Commercial banks’ support for the private sector: a statistical overview of a complex issue

Every country in the Middle East wants to increase the proportion of economic activity undertaken by its private sector. Commercial banks stand in the front line of this effort since they have the role of collecting savings and other surplus funds, and then distributing them as loans into the local economy.

How well are Middle Eastern banks performing that role of intermediation?

In some cases they are doing a good job. In the Gulf States, and a few others such as Morocco and Tunisia, private sector credit accounts for a significant proportion of commercial banks’ balance sheets and a large percentage – often more than 100% — of their private sector deposits.

But in other cases, are not. Most obviously, in Yemen, private sector credit accounted for only 24% of total bank assets at the end of 2009, and represented only 30% of private sector deposits.  That second ratio means that Yemeni banks recycled to the local private sector only 30% of the deposits which it received from the local private sector. Yemeni banks placed more money with their government or with foreign entities than they did to the local private sector. And Yemen is not alone. Between 2001 and 2009 credit extended by Libyan banks fell from 48% of their assets to 20% and from 71% of deposits to 24$. And for all the talk of economic reform in Egypt, Egyptian banks’ have shown only modest improvements in their commitment to the private sector.

Of course, these are complex issues and one has to be careful about drawing broad conclusions. Private sector credit in Egypt has been growing rapidly – by more than 20% in most recent years. That is much faster than economic growth or inflation. However underserved the private sector may be today, banks should not expand their loan portfolios so fast that they make bad credit decisions. Indeed, the refrain of commercial bankers throughout the region is that they do lend to private sector customers who are creditworthy and that they stand ready to lend to those who are not once those uncreditworthy customers upgrade their operations.

A country’s legal environment often discourages lending. If enforcement of collateral is uncertain, then banks will gravitate to customers who they know well or with whom they have an institutional connection. Only a country’s legislators and it legal profession can resolve that problem. A government’s fiscal position is another important influence. If the government is running a large deficit, as it does in Lebanon, then it competes with the private sector for banks’ resources – and governments can always win that competition.

At the risk of too great a generalization, on the issue of private sector credit, we can divide the Middle East banking systems into three groups. Those in the Gulf, which have high ratios of private sector credit to assets, and of private sector credit to private sector deposits; those in the developing countries of the region, still trying to shed the legacies of state control and excessive public sectors, where banks still have some way to go in developing their role as intermediators; and those countries, such as Jordan, which occupy a place somewhere in between.

The statistics below are taken from public reports from central banks. Please refer to the explanatory notes at the foot of Table 1.


Table 1: Private Sector Credit % Bank Assets*


2009

2008

2007

2006

2005

2004

2003

2002

2001

Algeria

22

19

19

20

21

17

17

17

12

Bahrain

27

26

23

29

35

34

33

35

32

Egypt

33

27

19

21

24

29

24

22

22

Iraq

2

1

1

1

0

0

1

na

na

Jordan

40

42

41

39

36

33

32

32

33

Kuwait

67

65

61

60

60

57

50

45

45

Lebanon

21

22

22

21

21

24

25

29

31

Libya

20

21

25

29

31

40

47

48

48

Morocco

66

64

59

57

54

54

54

54

56

Oman

65

64

59

61

65

67

69

70

73

Palestine

27

26

32

33

38

43

30

33

40

Qatar

38

40

38

39

37

32

39

37

33

Saudi Arabia

54

56

54

55

57

48

42

40

40

Syria

25

23

19

18

17

12

9

8

9

Tunisia

62

63

62

63

64

64

64

63

62

UAE

48

50

41

44

44

45

44

43

43

Yemen

24

27

28

26

29

27

25

23

25


Note on methodology: Effort has been taken to ensure that the figures for different countries are comparable, but small differences often remain. Furthermore, please note the following:

Bahrain: figures refer to retail banks and to Islamic banks. The unusually large growth in credit in 2007 is due in part to a change in classification under which some Bahraini wholesale banks converted to retail banks.

Egypt: Figures for 2001, 2002 and 2003 are for end-June not end-December.

Iraq: Most assets and liabilities are classified as “other”, so both loans and deposits are likely to be understated.

Libya: Private sector credit refers to total credit of the banking system, less loans to the Great Man Made River Project. Deposits refer to deposits for the whole system. That is to say, the figures include credit to and deposits from the government.

Sources: Central Bank Reports

 



Table 2: Private Sector Credit % Private Sector Deposits*


2009

2008

2007

2006

2005

2004

2003

2002

2001

Algeria

61

62

62

62

58

46

44

44

29

Bahrain

95

104

86

85

82

83

68

68

62

Egypt

30

25

19

20

23

28

23

22

22

Iraq

37

34

25

40

26

18

19

na

na

Jordan

78

88

88

85

79

72

72

79

85

Kuwait

112

120

119

106

103

98

95

84

77

Lebanon

31

32

31

30

30

35

37

41

43

Libya

24

25

32

39

42

56

70

72

71

Morocco

84

80

74

70

71

71

73

74

77

Oman

141

138

115

114

119

131

129

134

141

Palestine

26

21

28

36

35

29

24

27

26

Qatar

113

131

108

96

92

76

97

86

78

Saudi Arabia

102

110

93

101

110

89

77

75

82

Syria

55

51

46

45

48

35

29

23

26

Tunisia

109

112

112

115

120

122

123

124

123

UAE

115

129

103

118

108

102

103

99

104

Yemen

30

34

34

31

35

32

29

28

31


* Please refer to the Note on Methodology at the foot of Table 1

Sources: Central Bank Reports



Table 3: Private Sector Growth *


2009

2008

2007

2006

2005

2004

2003

2002

Algeria

13.3

16.3

14.8

18.0

32.8

14.8

6.8

63.2

Bahrain

0.2

48.1

48.9

20.2

26.1

27.2

13.4

15.3

Egypt

30.4

25.3

18.9

19.8

22.6

27.6

23.3

22.5

Iraq

36.6

34.2

25.4

39.6

25.8

18.1

na

na

Jordan

1.3

13.9

15.3

24.6

30.4

17.3

3.5

3.2

Kuwait

6.2

16.6

35.1

24.8

18.8

16.1

21.4

14.4

Lebanon

15.2

18.6

15.9

5.9

-9.2

5.4

-0.4

3.3

Libya

13.9

31.9

17.5

15.5

-5.6

-4.1

7.0

5.3

Morocco

10.3

22.9

27.5

16.0

13.1

5.8

8.0

1.6

Oman

4.9

43.6

38.8

20.2

11.7

6.0

1.2

-0.6

Palestine

3.9

11.9

-21.5

-16.4

2.9

4.0

-5.9

8.3

Qatar

10.8

45.1

50.8

50.3

63.3

63.3

27.4

22.3

Saudi Arabia

0.0

27.1

21.4

9.2

38.9

37.4

11.0

10.0

Syria

27.1

27.7

19.7

14.5

50.1

35.1

30.3

6.6

Tunisia

9.8

15.1

10.0

7.4

7.9

10.1

5.9

5.4

UAE

-0.8

48.5

30.7

32.9

40.3

24.0

14.6

11.0

Yemen

-4.6

17.9

35.1

17.9

21.7

33.9

27.2

14.3


* Please refer to the Note on Methodology at the foot of Table 1

Sources: Central Bank Reports