The financial services sector in the Middle East has made great strides over the last two decades demonstrating growth both in size and scale. Over the years, market has moved from being trade-based to one with a diversified focus in areas like manufacturing, real estate, hospitality, education and healthcare.
Local commercial banks went through a cycle of change driven by automation and customer focus. Adnan Chilwan, CEO of Dubai Islamic Bank, believes that this region possesses a level of dynamism that is unmatched. “Driven by strong economic growth and sovereign fiscal strength, the last twenty years have seen the wider GCC banking sector reach $2.2 trillion (H1 2019) in total assets supported by increases in capital inflows amongst emerging Arab economies such as Egypt, Saudi Arabia and the UAE.”
Providing an indication of scale, Saad Azhari, Chairman and General Manager of Blom Bank, highlighted, “The region’s banks have grown to become universal banks, they managed to largely bypass the financial crisis in 2008, and they have remained well-capitalised and profitable. Out of page the top 1000 banks in the world in 2019, eight per cent were from the region and their profits constituted 4.7 per cent of the total.
These figures are the more notable given that the region’s economy is only two per cent of the world economy; which indicate that the region’s banks are stronger and more visible than the region’s economy.” Adnan Ahmed Yousif, President & Chief Executive of Al Baraka Banking Group reminds us that financial development in the GCC to a large extent relied on banks.
“Financial development and inclusion is likely to be associated with stronger economic growth in the GCC countries as we noted over the last years. The development of banks and equity markets has been supported by a combination of buoyant economic activity, a booming Islamic finance sector as well as financial sector reforms.”
Financial systems in the GCC have developed significantly over the last couple of decades and there is further room for progress in future, especially with the recent evolution of financial technology in the financial sector. Technological advancements are inevitable and it is changing banking operations. Led by disruption and driven by emerging digital technologies, regional banks are increasingly exploring possibilities of integrating the use of innovation across different set of industries.
“Those of us who have closely worked within the financial industry have seen a significant change in shift of consumer habits and demands over the last two decades,” said Ahmed Abdelaal, Head of Corporate and Investment Banking Group at Mashreq Bank. Global financial institutions and multinational corporations found the market increasingly interesting and made significant investments. With the establishment of the DIFC in 2002 and the ADGM in 2013, UAE emerged as the key financial hub in the Middle East.
Commenting on this, Rohit Walia, Executive Chairman of Alpen Capital, said, “The region’s penchant for innovation, the economic boom of the 2000s and the slew of infrastructure projects saw a period of rapid growth in the financial sector with product innovations and cutting-edge technology.
The focus on rapid growth also meant there were lessons to be learnt along the way. Since then the financial sector has matured and operates with more prudence and an increasing focus on compliance driven by an evolving regulatory regime.” “Those of us who have worked in the region over the last two decades have witnessed unprecedented changes in consumer behaviour.
The pace of change continues to accelerate, and increasingly technology is seen as the key to unlocking success and meeting customer needs. Banks need to be innovative to retain the customers’ loyalty and interest,” added Abdelaal.
Having come a long way, the journey has not been without its challenges. One of the biggest is the global financial crisis and its repercussions—continued market volatility and the ability to navigate through its economic cycles in a prudent and timely manner.
Geopolitics has always made the Middle East an interesting market to operate in. “Although it has many pressures on both the funding and financing side of banks, this has resulted in new financial regulations associated with Basel 3, sanctions, anti-money laundering/combating the financing of terrorism and IFRS 9, amongst others.
These guidelines have changed the banking landscape in many ways causing de-risking, bank mergers, restrictions on financing, pressures on liquidity, additional compliance cost, risks, and many others,” said Yousif.
Sitting in Beirut, Azhari highlighted four major challenges: the first, was navigating the political and economic upheavals that the region has witnessed, especially since 2011; the second was complying with new and demanding international rules, regulations, and sanctions in matters relating to capital adequacy, terrorist financing, money laundering, and tax evasion; the third was managing competition successfully both domestically and abroad, in addition to ensuring that expansion into overseas markets in the region and beyond is both rewarding and durable; and the fourth challenge is building the right superstructures and infrastructures to make capital markets more visible and efficient.
A great believer in embracing adversity, Chilwan explained that the global financial crisis was a catalyst that delivered necessary corrections to some markets. Banks were forced to navigate the crisis in terms of risk management, corporate governance, revising business models and strategies as declining asset quality in the system impacted medium to long-term profitability. The crisis also constrained capital positions, which led to regulators introducing new policies on managing capital.
“In terms of ensuring the regions banking sector was fit for purpose these changes were both necessary and beneficial, increasing as they did, the longer-term stability and security of the sector. A decade on, we still face global volatility and economic and political uncertainties, but I have absolute confidence in the ability of this region to navigate through upcoming challenges,” said Chilwan.
Another inevitable factor is technology—the emerging digital economy is introducing opportunities to create and participate in multiple ecosystems that allow for partnerships with companies whether in financial services, technology or other industries. “Numerous technology firms are entering financial services through fintech, and it is up to banks to think more like a technology company rather than a traditional brick and mortar lender.
Keeping in mind the shifting consumer demands, banks need to be quick on their feet to reinvent themselves. If our competition is technology then that is where we would like to prepare ourselves. We firmly believe that competition is unlikely to come from banks in the future,” said Abdelaal.
The next two decades
Looking at the pace of things in the last five years it is difficult to predict how banking will look like in the next 10 years, what more 20. Especially in this part of the world where mobile penetration is one of the highest globally, and how receptive the market is to technology, one cannot imagine the potential milestones Middle East markets can achieve.
“The sector is already seeing the much-anticipated consolidation and banks are expected to come out stronger. Regulatory frameworks will continue to evolve, and the industry will enhance its focus on compliance to local as well as international regulations. Digital technologies will drive rapid transformation in the sector. With the development of fintech initiatives, banks will increasingly see competition from non-banks.
Brick and mortar businesses are likely to shrink further. Tech savvy products and online services will push boundaries and will gain dominance over traditional products and services, as well as delivery chains,” projects Walia. Sharing similar sentiments, Azhari said, “It is frankly not easy to envisage how the financial industry will look like in 20 years’ time, especially in our region that is liable to frequent but unpredictable shocks.
All I can say in this respect is that we will definitely see more and a significant role for digital banking, perhaps more mergers and acquisitions both among big banks and between big and smaller banks, and perhaps also more and a better role for capital markets.” Chilwan expects an increased level of global connectivity. The emergence of digitisation, and disruptive technologies such as fintech and AI to continue to shape region’s banking landscape.
“We need to pounce on the opportunities created by these new technologies. I would expect analytics to play an increasingly critical role in identifying customer pain points and sales opportunities. Successful banks will be those that can most effectively use their digital tools and solutions to address these issues.”
Elaborating further on technology, Abdelaal stressed that banks of the future need to complement the lifestyle of customers and must offer an integrated and seamless customer experience across all their channels. “Whether customers visit a branch, transact through a robot or machine, or use online banking or mobile banking apps— the experience must be unified, convenient, and easy to execute.
Another trend that will grow and that we have already invested in at Mashreq, is that more banks will use a combination of AI and data analysis to offer sophisticated and value-added advisory services to customers. We also see ATMs as being upgraded to Interactive Teller Machines (ITMs), acting as round-the-clock service centres for customers rather than cash-dispensing machines.
Digital-only banks are expected to play a huge role in the digital banking space and will use AI technology and big data to offer a simpler, more intuitive and more innovative banking experience to customers.” Sharing his two cents, Yousif added, “The scope and speed of evolution in regulation, customer behaviour and technology—coupled with the emergence of new competitors—means that the future of banking will not be a continuation of the past.
New technologies will transform the financial and banking industry, providing both opportunities and challenges for financial institutions.” Financial institutions are at an inescapable crossroads— to adapt to change, or perish.
This has been the case over the last few years and banks in the region have taken constructive initiatives to digitalize both their operations and services. The global economic climate has also forced a wave of consolidation in the sector that is much needed for scalable growth. These are signs of a maturing market and definitely a positive indication for a sustainable future.