Arab governments need to reduce their ownership in national banks and encourage foreign investment into their banking industry so they can focus on their supervisory role of the sector, the region's top economist has said.
The nearly 470 banks in the Arab World should also work on strengthening their financial position but merger among giant banks should be avoided as this will aggravate the problem of funds concentration in few banks, said Jassim Al Manai, Chairman of the Abu Dhabi-based Arab Monetary Fund (AMF), a key Arab League IMF-style financial establishment.
Manai, a Bahraini, also called on stock market authorities in the region to introduce new investment instruments and encourage cross-listing of local companies to expand business opportunities for investors.
"What we need now is to avoid politicising Arab banks. I mean by this, politics must be kept away from banking and all its sectors and branches," Manai told the monthly magazine of the Beirut-based Union of Arab Banks. "Arab governments must reduce ownership in national banks as much as possible as they cannot be a supervisor and a legislative body for these banks and at the same time own them. I call on Arab governments, which have a high shareholding in local banks to reduce their stake through privatisation."
Manai said this would prevent what he described as the contradiction in interests and ensure that banks are managed on sound basis in line with global standards.
"In this respect, I believe foreign investment should be most welcome because Arab governments are not required to own the banks but to supervise and monitor them. They have to concentrate on their fundamental role in this sector. I urge them to encourage foreign investment in the banking sector because foreign investors will not take the banks away with them but will place their money in the banks here. This will contribute to creating jobs, developing the banking sector and expanding investment opportunities."
Manai said Arab banks performed well in 2009 and are expected to make better profits in 2010 but added that high profitability is not enough.
He said the Arab banking sector is suffering from "some weakness points" including a high degree of concentration of funds in a few large banks.
"A handful of giant banks in the region control most of the assets and deposits of the banking sector. This should prompt us to work to tackle this concentration by avoiding mergers among large banks," said Manai.
"Such mergers will only aggravate the problem because they will lead to more concentration of funds and this in turn will limit options for clients and create a state of monopoly. I think Arab banks should concentrate on diversifying their investments, developing their operations, rationalising expenditure, upgrading efficiency and ensuring good competitiveness in banking services."
Manai gave no figures on Arab banks' profits but in recent remarks, UAB Chairman Adnan Youssef said the consolidated net profits of the region's banking sector grew by around eight per cent in 2009.
He said the decline and losses by a few single banks in the region was a result of heavy provisions against bad debt at home and globally, a sharp slowdown in lending and a general business downturn at the beginning of 2009.
Asked about 2010, Youssef said he expected regional banks to perform better because of growth in regional economies, higher oil prices and an expected recovery in lending due to rebounding domestic demand.
"As for the region's stock markets, I believe they require more development and more diversification of investment instruments," added Manai.
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