Banking and Financial Systems in the Arab World

352 Pages·2005·34.13 MB·English

by  Philip Molyneux, Munawar Iqbal (auth.)

Banking and Financial Systems in the Arab World
Also by Philip Molyneux and Munawar Iqbal
THIRTY YEARS OF ISLAMIC BANKING
Banking and Financial Systems
in the Arab World
Philip Molyneux
Professor of Banking and Finance
University of Wales Bangor
and
Munawar Iqbal
Chief, Islamic Banking and Finance Division
Islamic Research and Training Institute
Islamic Development Bank
jeddah
palgrave
macmillan
* © Philip Molyneux and Munawar Iqbal 2005
Softcover reprint of the hardcover 1st edtion 2005
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First published 2005 by
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ISBN 978-1-349-52068-8 ISBN 978-0-230-51212-2 (eBook)
DOI 10.1007/978-0-230-51212-2
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Library of Congress Cataloging-in-Publication Data
Molyneux, Philip.
Banking and financial systems in the Arab world I Philip Molyneux &
Munawar Iqbal.
p. em.
Includes bibliographical references and index.
ISBN 978-1-349-52068-8
1. Banks and banking, Arab countries. 2. Financial institutions-Arab
countries. 3. Banks and banking-Religious aspects-Islam.
4. Finance-Arab countries. 5. Banking law (Islamic law) I. Iqbal,
Munawar. II. Title.
HG3366.A6M65 2004
332.1'0917'4 927-dc22 2004052107
10 9 8 7 6
14 13 12 11 10 09 08 07 06
Transferred to Digital Printing 20 II
Contents
List of Tables ix
List of Figures xii
Preface xiii
About the Authors XV
1 Introduction 1
2 An Overview of Arabian Economies 8
Introduction 8
Economic, social and demographic trends 8
Role of the state 15
Constraints to growth 15
Economic reforms and the globalization
process 16
Oil and non-oil economies-a comparison of Jordan,
Egypt, Saudi Arabia and Bahrain 18
Select comparative analysis 30
Financial liberalization and intermediation
processes 35
Conclusion 41
3 Economic Performance of Arabian Countries
during the 1990s 43
Introduction 43
Drivers of economic growth in the Arab world 43
International trade and the liberalization
process 44
Inflation trends during the 1990s 49
External indebtedness and reserves of
Arab countries 49
Domestic investment and FDI in the Arab world 52
Recent economic performance in the Gulf region 57
Evidence on financial sector development in
Arab economies 67
Conclusion 71
v
vi Contents
4 Banking and Financial Systems in Non-Gulf
Arab Countries 74
Introduction 74
An overview of the financial systems in non-Gulf Arab countries 74
Financial system of Egypt 74
Egypt's capital market 79
Financial system of Jordan 80
Jordan's capital market 83
Comparison of]ordan and Egypt's banking system 84
Banking and finance in Maghreb countries 86
Brief history of the Maghreb financial systems 87
Algeria 87
Morocco 90
Tunisia 92
Financial liberalization in Algeria, Morocco and Tunisia 93
Structural and financial features of Maghreb
banking systems 98
Banking sector structure 98
Bank ownership features 105
Balance sheet characteristics 107
Profitability 108
Financial markets 110
Other non-Gulf financial systems 111
Conclusion 111
5 Banking and Financial Systems in Gulf Cooperation
Council (GCC) Countries 113
Introduction 113
Banking sector development in Saudi Arabia 114
Saudi Arabian financial markets 116
Banking in the UAE 119
UAE financial markets 121
Banking business in Bahrain 122
Bahrain's financial markets 124
Banking sector development in Kuwait 126
Kuwaiti financial markets 128
Banking in Oman 129
Omani financial markets 132
Banking sector development in Qatar 133
Qatari financial markets 136
Recent performance of GCC banking systems 136
Prospects for financial sector development 143
Conclusion 144
Contents vii
6 Islamic Banking 146
Introduction 146
History of Islamic banking 147
Distinguishing features of Islamic banking 151
Risk-sharing 151
Emphasis on productivity as compared to creditworthiness 151
Moral dimension 151
Wider set of products 152
Closer link between monetary and real sectors 153
Islamic banking in the Arab world 153
Islamic investment funds and insurance products 157
Regulating Islamic banks 161
Prospects for Islamic banking 164
Conclusion 167
Appendix: main Islamic banking and finance contracts 168
7 Financial System Efficiency 174
Introduction 174
Why should we be concerned about the efficiency of the
financial system? 174
Defining financial system efficiency 176
Aspects of efficiency as applied to the financial system 177
Informational efficiency 177
Symmetric information efficiency 178
Fundamental efficiency-efficient stock markets 181
Operational efficiency 182
Other aspects of operational efficiency 185
Structural efficiency 186
Regulatory efficiency 187
Measuring banking sector efficiency - theory and
empirical evidence 189
Importance of bank efficiency studies 190
What do banks produce? Defining the bank production process 191
Economies of scale in banking 194
Scope economies 197
X-efficiency in banking 199
Non-parametric approaches 201
Parametric approaches 202
Estimating efficient frontiers and the choice of
functional forms 205
Empirical evidence on X-efficiency in banking 207
Bank X-efficiency in emerging and developing countries 211
Conclusion 216
viii Contents
8 Efficiency in Arab Banking 217
Introduction 217
Why study Arab bank efficiency? 217
Measuring the efficiency of Arab banks 218
Bank efficiency in Egypt, jordan, Saudi Arabia and Bahrain 229
Efficiency in GCC banking systems 234
Scale economies in Gulf banking 239
Scale inefficiency in Gulf banking 239
Determinants of Gulf bank efficiency 242
Banking sector efficiency in Algeria, Morocco and Tunisia 245
Conclusion 254
9 Current Developments and Prospects for Arab Banks 256
Introduction 256
Trends in the structural features of Arab banking 25 7
Developments in retail banking 258
Private banking 260
Corporate and investment banking 262
Technological developments impacting on Arab banks 265
Regulatory trends 267
BIS core principles on effective banking supervision 267
Impact of Basel 2 on Arab banks 269
FATF' s anti-money-laundering and anti-terrorist-financing
recommendations 273
GCC single market and other Arab trading blocs 277
Conclusion 279
Notes 280
References 28 7
fu~ ~
List of Tables
2.1 Members of Arabian countries 9
2.2 Oil and non-oil Arabian countries 10
2.3 Area of Arabian countries 11
2.4 Population and population density of Arabian countries
over 1970-99 12
2.5 Poverty in Arabian countries (mid-1997) 13
2.6 Trends in human development of Arabian countries
for 1997 14
2.7 Credit ratings of Arabian countries for 1997 17
2.8 General indicators for Jordan, Egypt, Saudi Arabia
and Bahrain 19
2.9 Major economic reforms in Jordan over the last decade 22
2.10 GDP indictors for Jordan, Egypt, Saudi Arabia and Bahrain
over the last decade 30
2.11 Distribution of GDP (current prices) to economic sectors
for Jordan, Egypt, Saudi Arabia and Bahrain 31
2.12 Trade indicators for Jordan, Egypt, Saudi Arabia and
Bahrain over the last decade 33
2.13 External debt indicators for Jordan and Egypt
over the last decade 34
2.14 International reserves (excluding gold) of Jordan,
Egypt, Saudi Arabia and Bahrain over 1990-9 36
2.15 Investment activity in Jordan, Egypt, Saudi Arabia
and Bahrain over 1995-9 36
3.1 Real GDP growth, annual percentage change of
Arabian countries, 1982-99 45
3.2 Per capita GDP for Arabian countries 46
3.3 Composition of GDP in Arabian countries 47
3.4 Exports of Arabian countries, 1990-9 48
so
3.5 Imports of Arabian countries, 1990-9
3.6 Balance of trade of Arabian countries, 1990-9 51
3.7 Inflation in Arabian countries over 1982-98 52
3.8 External debt of Arabian countries 53
3.9 External debt of Arabia as a per cent of GDP 54
3.10 Monetary reserves (excluding gold) of
Arabian countries, 1990-9 55
3.11 Gross domestic investment of Arabian countries
as percentage of GDP 56
ix