Bank Credit and GDP in the Middle East: Deconstructing the Numbers

A desire to see banks lend more to the private sector is a familiar theme in the Middle East.

Scarcely a week goes by without the publication of a new report lamenting low levels of banking lending in the region, or a conference at which local officials confer on commercial banks the task of spurring economic growth by easing the availability of finance to local companies, particularly those deemed, “small and medium sized enterprises.”

But the collapse of the Irish banking system serves as a warning against credit growth which is too rapid. Ireland’s fiscal indicators have been generally sound over the last few years. It was the asset bubble, created in part by cheap credit and loose lending, which has destroyed the country’s economy.

So where does the Middle East stand? Do Middle Eastern economies and their banks have the capacity to increase private sector credit without jeopardising their long-term economic prospects?

The simple answer is, “yes”. Middle East banks could significantly increase the amounts they lend to the private sector private sector without approaching the type of ratios which Irish banks have been displaying in recent years. Only one Middle Eastern country shows a ratio of over 100% for bank credit to the private sector in relation to GDP. That country is Bahrain and the ratio reflects the Kingdom’s history as an offshore banking sector. (My ratio comprises private sector credit extended by Bahraini retail and Islamic banks, and excludes wholesale banks, whose principal purpose is usually to engage in overseas business.)

No other country showed a ratio exceeding 80% at the end of 2009, even the UAE (79%) and Qatar (56%) which witnessed extraordinary credit growth before the onset of the global economic crisis. The general picture is one of bank credit to the private sector gradually increasing in relation to GDP. (See table 1 below.)

In Ireland, the ratio of domestic credit to GDP doubled to over 200% between 2000 and 2008. In Iceland, bank credit was equivalent to more than 300% of GDP before its economy collapsed in 2008.

These statistics have to be treated with care – the figure for Ireland refers to all private sector credit, not just bank lending – but the overall picture emerging from the Middle East is that bank lending is far from levels commonly associated with overleveraged economies.

Of course, credit-to-GDP tells us only part of the story. Low ratios could reflect a stunted banking sector in which a small number of banks are dangerously overleveraged as they try to meet private sector credit demand. But that is not the case in the Middle East. Only five banking systems had private sector loans to asset ratios in excess of 50% at the end of 2009. (Kuwait, 67%; Morocco, 66%; Oman, 65%; Saudi, 54%; Tunisia, 62%. The UAE showed a ratio of 48%.)

Low ratios of credit to GDP could also reflect a lack of funding capacity, but again, the statistics show that this is generally not the case. Only six countries in the region are unable to fund their private sector loans exclusively from private sector deposits, a feature which does not in itself warrant alarm bells, provided that the excess is covered by stable sources of funding. (Kuwait had a loans-to-deposit ratio of 112% at the end of 2009; Oman, 141%; Qatar, 113%; Saudi Arabia, 102%; Tunisia, 109%; and the UAE, 115%.)

If the clear picture that is emerging is that banks have the capacity to lend more and that their economies have the capacity to absorb more, there are two important qualifications.

First, we must be conscious of the rate at which credit is growing (as opposed to its absolute level). A very rapid increase in credit may outpace a bank’s ability to conduct robust credit appraisal of new lending opportunities and to monitor the performance of its newly-enlarged portfolio. It is hard to see how banking systems which show annual increases in private sector lending by 30%, 40% or even 50%, as was seen in some Gulf countries in 2005 – 2009, can avoid making some bad decisions. The same question can be asked about Egypt and Syria, where lending has been increasing by 20% – 30% in recent years. True, both these countries have a lot of catching up to do in terms of credit extension (note the low credit-to-GDP levels cited in the table below) but the doubt remains about banks’ ability to upgrade their own credit departments at the same pace.

Second, we must recognise that financial sector infrastructure is weak in the Middle East. Few countries have mature credit bureaus, some lack collateral registries, and in all the ability to quickly enforce contracts through the courts is in doubt. When bankers are urged to lend more in the region, they usually respond that they are already lending to all the credit-worthy customers and that to lending to uncreditworthy customers is not just bad banking but brings no long-term benefits to the country.

There are other issues to consider, such as the relative sizes of the private and public sectors in the Middle East – to the extent that the private sector remains small, ratios of bank lending to GDP will always be lower than in other countries where the private sector is larger. And in counties where much economic activity is centered on capital intensive industries which rely on financing from large international banks (because local capacity is limited) or “project finance” structures, then again, private sector bank lending ratios will be depressed. I hope to address these issues in future postings on this website.

The statistics for loans/assets, loans/deposits and credit growth, cited above, are taken from the tables which accompany the “Private Sector Credit, 2001 – 2009” article which is flagged at the bottom of the Home Page.

Table 1: Bank Credit to Private Sector % GDP*


2009

2008

2007

2006

2005

2004

2003

2002

2001

Algeria

16

12

14

13

12

11

12

13

8

Bahrain

119

104

83

65

64

60

55

55

51

Egypt

37

32

27

29

35

41

27

27

24

Iraq

6

4

4

3

2

2

1

na

na

Jordan

79

84

92

91

86

73

69

71

74

Kuwait

78

63

69

55

55

62

66

68

63

Lebanon

71

71

72

71

66

73

77

82

86

Libya

16

9

9

10

10

14

20

25

32

Morocco

73

66

66

54

48

49

50

50

45

Oman

52

38

38

31

31

35

37

40

40

Palestine

23

17

24

27

25

24

22

25

22

Qatar

56

45

43

35

32

26

35

33

30

Saudi Arabia

53

41

40

36

37

33

28

29

27

Syria

21

14

15

15

15

12

11

8

8

Tunisia

62

56

59

58

55

60

53

60

56

UAE

79

76

64

63

58

53

50

51

51

Yemen

8

8

8

8

7

7

7

6

na


* Private Sector Credit extended by banks is taken from Central Bank Reports. GDP figures are taken from the World Bank Indicators and refer to GDP at current US$. The credit figure for Libya is for all bank credit minus loans for the Great Man Made River (GMR) project since the Central Bank of Libya does not break down loans to public and private sectors (other than for the GMR). Figures for Iraq need to be treated with care since the Central Bank of Iraq classifies most commercial bank assets as “other.” The credit figure for Bahrain refers to retail and Islamic banks, but not wholesale banks.