In the last few years, a wave of change has swept through the Middle East’s traditionally conservative banking sector.
Bumper oil revenues had kept the region’s economies afloat, and substantial public investment by governments brimful with cash had transformed nations like Saudi Arabia and the UAE into modern, wealthy economies. During the era of stable oil prices, the Middle Eastern banks were happy not to rock the boat. With this intransigence came a marked lack of disruption and change in the sector. The banks that were the largest two decades ago remain the main players today.
But there have been signs of looming change in recent years. As oil prices dipped, the need for economic diversification has become urgent, and the reticence and conservatism of Arab banks have grown out of place.
The competitive landscape in Middle Eastern banking has broadened, and a growing trend of high profile mergers between the region’s smaller banks are increasingly strong, well-capitalised competition for the traditional powerhouses.
Outside of brick-and-mortar banks, digital-first banks have gained traction, too. Liv., Emirates NBD’s digital and “lifestyle banking” app aimed at Millennials, is growing faster than its parent entity. Mashreq Neo, a digital division of Mashreq Bank, has found success in Dubai.
Digital banking is on the march in the Middle East. As Mashreq Bank’s longtime CEO put it, “The banks that will survive the next 10 years are the ones that will almost transform themselves into a fintech with a banking licence.” That’s the current landscape, so what will the next decade hold?
We’ve seen the increasing trend towards big-ticket mergers and a nascent shift away from brick-and-mortar banking. As the banking sector finally catches up with international competitors, a few patterns are starting to emerge.
The first is tightened regulation by governments. While it’s not quite a crackdown, it is a reaction to the global perception of Middle Eastern banking regulation being a soft touch, particularly in regards to anti-money laundering (AML).
Stricter regulation has led to higher capital adequacy requirements as well, with the gradual adoption of Basel III regulations. Basel III’s higher requirements, combined with more stringent definitions of capital, mean Middle Eastern banks will need to raise substantially more capital if they want to continue growing.
For the region’s smaller banks, the increased regulation is what has spurred many high profile mergers, like Saudi British Bank’s $5bn tie-up with Alawwal. Increased regulation has eaten into shareholder dividends and joining forces makes the costs more manageable.
In the last few years, Middle Eastern banks have performed well: indeed, much better than many Western banks. KPMG’s latest analysis of the Gulf Cooperation Council’s banks found that profits were strong and NPLs were idling at 3.2%. There has also been a downward trend in the already low NPL ratios, dipping by 0.3% since 2016.
But despite Middle Eastern banking being stable, some risks remain as we head into the 2020s. Although every country’s banking sector is tied to the fortunes of that country’s broader economy, Middle Eastern banks are uniquely exposed to flagging economic fortunes.
The region’s governments still have an outsized role in the banking sector. Dubai's biggest bank, Emirates NBD, is almost 56% owned by the Dubai government, and Jordan’s Arab Bank, one of the largest banks in the Middle East, is majority publicly-owned.
Banks are highly leveraged, often financing government expenditures, and lending to large companies is enormous. This model was great during times of booming oil revenues and real estate bubbles, but it has become increasingly volatile, as illustrated by Dubai’s financial crisis in 2009.
Retail banking, more removed from the government, will become important in the next decade. After Saudi British Bank’s (SABB) merger with Alawwal, SABB’s managing director said the new bank would grow its personal loan portfolio, with a particular emphasis on home loans and lending to small and medium enterprises.
Digital banks, like Liv. and Mashreq Neo, have an explicit retail focus. Liv., for example, markets itself as a “digital lifestyle bank”. These new entities are a far cry from the semi-public banks of old, mainly concerned with corporate and infrastructural projects.
The digital and smartphone emphasis of the new banks have yielded tremendous success. Liv., in its first year of operations, became the fastest growing bank in the UAE, acquiring over 10,000 new customers every month, faster than its parent bank NBD.
Broadly speaking, the Middle East is amid profound digital change. The National Bank of Abu Dhabi recently went live on Ripple’s blockchain, enabling real-time cross-border payments for the country’s legions of foreign workers.
Money, in the Middle East, whether it’s being sent overseas or being spent in a shopping mall in Riyadh, is an increasingly digital entity. A trend towards cashless transactions, backed by government policies, will continue to grow. The UAE, in particular, is most rapidly moving away from being a cash-based society.
It’s unlikely this digital trend will yield in the coming decade. For banks hoping to seize the momentum, introducing customer-friendly digital services will be vital. But excellent, modern customer service doesn’t just mean banking apps and money transfer services. Debt collections, as loan portfolios grow and stricter regulations come into force, will be a key battleground in Middle Eastern banking, too.
Effective collections is a customer service challenge, not just loss mitigation activity. As banks lend to young, digitally savvy consumers, a smart, convenient and mobile friendly collections process becomes a necessity, not a nice-to-have. And by making the process easier for customers, through self-service portals and segmentation, it’s possible to keep customers happy and NPL ratios low.
The arc in Middle Eastern banking trends towards digital. This encompasses banking, spending, overseas transfers, lending and even debt collections.
For Tier II banks, it offers an enormous opportunity. Unencumbered by links with government and bank owning dynasties, a new generation of banks can filter into a system that’s ripe for change. All over the region, consumers want digital service as shown by the success of neo-banks like Mashreq Neo and Liv.
There may be economic bumps on the road as the region struggles to end its dependency on oil revenue. In any period of uncertainty, it’s important to keep a tight grip on non-performing loans. But by investing in the right technology, this can be managed, all while offering world class customer service. It’s this careful blend that’ll be most important in the years ahead.
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