Financial systems in the GCC have developed significantly over the last couple of decades, but there appears to be further room for progress, said the IMF.
In a report titled ‘How Developed and Inclusive are Financial Systems in the GCC?’, the IMF said that financial development in the GCC has relied to a large extent on banks, while debt markets and non-bank financial institutions are less developed, and access to equity markets is narrow. The non-bank financial institutions – insurance, pension funds, asset management and finance companies – remain small.
In the insurance sector, the report noted that beyond motor and health insurance, demand for insurance products seems to be low in the GCC countries. GWP is below 2% of GDP on average. Activity is limited to, and competitive for, motor and health insurance. Life insurance remains negligible, given cultural reservations and a dearth of long-term fixed income instruments outside real estate. Generous pension funds for nationals also lower the demand for insurance. GCC countries are moving, at varying paces, towards putting regulatory frameworks addressing issues, including capital requirements and the treatment of takaful in place.
Further development of the non-bank sector is constrained by concentrated ownership of equities and poorly developed debt markets, the report said. This means that fixed-income focused institutional investors must hold foreign assets, which reduces their contribution to local capital market development. In addition, limited financial literacy and generous pension funds lower the demand for asset management and insurance.
All GCC countries maintain pension funds for nationals (the Saudi public and private pension funds being the largest by far). These pension funds offer generous benefits at relatively early retirement ages. Some GCC pension funds have large domestic equity holdings, limiting scope for other institutional investors.
The IMF said that further progress with financial development and/or inclusion is likely to go hand-in-hand with stronger economic growth. To realise the growth benefits, reforms to strengthen access to finance for SMEs, women, and youth are needed. Additional reforms to foster financial development should focus on developing debt markets. Stock-market reforms should focus on enhancing corporate governance and investor protection, removing restrictions on foreign ownership, and encouraging financial market competition. The latter would also help the development of non-bank financial institutions. M