Islamic banking has indeed won market shares in some GCC markets in recent years, according to Reinhold Leichtfuss, senior partner and managing director at Boston Consulting Group's (BCG's) Dubai office, and head of BCG's Financial Institutions Practice in the Middle East.
"We observe, however, that for many customers the product features as well as the overall service quality play a big role in their selection of banks. Thus, Islamic banks also have to make sure that they are providing a better customer experience if they want to outgrow the market," Reinhold Leichtfuss said in an exclusive interview with Arab News in Dubai.
Reinhold Leichtfuss, who has over 25 years of experience in consulting financial services companies in all areas of expertise and worked for financial institutions in Europe, the Middle East, Asia and the US, has developed numerous concepts in Retail Banking and is the lead author and editor of the book "Achieving Excellence in Retail Banking" and the report "The Future of Retail Banking."
He also has multiple project experience in all areas of retail, private and corporate banking as well as in all functional areas such as strategy, organization, positioning, marketing and sales, distribution, process optimization, operational excellence and credit. He has consulted on several bank and insurance mergers and published his thoughts about the golden rules of merger management.
The following are excerpts from the interview:
The Boston Consulting Group (BCG) launched its latest Banking Performance Index for the Middle East. What does this index mean?
BCG established the banking index in order to measure the development of revenues and profits for Middle East banks over time and in comparison to international counterparts. The index is completely based on published data by the biggest banks in the region with regards to their revenues (operating income), profits, operating costs and loan loss provisions. Currently, we cover 34 banks from Saudi Arabia, the UAE, Qatar, Kuwait, Bahrain and Oman in the index. We established the index in early 2009 with 2005 as the base year. Aside from the total group indices for revenues and profit, the BCG study also shares insights on the major business areas for banks, such as the corporate and retail segments. These are also based on the published segment reporting of banks.
Saudi banks have shown resilience during the time of global financial crisis. Do you believe fundamentals of Saudi banks are very strong compared to other banks in the region?
Yes, Saudi banks, like most other Middle East banks, have high capital ratios and low cost income ratios, which provide a cushion in times of crises. In fact Saudi banks have been able to restrict their cost growth to single digits in 2011, whereas costs in other GCC banking systems grew more strongly. In addition, the bigger home market certainly also helps to stabilize business developments.
Profits of Saudi banks increased nearly 14 percent in 2011, which is close to levels of profits recorded in 2006. What do you expect in 2012 for Saudi banks?
The outlook has become brighter for GCC banks and Saudi banks in particular. The results for 2011 are already better than expected for most banks, with further reduced loan loss provisions and a strong increase in profits. We expect that to continue in 2012 -- both in Saudi Arabia and the GCC overall.
Saudi banks have reported a significant decrease in loan loss provisions (LLPs). Do you think this is because of the strict policies of Saudi Arabian Monetary Agency?
The Saudi regulators have always been prudent and placed tight limits on loan/deposit ratios as well as on the multiples of consumer loans to salaries of employees. Therefore, Saudi banks were able to avoid some of the exaggerations we have seen in some international markets.
The Shariah-compliant financing is spreading globally. What is your take on Shariah-compliant financing?
Islamic banking has indeed won market shares in some GCC markets in recent years. We observe, however, that for many customers the product features as well as the overall service quality play a big role in their selection of banks. Thus, Islamic banks also have to make sure that they are providing a better customer experience if they want to outgrow the market.
The banking industry in the Middle East experienced a healthy revenue growth of 7 percent in 2011, after revenues had stagnated the year before. What contributed to this revenue growth?
In fact, in 2011 corporate banking revenues grew by 8 percent and contributed to the bulk of the increase while retail banking grew by 3 percent. Notably, in the two big markets, Saudi Arabia and the UAE, banking revenues grew by 4 percent and 6 percent respectively. In Qatar, revenues grew even higher by 22 percent.
Was there any impact of the Arab Spring on banks in the region?
During the Arab Spring certainly some money was transferred from particular countries to safer havens within the GCC. Historically, the geographic expansion interests of Middle East banks have only partially been directed toward North Africa. This means that there are more opportunities, be it in the GCC itself, in Turkey or in Asian countries such as India, Malaysia or even Indonesia. However, certainly, there is a shift within the portfolio of opportunities, at least in the short term. Given the share that foreign revenues contribute toward the overall revenues of banks, the impact is still limited.
Credit card debt is heavy in the region. What should be done to reduce it?
Credit card penetration is strong in some markets such as the UAE and has the potential to develop further in other markets such as Oman. In principle, it is the customers' choice whether to use credit cards or personal loans. Banks always have the opportunity to offer personal loans instead.
© Arab News 2012
