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French Version

Arab banks still recovering from aftermath of 11 September

Arab banking institutions today are surviving the repercussions of globalization, but experts believe more than 350 banks operating in the Arab world are facing more challenges than ever before.

At the end of 2001, Arab banks were holding $345 billion in deposits, with capital worth $53 billion.

Arab banks are expected this year to pump some $15 billion into the business markets of the region to ensure liquidity for development projects in different sectors, mainly energy. Vital issues such as security, e-banking and financial standings are all becoming urgent for Arab banks to adapt to the rapidly growing financial markets worldwide. Many Arab banks today face serious threats, as illustrated by the growing amount of defaulted loans, bad checks, and the detrimental results of money laundering practices.

Observers in the business regard the political and economic disturbances in the region as dangerous, affecting the performance of these banks in one way or another. This is not to forget the ramifications of the 11 September attacks last year, after which security measures were toughened in regional and international banks concerning the opening of new accounts and withdrawals. Dr Fuad Shaker, secretary-general of the Union of Arab Banks (UAB), says the time has come for Arab banks to take advantage of rapidly growing information technology (IT). He says Arab banks today lack the abilities to extend their capacities and fortify security programs with IT facilities. 'Arab banks total expenditure on IT research and development is less than one percent of the Arab GDP. In industrial nations, this ratio goes as high as 25 or 30 percent,' said Shaker in his opening speech of this year's Arab International Banking Technology Conference in Amman. Shaker added that technology today is evidence of a healthy economy. Participants in the two-day conference, which was organized by the UAB, tackled the possibilities and ways to enhance the use of IT programs and systems in Arab banks. Proposals were made during the meeting aimed at promoting the idea of collaboration among the Arab banks. Dr Mohammed Magued, chairman of the Egyptian Banks Company for Technical Advancement, believes inter-Arab bank cooperation will help these banks meet the global competition. Such cooperation, added Magued, first requires fundamental changes and basic technical infrastructure.

Arab bankers today argue banks in the Arab world are doing well as regards customer services and loaning facilities. They, however, argue these banks require efficient reshaping to their services and structures to better correspond with global standards. The only way available for Arabs banks is to employ more IT in their structures to satisfy the growing demands of their customers and marketing pressure.

A recent report by the Saudi-based Arab Petroleum Investment Corporation (APIC) indicated Arab banks are likely to be overrun by giant international institutions, a fact that will hinder the flow of world resources and investments to the Arab countries. The report warns that Arab banks need first to determine their potential, while becoming more accessible both locally and abroad. 'The majority of Arab banks are still concentrating on the local market in their financing operations. This makes it difficult for other countries to seek funds for their projects from Arab banks,' the APIC report explained.

But technology also has its own risks concerning financial transactions among banks. Paul Dodd, banking expert in the UAE-based Misys for International Banking Systems, sees in the advanced IT access a hazard to the safety of bank accounts and trust between these banks and their customers.

He highlighted the need to enhance financial risk management tools among Arab banks in order to face the risks and threats of well-developed structures. Sherrif Seddik, from Microsoft's Enterprise and Partner Group, agrees.

He proposed the 'middle-ware' system in the conference, in which banks can manage their services and operating systems in a more convenient and secured manner. 'The system helps the banks to adjust its services better,' he told The Star.

Seddik pointed out e-banking services in the Arab countries are still immature, even though some Arab banks have already applied systems and programs to introduce e-banking services. Many bankers believe the e-banking systems are not secure enough to be implemented in the Arab world, due to the lack of effective legislative and administrative infrastructure.

Trust among banks is one of the main points that Seddik focused on in his presentation at the UAB conference. 'The only way to make e-banking succeed is through collaboration. It is better for all Arab banks to share their data and information about customers to avoid wrongdoings,' he said. Experts, meanwhile, agree the Arab banking sector is facing problems in view of the rapid increase in small-scale banks. They note that Arab central banks must guide the merger process among the small banks to avert further financial risks in future.

'Arab central banks should mobilize, not remain lax about small banks which are lacking in capital, supervision, administration and technology,' said Adnan Al Hindi, member of the UAB board. 'Small banks can't compete, and cope with technology, and deal with the outside without capital. Confidence is very fragile throughout the region. It can't stand the failure of small banks.' That's why Seddik urged local banks, especially in Jordan, to establish their own credit bureaus. These bureaus, which should be part of the central bank of each country, would help local banks share information and data about clients. If one of the banks distrusts a customer, it can obtain all the required personal data about the customer from the credit bureau within minutes before approving him. Seddik also noted that Arab banks need to understand what kind of customers they are dealing with. He urged each bank to maintain its own personal customer profiles.

'If Arab banks can't compete with other banks they still can compete within themselves,' Seddik stressed. 'By prompting new systems that make these banks so close to their customers, the banks will eventually get bigger within the national scale, and probably regionally in the future.' Most recently, the UAB urged Arab governments to revitalize their financial structures to allow their banks to take part in privatization programs. 'The average of Arab banks is limited compared with international banks and the size of required financing,' the APIC report said. Islamic banks seem more capable in that regard. The APIC report said Islamic banks could play a key role in funding vital development projects in the region. However, Shari'a laws and the practice of short-term deals currently prevent Islamic banks from financing development projects.

Ghassan Joha
The Star

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