A region lacking in banking access

Published in MEED, 28 September 2015

The countries of the Middle East and North Africa would benefit from far more extensive branch networks.

It can be difficult to find a bank branch in some parts of the Middle East and North Africa region. In countries such as Algeria, Egypt and Mauritania, there are just five commercial bank branches for every 100,000 people. The situation is even worse in places like Sudan and Syria, where there are just three and four branches respectively. In contrast, the network of bank branches is five or six times more extensive in the likes of Lebanon, Iran and Morocco.

The disparity around the region offers an indication of the weakness of some economies and their lack of diversity and resilience. The fewer the bank branches there are in a country, the less likely it is that the people there will hold bank accounts.

In Iran, for example, where there are 28 branches for every 100,000 people, 92 per cent of adults have an account at a financial institution. In Sudan, where there are just three branches for every 100,000 people, the proportion of adults holding a bank account is just 15 per cent.

Low rates of bank account ownership are in turn likely to be a contributing factor to poverty. Financial inclusion is seen as critical to raising people up the economic scale, as it enables them to put money aside for schooling, home improvements or emergencies, and it allows them to borrow money to make investments too.

On this basis, the low number of bank branches in many Mena countries can be seen as holding back the general prosperity of many parts of the region. In Algeria, with its low penetration rate of bank branches, there are 332 depositors and 44 borrowers for every 1,000 adults. In Lebanon, which is well served by banks, there are 832 depositors and 299 borrowers for every 1,000 adults.

Taken as a whole, the Middle East is one of the worst regions in the world when it comes to the reach of its banking system. There are 13 bank branches for every 100,000 people in the region, and the figure for the Arab world is slightly worse, at 11 branches. These figures are not quite the worst in the world – in sub-Saharan Africa there are just four branches for every 100,000 locals. However, on another important measure, the Mena region does lag behind its African neighbours.

According to the Global Findex database produced by the Washington-based World Bank, only 14 per cent of adults across the Mena region have an account at a financial institution, and only 7 per cent of those in the poorest 40 per cent of households do. That means more than 85 million adults in the region remain ‘unbanked’. The situation is worse for women, with only 9 per cent of them having an account.

By these measures, the Middle East is the most underbanked region in the world, with less than half the rate of bank accounts in the next worst region, sub-Saharan Africa.

Enabling women

“When a woman has an account and a safe place to save outside the home, she also has greater control over finances and household incomes,” said Sri Mulyani Indrawati, managing director of the World Bank, at the launch of the Findex report in April. “With access to formal savings and credit, women participate more in the economy. They can set aside funds for emergencies, for schooling, or for starting a business. This is an important stepping stone out of poverty and towards more equality.”

The worst performing country in the region is Yemen, where only 6 per cent of adults have an account at a financial institution, with the figure for women at just 2 per cent. Others that are notably weak in this regard include Sudan, Iraq and Egypt, all of which have bank account penetration rates of 15 per cent or less.

The positive news is that most countries have seen their banking coverage improve over the past decade, although some of the gains have been lost in recent years. In 2004, there were 11 bank branches per 100,000 people across the region as a whole. That increased to 14 by 2008, but since 2011, it has dropped back to 13 branches.

That matches a pattern seen in some other parts of the world, such as East Asia and the Pacific, and the EU. In Latin America and in sub-Saharan Africa, however, the number has continued to rise, as it has for the world as a whole. Globally, the number of bank branches for every 100,000 people has steadily increased from nine in 2004 to 11 in 2005 and to 12 in 2013, the most recent year for which figures are available.

The situation has remained fairly stable for most countries within the Middle East over the past decade, with Lebanon and Iran the clear leaders in terms of the extent of their branch networks, followed by the likes of Morocco, Oman, Jordan and Tunisia. The most notable growth has come in Morocco. It had just 10 branches for every 100,000 people in 2004, which placed it below the regional average. Now Morocco has the third-most extensive network in the region.

Going in the opposite direction, Qatar has slipped back from 24 branches per 100,000 people in 2004 to 13 by 2013. That is partly a reflection of the rapid growth in the country’s population as migrant workers have come in to help with the huge construction efforts under way in preparation for the 2022 Fifa World Cup. The only other countries to have seen their bank branch coverage decline over this period were the UAE, Oman and Lebanon, although none suffered such a dramatic fall.

Of course, the extent of a bank branch network does not necessarily denote strength. Although they have limited networks relative to their populations, banks in Oman and Qatar have non-performing loan ratios of 2 per cent or less, which are well below the regional average of 4.6 per cent and suggest they are performing well.

However, the Gulf banks are liable to find life more difficult in the near future if oil prices remain low. A reduction in state revenues is likely to lead to a fall in government deposits, which currently make up anything between 12 and 38 per cent of all deposits in the GCC banking systems. Lower government expenditure along with the impact on economic growth rates more generally is also likely to mean slower loan growth, higher numbers of problem loans and lower profit levels.

In some other parts of the region, the banking sector is already dealing with very serious difficulties, including years of wars and political instability. For example, according to one official at the Central Bank of Yemen, about a third of bank branches in the country are closed due to the fighting in that country.

Initiatives such as microfinance and mobile banking solutions are starting to fill the gap for the poorer sections of the population, and can be easier to operate during times of conflict. The most recent move in this direction came from the Central Bank of Yemen, which introduced mobile banking regulations in December last year. Although the progress in launching services since then has been fitful, it could in time provide a useful alternative for Yemenis wanting to save or borrow money

Poor uptake

Despite the potential benefits, however, the region as a whole has not seen the uptake in microfinance and mobile banking that it might have, something that observers blame on the overly cautious nature of regulators.

“There are problems on many levels,” says one industry analyst. “The banks are not really interested in serving poor people; they’re serving the rich. And the regulators are focused on banks, and banks alone.

“Microfinance institutions exist but they can’t take deposits in most cases. Institutions that only lend money to poor people will eventually find their growth limited if they can’t find ways to raise their own deposits. The regulators are also very conservative with allowing other non-bank players, for example telecoms firms. I’d like to see what would happen to the financial inclusion landscape if they allowed telecoms operators to play. Personally, I think you’d see an explosion of services.”

In some other parts of the world, mobile phone technology has been the driver of rapid change in the financial landscape, with millions of people who never had a bank account now signing up for mobile money accounts. That has proven to be cost effective for financial providers when it comes to dealing with small transactions. Without the high cost of bank branch networks, they can afford to provide a service to people who would otherwise be locked out of the financial system.

In the longer term, technology might also reduce the need for bank branches for other customers, with online banking increasingly prevalent. But while the people of the Middle East wait for all that to happen, they would undoubtedly benefit from far more extensive branch networks.