The Current Financial Ecosystem in GCC: A Focus on Banking and Fintech

By 2024, the Gulf Cooperation Council (GCC) nations, including Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Oman, and Bahrain, are projected to align with the major global economies in the post-pandemic landscape.

The International Monetary Fund anticipates that global growth will contract to 3.0% in 2024. The World Bank's projections suggest a more pronounced deceleration in global economic expansion, with the risk of a recession looming due to the majority of central banks implementing tighter monetary policies. Consequently, the World Bank has reduced its global growth projection to just 2.4% for 2024.

The higher interest rates imposed by key central banks globally, such as the U.S. Federal Reserve and the European Central Bank, to curb inflation are continuously impacting economic activities. While global inflation is projected to decrease to 5.2% in 2024, it remains volatile. In contrast, the GCC countries are expected to experience an inflation rate of 2.3% in 2024, consistent with the previous year.

This lower inflation rate in the GCC compared to global levels suggests that these nations can afford to import advanced technology from other countries to bolster their digital economies.

Core inflation appears to be more resilient, indicating that even if oil and natural gas prices remain low in 2024, the underlying structural issues of the global economy will sustain inflation expectations. These structural challenges can be addressed by modernizing banking systems through the accelerated adoption of fintech.

However, the reduction in headline inflation has both positive and negative implications. It indicates that the world is grappling with lower fuel and commodity prices due to weak global demand, and the early 2024 consumer demand stagnation is evident in the world's second-largest economy, China, which is now facing a deflation crisis.

For the GCC countries, 2023 was marked by a slowing GDP growth rate, with an estimated 2.3% growth following a remarkable surge of 7.6% in 2022. However, 2024 appears to be a brighter year, with the bloc's economic growth rate expected to improve to 3.2%. This growth is expected to be fueled by increased oil production (excluding Saudi Arabia), easing monetary policy tightening, government and private sector initiatives to boost fintech and digitalize the banking sector, and a rise in non-energy exports. The key to further GDP growth lies in enhancing total factor productivity, which can be achieved through innovations integrated into the financial system.

GCC Banks and Fintech at a Glance

The banking industries of the United Arab Emirates (UAE), Oman, Qatar, and Saudi Arabia have been witnessing some key trends in the current economic environment. These trends showcase a blend of internal dynamics within these economies and external influences from global economic conditions.

Net Interest Margins

A notable trend in the region is the upturn in net interest margins (NIM). In 2023, NIMs in GCC banks soared to a multi-year peak of 3.1%. UAE banks spearheaded this rise, registering a significant surge of 26 basis points to hit 3.28%. This outpaced Saudi Arabian banks at 3.22% and Qatari banks at 3.05%.

The banking sectors of these nations are also impacted by external elements like the tightening monetary policies of central banks, leading to fluctuations in interest rates that can impact lending and deposit behaviors. Furthermore, the aggressive interest rate hikes by the U.S. Federal Reserve have been closely mirrored by GCC banks, fostering expectations of NIM expansion in the foreseeable future.

Lending Growth

Despite a slowdown in lending growth to a five-quarter low of 1.2%, aggregate gross loans surged to a record high of $1.89 trillion. Saudi-listed banks reported the strongest quarter-over-quarter growth in lending at 3.2%, reaching $623 billion. UAE-listed banks followed with a 1.6% growth in gross loans amounting to $518 billion.

Deposit Growth

The total customer deposits at GCC banks continued the growth trajectory seen in 2021-2022, hitting a new peak of $2.3 trillion. This growth indicates higher income-seeking depositors, as banks raised interest rates following the local central banks' monetary tightening policies. UAE banks had the largest absolute increase in deposits, growing by an average quarter in 2023 $41 billion or 6.2% to $705 billion, followed by Saudi banks with a 3.7% growth to $717 billion. Omani banks also experienced a growth of 6.8%, reaching $67 billion.

Loan-to-Deposit Ratio

The collective seasonally adjusted loan-to-deposit ratio for the GCC banking sector remained below the 80% threshold, clocking in at 78.5% in 2023. UAE and Omani banks led the decrease. The loan-to-deposit ratio remains under the historical average, marking one of the lowest points for regional banks, paving the way for digital lending practices to sustain the ongoing growth trend.

Initial Public Offerings

Dubai has experienced significant activity in the initial public offering (IPO) market, with the biggest IPO in the Middle East taking place in 2022, indicating investor confidence in the local economy and the banking sector's ability to attract international attention through successful IPOs. However, GCC IPO proceeds fell by 55% to $10.1 billion in 2023 due to the tightening monetary environment worldwide.

Capital Movement

In the realm of capital movement, the countries of Oman, Qatar, the U.A.E., and Saudi Arabia are primarily known as remittance-sending jurisdictions. Interestingly, less than 20% of all remittances sent from these countries are transferred to other Middle Eastern nations. This pattern suggests the potential for the emergence of new global cross-border services utilizing fintech, which could find a niche in the GCC countries.

Fintech

The payments and transfers sector is widely recognized as one of the most prevalent areas for the application of modern financial technologies in the Gulf Cooperation Council (GCC) countries. This sector holds the largest share in the realm of modern financial technologies within the GCC countries.

Modern financial technology companies are offering a myriad of solutions related to digital wallets for mobile phones and payment gateways. Additionally, these technologies present opportunities for regulatory and supervisory authorities in the GCC countries to prudently utilize modern financial technologies for regulatory purposes.

The GCC countries are currently undergoing rapid digitalization and experiencing substantial growth in the fintech industry. Investments in digital infrastructure, including cloud computing, digital and instant payments, artificial intelligence, and APIs, which are already prevalent in many GCC countries, are enhancing the capabilities of financial institutions to support new banking decisions. These decisions encompass initiatives such as Open Banking (OB) and Open Finance (OF).

There is a growing trend of collaboration between traditional banks, non-banking financial institutions, and fintech firms to develop innovative solutions that leverage OB and OF principles. The regional Open Banking market size is projected to reach $0.7 billion in 2024, with a forecast to increase to $1.17 billion by 2027, reflecting an average compound annual growth rate (CAGR) of 25%.

Rapid Growth of Fintech in the GCC countries

The fintech industry in Oman, Qatar, the United Arab Emirates (UAE), and Saudi Arabia is experiencing substantial growth due to the integration of technology into financial services to improve delivery and usability. These countries have witnessed an increase in venture capital investments, a surge in digital payments, and a growing adoption of fintech applications.

Saudi Arabia, as the largest economy in the GCC region, is making significant strides in the fintech sector. According to a report from the Saudi Central Bank (SAMA), the country's fintech industry is projected to reach a value of $1.2 billion by 2025, with a compound annual growth rate (CAGR) of 81%. Similarly, the Qatar Central Bank (QCB) has set a comparable CAGR for fintech development in Qatar, albeit with a market value expected to be six times lower than that of Saudi Arabia. The United Arab Emirates is also a strong contender, with its fintech industry anticipated to reach a value of $774 million by 2025, growing at a CAGR of 67%. Finally, the Central Bank of Oman (CBO) forecasts that Oman's fintech industry will reach a value of $100 million by 2025, with a CAGR of 72%.

Key Trends Reshaping the GCC Banking and Fintech

The GCC countries are undergoing significant transformations in their banking and fintech landscape, driven by several key trends:

Digitalization: fintech is rapidly reshaping the region's banking sector, with a strong emphasis on mobile banking, online payments, and AI-powered solutions. Banks are making substantial investments in technology to streamline operations and enhance customer experiences.

Consolidation: Mergers and acquisitions are on the rise as banks seek to bolster their competitiveness and scale. This process also creates opportunities for the burgeoning fintech business community in these countries.

Economic Diversification: GCC countries are actively diversifying their economies, reducing their reliance on oil, and creating new prospects for the banking sector.

Sustainability and ESG: There is a growing focus on sustainable and responsible banking, aligning with global Environmental, Social, and Governance (ESG) standards.

Regulatory Reforms: Governments are implementing stricter regulations and promoting financial inclusion to enhance the sector's stability and outreach. Local central banks are playing a pivotal role in supporting the banking sector through progressive regulations and fostering an environment conducive to innovation and growth.

Geopolitical Uncertainty: The banking systems in Oman, Qatar, the UAE, and Saudi Arabia are interconnected with the global economy. Events in the U.S., European, and Chinese banking systems, such as economic downturns, trade disputes, or geopolitical risks, can have spillover effects on the banking sectors in these countries, adding another layer of complexity to their challenges