Survival of the fittest

As we begin 2007, there is one thing that seems certain: by the end of the year, some of the region’s banks will no longer exist.

That is not to say that they will go out of business. Rather, the financial sector in the Middle East is overdue a period of consolidation. As Mohamed Abdalla, the new CEO of Sharjah Islamic Bank, explains in our interview, he does not believe that any bank, in the UAE at least, can hope to thrive in the increasingly competitive climate if it is backed by paid-up capital of less than US$200m.

The market seems overcrowded, and with the impending introduction of foreign banks to the region the incumbents need to make sure that they are not going to be muscled out by larger, more efficient and more experienced operations. This means having the backing to be able to open new branches, roll out new products and services, and offer competitive rates to lenders and depositors alike.

It also means running a lean operation. Inefficiencies that may be acceptable now will be exposed in a large organisation, while economies of scale can be achieved. In addition to eliminating waste and duplication throughout the organisation, banks may also find that there are particular processes outside their core business that they would be better off outsourcing, especially when it comes to IT.

Banks also need to ensure that they are operating to international standards as soon as possible, and not only when they are forced to do so by their central bank.

This may sound daunting to some, but it a change is coming in the market. The only question is which banks will be left standing when the dust settles.

In fact, it could be the traditional banks that fare best in the face of international competition. Islamic banks in the Middle East have an opportunity to create a niche for themselves. Conventional banks may have a tough time differentiating themselves from foreign competition, but the creation of an Islamic superbank, made up of two or more local institutions and run in compliance with international standards, could present a unique value proposition.

There may still be a place for the smaller banks if they can find a niche, but not if a larger bank can offer better service and better products. Bigger is not necessarily better, but if banks do not adapt to suit the evolving market, they will not survive. If that means merging with or acquiring their local competitors, so be it.

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