This checklist examines what regulatory structures exist in Middle Eastern financial markets.
The Middle East region consists of Afghanistan, Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Pakistan, Qatar, Saudi Arabia, Syria, United Arab Emirates (UAE), West Bank and Gaza, and Yemen. Sometimes the region is grouped with North African countries, together known as the MENA (Middle East and North Africa) region, and includes Algeria, Djibouti, Libya, Mauritania, Morocco, Somalia, Sudan, and Tunisia.
Only Saudi Arabia is part of the G20, so MENA’s influence on the G20 is limited, and, critically, the influence of the G20 on MENA is also limited.
Saudi Arabia’s membership of G20 means that it can carry influence in the Middle East region. King Abdullah has quietly built Saudi Arabia into a major power in the region, which gives the country the opportunity to exert power in the area, by influencing policies.
The Gulf Cooperation Council (GCC) is making progress to fit in with global frameworks, with 89% of Middle East banking assets expected to be covered by Basel II by the end of 2009. The banking sector is better developed in the Middle East than elsewhere in the MENA region.
The development of regulatory institutions in the GCC has shown marked progress, as growth in the finance sector has brought with it increased awareness of the need to keep up and, indeed, be proactive. Saudi Arabia’s Capital Market Authority is one example of a new regulatory authority in the region, and Qatar is seeing the streamlining of market regulators; both are examples of the development of effective bodies. The Dubai International Financial Centre has introduced a more accessible court system, working with new regulations in English, and the Dubai Financial Services Authority issued a hedge fund code of practice at the end of 2007—the first such code to be issued by a financial market regulator.
Regulators in the region are growing in size, and strengthening their links regionally and internationally, but the picture remains mixed, with some further down the line with Basel II than others. As plans for a GCC common currency and the creation of a common GCC market seem to be making some progress, the opening of markets will mean that regulators will have to work more closely to create a common approach.
Saudi Arabia has the biggest economy in the region. In 2003 it established the Capital Market Authority, which issues rules, regulations, and instructions related to the capital markets. In Qatar, the Qatar Financial Centre Regulatory Authority was set up in 2005, and in 2004 the Central Bank of Bahrain issued its CBB Rulebook, with updates appearing regularly ever since. The regulatory framework for banking in the UAE stipulates that banks must have fully paid-up capital of at least AED 40 million, and must place a tenth of their net annual profits in a special reserve until the fund amounts to half the capital.
Progress has undoubtedly been made, but with freer markets and greater foreign interaction, more will be required. World Trade Organization (WTO) accession initiatives and International Monetary Fund (IMF) financial sector assessment programs will bring challenges in the future. Opening the markets to foreign capital regulators will increase risks in the sector and the region.
There is little doubt that in order to promote continuing and lasting economic growth, financial sector reform and regulation should be a high priority. Studies have shown that well-developed financial systems promote efficiency and growth owing to reduced information, transaction, and monitoring costs. A study carried out by the IMF showed that MENA countries were fairly strong in financial regulation and supervision, but there are wide variations. In those countries with the most advanced financial sectors, appropriate financial regulation and supervision was found to be an important part of development of the financial sector. In other words, better financial sector regulation promotes a more healthy financial system and economy.