Arab Capital Markets: Introduction – Part I

Wafik Grais, 05 Mar 2015

One of the roles of finance is to mobilize surplus capital and channel it to agents needing finance. Traditionally that has been the role of financial institutions like banks. However, capital markets have been playing an increasing role directly mobilizing public savings and directly funding predominantly companies or governments. Equity participations and debt are the two main intermediation categories of instruments of capital markets, generally taking the form of equity shares and bonds, respectively.

 

Arab financial systems are developing their capital markets gradually, with some gaining the status of emerging markets. Despite glaring contrasts in capitalization and fixed-income diversity, Arab capital markets share two glaring similarities. First, in most Arab countries, market capitalization remains lower than bank held assets. Jordan, Kuwait, Qatar, and Saudi Arabia are exceptions, since their stock market capitalization as a share of gross domestic product (GDP) is as large as assets held by deposit and non-deposit banks. Morocco’s stock market weight in GDP ranks next. Other countries’ share in GDP of market capitalization is much lower than assets held by banks as noted in the table below.

 

Table 1: Relative Size of Banks and Stock Markets, Selected Arab Countries

2011

Deposit and Nondeposit Bank Assets to GDP (%)

Stock Market Capitalization to GDP (%)

Egypt, Arab Rep.

64.6

27.8

Jordan

101.4

100.1

Kuwait

61.9

63.6

Lebanon

134.2

26.1

Morocco

88.1

66.1

Oman

42.5

27.9

Qatar

66.8

72.2

Saudi Arabia

62.2

60.1

Tunisia

75.9

22.2

United Arab Emirates

77.9

27.4

Source: World Bank – Development Finance Database; http://data.worldbank.org/data-catalog/global-financial-development

 

Second, Arab stock exchanges are mostly state owned or organized as public institutions. Few exchanges in the region are listed or mutually owned. Of the 18 bourses in the region, 14 are owned by the state and three are structured as mutual organizations. Alone, the Palestine Stock Exchange and the Dubai Financial Market are owned by private investors and are not “mutualized” (OECD 2012).

 

But the foregoing two features belie a distinct diversity in capital markets across the Arab world. In this six-part series, we will examine the structures and challenges for Arab equity and fixed-income capital markets as well as the various regulatory structures that govern them. Along the way, we will look at the similarities and dissimilarities across Gulf Cooperation Council (GCC) capital markets and non-GCC markets, as well as explore the tasks at hand to bring Arab capital markets to harmony. Each of the six parts begins with a brief explanation of the purpose of various capital market structures with subsequent analytics that illuminate how Arab markets put these structures to use.

 

Read 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.

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