World Economy

Arab Banks’ Ties With Foreign Counterparts Deteriorating

The decline in CBRs, experienced by banks in the Arab region significantly affects banks’ ability to service certain client segments
HSBC and Barclays Bank headquarters at Emaar Square in Dubai.HSBC and Barclays Bank headquarters at Emaar Square in Dubai.

More than a third of Arab banks have seen their business links with foreign banks shrink over the past four years because of pressures such as economic sanctions and concern about money laundering.

"The inability of banks in some Arab countries to enter into correspondent relationships with foreign banks could have a deleterious impact on trade and remittances and ultimately on real economic activity," the Arab Monetary Fund said in the study, Reuters reported.

The survey, done between February and June 2016, aimed to assess to what extent banks operating in the Arab region have seen terminations and/or constraints on the operation of their Correspondent Banking Relationships over the past four years (2012-2015), to identify the underlying causes, and to collect evidence on how this withdrawal has affected bank products and services and their client segments.

"Consequently, this is an increasingly important challenge facing Arab countries."

Senior officials in the Persian Gulf Arab countries, including the central bank governors of the United Arab Emirates and Bahrain, have publicly complained in the past year about the reluctance of international, particularly US, banks to deal with some of their Arab counterparts.

The study by the Arab Monetary Fund, in cooperation with the International Monetary Fund and the World Bank, tried to gauge the extent of the problem by surveying 216 banks operating in 17 Arab countries.

Almost 39% of banks said there had been a significant decline in the scale and breadth of their CBRs between 2012 and 2015. Of them, 55% reported no change and 5%, an increase.

Bank Accounts Closed

The number of correspondent banking accounts being closed seems to be increasing, with 63% of banks reporting the closure of such accounts in 2015 compared with 33% in 2012, the survey found.

And 40% of Arab banks said US lenders were most prone to withdraw from correspondent banking relationships with them, followed by British and German banks.

The survey found that bankers believed concern over money laundering and the financing of terrorism was only the fifth most important reason for ties to be cut.

Shrinking appetite for risk among foreign banks, sanctions and other changes to regulations in their home countries, a lack of profitability in doing business and sovereign credit risk in Arab countries were bigger reasons.

Among Arab banks whose relationships were cut, 63% were able to find replacement relationships and 17% managed to make other arrangements to meet their needs, but 20% were unable to do either, the survey showed.

In cases where replacements are found, "these are often inferior in either scale of services or costs" to the original relationships, it found.

The report notes that the decline in CBRs, experienced by banks in the Arab region significantly affects banks’ ability to service certain client segments and to provide certain products, as well as to conduct foreign-currency-denominated capital and current-account transactions.

The three entities in charge of the report ensured their readiness to continue supporting all efforts that aim to help reduce effects of the declined Correspondent Banking Relationships.

Though the report doesn’t provide a complete analysis of the economic impact of the declined CBRs in the Arab region, it helps enhance dialogue and support policy makers in reaching solutions.

The report also highlights the need to pursue further efforts to strengthen regulatory regimes, as well as to establish and maintain an open dialogue and regular discussions among regulators in the jurisdictions involved.