April 29, 2009 5:07 pm

Comment: Gulf must learn lessons of crisis

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At the recent G20 summit, leaders of the world’s leading economies committed themselves to a wide-ranging and specific set of actions aimed at shortening the global economic crisis and strengthening international financial regulation.

International groups such as the Financial Stability Forum (now renamed and empowered by the G20 as the Financial Stability Board), the Counterparty Risk Management Credit Group, which comprises leading international banks, and the Committee of European Bank Supervisors have also made recommendations on how the structure and regulation of financial markets can be improved.

We have yet to see an equivalent Arab response to the crisis; still less, a set of recommendations for what Arab financial markets can learn from the turmoil in the west.

The communiqué issued after the Arab League Summit in Doha in March made only a glancing reference to the global crisis – it commended the decisions of an Arab economic and development summit in Kuwait the previous month.

That Kuwait summit considered the crisis directly, but issued no specific recommendations, while the Doha meeting was overshadowed by the attendance of Omar al-Bashir, the Sudanese president, who has an international arrest warrant hanging over him.

The communiqué issued by the Gulf Co-operation Council after the heads of state meeting in Muscat in December addressed matters of economic integration with the GCC itself, but the global crisis, and even the effects on the Gulf of the rapid fall in oil prices, was left untouched.

The Arab Maghreb Union has issued no public statements on the global financial crisis.

This lack of collective engagement with the biggest economic crisis in 60 years is due in part to the widespread belief in the Middle East that the crisis is western rather than global, both in its origins and its effects.

Subprime lending does not exist in the Middle East – mortgage markets as a whole are in their infancy. Exposure to complex instruments has been limited.

Saudi banks, which purchased relatively large quantities of structured products, have seen their profits reduced, but not their solvency overwhelmed.

Middle Eastern bankers are well paid – but their compensation pales into insignificance when compared to that of bankers in the west.

Partly because the global financial crisis has not dominated the policy agenda across the Middle East (the property meltdown in Dubai and the difficulties of Kuwait’s investment funds owe as much to local hubris as to global turmoil), regional bodies such as the Arab League and the GCC have remained focused on older, largely political issues.

Yet in characterising the global crisis as a western phenomenon, the Arab states are not simply ignoring some of the real impact of it – not least weaker oil prices and tightening financial liquidity – but more importantly, they are missing an opportunity.

The collapse of western financial markets has illuminated shortcomings in Arab financial systems – shortcomings that cannot be ignored:

The scope of regulation needs to be extended to include all financial institutions that affect economic activity, and in some cases the quality of regulation needs to be improved. In many Arab countries, the regulation of insurance companies and of investment funds is rudimentary.

Deposit insurance needs to be co-ordinated to prevent unilateral guarantees by governments resulting in capital flight away from others.

Cross-border licensing and supervision of banks needs to be made more rigorous. This is an issue of particular importance in the Middle East in view of the recent surge in cross-border bank mergers and acquisitions.

All financial institutions should be required to report in line with international financial reporting standards.

Governance standards, and in particular those related to board of directors’ independence and oversight, should be strictly enforced.

Western financial markets will emerge better regulated and ultimately stronger from the crisis. Arab governments need to ensure that their financial systems keep pace.

The writer is a managing director with the Financial Services Volunteer Corps in New York

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