Accelerating bank mergers and acquisitions in the Arab region could have both macro economic and macro financing effects through the encouragement of increased investment in newly emerging banks, said Dr Foud Shaker, secretary general of the Union of Arab Banks (UAB).
In a paper addressing the strategic importance of mergers and acquisitions in consolidating banking investment in the Arab region that he presented to the annual conference of Arab banks and investment, organised by UAB in the Lebanese capita last week, Dr Shaker said several factors necessitate inter Arab or cross border acquisition and merger operations.
Among these is the over-banking phenomenon in Arab economies in which Arab banks assets amount to $780 billion owned by 480 financial institutions.
This figure, he said, far exceeds the overall Arab Gross Domestic Product of $708 billion.
Dr Shaker said that among the factors that press for merger and acquisition among banks in the Arab world is that a large number of these banks are of small size.
A clear indication is the fact that the entire assets of all Arab banks account for just 60 per cent of the assets of a large financial group like Mizuho Financial Group, or 62 per cent of the assets of City Bank.
Another factor is that private money in all Arab banks amounts to $71 billion, which is a little bit higher than the capital of City Corp's $66.9 billion. To this is added the high concentration of banking services in certain Arab markets.
In the six Gulf countries, the share is $443 billion of 57 per cent of overall Arab banks assets. Gulf banks, including banks in Egypt and Lebanon account for 77 per cent of total assets.
Some countries have banks with high liquidity compared to others, as in the case of banks in the Gulf and Lebanon.
Dr Shaker spoke of the dominance of commercial activities in Arab banks over the industrial activities and the weakness in the diversity in non conventional banking activities, especially capital markets, insurance, lease and other activities.
BAU secretary general said merger operations in the banking sector accounted for just 3 per cent of overall mergers during the late 1990s, while acquisitions accounted for 50 per cent.
Majority of the acquisitions involving 10 per cent to 49 per cent of the capital, constituted one third of the overall acquisition operations in the developing countries.
Expansion in acquisitions and mergers, he said, would lead to an increase in direct foreign investment (DFI) and that according to international estimates a one per cent increase in the acquisition and merger operations would result in an increase of 1.5 per cent in DFI.
Dr Shaker cited a number of encouraging factors that could serve as incentives for merger and acquisition operations in Arab countries.
They include the expansion of bank activities into other regional markets, increased liquidity rates in several countries and Arab countries' need for more liquidity, balanced distribution of liquidity in the region and the increased awareness among the banking sector of the importance of strategic alliances.
He said the presence of a substantial number of small and medium banks that now find themselves facing the rising pressure of the market should serve as an incentive for accelerating merger and acquisition among Arab banks.
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