Banking for a modern Middle East

Change in the Middle East’s financial sector can often seem painfully slow.

Consolidation is widely thought to be a priority across the region, but there was a 10-year gap between the formation of Emirates NBD and the next big merger that gave birth to First Abu Dhabi Bank (FAB) in 2017.

Diversification – including geographical – is viewed as key to financial health in a time of low oil prices, but most banks are still small, one-country institutions. New technologies are transforming the way banks operate worldwide, but in the Middle East one can still see long queues of customers outside branches on payday.

The Middle East’s financial sector has long been conservative. Largely owned by the region’s governments and by powerful families, who pass their shares down the generations, and frequently populated at board level by senior political figures with a sometimes limited understanding of finance, most banks have been defined by their reluctance to change.

As a result, the competitive landscape seems to evolve at a snail’s pace. Western, not local, banks still dominate investment banking in the region.

The names that topped rankings of Arab banks two decades ago are still large institutions today. Arab Banking Corporation (ABC) of Bahrain was then the largest bank in the region by total assets, followed by Saudi Arabia’s National Commercial Bank and Riyad Bank, Jordan’s Arab Bank and National Bank of Kuwait.

But while all of these banks are still key players in their domestic markets and in some cases regionally, it has become increasingly clear to Middle Eastern banking executives that relying on existing tools and customer bases will not be enough to preserve, let alone gain, market share.

ABC, which has long since lost its place as the largest bank in the region, is perfectly aware of that challenge.

“Today, if I don’t have a digital strategy for my group, I’ll be out of business,” ABC’s deputy group chief executive, Sael Alwaary, tells Euromoney.

Banking heads across the region say that the financial sector can no longer afford the luxury of sluggishness. They say the Middle East banks of the future will be large, connected and international – many believe that this process has already begun.

When Euromoney sat down with Sulaiman Abdul Aziz Al Rajhi in 1983, he was then one of the richest men in the world. Speaking to a western journalist at length for the first time, the founder of the Al Rajhi banking empire described the start of his career in finance.

In the 1950s, the price of gold and silver varied substantially between Jeddah and Riyadh. He and his brother took advantage of this discrepancy and ran a highly lucrative arbitrage business in bullion. Al Rajhi lived in Jeddah, his brother in Riyadh. To conduct the trades, each would simply give the precious metal and documentation to passengers on the twice-weekly flights that connected the two cities, with instructions to pass these on to the brother waiting at the other end.

Al Rajhi would walk to the airport the night before the flight, bury his gold, sleep on it and the next morning dig it up to hand to a perfect stranger entrusted to conduct the trade.

“I never asked for a receipt,” he said, “and we never lost any gold.”

From there, Al Rajhi went on to found a large money-changing business and eventually a retail bank.

His tale says much of how finance worked in the region at the time: slow, physical dealings, reliant on natural resources and limited regulatory control.

Half a century later, speaking to the head of a large financial institution feels altogether different. Most banking executives in the region can speak at length on the subject of digital banking and are well-versed in everything from artificial intelligence to cryptocurrencies.

There is a sense of urgency that is new to the region’s banking sector. This is true of the largest banks in the region and of the smaller ones. The heads of Bahrain’s ABC and Dubai’s Mashreq Bank both speak with passion of their standalone digital banks and of the disruption these represent to their broader organizations.

Abdul Aziz Al Ghurair has headed Mashreq since 1990, taking on the role from his father. The bank is one of the oldest in the region and has grown from seed capital of just $1.5 million to a market capitalization of $3.4 billion. Mashreq’s shareholders are virtually unchanged from the bank’s origins, they pay relatively little attention to the quarterly numbers, satisfied over the years with the regular flow of dividends they have received.

But Al Ghurair is adamant that this track record should be no excuse for complacency.

“People spend a lot of time managing the present and very little time managing the future,” he says. “You really need to spend time to think about the future.”

This led him to the formation of Mashreq Neo, a bank whose ambition is to see its customers only once – at account creation – and never again after that. All services, he says, must be offered digitally. He praises the consistent reliability of machines and algorithms over employees.

Customers, he says, expect this from their banks now, even in the Middle East, which had long preferred brick-and-mortar thinking.

“In the next 10 years, the banking system will go through a lot of challenges because customers are demanding more changes,” he says. “The banks that will survive the next 10 years are the ones that will almost transform themselves into a fintech with a banking licence.”

Al Ghurair says that there has been internal resistance to this transformation of the Mashreq workplace, but that most staff members will eventually realize the value of being more flexible and of constantly updating systems to fit the changing needs of customers – and the advances of technology. 

ABC’s Alwaary is of a similar opinion. He says that in July 2017, when he asked his board for their support to create a standalone digital bank, many had never even heard of fintech. But they granted his request, convinced by his demonstration of its importance. The executive says a recent visit to India further inspired him to do his bit towards a cashless society.

“I came back a different man,” he says. “I don’t want to have another brick-and-mortar branch.”

ABC ran a survey to find out if people would move their custom to a digital bank: it found that a majority would. It is investing in digital marketing to bring new customers to ABC through its digital bank.

Commercial Bank of Qatar (CBQ), although not a leader in digital banking, is also managing to grow its business through the adoption of new tools. Its ‘60 seconds remittance’ service, which enables CBQ customers to send money to India instantly and at competitive rates, has led to rapid growth in the number of transfers processed by the bank – from 5,000 a month before launch to 100,000 now, CBQ’s chief executive, Joseph Abraham, tells Euromoney.

Abraham had previously worked at banks in southeast Asia, among them Standard Chartered, and sometimes felt disempowered in those organizations. He says that working in Middle Eastern banking at a time of such change – and being able to implement disruption quickly because of CBQ’s relatively small scale – is “very energizing”.

Enthusiasm about the opportunities available now is a recurring theme among the bank heads interviewed by Euromoney. Although Emirates NBD has long been Dubai’s largest bank by assets, it is still growing at a fast pace – a growth driven primarily by its digital strategy. Liv., the bank it created to target millennials, generates more than 10,000 new clients every month.

“That’s more than the main bank,” says Shayne Nelson, Emirates NBD’s chief executive.

He adds that digital platforms are not only useful to retail banking, they also allow Emirates NBD to improve its offering to companies large and small.

In his view, the urgency of getting the region’s banks up to speed with the latest tools is partly to do with the expanded competition technology generates. The Middle East’s banks used to compete only with one another, now there are other potential rivals to ward off. And for Nelson these aren’t necessarily the startups most bankers fear.

“People always used to say: ‘You’ve got to be careful of fintechs, they’re going to eat your lunch’,” Nelson says. “I’ve never been scared of fintechs. What I’m scared of and what worries me is the techfins: it’s the Alibabas, it’s the Amazons, Facebooks, Googles. They’re the ones with massive investment clout and very long-term investment horizons. They’re the ones that worry me from a competitive perspective.”

Their strength?

“The power of the data they’ve got,” says Nelson.

About 95% of transactions processed by Emirates NBD are now electronic – a sign of how far the more sophisticated banks in the region have come already. The idiosyncrasies of banking in the Middle East also make the sector conducive to long-term investment in tech.

“One of the great things about running a bank in the Middle East is my shareholders aren’t that concerned about my share price, my shareholders aren’t that concerned about return on equity,” Nelson says. “My shareholders are more concerned about one thing: that’s dividends.”

That means Emirates NBD can invest heavily now and reap the benefits later, even if it damages returns in any given quarter.

The bank’s transformation budget totals around $300 million. This sort of sum is only deployable by the largest institutions in the region, which is one of the reasons why scale is now so important in Middle Eastern banking.

“If I look at the amount we’re spending in digital,” Nelson says, “how do the small banks compete?”

Others have come to a similar realization, and consolidation now looks set to change the face of banking across the region. That began with the formation of First Abu Dhabi Bank, the largest bank in the UAE and the second largest in the Middle East.

Its deputy chief executive and head of corporate and investment banking, Andre Sayegh, tells Euromoney that the combined age of the two banks that formed FAB is 90, but he too wants to focus on the future.“We forget about the history,” he says, “because we move forward.”

He is eager to promote the potential that merging financial institutions can unleash.

“The time has come to consolidate and build a stronger foundation for the future,” says Sayegh. “The integration happened, to a large extent, in a smooth way. It was probably one of the most successful globally, because you’re talking about an asset base of close to $200 billion and to do it in less than 18 months, that’s a remarkable achievement.

“It required a lot of work. A lot of work,” continues Sayegh. “But then you move on solid foundations.”

Others are already moving to follow FAB’s example. A trio of Abu Dhabi-based banks – Abu Dhabi Commercial Bank, Union National Bank and Al Hilal – recently announced they are merging to form the third largest Emirati bank. In Saudi Arabia, Saudi British Bank and Alawwal Bank are also merging. Other banking M&A activity has been announced from Oman to Kuwait and Bahrain.

“To me, it’s quite obvious that scale is really critical as you go forward, to meet customer needs, both in the corporate and the consumer space,” says Emirates NBD’s Nelson. With the two recent Abu Dhabi mergers, Nelson says, the top four banks now share about 70% of the market, with dozens more fighting for the remaining 30%.

“The consolidation is pretty much alive and kicking,” he says. “If you look forward, you’d have to say there’s going to be more, because economies of scale in banking now are really critical.”

The largest banks not only have the biggest share of the market but they are also growing that share at a faster rate – an ominous sign for the smaller firms.

“If you haven’t got the spend to invest in digital capabilities, you’re going to lose market share,” says Nelson. “We are gaining market share in both loans and deposits. Customers are becoming more and more demanding in the digital space. [As a smaller bank] your capacity to deliver is diminishing.”

Sayegh agrees: “We have a lot of competition, but small institutions cannot unfortunately invest into such things.”

Some executives who have not announced any merger plans also declare themselves open to such an idea. Michel Accad, head of Al Ahli Bank of Kuwait, tells Euromoney that it might also make sense for his institution at some point.

Mashreq’s Al Ghurair also sees value in consolidation: “There are a lot of reasons why consolidation is good.”

Would he consider it?

“If we have to compete on an international scale, yes.” But he quickly adds that his bank does not have international ambitions.

He also stands up for the prospects of smaller institutions, such as his, in this shifting landscape.

“I think there will be room for everybody,” he says. “There will be small banks, medium-sized banks and large banks. Some are comfortable dealing with a very small bank, some don’t care as long as the service is there.”

As long as each category stays nimble in its approach to banking, “all we need is to reinvent ourselves every once in a while.”

Al Ghurair goes further, arguing that having such a high concentration of assets may be unhealthy, comparing the situation in the Gulf – with a few banks dominating the market – to the situation in the UK, where the ‘big four’ were unchallenged for decades.

Mashreq may have no intention of expanding beyond the region. But new banks such as FAB appear to have bigger goals.

“The world of finance has no borders any more, especially in a country like the UAE, which is open to the east, to the west, to the north, to the south,” says Sayegh. “By definition, a financial institution of this magnitude is supposed to help build the franchise of the country, even globally.”

In the same way as Qatar National Bank acts as a national champion of Qatari banking, spreading the country’s influence wherever it goes, from Africa to southeast Asia, FAB can also be an ambassador for Abu Dhabi.

The formation of other large banks will likely enable more financial firms to expand across the region. Emirates NBD, for example, is moving into Turkey with the purchase of Denizbank.

Banking in the Middle East is changing fast. Financiers intend to make their firms simultaneously larger and more flexible than ever before. Their hope is to stay relevant even as global competition – especially from tech innovators – challenges how finance has been carried out in the region for decades.