The Financial Structures of oecd and mena Economies Show Significant Differences
The most developed credit systems are found in oecd member countries, the majority of member states having economies that operate with most of the desirable conditions we have described, delivering the most creditable set of ‘trust contracts’ to the largest possible number of participants in their economies. In oecd countries, banks’ share of the total funding of the economies of member states is on average in a range of 33 to 35 per cent (oecd, 2014); capital markets’ share is between 65 and 67 per cent. Within capital markets, stock markets and equities contribute between 25 and 30 per cent, and bonds between 40 and 42
per cent of the total. This shows that credit’s share of total sources of finance in oecd countries as a whole amounts to 75 per cent on average.
This places credit at the centre of the OECD’s economic activities, an assessment consistent with the theoretical position that credit should have in the context of developed democratic frameworks. Two primary characteristics emerge when looking at the structure of OECD country balance sheets in the banking sector:
This indicates high leverage in the sector, which confirms the level of trust in the governance framework surrounding the inventory of credit delivered through this channel, and a high level of confidence in the mechanisms in place to guarantee the protection of rights and the execution of clauses in the multitude of contracts struck between all parties related to this credit inventory. This can be considered a confirmation of the credibility of the governance framework provided by the democratic context in OECD countries.
The structures of mena economies paint a very different picture. In early 2000, the financing structure was composed of banks, with a total share of 80 to 85 per cent, with equity markets representing 12 to 15 per cent on average and bond markets a mere 2 to 3 per cent (imf, 2004). These numbers changed with the rise of stock markets during the years preceding the 2008 crisis, with the share of stock markets reaching 45 per cent or more (in 2007), decreasing again to 26-27 per cent in 2008, and then stabilising around 35 per cent in recent years. The share of bonds and debt securities has increased significantly in the last decade, doubling in size and number of issues. While this is an important change, the starting point was very low. Banks’ share, while decreasing over the period, remains very high at around 67-68 per cent (Kern, 2012).
The primary difference in mena’s financing structure is the dominant role bank credit plays in economic activities. Moreover, state banks account for
38-40 per cent of total available bank credit (Farazi et al., 2011). However, state banks’ share has decreased in the last ten years: the above ratio is an average covering all mena economies, and the figure varies significantly from one country to another. On average, state ownership of banks in the member countries of the Gulf Cooperation Council (ccc) has significantly decreased during the last decade, but in comparison to the OECD average it remains higher by a factor of 2 to 2.5 times. In the other mena countries this ratio has decreased far less, and in some cases has remained very high, with state-owned banks accounting for more than 70 per cent of total bank credit.
The balance sheets of banks from the mena region show that a majority of their loans have maturities of one year or less, which indicates a lack of transformation in these banks’ financing activities.
Capital adequacy ratios (cars) in the GCC banking sector—where the percentage of direct state ownership is the lowest—were in the range of 18 to 20 per cent in 2003. These ratios were impacted by the 2008 financial crisis, but in a limited way, leaving them closer to the level of 15 to 17 per cent. Some countries were affected more than others; in particular the uae’s banking system was hit the hardest in relative terms, with the CAR decreasing from 18 to 12 per cent. While this is a significant decrease (a 35 to 40 per cent deterioration of the ratio is a very significant impact by any standards), a 12 per cent ratio remains very high compared to ratios observed in OECD countries (Khamis, 2010).
The total inventory of credit to the private sector in mena countries represents a mere 50 per cent of gdp, while in OECD member states as a whole this ratio reaches 150 per cent of gdp. This is an indication of the significant difference in the role of credit in mena. Although banks seem to have an important share in the economies of the region, they do not perform with the same ratios as those observed in OECD countries, delivering on average one year maturity loans—a figure that is 2.5 times lower than in OECD countries. This is low leverage given the high capital adequacy ratios they maintain. Moreover, the relatively high number of state-owned banks should discount the banking sector’s share in mena credit activity.
Such low performance leads to exclusion. A study carried out by the World Bank Financial Access Group in 2010 (cgap, 2010) shows that small and medium-sized companies in OECD countries receive close to 27 per cent of total loans, while the figure is only 7.6 per cent for mena countries. The study also shows that in OECD countries the number of bank accounts per 1,000 adults is 2,300, of which 750 are loan accounts—an indicator of access to the credit pool available in the economy. This compares with only 750 accounts per 1,000 adults in mena, of which only around 100 are loan accounts. Another study, carried out by the imf in 2007, shows—if any additional proof were needed—that in the us approximately 90 per cent of the population has access to financial services; in Europe this figure is about 75 per cent; and in mena countries only about 30 per cent.
All these elements show that banks in mena are highly capitalised, meaning that their potential to deliver credit is much higher than their actual contribution. Additionally, the credit they provide is very short term. This is partly a result of limited access to risk assessment tools, the absence or poor reliability of data that would allow a robust credit scoring system, and the difficulty of accessing a set of enforceable guarantees that would allow them to project credit risk visibility towards longer average maturities for their loans.