Arab central banks need to take measures to control lending activity in their countries to counter the risk of asset price bubbles that could be triggered by fresh influx of foreign capital, the region's top banker said yesterday.
Adnan Ahmed Yousif, Chairman of the Beirut-based Union of Arab Banks (UAB), also said banks in the oil-rich Gulf and other regional nations should consider mergers to create stronger financial units following the global fiscal turmoil.
Writing in the UAB's monthly bulletin, Yousif cited recent forecasts by the International Monetary Fund (IMF) that foreign investment flow into emerging markets would pick up in the coming period because of higher interest rates.
"We have already started seeing the return of private capital to the emerging markets seeking higher profits, which would increase the risk of bubbles in assets prices as predicted by the World Bank," he said.
"From now on, we should seek methods to organise credit, where central banks in the Arab World should discuss and monitor the increase in assets prices. There is a need for more organisational measures to take the asset prices bubbles into consideration if we want to prevent such a crisis."
Yousif, whose group comprises more than 400 Arab banks and financial establishment, also referred to recent warnings by the Washington-based IMF that some of the emerging markets are exposed to the risk of uncontrollable movement of capital, in addition to the asset bubble and reserves accumulation.
He noted that interest rates in most emerging markets, mainly the six-nation Gulf Co-operation Council (GCC), are presently higher than those in advanced economies following a spate of rate cuts in developed nations. They are also under bigger pressures regarding local exchange rates, thus they are taking steps to diversify their foreign currency assets.
"This is desirable but it will not lead to the collapse of the US dollar. We could say that the GCC economies are strategically attractive and will always be for foreign investors because they have a safety valve – oil, which guarantees a continued cash flow into their economies. But these countries also need to take measures to control credit and avert asset price bubbles."
In his article, Yousif said the repercussions of the global crisis on the Arab region have underscored the need for mergers among financial institutions, mainly banks in the GCC, which controls nearly 45 per cent of the world's oil wealth.
"The Arab economic situation has shown that mergers have numerous advantages – most importantly achieving massive savings, increasing the banks' ability to expand locally and externally, boosting their competitiveness edge, developing the management systems, improving profitability and enhancing their capability to export banking services and diversify activities."
Yousif said the crisis, which has hit most regional countries, has also revealed the significance of alternative funding sources, mainly bonds and sukuk, which could provide the needed financing for companies when banks tighten lending.
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