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Sat 11 Jun 2011 06:19 PM

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Banking on growth

The Middle East needs a mega-bank if it is to compete with the west, says V Shankar, regional CEO for Standard Chartered Bank

Banking on growth
Shankar says that MENA will increase by 4-5% as a total fraction of world GDP to $17 trillion by 2030

If you're looking for someone to predict the future, then one of the top officials at one of the world's most successful banks is as good as anyone. V Shankar, who looks after Standard Chartered’s operations in the Middle East, Africa, Europe and the Americas, has a pretty good handle on global macroeconomics.

According to Shankar, there are three main questions that are vital for the success of the regional banking sector. Those are:  what is the impact of the recent uprisings? What will be the regulatory changes in the region? And what will be the impact of the shift in global trading trends?

On the subject of the recent uprisings, Shankar began by stating the obvious. The MENA region has a massive, young population. Instead of being a bonus, this demographic situation will instead turn into a disaster if job creation doesn’t occur. Across the region, one in four people are unemployed, and there’s a severe need for economic diversification. While the Gulf may be sitting on a wealth of resources, the same is certainly not the case for a multitude of other countries in the region.

As for the impact of regulation, Shankar made it clear that the scale of recent changes in the last two years worldwide has been unprecedented. Not only are new liquidity requirements in place, but retail banking may well be ring-fenced in the future.

“Certainly if a country borrows more than it can pay, sooner or later there will be a crisis,” Shankar said.  “Banks are like drivers of cars — but when the government gives you a Ferrari, you will often drive faster.”

On the flip side, however, there is also a risk with heavy-handed regulation. Could the cure end up being worse than the disease?

“The truth is that banks will make us safe, but it is debatable as to whether the overall financial system will be safer if there is too much regulation,” he stated.

Looking at the region in more depth, the Standard Chartered executive predicted that the near-term forecast for the region is “quite negative”, although it could be very positive in the long term if the demographic dividend is realised.

According to the bank’s forecast, the MENA region is likely to witness of around 4-5 percent as a total fraction of world GDP to $17 trillion by 2030, which would make the regional economy twice as big as Japan’s. Emerging economies will account for almost two thirds of the pick up in the world economy between now and 2030, he added, while export volumes have tripled since the 1990s. But those happy prognostications come with a couple of caveats.

“A necessary pre-requisite would be to invest in education and skilled labour and diversify away from oil as Dubai has done so successfully,” Shankar said.

A further improvement to the local economy can also be achieved if the region develops its own ‘financial champion’.

There has been some talk of Islamic ‘superbanks’ in recent years, but this has not yet come to fruition.

“The economic shape of the world is changing. Simply put, the East is rising, and the Middle East geographical position is well positioned for trade and investment flows,” Shankar said. “The location of the MENA region makes it ideally suited for trade. Does it need a Middle East bank to step up and mediate trade flows?”

“Although the Middle East is a region with huge reserves most of this is recycled to Western financial institutions. Very few, if any of the top 50 banks around the world are from emerging markets,” the Standard Chartered executive added.

“Is the time right for the Middle East to fill this void and build its own financial champion? This would require a level of regional cooperation. A serious global Middle East bank would help the region manage and control its wealth reserves.”

He has a point here; even the largest of the Middle Eastern banks is dwarfed by their counterparts from overseas.

The biggest listed Gulf bank — Saudi Arabia’s Al Rajhi — has a market cap of around $31bn. China’s Industrial & Commercial Bank, the world’s biggest, dwarfs that sum with a market cap of $278bn.

“Another notable absence in the MENA region, is a development bank. Asia has its South Asian Development Bank, Europe has its European Development Bank but we certainly don’t yet have one for MENA,” Shankar added.

“Why shouldn’t we have one? Surely such an institution would help trade flows and help keep an equal distribution of wealth across the region.”

On a separate note, Shankar also suggested that the region could benefit from a Middle East development bank.

Although the region already has the Jeddah-based Islamic Development Bank (IDB), Shankar fervently believes that a new entity would be invaluable in helping the region to finance the circa $1.5 trillion-worth of infrastructure projects planned in the Gulf over the next decade.

“Furthermore, such a bank would be a clear signal to the rest of the world that we are taking development seriously,” he added.

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John David 9 years ago

Islamic Development Bank is doing a good job. There is no need to recreate a clone.Mega banks export inflation to other markets within MENA rapidly. It will destabilise currencies of GCC.