## How developed and inclusive are financial systems in the GCC

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### Structure of the financial system in the GCC
- Size and composition:
  - Total assets of GCC financial institutions: about $2.9 trillion (around 196 percent of GDP).
  - Share of non-bank financial institutions (NBFIs) in GCC financial institutions’ assets: about 20 percent.
- Growth (2010–17):
  - Average growth for GCC financial institutions: around 8.5 percent (y-on-y) during 2010–17 (UAE excluded due to data).
  - NBFIs growth averaged around 10.7 percent (y-on-y).
  - Banking system growth averaged around 7.8 percent (y-on-y).
- Banking system characteristics:
  - Banking systems are generally well-capitalized, largely domestically owned, with significant public and quasi-public ownership.
  - Banking system assets to non-oil GDP examples: Bahrain 820 percent; Saudi Arabia 131 percent.
  - Deposits represent around 60 percent on average of total GCC banking system funding.
- Islamic banking:
  - Total assets of Islamic banks in the GCC grew over the last decade at an average rate of around 11 percent (y-on-y) versus about 6 percent (y-on-y) for conventional banks.
- NBFIs and capital markets:
  - NBFIs remain relatively small except in Saudi Arabia (assets around 97 percent of non-oil GDP).
  - Kuwait and Bahrain have NBFIs with total assets of more than 30 percent of non-oil GDP.
  - Insurance sector remains limited; investment companies and mutual funds have larger activity mainly in Kuwait and Saudi Arabia.
  - Stock markets: Saudi stock market accounts for about 50 percent of GCC market capitalization.
  - Domestic debt markets are under-developed; outstanding private sector domestic debt instruments were around 5 percent of GDP in 2017.
  - Private sector total external debt securities in 2017 ranged from 21 percent of GDP in Saudi Arabia to around 77 percent of GDP in UAE.

### Financial development — assessment and indices
- Benchmarks and methodology:
  - Financial development measured using a comprehensive index for 129 countries (1980–2016) building on Svirydzenka (2016), with two major components: financial institutions and financial markets; each broken into access and depth sub-components.
  - Benchmarks used: (i) EMs; (ii) AEs; and (iii) economic fundamentals (statistical benchmarks estimated by regressing the financial development index on structural and economic characteristics).
  - The financial development index is not constructed for Bahrain due to data constraints.
- Key indicators included (preserved):
  - Private sector credit to GDP
  - Pension fund assets to GDP
  - Mutual fund assets to GDP
  - Insurance premiums, life and non-life to GDP
  - Bank branches per 100,000 adults
  - ATMs per 100,000 adults
  - Stock market capitalization to GDP
  - Stocks traded to GDP
  - Debt securities in local currency of nonfinancial corporations to GDP
  - Percent of market capitalization outside of top 10 largest companies
  - Total number of debt issuers, nonfinancial and financial corporations
- Findings:
  - GCC countries score higher on the financial development index than EMs but lag AEs.
  - Analysis relative to economic fundamentals points to negative financial development gaps for all countries except Saudi Arabia.
  - Financial institutions development is somewhat lower relative to financial markets; gaps largely attributable to limited roles of pension funds, the insurance market, and mutual funds.
  - Domestic private bond markets remain small: corporate bond issuance is less than 2 percent of GDP in most GCC countries, except Bahrain.

### Financial inclusion — access and usage
- Access and breadth:
  - Financial access index indicates GCC countries have less inclusive financial sectors than countries with similar per capita income and relative to economic fundamentals.
  - Commercial branches per 100,000 adults: comparable to EMs, lower than the average for AEs.
- Account ownership and usage:
  - Share of population with accounts at formal financial institutions increased to 80 percent in 2017 from 64 percent in 2011 (average across countries for which surveys exist).
  - Share of population that borrowed from a financial institution: around 16 percent in 2017.
  - Share of adults reporting having borrowed informally: about 26 percent in GCC versus 13 percent in advanced economies.
  - Household reliance on informal channels (peer financing, family) remains dominant; bank loans are the residual source.
- Gender, youth, and SME access gaps:
  - Gender:
    - About 86 percent of male adults had an account at a financial institution in 2017, compared to 70 percent of female adults.
    - Percent of credit card holders among female adults is around one third of that among males.
    - Usage of loans and mortgages by males is significantly higher than by females.
    - Gender gaps have decreased in Bahrain, Kuwait, and the United Arab Emirates.
  - Youth:
    - Only 63 percent of youth (15–24) had an account in 2017 versus 83 percent of adults.
  - SMEs:
    - Bank lending to SMEs averages around 4.5 percent of total loans, lower than the average in MENA and other regions.
- Data caveats:
  - It is not possible to determine from these indicators whether gaps arise from supply constraints or demand-side factors.
  - The Findex survey basis and limited respondent/geographic coverage suggest cautious interpretation.

### Financial development, inclusion, and growth implications
- Role and potential:
  - Financial systems pool savings and channel them to productive investments; financial development and inclusion are key for achieving higher, sustainable, and inclusive growth in the GCC.
- Estimated growth effects from regression analysis (quadratic relationship with a possible turning point):
  - Further developing financial systems to the estimated turning point could increase annual per capita growth by:
    - 0.4 percentage points in Oman
    - 0.7 percentage points in Kuwait
  - Growth benefits appear much smaller for Qatar.
  - The United Arab Emirates and Saudi Arabia are found to be slightly beyond the turning point, with ambiguous effects of further financial development on growth within the range of uncertainty.
- Financial inclusion effects:
  - IMF (2018b) estimates that, in high AEs, each percentage point improvement in financial inclusion can increase growth by 0.09 percentage points (after controlling for financial development).
  - Based on this estimate, increasing financial inclusion to the average level observed in AEs could increase annual per capita growth by 0.3-0.7 percentage points.
  - IMF (2018b) also finds greater financial inclusion is associated with less inequality as measured by the Gini coefficients and income gaps.

### Constraints and reforms to improve SME, women, and youth access to finance
- Major constraints identified:
  - Institutional weaknesses and limited financial sector competition reduce SME access to finance.
  - Low financial literacy, weak SME governance structures, and inadequate insolvency frameworks constrain SME financing.
  - Social norms, low female labor force participation, and high youth unemployment contribute to lower access to finance for women and youth.
  - GCC-specific hurdles: transitory nature of SME owners, expatriate-dominated SME employment, criminalization of loan defaults, high SME loan rejection rates (example: UAE up to 70 percent rejected vs less than 20 percent in the UK), weak insolvency recovery (banks recovering only 30 to 40 percent on defaulted loans versus 72 percent average in advanced economies).
- Recommended reforms for SME lending (IMF forthcoming):
  - Operationalize and digitize central collateral registries for movable and non-movable assets; expand coverage of movable collateral registries.
  - Operationalize bankruptcy laws; modernize court systems including training of judges; decriminalize loan delinquencies; introduce out-of-court restructurings.
  - Expand coverage of credit bureaus to SMEs.
  - Reduce market distortions and increase financial market competition; minimize direct interventions such as interest rate caps; avoid relaxing risk weights for banks on SME loans; encourage new lenders/alternative financial institutions (community banks, microfinance institutions).
- Supporting measures:
  - Financial literacy programs for entrepreneurs (examples preserved: Dubai Entrepreneurship Academy (Dubai SME), NBAD bank SME academy; Saudi Arabia’s FSDP envisages a program to improve financial literacy for SMEs).
  - Measures to boost female and youth labor force participation—affordable child care, maternity and paternity leave, youth-focused measures—expected to decrease gender and youth access-to-finance gaps.
  - Financial education programs for women and youth (global examples preserved).

### Role of Fintech
- Opportunities:
  - Decrease information asymmetry, improve competition, and lower lending costs for SMEs.
  - Enable credit scoring from alternative data sources via big data analytics.
  - Use blockchain for ownership data and online collateral registries.
  - Allow consumers to compare banking services, and reduce costs of AML/CFT and KYC procedures.
  - UAE and other GCC jurisdictions host successful SME crowdfunding platforms.
- Risks and regulatory needs:
  - Risks from big data analytics (privacy, consumer protection) and crowdfunding platforms (fraud).
  - Need for planned regulations and regulatory incubators (example preserved: ADGM in the UAE) to develop Fintech regulation in consultation with companies.

### Fostering capital market and NBFI development
- Key bottlenecks:
  - Domestic debt market underdevelopment linked to extended absence of government debt issuance and limited investor base.
  - Stock markets are narrow in terms of number of issuers and are dominated by large public-sector firms; the 10 largest listed companies account for more than 60 percent of total market capitalization on average.
  - NBFIs remain small relative to banking systems in most GCC countries.
- Market infrastructure and recent progress:
  - Since 2000, new capital market laws and regulatory bodies; enhanced corporate governance; eased restrictions on foreign investors.
  - Reforms enabled inclusion of Qatar and the UAE in the MSCI Emerging Market Index in 2014 and Saudi Arabia more recently.
  - Saudi Arabia specific reforms preserved: “Nomu” parallel market for SMEs; securities lending and short selling enabled; settlement amended to “T+2”; inclusion timelines and bond market steps preserved.
- Policy recommendations to deepen equity markets and NBFIs:
  - Enhance corporate governance and investor protection.
  - Remove restrictions on foreign ownership.
  - Develop secondary stock markets for smaller companies.
  - Encourage financial market competition to support NBFI development.
- Policy recommendations to grow debt markets:
  - Develop a government yield curve and further develop public debt management frameworks with a clear issuance strategy and calendar.
  - Increase market liquidity through secondary market trading and repo markets for government and corporate bonds.
  - Ensure requirements for private issuance are not onerous; broaden access to government bonds beyond banks, SOEs, and pension funds.
  - Create rating agencies and improve disclosure/information systems and bankruptcy laws to support corporate bond markets.

### Nonbank sector constraints and policy priorities
- Main constraints:
  - Public ownership of a large share of equities and limited trading have constrained stock market liquidity.
  - Absence of developed debt markets forces fixed-income institutional investors to hold foreign assets.
  - Limited financial literacy and generous pension funds lower demand for asset management and insurance.
  - Finance companies: more than 80 finance companies with loan portfolio around 3 percent of GDP in 2017; NPLs around 12.8 percent (UAE), 10.3 percent (Saudi Arabia), and 5 percent (Oman).
- Policy priorities summarized:
  - Develop a yield curve and increase market liquidity through secondary markets trading.
  - Enhance corporate governance and investor protection; remove restrictions on foreign ownership.
  - Encourage financial market competition to support NBFI development.
  - Improve SME governance structures, expand credit bureau coverage, strengthen insolvency frameworks, and ensure adequate banking competition.
  - Encourage female and youth employment, increase financial literacy programs, and use Fintech to close financial inclusion gaps.

### Conclusions
- Financial systems in the GCC have developed significantly but can progress further.
- Priority reform areas to translate financial development and inclusion into stronger, more diversified, and more inclusive growth:
  - Improving access to finance for SMEs, women, and youth.
  - Developing domestic debt markets and making stock markets more accessible.
  - Enhancing corporate governance and investor protection.
  - Removing restrictions on foreign ownership.
  - Promoting competition to support NBFI development.
- Estimated potential growth gains:
  - Further financial development could be associated with higher annual per capita income growth of 0.4-0.7 percentage points in some GCC countries.
  - Increased financial inclusion could be associated with higher growth of some 0.3-0.7 percentage points.

*Prepared by a team led by Nabil Ben Ltaifa, comprising Ali Alreshan, Aidyn Bibolov, Divya Kirti, Anta Ndoye, and Erik Roos, under the supervision of Stéphane Roudet (all MCD).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 3

### EXECUTIVE SUMMARY

### Introduction
- Financial development and inclusion are crucial to achieving robust and inclusive growth. Financial development improves the financial sector’s functions of pooling savings, allocating them to productive use, promoting greater sharing of information, and diversifying risks. Financial inclusion is the degree to which access and use of the financial sector is disseminated throughout the population.
- The paper assesses financial development and inclusion in the GCC, using broad indices and complementary indicators (including surveys) to capture multiple dimensions and to allow cross-country and over-time comparisons.

### Structure of the Financial System in the GCC
- Overall structure and size:
  - Total assets of GCC financial institutions: about $2.9 trillion (around 196 percent of GDP).
  - Share of non-bank financial institutions (NBFIs) in GCC financial institutions’ assets: about 20 percent.
- Growth (2010–17):
  - Average growth for GCC financial institutions: around 8.5 percent (y-on-y) during 2010–17 (UAE excluded due to data).
  - NBFIs growth averaged around 10.7 percent (y-on-y).
  - Banking system growth averaged around 7.8 percent (y-on-y).
- Banking system characteristics:
  - Banking systems are generally well-capitalized, largely domestically owned, with significant public and quasi-public ownership.
  - Banking system assets to non-oil GDP examples: Bahrain 820 percent; Saudi Arabia 131 percent.
  - Deposits represent around 60 percent on average of total GCC banking system funding.
- Islamic banking:
  - Important driver of banking growth; total assets of Islamic banks in the GCC grew over the last decade at an average rate of around 11 percent (y-on-y) versus about 6 percent (y-on-y) for conventional banks.
- Non-bank financial institutions (NBFIs):
  - NBFIs remain relatively small except in Saudi Arabia (assets around 97 percent of non-oil GDP).
  - Kuwait and Bahrain have NBFIs with total assets of more than 30 percent of non-oil GDP.
  - Insurance sector remains limited; investment companies and mutual funds have larger activity mainly in Kuwait and Saudi Arabia.
- Capital markets and debt:
  - Stock markets are relatively well developed by market capitalization, but remain below pre-global financial crisis levels; Saudi stock market accounts for about 50 percent of GCC market capitalization.
  - Domestic debt markets are under-developed; outstanding private sector domestic debt instruments were around 5 percent of GDP in 2017.
  - Private sector total external debt securities in 2017 ranged from 21 percent of GDP in Saudi Arabia to around 77 percent of GDP in UAE.

### How Developed and Inclusive are Financial Systems in the GCC?
- Comparative assessment:
  - Financial development in the GCC compares well with emerging markets but lags advanced economies.
  - Banking systems and equity markets are generally well-developed in size; NBFIs and debt markets are less developed.
  - Equity markets are concentrated and dominated by a few large (often public-sector) companies.
- Financial inclusion progress and gaps:
  - Progress has been made on financial inclusion overall; however, access to finance for SMEs, women, and youth remains relatively low.
  - Low access may partly reflect social norms, low levels of participation of women in the labor market and private sector activity, and high levels of youth unemployment.
- Measurement approach:
  - Financial development measured using a comprehensive index for 129 countries (1980–2016) building on Svirydzenka (2016), with two major components: financial institutions and financial markets; each broken into access and depth sub-components.
  - Financial inclusion proxied by an index of household access (number of branches of commercial banks and ATMs per 100,000 adults) supplemented by indicators capturing access and usage for women, youth, and SMEs.

### Financial Development and Inclusion and the Impact on Growth
- Relationship to growth:
  - Further financial development and inclusion is likely to be associated with stronger economic growth in GCC countries.
  - Empirical estimates are uncertain, but progress in financial development and/or inclusion is likely to go hand-in-hand with stronger growth.
  - Growth benefits are likely to vary across countries depending on current levels of financial development and inclusion.

### Encouraging Access to Finance for SMEs, Youth and Women
- Major constraints identified:
  - Institutional weaknesses and limited financial sector competition reduce access to finance for SMEs.
  - Low financial literacy, weak SME governance structures, and inadequate insolvency frameworks constrain SME financing.
  - Social norms, low female labor force participation, and high youth unemployment contribute to lower access to finance for women and youth.
- Policy recommendations:
  - Strengthen institutional frameworks and promote financial sector competition to boost SME access to finance.
  - Enhance financial literacy programs.
  - Improve SME governance structures and insolvency frameworks.
  - Implement reforms encouraging female and youth employment.
  - Encourage the use of emerging technologies in finance to broaden access.

### Fostering Capital Market and Non-Bank Institution Development
- Key bottlenecks:
  - Domestic debt market underdevelopment linked to extended absence of government debt issuance and limited investor base.
  - Stock markets are narrow in terms of number of issuers and are dominated by large public-sector firms.
  - NBFIs remain small relative to banking systems in most GCC countries.
- Policy recommendations to grow debt markets:
  - Develop a government yield curve.
  - Increase market liquidity through secondary market trading.
  - Ensure requirements for private issuance are not onerous.
  - Broaden access to government bonds beyond banks, SOEs, and pension funds to deepen investor base.
- Policy recommendations to deepen equity markets and NBFIs:
  - Enhance corporate governance and investor protection.
  - Remove restrictions on foreign ownership.
  - Encourage financial market competition to support NBFI development.
  - Encourage greater participation of a larger pool of companies and investors in stock markets.

### Conclusion
- Financial systems in the GCC have developed significantly but can progress further.
- Priority areas for reforms include: improving access to finance for SMEs, women, and youth; developing domestic debt markets; making stock markets more accessible; enhancing corporate governance and investor protection; removing restrictions on foreign ownership; and promoting competition to support NBFI development.
- Implementing these reforms should help translate further financial development and inclusion into stronger, more diversified, and more inclusive economic growth.

*Prepared by a team led by Nabil Ben Ltaifa, comprising Ali Alreshan, Aidyn Bibolov, Divya Kirti, Anta Ndoye, and Erik Roos, under the supervision of Stéphane Roudet (all MCD).*

### 14.      The level of financial development and inclusion in GCC countries is assessed in

### 14. The level of financial development and inclusion in GCC countries is assessed in

### Financial development: overall assessment and indices
- Benchmarks used: (i) EMs; (ii) AEs; and (iii) economic fundamentals (statistical benchmarks estimated by regressing the financial development index on structural and economic characteristics, such as per capita income, rule of law, government size, and others).
- The financial development index is not constructed for Bahrain due to data constraints.
- Key subcomponents and indicators included in the financial development index:
  - Private sector credit to GDP
  - Pension fund assets to GDP
  - Mutual fund assets to GDP
  - Insurance premiums, life and non-life to GDP
  - Bank branches per 100,000 adults
  - ATMs per 100,000 adults
  - Stock market capitalization to GDP
  - Stocks traded to GDP
  - Debt securities in local currency of nonfinancial corporations to GDP
  - Percent of market capitalization outside of top 10 largest companies
  - Total number of debt issuers, nonfinancial and financial corporations
- Findings:
  - GCC financial systems have developed substantially over the past two decades, with variation across countries.
  - GCC countries score higher on the financial development index than EMs, reflecting greater financial market development and somewhat lower financial institutions development.
  - Financial development in the GCC lags that of AEs.
  - Analysis relative to economic fundamentals points to negative financial development gaps for all countries except Saudi Arabia.

### Financial institutions and markets: depth, access, and composition
- Financial institutions:
  - Development broadly in line with EMs but lags AEs and fundamentals.
  - Increased banking system depth, but gaps relative to fundamentals largely attributable to limited roles of pension funds, the insurance market, and mutual funds.
- Financial markets:
  - Indices have improved for most GCC countries over the last two decades.
  - Domestic private bond markets remain small: corporate bond issuance is less than 2 percent of GDP in most GCC countries, except Bahrain.
  - Market improvements reflect oil-price-driven stock market performance and legal, regulatory, and supervisory reforms enhancing stock market transparency; repatriation of investments and privatizations also boosted market capitalization.
- Equity market structure and participation:
  - The number of listed companies is relatively low compared to peers (scaled by population, Saudi Arabia, the UAE, Qatar, and Oman have fewer listed companies than EMs and AEs).
  - IPO activity: peaked at only 20 IPOs, which raised less than $1 billion, in 2017.
  - Listings concentrated in a few large companies and sectors; the 10 largest listed companies account for more than 60 percent of total market capitalization on average, above EM and AE averages.
  - Governments and SOEs hold a substantial share of market assets (in Saudi Arabia, government entities hold about 40 percent of market capitalization), limiting free floating shares.
  - Foreign investor participation:
    - Foreign investors held between 2 and 8 percent of market capitalization in 2017 in GCC countries.
    - Restrictions on foreign participation have been eased: foreign ownership limits increased to 49 percent in Oman and Saudi Arabia and up to 100 percent in other GCC countries.
  - Low liquidity, high volatility, and lack of hedging instruments may have discouraged foreign investment.

### Financial inclusion: access and usage
- Access and breadth:
  - According to the financial access index, GCC countries have less inclusive financial sectors than countries with similar per capita income and relative to economic fundamentals.
  - Commercial branches per 100,000 adults: comparable to EMs, lower than the average for AEs.
- Account ownership and trends:
  - Share of population with accounts at formal financial institutions increased to 80 percent in 2017 from 64 percent in 2011 (average across countries for which surveys exist).
  - GCC account access remains below the average for AEs.
- Usage and informal finance:
  - Share of population that borrowed from a financial institution: around 16 percent in 2017.
  - Share of adults reporting having borrowed informally: about 26 percent in GCC versus 13 percent in advanced economies.
  - Household reliance on informal channels (peer financing, family) remains dominant; bank loans are the residual source.
- Gender, youth, and SME access gaps:
  - Gender:
    - About 86 percent of male adults had an account at a financial institution in 2017, compared to 70 percent of female adults.
    - Percent of credit card holders among female adults is around one third of that among males.
    - Usage of loans and mortgages by males is significantly higher than by females.
    - Gender gaps have decreased in Bahrain, Kuwait, and the United Arab Emirates.
  - Youth:
    - Only 63 percent of youth (15–24) had an account in 2017 versus 83 percent of adults.
  - SMEs:
    - Bank lending to SMEs averages around 4.5 percent of total loans, lower than the average in MENA and other regions.
- Data and interpretation caveats:
  - It is not possible to determine from these indicators whether gaps arise from supply constraints or demand-side factors.
  - The Findex survey basis and limited respondent/geographic coverage suggest cautious interpretation.

### Financial development and inclusion: implications for growth
- Role and potential:
  - Financial systems pool savings and channel them to productive investments; financial development and inclusion are key for achieving higher, sustainable, and inclusive growth in the GCC.
- Estimated growth effects from regression analysis (quadratic relationship with a possible turning point):
  - Further developing financial systems to the estimated turning point could increase annual per capita growth by:
    - 0.4 percentage points in Oman
    - 0.7 percentage points in Kuwait
  - Growth benefits appear much smaller for Qatar, which is already close to the estimated turning point.
  - The United Arab Emirates and Saudi Arabia are found to be slightly beyond the turning point, although they are within the range of uncertainty where the effect of further financial development on growth is ambiguous.
- Limitations and broader considerations:
  - The financial development index primarily captures size and not all qualitative aspects (competition, allocative efficiency).
  - Comprehensive financial development (improving competition, allocative efficiency, debt markets, NBFIs, foreign investor presence, SME finance) could yield larger growth benefits than indicated by the size-based index.
  - Stock markets concentrated in state-owned companies and underdeveloped debt/NBFI sectors constrain the productive allocation of savings.

*Source: IMF staff calculations and analysis as presented in the chapter "FINANCIAL DEVELOPMENT AND INCLUSION."*

### 24.      Fostering greater financial inclusion would support growth and help reduce inequality

### 24.      Fostering greater financial inclusion would support growth and help reduce inequality

### Financial inclusion — growth and inequality impacts
- A composite index constructed following Mialou and others (2017) suggests that GCC countries are less financially inclusive than the average for AEs (Figure 13).
- IMF (2018b) estimates that, in high AEs, each percentage point improvement in financial inclusion can increase growth by 0.09 percentage points (after controlling for financial development).
- Based on this estimate, increasing financial inclusion to the average level observed in AEs could increase annual per capita growth by 0.3-0.7 percentage points.
- IMF (2018b) also finds greater financial inclusion is associated with less inequality as measured by the Gini coefficients and income gaps.
- IMF (forthcoming) finds that growth gains from closing the SME financial inclusion gap in the MENA region could be of comparable magnitude, though lack of detailed SME data for GCC countries prevents more detailed GCC-specific estimates.

*Key statistic from Figure 13 (preserved):*
- Growth Benefit of Financial Inclusion (Percentage points of real GDP per capita growth) by country ranges shown as 0.0 to 0.8 on the figure; Financial Inclusion Index, 2015 (0-1 scale) shown for KWT QAT U A E SAU OMN relative to Advanced economies average.

### Encouraging access to finance for SMEs, youth, and women
- Efforts needed to increase SME, women, and youth access to finance; key reforms include strengthening regulatory frameworks and institutional infrastructure, encouraging labor force participation for women and youth, and promoting fintech.

SMEs and financial inclusion — findings and challenges
- Improving access to finance for SMEs is a key priority in the GCC; small, growing firms contribute importantly to job creation.
- SME access to finance is generally low worldwide due to shared sector challenges (Bibolov and others, 2010):
  - SMEs are generally riskier and lack proper collateral; assets and loans can be used interchangeably by SMEs and their owners, complicating monitoring and recovery.
  - SME financial information is limited; owners often lack finance and accounting skills; SME accounts do not meet bank accounting and disclosure requirements; widespread use of cash prevents relationship building with banks.
  - SME coverage by credit bureaus is generally low; credit bureaus have started just recently covering SMEs in the GCC.
  - Costs of serving SME accounts is high; banks must follow AML/CFT procedures when onboarding SMEs, and returns on SME lending may not be sufficient to cover costs.
- Additional GCC-specific hurdles:
  - Transitory nature of SME owners: nationals less willing to join SMEs; expatriates comprise most SME employees in Saudi Arabia and UAE; stringent regulation (criminalization of loan defaults) leads some expatriate SME owners to flee rather than resolve debts.
  - Lack of competition in the financial sector: many GCC banks are state-owned, serve large companies, enjoy stable interest margins and cheap deposits; IMF (forthcoming) finds GCC banking systems on average are less competitive than other regions; high SME loan rejection rates (example: UAE up to 70 percent rejected vs less than 20 percent in the UK).
  - Lack of working insolvency frameworks: bankruptcy laws are recent or untested (UAE adopted 2017, Saudi Arabia 2018); banks recovering only 30 to 40 percent on defaulted loans compared to an average of 72 percent for advanced economies; insolvency regimes in the MENAP region are among the weakest in the world.

- Figure 14 (preserved indicators): Share of SMEs in GDP and Share of Total Loans — contribution of SMEs (Percent) compared between GCC and Advanced Economies (interpreted with caution due to limited respondents and coverage).

### Reforms to address SME lending constraints (IMF forthcoming)
- Operationalizing and digitizing central collateral registries for movable and non-movable assets to increase access to bank finance for smaller and younger firms; expand coverage of movable collateral registries in the GCC.
- Insolvency frameworks: operationalize bankruptcy laws; modernize court systems including training of judges; decriminalize loan delinquencies; introduce out-of-court restructurings to decrease losses on SME loans.
- Expand coverage of credit bureaus to SMEs to decrease credit information gaps and lower credit risk for banks; example: Saudi Arabia’s Financial Sector Development Program (FSDP) plan for a local rating agency for SME credit assessment.
- Reduce market distortions and increase financial market competition: minimize direct interventions such as interest rate caps; avoid relaxing risk weights for banks on SME loans; consider encouraging new lenders/alternative financial institutions (community banks, microfinance institutions) to better target SMEs.

### Supporting measures for SME financial inclusion
- Financial literacy programs for entrepreneurs: governments and private sector to offer courses in finance and doing business; existing examples include Dubai Entrepreneurship Academy (Dubai SME), NBAD bank SME academy; Saudi Arabia’s FSDP envisages a program to improve financial literacy for SMEs.

### Women and youth financial inclusion
- Women and youth SME owners face additional difficulties accessing finance:
  - Muravyev and others (2009): women entrepreneurs are 5 percent less likely to receive a loan and equally more likely to pay higher interest rates.
  - Klapper and others (2010): including nonbanking credit information (utilities, cell phone payments) in credit registries would benefit women.
  - Increasing the range of accepted movable collateral and promoting leasing could benefit women and youth who own less real estate and property.
- As participation of youth and women in the workforce increases, financial access is likely to improve: limited participation and employment of women has reduced likelihood of holding bank accounts and accessing services (Demirguc-Kunt and others, 2013; Delechat and others, 2018).
- Policy measures to boost female and youth labor force participation—affordable child care, maternity and paternity leave, youth-focused measures—are expected to decrease gender and youth access-to-finance gaps.
- Financial education programs for women and youth can increase access: global examples include YouthInvest (50,000 youth in Egypt and Morocco); girls’ Saving and Financial Education Programs (Mongolia, Dominican Republic); Silatech in Qatar. Saudi Arabia’s FSDP envisages enhancing financial literacy and awareness via the Financial Literacy Entity (FLE) and a government-backed retail savings scheme.

### Role of Fintech
- Fintech can help address SME lending problems and boost inclusion for women and youth by:
  - Decreasing information asymmetry, improving competition, and lowering lending costs.
  - Enabling credit scoring from alternative data sources via big data analytics to generate real-time credit scores for SMEs.
  - Keeping ownership data and online collateral registries using blockchain; increasing competition between traditional fund providers.
  - Allowing consumers to compare banking services, credit cards, insurance, and other products online.
  - Reducing costs of AML/CFT and KYC procedures—particularly important for SME loans.
  - GCC jurisdictions, particularly the UAE, are home to successful SME crowdfunding platforms.
- Fintech risks to be managed:
  - Risks from unseasoned technology such as big data analytics (privacy, consumer protection) and crowdfunding platforms (fraud).
  - Need for planned regulations to minimize risks; regulatory incubators (example: ADGM in the UAE) can help develop Fintech regulations in consultation with companies.
  - Regulated properly, Fintech holds promise to spur financial inclusion for SMEs, women, and youth in the GCC.

### Fostering capital market and non-bank institution development
- Access to equity and debt markets and development of non-bank financial institutions could be increased through enhancing regulatory frameworks and investor protection, promoting secondary market development, encouraging competition, and improving resource pooling and market allocative efficiency.
- Benefits of well-developed domestic capital markets:
  - More efficient capital allocation and better risk sharing.
  - Increased private sector access to financing sources and finance for strategic infrastructure projects.
  - Improved conduct of fiscal, monetary, and exchange rate policies (Laeven, 2014).

Stock markets and institutional infrastructure — progress and gaps
- Since 2000, GCC countries stepped up efforts: new capital market laws (Saudi Arabia, Bahrain, Qatar); new regulatory bodies (UAE, Saudi Arabia, Qatar, Kuwait); enhanced corporate governance; eased restrictions on foreign investors.
- Reforms enabled inclusion of Qatar and the UAE in the MSCI Emerging Market Index in 2014 and Saudi Arabia more recently.
- Areas needing progress:
  - Develop parallel stock markets for smaller companies in Bahrain, Qatar and UAE.
  - Ease restrictions on foreign investor access and foreign listing in four out of six countries.
  - Strengthen implementation of investor protection and corporate governance frameworks (Annex III).

Boxed country-specific summary preserved (Saudi Arabia reforms highlights):
- Organizational/operational reforms at CMA; “FinTech Lab” initiative; MOUs with other government entities.
- Regulatory reforms: enabled securities lending and short selling; amended settlement to “T+2”; eased QFI criteria.
- Infrastructure: introduced “Nomu” (parallel market for SMEs); established financial academy; “Edaa” securities depository center.
- Corporate governance and investor protection: corporate governance regulations in 2017; electronic investor protection system; obligatory electronic voting; all listed companies adopting IFRS.
- Inclusion timeline notes preserved: inclusion of Tadawul in MSCI in two stages (May 2019 and August 2019) and in FTSE/Russell between March and December 2019; domestically issued government bonds registered at Tadawul and traded since April 2018; steps to develop bond market including primary dealer system and extending the yield curve.

Debt market development needs
- Debt markets in all GCC countries are still at an early stage despite active money markets.
- Further development needed in:
  - Repo transactions for government and corporate bonds.
  - Easing restrictions on participation in the primary market for government debt.
  - Encouraging competitive bond pricing (auction systems).
  - Growth of secondary markets and development of benchmark yield curves and corporate bond markets via disclosure/information systems, credit rating systems, and bankruptcy laws.

*Source: IMF staff summary of the chapter "Fostering greater financial inclusion would support growth and help reduce inequality" from the provided IMF content.*

### 37.      Further development of the nonbank sector is constrained by concentrated ownership

### 37.      Further development of the nonbank sector is constrained by concentrated ownership

### Main constraints on GCC nonbank financial development
- Public ownership of a large share of equities and limited trading have constrained stock market liquidity.
- Absence of developed debt markets forces fixed-income focused institutional investors to hold foreign assets, reducing their contribution to local capital market development.
- Limited financial literacy and generous pension funds lower demand for asset management and insurance.
- Local capital markets and nonbank financial services develop in a self-reinforcing manner; current structural features impede that feedback loop.

### Box 4 — Detailed constraints on GCC NBFIs
- Pension funds
  - Pension funds for nationals offer generous benefits and hold most of their assets abroad.
  - All GCC countries maintain pension funds for nationals (the Saudi public and private pension funds being the largest by far).
  - These pension funds offer generous benefits at relatively early retirement ages.
  - Some GCC pension funds have large domestic equity holdings, limiting scope for other institutional investors.
  - As local debt markets are not developed, fixed income assets are largely held abroad.
  - GCC institutional investors face little currency risk from holding dollar denominated assets, given their countries’ pegged exchange rate regimes.
  - Expatriates are typically offered severance pay in lieu of pension coverage.

- Asset management and mutual funds
  - Asset management remains small in GCC countries, typically below 5 percent of GDP.
  - Outside Kuwait, mutual funds account for most assets under management.
  - Bahrain’s mutual fund sector is comparatively large, at nearly 25 percent of GDP.
  - Concentrated ownership of (large) equities by pension funds and other government entities limits free float, trading, and liquidity.
  - Poorly developed fixed income markets narrow the scope for asset managers to grow.
  - Demand may be low partly because retail investors are unaware of the benefits of investing through mutual funds.
  - Outside Kuwait, large banks dominate institutional access to retail clients.

- Insurance
  - Beyond motor and health insurance, demand for insurance products seems to be low in GCC countries.
  - Gross written premiums are below 2 percent of GDP on average.
  - Activity is limited to, and competitive for, motor and health insurance.
  - Life insurance remains negligible, given cultural reservations and a dearth of long-term fixed income instruments outside real estate.
  - Generous pension funds for nationals also lower the demand for insurance.
  - GCC countries are moving, at varying paces, towards putting regulatory frameworks addressing issues including capital requirements and the treatment of Islamic products (Takaful) in place.

- Finance companies
  - GCC countries have more than 80 finance companies with a total loan portfolio of around 3 percent of GDP in 2017.
  - Their loans are concentrated mainly in real estate, SMEs, and personal and microfinance loans.
  - Non-performing loans (NPLs) have increased lately, reaching around 12.8 percent, 10.3 percent, and 5 percent in the UAE, Saudi Arabia, and Oman, respectively.
  - While regulatory frameworks for finance companies appear sufficient in most of the GCC, lack of public awareness and high cost of funding are among their main challenges.
  - Funding sources are mainly debt and paid-up capital, which puts them at a disadvantage relative to banks which have access to interest free deposits.
  - GCC countries, except the UAE, do not allow finance companies to accept customer deposits.
  - Recently, Oman has started allowing finance companies to raise six-month term deposits from corporates to ease their funding pressures.

### Market infrastructure and regulatory observations (summary of checklist)
- Local capital markets show mixed compliance with infrastructure and regulatory requirements; public ownership and limited secondary market activity reduce liquidity and market depth.
- The absence of developed repo markets and limited secondary market infrastructure constrains government debt market development and the establishment of a reference yield curve.
- Investor protection and corporate governance remain weaknesses that hinder capital market development (legal rights index scores of 1 and 2 out of 12 reported).

### Policy recommendations to develop equity markets (paragraph 38)
- Improve corporate governance to enhance stock market efficiency and reduce equity price sensitivity to shocks.
- Develop secondary stock markets to enhance trading activities/market liquidity and enable greater access to SMEs.
- Reduce restrictions on foreign ownership in stock markets and enhance investor protection (for example, better financial fraud regulation and stronger disclosure requirements) to diversify the investor base and attract foreign capital.

### Policy recommendations to deepen debt markets (paragraph 39)
- Further develop public debt management frameworks with a clear issuance strategy and calendar to help anchor investors’ expectations and increase participation.
- Introduce repo transactions for government bonds and allow potential investors to participate in primary issuance to increase market size and access and diversify the investor base.
- Establish secondary markets for government debt to help build a benchmark yield curve.
- Create rating agencies to provide independent credit risk assessment to help develop local corporate debt markets and better manage risks.

### Conclusions and growth implications
- Financial systems in the GCC remain bank-reliant, with NBFIs and debt capital markets generally less well developed; SMEs, women, and youth have lower access to the formal financial system than would be expected.
- Estimates in the paper suggest that further financial development could be associated with higher annual per capita income growth of 0.4-0.7 percentage points in some GCC countries.
- Increased financial inclusion could be associated with higher growth of some 0.3-0.7 percentage points.
- Priority reforms to realize potential growth benefits:
  - Develop a yield curve and increase market liquidity through secondary markets trading.
  - Enhance corporate governance and investor protection, remove restrictions on foreign ownership, and encourage financial market competition to support NBFI development.
  - Improve SME governance structures, increase availability of financial information through credit bureaus, strengthen insolvency frameworks, and ensure adequate banking competition to increase SME access to finance.
  - Encourage female and youth employment, increase financial literacy programs, and use Fintech to overcome constraints to financial sector usage to close the financial inclusion gap.

*Source: IMF staff.*

### References

### References

### Academic literature on finance, growth, and financial structure
- Al-Hassan, A., M. Khamis, and N. Oulidi (2010); “the GCC banking Sector: Topography and Analysis”, IMF Working Papers 10/87, Washington, DC: International Monetary Fund.
- Arcand, J. L., E. Berkes, and U. Panizza (2015), “Too much finance?”, Journal of Economic Growth 20(2): 105-148.
- Aghion, Philippe, Howitt, Peter and David Mayer-Foulkes (2005). “The Effect of Financial Development on Convergence: Theory and Evidence”, The Quarterly Journal of Economics. Volume 120, Number 1.
- Beck, Thorsten, Demirguc-Kunt, Asli, and Maria Soledad Martinez Peria (2007). “Reaching out: Access to and use of Banking Services Across Countries”, Journal of Financial Economics. Volume 85.
- Beck, Thorsten, Levine, Ross, and Norman Loayza (2000). “Finance and the Sources of Growth”, Journal of Financial Economics. Volume 58.
- Goldsmith, Raymond (1969). “Financial Structure and Development”, Yale University Press.
- King, Robert and Ross Levine (1993). “Finance and Growth: Schumpeter Might be Right”, The Quarterly Journal of Economics. Volume 108, Number 3.
- Levine, Ross. (2005). “Finance and Growth: Theory and Evidence”, Handbook of Economic Growth, Edition 1, Volume 1.
- Levine, Ross, Loayza, Norman and Thorsten Beck (2000). “Financial Intermediation and Growth: Causality and Causes”, Journal of Monetary Economics. Volume 46.
- Rajan, Raghuram and Luigi Zingales (1998). “Financial Dependence and Growth”, The American Economic Review. Volume 88, Number 3.
- Reinhart, Carmen and Kenneth Rogoff (2009). “This Time is Different: Eight Centuries of Financial Folly”, Princeton University Press.
- Jorda, Oscar, Schularick, Moritz, and Alan Taylor (2011). “Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons”, IMF Economic Review. Volume 59, Number 2.
- Loayza, Norman and Romain Ranciere (2002). “Financial Fragility, Financial Development, and Growth”, World Bank mimeo.
- Aghion, Philippe, Howitt, Peter and David Mayer-Foulkes (2005). “The Effect of Financial Development on Convergence: Theory and Evidence”, The Quarterly Journal of Economics. Volume 120, Number 1.
- Bloom, Nicholas and John Van Reenen (2007). “Measuring and explaining management practices across firms and countries,” Quarterly Journal of Economics, Volume 122, Number 4.
- Haltiwanger, Jon, Jarmin, Ron, and Javier Miranda (2013). “Who creates jobs? Small versus large versus young,” Review of Economics and Statistics, Volume 95, Number 2.

### Financial inclusion, access, and gender
- Beck, Thorsten, Demirguc-Kunt, Asli, and Maria Soledad Martinez Peria (2007). “Reaching out: Access to and use of Banking Services Across Countries”, Journal of Financial Economics. Volume 85.
- Demirguc-Kunt, A., L. Klapper, and D. Singer (2017), “Financial Inclusion and Inclusive Growth: A Review of Recent Empirical Evidence,” World Bank Policy Research Working Paper No. 8040.
- Demirgüç-Kunt, A., L. Klapper, and D. Singer (2013), Financial inclusion and legal discrimination against women: evidence from developing countries, World Bank.
- Corinne C Delechat; Monique Newiak; Rui Xu; Fan Yang; Goksu Aslan (2018), What is Driving Women’s Financial Inclusion Across Countries? International Monetary Fund.
- Myka Reinsch (2012), Youth Financial Inclusion: Promising Examples For Achieving Youth Economic Empowerment, e-MFP Youth Financial Inclusion Action Group.
- Justin Sykes, Sara Elder, Yonca Gurbuzer and Marco Principi (2016), Exploring the linkages between youth financial inclusion and job creation. Evidence from the ILO school-to -work transition surveys, ILO.  
- Young K.E. (2016), “Women’s Labor Force Participation Across the GCC”, The Arab Gulf States Institute in Washington.

### GCC- and region-specific studies, SME finance, and labor/skills
- Al Masah Capital (2015), GCC Women – Improving the Odds.
- Calice, Pietro; Buccirossi, Paolo; Cervone, Roberto; Mohamed, Nadir; Pesme, Jean Denis (2016), Competition in the GCC SME lending markets: an initial assessment, World Bank.
- Jeddah Chamber (2016), Small–Medium Enterprises in Saudi Arabia.
- OECD (2016), Entrepreneurship and SME financing in Abu Dhabi.
- UK Department for Business, Innovation & Skills (2016), Small and medium enterprises lending and competition: market comparison.
- World Bank (2015), “Improving the Quality of Financial Intermediation in the GCC countries”, GCC engagement note No 2, Washington, DC: World Bank.
- Kern, Steffen (2012), “GCC Financial Markets: Long-term Prospects for Finance in the Gulf Region”, Current Issues: Global Financial Markets, Deutsche Bank.
- EY (2015), How will the GCC close the skills gap?

### Policy, IMF, World Bank, and working papers on stability, inclusion, and market development
- Arellano, Manuel, and Stephen Bond (1991). “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations”, The Review of Economic Studies, Volume 85, Number 2.
- Bibolov A., Crowley, J. (2001), Should SME Loans be Supported and How, Monetary and Capital Markets Department Note, International Monetary Fund.
- Bruhn, M., and I. Love (2014), “The real impact of improved access to finance: Evidence from Mexico”, Journal of Finance 69(3): 1347-1376.
- Burgess, Robin, and Rohini Pande (2005). “Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment”, American Economic Review. Volume 95, Number 3.
- Dell’Ariccia, Giovanni, Igan, Deniz, Laeven, Luc, and Hui Tong (2012). “Policies for Macrofinancial Stability: Dealing with Credit Booms and Busts”, Staff Discussion Note 12/06, International Monetary Fund.
- Dutta A., J. Nikkinen, and T. Rothovius, 2017, “Impact of oil price uncertainty on Middle East and African stock markets,” Energy 123, pp. 189–197.
- Ferrari, A., Masetti, O., Ren, J. (2018), Recent trends in the use of interest rate caps, World Bank.
- IMF (2004), “Monetary Policy Implementation at Different Stages of Market Development,” IMF Board Paper, International Monetary Fund.
- IMF (2016). “Global Financial Stability Report,” International Monetary Fund.
- IMF (2017). “Regional Economic Outlook – Middle East, North Africa, Afghanistan and Pakistan”, International Monetary Fund.
- IMF (2018), “The Riskiness of Credit Allocation: A Source of Financial Vulnerability?”, Chapter 2, April 2018 Global Financial Stability Report, International Monetary Fund.
- IMF (2018a), Selected Issues Papers, Saudi Arabia Article IV Consultations, International Monetary Fund.
- IMF (2018b). “Financial Inclusion in Asia-Pacific”, Asia Pacific Department Paper, International Monetary Fund.
- IMF (forthcoming). “SME Financial Inclusion in the MCD region”, Middle East and Central Asia Department Paper, International Monetary Fund.
- Laeven, Luc (2014), “The Development of Local Capital Markets: Rationale and Challenges”, IMF Working Paper, International Monetary Fund.
- Laeven, Luc and Fabian Valencia (2018). “Banking Crises Revisited”, IMF Working Paper 18/206, International Monetary Fund.
- Kirti, Divya, (2018). "Lending Standards and Output Growth", Working Paper 18/23, International Monetary Fund.
- Park, Joonkyu (2012), “Brazil’s Capital Market: Current Status and Issues for Further Development” IMF Working Paper, International Monetary Fund.
- Sahay, Ratna, Čihák, Martin, N’Diaye, Papa, Barajas, Adolfo, Bi, Ran, Ayala, Diana, Gao, Yuan, Kyobe, Annette, Nguyen, Lam, Saborowski, Christian, Svirydzenka, Katsiaryna, and Seyed Reza Yousefi (2015a). “Rethinking Financial Deepening: Stability and Growth in Emerging Markets”, Staff Discussion Note 15/08, International Monetary Fund.
- Sahay, Ratna, Čihák, Martin, N’Diaye, Papa, Barajas, Adolfo, Mitra, Srobona, Kyobe, Annette, Nian Mooi, Yen, and Seyed Reza Yousefi (2015b). “Financial Inclusion - Can It Meet Multiple Macroeconomic Goals?”, Staff Discussion Note 15/17, International Monetary Fund.
- Svirydzenka, K (2016). “Introducing a New Broad-based Index of Financial Development.” IMF Working Paper. Washington, DC: International Monetary Fund.
- Mialou A., G. Amidzic, and A. Massara (2018). “Assessing Countries’ Financial Inclusion Standing: A New Composite Index”, Journal of Banking and Financial Economics forthcoming.
- Love, Inessa, Martínez Pería, María Soledad, and Sandeep Singh (2013), Collateral Registries for Movable Assets: Does Their Introduction Spur Firms’ Access to Bank Finance? World Bank.

### Market structure, competition, governance, and capital markets
- Calice, Pietro; Buccirossi, Paolo; Cervone, Roberto; Mohamed, Nadir; Pesme, Jean Denis (2016), Competition in the GCC SME lending markets: an initial assessment, World Bank.
- Pillai, Rekha and Husam-Aldin Al-Malkawi (2016), “Corporate Governance in the GCC Countries: Empirical Assessment Using Conventional and Non-Conventional Indices”, The Journal of Developing Areas, Volume 50, Number 6, 2016 (Special Issue).
- Park, Joonkyu (2012), “Brazil’s Capital Market: Current Status and Issues for Further Development” IMF Working Paper, International Monetary Fund.
- World Economic Forum (2016), “Accelerating Capital market Development in Emerging Economies: Country Case Studies”, White Paper.
- Kern, Steffen (2012), “GCC Financial Markets: Long-term Prospects for Finance in the Gulf Region”, Current Issues: Global Financial Markets, Deutsche Bank.

*References section (as listed in the source PDF).*

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_Source: https://www.imf.org/-/media/files/publications/pp/2018/pp120618gcc-how-developed-and-inclusive-are-financial-systems-in-the-gcc.pdf_