The severe corporate debt default crisis that jolted the banking sector in Gulf oil producers in 2009 underscored poor transparency and outdated credit practices in the region, said a Saudi investment company report.
NCB Capital, owned by Saudi Arabia's largest bank, National Commercial Bank, said yesterday that the crisis, which involved billions of dollars in bad debt, was the main factor in dampening investor confidence and obstructing economic recovery in the GCC following the global fiscal distress.
"Even as the regional corporate sector has generally performed well in the face of the crisis, the scandals have offered evidence of over-extension and poor risk management at some companies. The impact of the crisis has been amplified by poor transparency and the relative lack of well-defined and broadly accepted mechanisms for dealing with situations of distress," it said.
"From the regulatory perspective, the crisis has highlighted the risks and limitations of many outdated credit practices, but new standards have yet to fully replace them. The poor sentiment in the corporate sector has gone hand-in-hand with highly restrictive lending practices by regional banks."
In Saudi Arabia, the largest Arab economy, credit provided by its 12 commercial banks to the private sector declined to SR708.7 billion (Dh694bn) in the fourth quarter of 2009 from around SR721.6bn in the previous quarter and SR712.7bn during the fourth quarter of 2008, said the report.
"In spite of month-to-month variations, a clear recovery is yet to materialise. Similarly, growth in claims to the private sector in the UAE declined by about one per cent to nearly Dh737.5bn in the third quarter of 2009 compared with the previous quarter while credit in Kuwait remained flat at KD28.6bn [Dh363.9bn] in the same period," it said. "The reluctance of financial institutions to provide credit to the private sector is hampering the transition away from the stimulus-driven growth." But the study noted that while the credit tightness by GCC banks could pose a problem in the short term, it also offers one of "best prospects" for economic recovery once the situation begins to normalise.
"Here the prospects, especially for Saudi banks, look fairly favourable," said the report. "Although the 2009 banking results fuelled concerns about non-performing loans, the situation is generally deemed healthy."
The report showed that some smaller Saudi banks last year recorded several-fold increases in their non-performing loans (NPLs), which forced some of them to book higher provisions. But it added that some of the larger banks have been able to reduce theirs and the NPL coverage surged to as high as 96 per cent.
"Nor do regulatory restrictions seem to pose serious risks with the loan-to-deposit ratio declining from 87.0 per cent in 2008 to 77.6 per cent last year. Excess deposits with Sama last year totalled $26bn [Dh95.497bn].
"The outlook for the rest of the region is generally somewhat more subdued.
"Provisioning in the broader GCC increased by 40 per cent to more than $9.4bn in 2009 with UAE banks leading the way with about $4.8bn, 23 per cent above the 2008 levels. Kuwaiti banks had provisions of about $1.7bn in 2009, even ahead of the Saudi aggregate of $1.6bn."
NCB Capital did not elaborate on the credit practices, but the nearly 150 banks in the GCC have been partly blamed for the default distress that involved mainly the financially troubled Saudi Saad and Algosaibi family conglomerates.
One study by the Saudi American Bank Group (Samba) said GCC banks had lavished funds on those businesses on the basis of reputation although the two companies and other Gulf family firms lack transparency and disclosure norms.
"The risks that businesses have undertaken, and that have become publicly exposed, heighten the level of concern. Lack of corporate transparency exaggerates the unknown," said Samba, one of the largest Saudi banks. "The need for additional efforts towards improved corporate transparency is paramount.
"There are two important and inter-related issues here. Firstly, the bank-wide exposure to these business groups, as lending is carried out on a name basis; secondly, the level of exposure, risk and ratings which banks experience in the event of system-wide difficulties."
Besides the credit squeeze, the default problems have sparked calls for reforms within local family businesses, including their management and practices.
A group representing the GCC's private sector also said last month it is planning to issue the region's first directory of family businesses recounting their foundation and providing information on their activities.
The Dammam-based Federation of GCC Chambers of Commerce and Industry is undertaking the project to release the region's first such encyclopedia, entitled Family Companies in the Gulf.