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This final section this seven-part series examines Arab banking’s economic performance, or the ability of the banking sector to promote economic growth and foster inclusion, particularly for micro, small and medium enterprises (MSMEs).

In short, the financial systems of Arab countries appear to be less effective in fostering economic growth and financial inclusion than those of peer countries with similar financial depth (Barajas and Chami 2013).

In the aggregate, balance sheets seem to be heavily concentrated on public sector financing in non-GCC countries, and on personal loans and real estate in GCC countries. The broad business sector’s share of bank financing appears limited. The banking systems of Egypt, Kuwait, and Saudi Arabia reflect the broad patterns that can be observed in the region.

In Egypt, only 54 percent of bank assets are allocated to loans and discounts to the economy, while government financing mobilizes the large share of 41 percent as of end-June 2012. Even within the 54 percent, financing of the government sector takes an additional 4 percent of local currency extended loans and discounts and 13 percent of foreign currency extended loans and discounts. Moreover, the public business sector captures an additional 9 percent of local currency bank lending and 6 percent of foreign currency bank lending to the economy. As a result, the private business sector ends up with 57 percent of the local currency lending facilities and 68 percent of the foreign currency lending facilities to the economy.

In Kuwait, bank credit to the private sector represents 56.8 percent of assets on bank balance sheets, and in Saudi Arabia it represents 55.7 percent. Personal loans and real estate capture more than 64 percent (or 37.5 percent and 26.5 percent, respectively) of the credit facilities extended to residents in Kuwait, while claims on government are only 3.6 percent of the bank balance sheets assets.

Similarly, consumer lending is about 30.4 percent in Saudi Arabia and claims on government 5 percent. Banks appear comfortable extending personal loans in the GCC countries since they have the security of having the borrower’s salary assigned to them. Another characteristic of the GCC banking system is the significant size of net foreign assets, which reach 68 percent of banking system assets in Saudi Arabia and more than 30 percent in Kuwait.

One aspect of financial inclusion is the ability of financial services to reach large segments of the population and enterprises. In this respect, specific market segments are the MSMEs. Various challenges limit the access of these segments to bank financing including bank perception of their riskiness, the quality and reliability of the information they provide, the higher costs of their small loans, the criteria for defining programs to support them, the availability of information to assess credit risks, and the ability of bankers to conduct risk assessments of these clients.

The consequences of the foregoing challenges are that the size of lending to MSMEs is not impressive in Arab countries. As of 2010, the share of MSME lending in total lending was only 8 percent, with 2 percent in the GCC countries and 13 percent in the non-GCC countries. The low share of SME lending in the GCC countries also reflects the characteristics of concentrated oil economies. Although higher, the share of MSME lending in non-GCC countries is still lower than the shares of MSME activity in the economies of the region. The shares of MSME lending in total lending in both the GCC and non-GCC regions are substantially lower than the banks’ own long-run targets, suggesting substantial room for further lending to MSMEs (Rocha. et al. 2011b).

Authorities in the region have been emphasizing the importance of lending to MSMEs because they recognize the significant potential contributions of MSMEs to GDP, employment, taxes, and trade. For example, Egypt’s central bank established a specialized MSME unit in 2009, which offers a wide range of capacity-building services to MSME units and staff in all banks and enhances awareness of entrepreneurs about access to finance. Similar programs are being developed in other countries, notably with the help of the World Bank and the International Finance Corporation, as well as bilateral aid agencies.

The analysis of Arab banking presented throughout this seven-part series highlights core features and issues without claiming to comprehensiveness. It is hoped that it provides some insight into the issues and challenges faced in the development of Arab banking systems and offers some leads for further research on the sector.

Read Part I, Part II, Part III, Part IV, Part V, Part VI

Wafik Grais is an International Senior Adviser specializing in Islamic finance, financial regulation, investment financing, private equity management, and corporate governance with expertise in SMEs and green growth financing. He was co-founder and chairman of Viveris Mashrek, a Cairo-based, financial advisory services company specialized in private equity investments in SMEs, licensed by Egypt's Financial Supervisory Authority. He spent 28 years in international finance notably with the World Bank in Washington DC where he held several senior positions both in operations and at corporate levels. He holds a Ph.D. in Economics.