members to push ahead with establishment of the monetary union and a single currency.

In an article published in the London-based Arabic language daily Al Hayat, Yousuf said the monetary union, which groups Saudi Arabia, Kuwait, Qatar and Bahrain, would also develop local stock markets, mainly bonds.

"The single currency will eliminate instability in Gulf exchange rates and this will deepen the concept of a single market in the region," he said.

"This means companies in the region will be operating in a single market, which could encourage them to merge and giant companies to acquire smaller firms in member states. This in turn will have a positive impact on the overall economy. As for banks and other financial institutions in the region, the monetary union is expected to encourage competition, which will lead to better and more diversified services. It could also trigger mergers among those institutions so they can benefit from the larger economy."

The four countries, which are members of the GCC, launched the monetary union at the start of 2010. Last week, their central bank governors announced the formation of the Riyadh-based GMC, headed by the Saudi central bank governor.

The launching of the monetary union followed years of negotiations, which ended up in the withdrawal of the UAE and Oman for different reasons. Officials have said the introduction of a single currency would take many years but have not made clear whether it would be pegged to the US dollar or a basket.

GCC countries have around 150 banks and more than third of them are based in the UAE. According to UAB, the GCC banks control more than half the combined financial resources of the Arab world's 470 banks.

With their assets standing at around $660 billion (Dh2.42 trillion) at the end of September 2009, the GCC banks accounted for over 50 per cent of the total Arab bank assets.

The GCC nations, sitting atop more than 40 per cent of the world's proven oil deposits, are seeking to unify rules for supervision of their banks as part of plans to bridge the gap in their financial systems ahead of the monetary union.

A committee set up last year met in Riyadh last month and discussed a draft law on unifying legislations related to control and supervision of the banks in the four countries that are signatories to the monetary union.

The four states have charged a regional consultancy firm with conducting a study on drafting common banking regulations to be enforced in the monetary union.

"Besides financial services, the union is also expected to spur an influx of foreign capital into the region and at the same time boost inter-Gulf investment. This will have positive effects on banks and stock markets," said Yousuf. "We hope that the UAE and Oman will eventually join this vital project."

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