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The competitive nature of the Arab Middle Eastern banking markets.

Article Excerpt
Abstract

The competitive nature of the Arab Middle Eastern (AME) banking markets during the 1990s is the focus subject of this study. Using banks data from nine AME countries, and utilizing the so-called Rosse-Panzar test to quantitatively appraise the dominant competitive conditions in these markets between 1993-97, this study concluded that banking markets have been operating in the region under conditions of monopolistic competition. An important finding revealed by this study is that in the AME region, where two distinct economic spectrums dominate the markets, banking sector in the oil-producing countries (Gulf States) appears to be less competitive than its counterpart in non-oil countries. (JEL G28)

Background of Study

Over the last two decades, the banking sector has been expanding very rapidly in the Arab Middle Eastern (AME) region. In the 1960s and 1970s, the region was characterized by mainly small-sized banks primarily serving the requirements of the limited domestic markets, at a time when no local commercial banks had internationalized their operations to any significant extent. Yet today the whole financial scene has been transformed with a substantial increase in the size and number of local banks, a rapid expansion of branch networks, and an enormous widening in the range of financial services provided by domestic institutions.

The 1990s in particular have witnessed dramatic changes in the entire region's economy that in turn have influenced its banking systems. These changes can be attributed to three key factors: the world-wide trend of globalization, the Gulf war in 1990-91 that resulted in devastating consequences for the whole region's economy, and the advent of the peace process that rendered changes in many countries towards directing their resources into developing and raising the efficiency of their economy instead of military spending.

When focusing on the broad characteristics of the region's economy, two main distinct spectrums of the banking economic environment can be appreciated. On the one hand, banking markets in the rich oil exporting countries have been closely linked with the oil industry and its level of prices. Traditiona1ly, banking sectors in this region have been tightly regulated (except in Babrain, which has followed a more liberal regulatory environment). Despite the measures taken by some authorities to enhance competition and raise the banking sector's efficiency (like the case of Kuwait and to lesser extent, Qatar), the sector appears to remain relatively restricted with regard to competition.

Non-oil countries, on their part, are characterized by financial institutions that rely on a wider array of domestic and regional resources in order to mobilize savings and investments.

The journey towards financial liberalization started earlier in these countries than in the Gulf states. It seems that, out of necessity, regulators in non-oil countries have been more active at introducing serious forms of financial deregulation as the removal of exchange controls that permits a movement towards currency convertibility, the issuance open investment laws and the promotion of privatization.

Motivated by the desire to closely scrutinize the effects of these interrelated economic dimensions on the banking sector, this study is intended to provide an empirical analysis of the existing competitiveness in AME banking markets during the 1990s.

Literature Review

The issue of determining the level of competition in the banking sector has been subject to an extensive investigation carried out by bankers, academics, and policymakers alike. Traditionally, there have been different approaches for the empirical study of competitive...

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