GCC banks at a crossroads

The Oriental Bank opened its first branch in Bahrain over 100 years ago, marking the beginning of the entire GCC’s banking and finance industry.

A century later, the industry faces challenges unlike any it has seen before. Most pressing and recent among these has been the disruptive impact of the Covid-19 pandemic, and the near-unprecedented uncertainty of the post-Covid era, which stretches out before us for the foreseeable future. From an operational perspective, the industry has been shaken to its core, as like elsewhere in the world, the region’s banks raced to introduce robust measures to protect staff and customers, such as comprehensive plans for remote working, as well as introducing relief efforts such as financing facility deferrals and overdraft limit increases to support customers and the broader economy. Many banks are yet to see the full impact of Covid-19 on their financing portfolios, significant portions of which have been subject to such deferments. Moreover, the pandemic struck during a period of historically low oil prices, which combined with the factors mentioned above, is exerting negative pressure on liquidity and profitability.

In short, the industry is facing a period of heightened uncertainty. However, as key drivers of economic growth and diversification, banking and financial services are priority sectors for governments across the GCC. Moreover, as the latest edition of KPMG’s GCC listed bank results report makes clear, financial trends in the region such as asset and profitability growth over 2019 were largely positive, meaning the sector was already in a strong position to handle the inevitable pressures on liquidity and revenue. Indeed, it has proven resilient so far.

Another key challenge that will persist into the coming year and beyond is one that predates but has been catalysed by the pandemic – namely the onset of global digitalisation and the continuing rise of fintechs. For a long time the global banking industry was accused of being entrenched in its habits, and reticent to change, and this was no less true in the GCC. But this perception was changing pre-Covid thanks to high levels of investment in technology and more active collaborations with fintechs, and is now out-of-date as banks rapidly pivot to meet shifts in consumer behaviour – which is now unrecognisable to what it was just months ago.

The region’s consumers are well known for their preference for cash, even in the digital era, but the sudden shift to living under the conditions of the pandemic has seen a meteoric rise in the use of online payments, for example. A recent survey by Visa showed that 49 per cent of UAE consumers have been shopping online more because of the pandemic, with three out of five (61 per cent) now using cards or digital wallets more to make payments online instead of opting for cash on delivery. In Saudi Arabia, according to a study by Mastercard, 77 per cent of consumers are spending more money online. Banks in the region have needed to respond quickly to this new reality, and in Bahrain, we are seeing plenty of evidence of this – a proliferation of virtual branches, mobile banking apps, WhatsApp banking and so on.

Digital banking
This urgent need to quickly adapt and respond to the digital requirements of today still poses a significant challenge for the industry, but it is also perhaps its greatest opportunity. It is worth reiterating that while Covid-19 has undeniably catalysed a digital shift in consumer behaviour, across the region, we were already witnessing rapid growth in digital banking. Online payments penetration across MENA had already reached 76 per cent, which is expected to increase. E-commerce is expected to grow exponentially from $8.3bn in 2017 to $28.5bn in 2022. In the GCC, smartphone penetration is at well over 100 per cent. Moreover, digitalisation of the Islamic Finance sector presents a unique opportunity to the region’s banks, and nowhere more so than for Bahrain, which is a world leader in this field. The Kingdom has topped the region in the Islamic Finance Development Indicator (IFDI) for eight consecutive years, and the latest Islamic Finance Development Report highlighted fintech as a key driver and shaper of the Islamic Finance industry.

There is a clear opportunity for the GCC’s banks to develop new products, services and revenue streams that will see them not just survive these unpredictable times but thrive in them. For the sector to innovate we will need to see more collaboration with up-and-coming fintechs, and both banks and fintechs themselves are becoming better at enabling this. In Bahrain, recognising the seismic transformation experienced by financial services firms, and as part of its ongoing initiatives towards financial digital transformation, the CBB has established a dedicated fintech and Innovation Unit.

Open banking
Thanks to these efforts, Bahrain is home to the region’s first onshore fintech regulatory sandbox, where currently more than 25 fintechs from all over the world are testing their technologies. One of the first graduates from this sandbox – Tarabut Gateway (TG), the region’s first open banking infrastructure provider – partnered with Bahraini banks to help them roll-out open banking services. The CBB is continuously enhancing this ecosystem, making it even easier for banks to collaborate, innovate and grow. Recent developments include the launch of FinHub 973, a fintech platform that provides traditional banks and fintechs with a virtual space to partner and collaborate; and the Bahrain Open Banking Framework (BOBF), a set of guidelines for open banking and the first in the world to incorporate Islamic Finance.

There are several areas for improvement, but ultimately the GCC finance network has been growing more flexible, innovative, open and forward-looking for some time now, as has its regulatory landscape. The forthcoming GCC RTGS system for cross-border payments is a prime example of enhanced regional collaboration and integration that will streamline transactions between GCC countries. This is a gamechanger for the industry in a region where fragmented market dynamics and regulatory standards can make collaboration tricky and implementing digital initiatives at scale is costly. For the banking sector in Bahrain and the wider region, its most prominent challenge is also its greatest opportunity: disruption. Those banks that embrace innovation and change; that are prepared to partner with, cooperate with and learn from agile fintech; that can respond to the global shift in consumer needs – those are the banks that will thrive in the so-called “new normal”. Fortunately, those are the banks that have been driving the GCC’s meteoric growth in banking since its humble beginnings in 1920s Bahrain.

David Parker is the co-chief investment officer, Bahrain Economic Development Board