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22 April 2024

Global crisis to depress Arab banks' profits by up to 40%

By Nadim Kawach

A festering liquidity shortage caused by the global economic crisis will ally with lower foreign capital flow to depress the combined profits of Arab banks by up to 40 per cent in 2009, according to the region's top banker.

Adnan Ahmed Yousuf, Chairman of the Beirut-based Union of Arab Banks (UAB), urged local banks to take measures to deal with the crisis, including admitting sovereign wealth funds (SWFs) and other long-term shareholders to strengthen financial base and regain investors' confidence.

Quoted by the London-based Arabic language newspaper Al Hayat, Yousuf said, Arab central banks should also take action to support commercial banks and ensure the flow of liquidity into local markets.

Yousuf described 2009 as a difficult year for banks and other financial and economic institutions in the Arab countries and the whole world, and said this should prompt joint efforts by all banking establishments in the region to prepare for what he described as "a let up in the crisis" during 2010. "Due to the global economic downturn and its downward impact on oil prices, shelving of some projects in the region, and a liquidity crunch, we expect the profits of Arab banks to decline by 20-40 per cent," he said.

"Bank credit is projected to contract by 10-30 per cent during 2009 after surging by at least 60 per cent in the past few years… normally, any decline in interest rates by banks will spur credit activity but the problem is not only in the shortage of liquidity, but also in the more careful lending policies adopted by banks, at least during the first quarter of this year until the global situation becomes clearer. Liquidity is also affected by lower foreign capital flow."

Yousuf gave no figures on collective Arab banks' profits but most of the UAB's 470 banks had recorded strong performance over the past few years because of strong economic activity in the region caused mainly by high oil prices, an increase in foreign investment and reforms in some member states.

Banks in the UAE and its partners in the six-nation Gulf Co-operation Council (GCC) have been the main beneficiaries of the business upsurge due to the sharp growth in their economies and opening up of new sectors to foreign investors. While they were expected to make higher earnings in 2008, the performance of Gulf banks could be affected in 2009 by a sharp drop in crude prices despite higher public expenditure by most members.

"Arab central banks should engage in effective policies to encourage the flow of liquidity into the domestic economy, including lowering reserve requirements by banks, offering incentives to ensure funds will be channelled into productive sectors, guarantee deposits and eliminate bad debt," Yousuf said.

"In return, Arab banks should embark on plans to strengthen their capital base to regain the investors' confidence… in this respect, they should search for long-term shareholders, including pension funds and SWFs, given their capability of investing in the long run and accepting reasonable return. Our banks should not wait for the authorities to act but have to take initiatives by themselves."

Yousuf said UAB would present proposals at the Arab economic summit in Kuwait on January 19 to support the regional financial sector, remove obstacles for the Arab free trade agreement, and free inter-Arab financing and other services.

Writing last month in the UAB's bulletin – the Arab Banker – Yousuf urged regional banks to expand co-operation to face the global crisis and contribute to the new world financial order, which he said would be spawned by the crisis.

"All countries are expected to participate in the new world order, including Arab states. The trips to the Gulf by British Prime Minister Gordon Brown and other officials represent a clear recognition of the role of regional states in tackling the current crisis. In recognition of such a role, they should be involved in forging the new global economic order on par with other nations," he said.

"In this field, Arab banks can play an effective role that will complement the role of their governments.

"Arab banks need to take quick measures to expand co-ordination and act as a single Arab banking bloc. Arab banks are also urged to learn lessons from the current crisis by utilising it to develop their financial, technical and human resources." According to UAB data, Arab banks recorded strong performance in 2007, with their combined assets surging from $1,268 billion (Dh4.65trn) at the end of 2006 to a record $1,691bn, an increase of around $422bn or 33.2 per cent. Their shareholders equity leaped from around $115.7bn to $161bn.

The figures showed the UAE controlled the largest bank assets in the region at the end of 2007, standing at around $335bn, nearly 20 per cent of the total assets of Arab banks.

Saudi Arabia had the second largest Arab banking sector at the end of 2007, with assets of nearly $286bn. The figures showed the combined assets of banks in the GCC totalled around $878bn at the end of 2007, more than half the Arab assets.