Gulf Cooperation Council: How Developed and Inclusive are Financial Systems in the GCC?

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Gulf Cooperation Council: How Developed and Inclusive are Financial Systems in the GCC?

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Bibliographic details

• Published: December 6, 2018

Summary findings

• Financial systems in the GCC have developed significantly over the last couple of decades, but there appears to be further room for progress.
• The development of bank and equity markets has been supported by a combination of buoyant economic activity, a booming Islamic finance sector, and financial sector reforms.
• Overall, the level of financial development compares well with emerging markets but still lags advanced economies and, other than for Saudi Arabia, appears to be lower than would be expected given economic fundamentals, such as income levels.

Structure of financial systems and market gaps

• Financial development in the GCC has relied to a large extent on banks.
• Debt markets and nonbank financial institutions are less developed:
  • Non-bank financial institutions—pension funds, asset management and finance companies, and insurance—remain small.
  • Domestic debt markets are underdeveloped.
• Equity markets:
  • Appear to be well developed by market size.
  • Are dominated by a few large (and often public-sector) companies, resulting in narrow access.

Financial inclusion

• GCC countries have made progress on financial inclusion, but gaps remain in some important areas.
• Access to finance for SMEs, women, and youth, in particular, appears relatively low.
• Contributing factors identified include:
  • Social norms.
  • Low levels of participation of women in the labor market and private sector activity.
  • High level of youth unemployment.

Growth link and empirical uncertainty

• Further financial development and inclusion is likely to be associated with stronger economic growth in the GCC countries.
• The paper notes uncertainty surrounding the empirical estimates, but concludes that further progress with financial development and/or inclusion is likely to go hand-in-hand with stronger growth.
• The growth benefits are likely to vary across countries depending on the current level of financial development and inclusion.

Policy recommendations and reforms

• To realize growth benefits, reforms to strengthen access to finance for SMEs, women, and youth are needed.
  • Address institutional weaknesses and promote financial sector competition to boost access to finance for SMEs.
  • Enhance financial literacy.
  • Improve SME governance structures and insolvency frameworks.
  • Encourage female and youth employment.
  • Promote the use of emerging technologies in finance.
• Additional reforms to foster financial development:
  • Develop debt markets:
  • Develop a government yield curve.
  • Seek to increase market liquidity through secondary market trading.
  • Ensure requirements for private issuance are not onerous.
  • Make stock markets more accessible to a larger pool of companies and investors:
  • Enhance corporate governance and investor protection.
  • Remove restrictions on foreign ownership.
  • Encourage financial market competition (which would also help the development of non-bank financial institutions).

International Monetary Fund. December 6, 2018.

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• Policy Paper
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  • Policy Paper (PDF)