Keywords: Changes in the banking system in MENA, Features of the banking system in MENA, Bank performance and features as financial strength or weakness in MENA, Banking and Finance Assignment writing services


Ochi, Maktouf and Nouaili (2015) stated that there has tremendous growth in the Islamic finance and banking system in the recent decades but the aftermath of the global financial crisis (GFC) has presented new opportunities and challenges for the financial institution and Islamic finance industry. MENA (Middle East and North Africa) banking system is based on dual banking systems, which are conventional and Islamic banking system, but to tackle the challenges of GFC and sustainability of growth it has grown through significant changes.

The objective of this paper is to examine the changes in the banking system, the key features of the banking system and bank performance as well as the suitability of features as financial strength or weakness of banking in MENA.

Islamic finance and banking system

Islamic finance does not impose a religious or ethnic restriction on the investment process but Islamic financial product and transactions are based on the sharia-compliant. The two principles techniques associated with Islamic finance are Musharaka and Mudharaba. The table below summarises the transaction process of the conventional vs. Islamic bank (Laldin and Furqani, 2013).

Conventional financeIslamic Finance
PC = R-CT- IPI = R –CT- p
PC = Profit from loan (payment of interest), R = total income, CT = Cost expect interest and I = Interest CostPI= Profit of Contractors

P = Profit sharing with bank

The mechanism of Islamic bank is that customers are not the creditors or shareholders of the bank but companies and individual manage relationship with business on profit sharing basis. Therefore, the bank customer does not know the potential of his future earning because there is no fixed interest rate. The applicant shares profit or suffer a loss of his funds because deposit in a theoretical sense acts as equity. The principles of Islamic finance and banking system are largely regulated by ‘Sharia committee’  (Beck, Demirguc-Kunt and Merrouche, 2013).

The table below highlight the difference between the Islamic and conventional banking

Islamic banking systemConventional banking system
Currency and AssetTrade and profit sharingTrading, loan and deposit system
Operations and investmentDepositors knows use of money and affect investment decisionsDepositor and bank are in total separation
Financial transactionReal assets is used as basis of transactionFinancial assets is used as  basis of transaction
Remunerations and profitsProfit sharing and no fix interestInterest are profits

Source: (Mirakhor and Bao, 2013)

Dual banking system in MENA

According to Hassan, Kayed and Oseni (2013) stated that the creation of the ‘Dubai Islamic Bank’ in 1975 has evident the emergence number of financial institutions in MENA which operates on the principles of Islamic finance. The dual banking system in MENA based on Islamic banking alongside conventional banking.

According to a recent report published on ‘Global Islamic finance’, there are nearly six hundred Islamic banks operating in MENA region. The principles of Islamic finance highlight the gap between the banking practices and principles of Sharia law and i.e. it prohibit interest in a number of ways based on Fiqh (jurisprudence), holy Koran as well as-Sunna (Teaching of Prophet -PBUH)  (Aronson, Thornton and Beseiso, 2014).

Changes in Banking System in MENA

According to Hanif (2016), the expected size of Islamic finance industry will be 4.5 trillion USD by 2020 and growing demand for Islamic financial products has resulted in the emergence of the innovative financial institutions. The oil price boom (2003-2008) has resulted in tremendous economic activity in the MENA region and credit as well as asset boom changes the economic landscape of these countries. However, financial crisis and the decline in oil prices have highlighted the vulnerabilities, which have changed the financial system in the region.

Mongid (2016) added that there has been new legal and regulatory framework to strength the Islamic banking industry to regulate and promote sustainability of the Islamic financial industry. The problems such as global liquidity crisis’s, sharp decline in commodity prices, higher CDS and plugging prices and pressure for bank liquidly and funding has changed the financial landscape in the region. For example, Dubai real estate market was almost crashed which has raised questions on the structure of existing financial system (Sufian and Zulkhibri, 2015).

MENA group and impact on banking system

MENA group of countries are divided into three main groups, which are oil exporting (OX) countries (Bahrain, Oman, Kuwait, UAE, Qatar and Saudi Arabia), oil importing (OM) countries (Jordan, Egypt, Syria, Lebanon, Morocco and Tunisia) as well as non-GCC countries (Iraq, Libya and Yemen). MENA countries financial system has remained excessive remained bank based control despite the changes to encourage and establish market-based financial sector. Moreover, state bank dominates the ownership in MENA and thus ownership concentration has resulted in weak right for stakeholders (Mokni and Rachdi, 2014).

Boussaada and Karmani (2015) analysed that MENA banking system has experienced fundamental change based on the demographic, macroeconomics and regulation changes, which have an effect the banks on both strategic and operational level. The diagram below summarises the asset growth rate in which significantly lowered. For example, Qatar growth bank asset growth rate dropped to just 20% compare to 46% of the crisis as well as Bahrain growth is merely 3% compare to 35% growth prior to financial crisis’s.

Basel accord and banking system

Ghanem (2016) discussed that the Basel agreement standardised the minimum capital requirement and scrutinised capital adequacy, which ensures bank, holds capital in relations to their perceived credit risk. The Basel committee has highlighted that internal control of the bank is an important component of bank governance and therefore, the focus of several studies is a relationship between the bank performance and ownership structure. The factors, which elaborate the bank growth and profitability, are the ability to settle resources, differences in identity and reward as well as the ability to monitoring the managers. Many MENA countries have adopted the Basel accord, which imposed a minimum capital requirement for the banks.

Bitar, Saad and Benlemlih (2015) stated that increased need for the risk-weighted capital ratio has raised capital requirement and shift in assets towards the less risk. Moreover, the financial crisis has made MENA countries focus on the need for the open banking system along with modernisations of the financial industry. The MENA region countries have introduced liberalisation programme after the financial crisis to improve bank performance and efficiency. The liquidity rules for the banks have an overall effect on the functions of the money markets. The banks rely on the interbank and borrowing bank has high liquidly ratio and lending bank have low liquidity ratio.

The operations in MENA are dependent on the central bank and thus, Basel affects the liquidity of both central and commercial bank. The liquidity rule encourages the financial stability and banks are more to invest in the assets, which are financially sound. For example, the Basel accord has resulted in consolidation in the Egypt banking sector with the increased the capital requirement (Bitar, Saad and Benlemlih, 2015).

Farazi, Feyen and Rocha (2011) studied that the poor performers and small banks were a target for acquisition to meet the capital requirement. The liquidity of bank has improved while Islamic banks have an advantage because they are less exposed to borrowing. In the case of the foreign banks in the market, the acquisition was an important to the source of entry in the market range of foreign players enters the market

Naceur and Kandil (2013) discussed that the changes in macroeconomic policies of Jordan and Basel requirement a drastic change in the Jordan market was a merger of the four undercapitalised banks and restructuring as a single bank. In the case of Dubai, the central bank has provided incentives to change the ownership structure of the industry through the private financial institution and foreign bank to provide credit in the market.

The financial crisis’s has led to increased liberalisation of the banking system in Tunisia and Saudi Arabia. For example, these countries as evident a decrease of total bank assets and rise in the private sector share in finance industry.

Salient features of MENA banking system

Central Bank in MENA

MENA banking sector has a number of similarities and differences based on the financial development and GDP of the countries. The financial sector has pivotal role in the economic growth and strong financial institutions are critical for the development of the economy. The central banking system in MENA is driven based on the assets and liabilities and i.e. particularly in conventional banking retail deposit base are a critical factor to determine the size of the loan portfolio. On the assets side for the banks, credit to government and private banks and foreign assets are important factors. On the other hand, liabilities are included government deposits and term deposits (Lassoued, Sassi and Attia, 2016).

Aronson, Thornton and Beseiso (2014) analysed that the share of the Islamic bank asset is relatively small of 15% of total market. Another important indicator, which affects the balance of the balance, is the foreign movement. The purchase of foreign and adjustment against the US dollar have the direct effect on the assets and liabilities of the bank. The balance sheet of bank in MENA is largely driven based on the asset-is driven (deposit and foreign exchange) rather long-term assets.

The assets across the MENA countries are based on the liquidity generation from deposits and in countries such as (Yemen and Tunisia), it is in transition phase whereas countries such as UAE and Qatar the spill-over effect of the GFC has the effect the deposit ability of the banks. For example, oil-importing countries have had a marginal decline in the in foreign reserves from 2010-2014. On the other hand, oil-exporting countries have higher cash balance compare to importing countries. For the oil exporting countries, foreign exchange prevails as the same extent as oil importing countries (Srairi, 2013).

Feyen et al (2014) mentioned that the selected group of the oil exporting countries have large changes from 2010-2014 in which structure movement was in excessive of liquidity. For example, Morocco and Tunisia banks have changes to their balance sheet, which includes reduction of foreign assets. The gross claims in countries such Jordan and Yemen have strength the deposit ratio of the bank because of the capital inflows where countries such as UAE have suffered higher government to domestic claims and large outflow of the capital has affect  balance sheet of the bank because of pullback on the capital inflows.

Commercial Banks in MENA

The loan to deposit ratio (LTD) of the commercial banks in MENA region falls between the 60-80 percent when to compare with a world average of 85 percent, which represents lower values. Moreover, the striking factors are that LTD ratio is even lower in the countries such as Syria, Egypt and Lebanon are below the 50 percent, which is further evident from the high government borrowing and weak consumer demand in these countries. On the other hand, oil-exporting countries have high LTD ratio because of the wholesale banking. The growth in the credit and deposit rate in the countries such as Saudi Arabia, Qatar and Kuwait is based on the high growth in these countries (Lemonakis et al., 2015).

Fang and Foucart (2014) elaborate that the negative growth rate and high inflation in the countries such as Yemen, Sudan and Egypt represent a decline in credit and deposit growth rates. Moreover, the return on asset for the MENA region has an average of 3% but it varies substantially based on the economic development of the country. For example, banks in Saudi Arabia have strong performance and positive ROE whereas banks in UAE and Tunisia have negative ROE.

The shortcoming of the MENA region banks is lack of long-term assets and poor capital adequacy ratio. The Islamic banking sector needs the new innovative financial product to increase market share and attract new customers. On the liability side, deposit from the private sector and the government are critical factor. The drop in the oil prices has affected the deposit ratio of the bank and resulting decline of deposits (Boussaada and Labaronne, 2015).

Islamic banks in MENA

The performance of the Islamic bank in the region is high when to compare to conventional banks in the region. For example, the study of Hassan, Kayed and Oseni (2013) has shown that profitability, risk and liquidity of the Islamic banks is high when to compare to convention bank in the oil exporting countries. The Islamic banking system in the MENA countries has not reduced the deposit of the conventional banking system (Beck, Demirguc-Kunt and Merrouche, 2013).

The Islamic banking system offers the wide range of financial products, which improve the efficiency of the financial sector. The Islamic banking system in MENA region is largely owned by the privately owned institutions. The concentration of Islamic banks in MENA is found in Saudi Arabia, UAE, Kuwait and Qatar (Rahman and Rosman, 2013).

The Islamic bank raises deposit through demand deposit based on the relationship between creditor and debtor but no return is offered. The second type of accounts is known as an unrestricted account, which is utilised by the banks for investment purpose and profit or loss shared between depositor and bank. This type of account is also known as restricted investment account and funds are invested by the banks based on the pre-agreed relationship with banks. These accounts act as equity of the bank rather an investment. The asset side of the banks includes cash and cash equivalents, portfolio investment and Islamic modes of finance (Ali, 2011).

Said (2015) highlighted that the Murabaha represent the 90% of the total assets of the Islamic bank. The liability of the bank balance sheet includes customers funds (Mudarabah saving and investment), the fund to other creditors (LC, Contractors) and other profit liabilities (Dividend, taxes and Zakah). The graph below summarises the profit and equity of Islamic banks.

Source of Financial Strength or weakness of financial system in MENA

Independent Monetary policy

The advantage is that interest rates in the MENA countries are freely determined by the government as well as monetary and government securities exist in the market. Nevertheless, the limitation in terms of secondary money market which restrict the securities and central banks operation. The countries with a concentration of central bank lack effective design and deployment of monetary policy. The focus of the central banks in the region is to create more autonomy for the commercial banks. On the other hand, the Islamic banking sector offers bank an opportunity for secure deposit, promote ethical investment and contribute to the strength of banking sector in MENA region (Balli and Balli, 2013).

Profitable banking sector

Ben Selma Mokni and Rachdi (2014) emphasised that the banking sector is well developed in many MENA countries and is profitable and efficient. Nevertheless, countries, which are non-GCC and oil importing, have a relative complicated economic scenario. Moreover, the dominance of public sector and interventions of the government in terms of credit allocation have liquidity problems. The countries such as UAE and Saudi Arabia have banking sector concentration with the large market are controlled by few institutions.

The co-existence of the Islamic banking and conventional banking system has allowed the bank to remain profitable maintain the liquidity and credit quality. The important indicator of the bank financial strength is the financial stability assessment, which shows that banks in the MENA region have high liquidity and profitability (Ben Selma Mokni and Rachdi, 2014).

Lack of Secondary money market

Guscina, Pedras and Presciuttini (2014) stated that the lack of secondary money restricts the credit availability and result in liquidity problems. The non-banking financial sector such as bond market, pension funds, insurance companies and mutual funds is almost non-existence and needs further development to support the banking system. The ownership structure makes it relative complicated and there is a need for stable and clear legislation for the development of secondary money markets.

Measures to enhance the part of shared subsidises and cultivate remote financial specialist vicinity are likewise of most extreme significance to build competition and expansion in these banking sectors. There is the lack of competition in the industry which high level of concentration of public institutions. The banking sector is subject to entry restriction and large intermediaries’ holds the significant market share (Fang and Foucart, 2014).

Financial openness and regulatory environment

The financial sector in half of the MENA countries is opened to foreign banks and open financial sectors allow free flow of credit. However, there are still large numbers of countries, which have restrictions on the foreign ownership. The earning repatriation and ownership structure have complication for the banking operations. The adaptation of Basel accord and strict policies of the central bank have strength banking supervision to minimise the risk and improve governance of banking sector. The need for capital adequacy has improved the quality of the financial institution and has reduced the non-performing bank loans (Ben Selma Mokni and Rachdi, 2014).

The participative environment for the foreign banks and elimination of the entry barrier is important for sustainability and competitiveness of the banking sector in the region. The regulatory environment is much needed to ensure the long-term stability of the financial system in the country (Barajas and Chami, 2010).


MENA countries have experienced dramatic economic development and banking reforms in recent times. The global financial crisis has changed the financial landscape in the region. The concentration of public sector institution and small market share of Islamic banks has posed challenges for the banking sector in the region. However, Basel accord has strengthened the banking industry through concentration of the sector as well as the liberation of bank industry has encouraged foreign ownership in the region. The economic reforms and structural changes by the policy makers have encouraged financial development in the sector.

The Islamic banking sector has low market share but Islamic financial transactions facilities credit and strength the banking sector. The factors, which support the financial development in the region, are independent monetary policy and profitable banking sector. The lack of alternative money market, lack of financial openness and restrictions on foreign investment limit the financial development. The balance sheet structure of the bank on in oil-importing and oil-exporting countries has a significant financial difference because of their regulatory and economic environment.


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