How GCC banks can help clients through the effects of the pandemic

By Jorge Camarate and Dr. Antoine Khadige

Article

While the full economic impact of the Covid-19 pandemic is unclear, GCC banks can mitigate the risks and position themselves for emerging opportunities. GCC financial institutions, like other companies, are already responding with appropriate measures to ensure the safety of their employees, clients, and others.

It is speculated that the pandemic will have the following five effects on GCC banking:

Straining digital collaboration and service

As banks restrict physical interactions, they are turning to digital tools and platforms. Productivity will decline in the short-term because GCC banks have been slower to adopt virtual infrastructure than European and U.S. financial institutions. Employees are also not accustomed to using remote working protocols. Digital channels for customers will be tested as some branches close and customers stay away. Banks that have invested to give customers access to a wide range of online services will benefit the most, however, the spike in digital usage will test the infrastructure of all banks.

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Financing for stressed consumers and companies

“Gig” economy workers, and employees in leisure, travel, and hospitality will experience notable income declines. This will oblige them to rely on short-term loans or existing lines of credit. SMEs will also encounter financial pressure as consumers reduce spending. This will result in more non-performing loans. Surveys have already demonstrated that fewer GCC SMEs have lines of credit compared to similar companies in advanced economies, and they are also a smaller proportion of the total loan book, making them financially vulnerable. Banks may need “moratorium tools” to restructure payments for otherwise healthy borrowers facing difficulties, which is an opportunity to generate long-term goodwill.

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Lower fee revenues for value-added services

Some income streams will shrink. Customers will make fewer payments, meaning less transaction fee income. Regional financial markets, which governments have sought to develop, will be tested. Less activity by the region’s sovereign wealth funds could exacerbate matters. Worried clients may shift assets from riskier classes to safer holdings, cutting management fees. Corporate finance fees will decline as M&A activity is confined to emergency acquisitions. The uncertainty and volatility will put major issuance in the capital markets temporarily on hold.

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Less VC funding means bank-fintech collaboration

Venture capital for Financial Technology (fintech) will wither, with government-backed initiatives unlikely to maintain fintech funding as a priority. That means investment opportunities for traditional banking organizations. The need for digital banking services could force banks to accelerate digital innovation, inclining them to partner with fintechs.

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Non-cash payments and e-commerce boom

Contactless payments can limit the spread of COVID-19 on banknotes. The World Health Organization is encouraging contactless payments and has asked card associations and networks to temporarily reduce fees. The GCC is in a strong position thanks to fast adoption rates for contactless card and mobile payments, along with high smartphone penetration. E-commerce is also likely to grow as customers avoid physical stores and shift their daily shopping online.

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In light of these developments, financial institutions can take the following actions to navigate the crisis in the short term and position themselves for the economic rebound that will follow.

Focus on business continuity, putting in place procedures and tools that meet customers’ needs without jeopardizing the health and well-being of employees and prevent the stigmatization of those who fall ill.

Assess exposure to sectors and clients that will be affected the most and invest in deeper businesses relationships. This can include flexible repayment options, new debt packages to address cashflow shortages, and relief and insurance products. Banks can offer SMEs access to a centralized database of resources so that these companies can identify and apply for aid packages and government support programs. Banks can also work with partners to meet the non-financing needs of SMEs.

Ensure adequate liquidity as wholesale funding comes under pressure and markets continue pricing for the worst-case scenario. Regulators are already discussing relaxing liquidity rules on banks and raising the level of leverage to reduce financial pressure. However, banks should also prepare contingency funding plans if liquidity coverage ratios fall below a critical level.

Have a clear strategy on when to buy. As some banks and financial institutions fall into distress there will be potential for M&A and other strategic moves. Since the 2008 financial crisis distressed and special situation funds have had hefty returns, showing that market chaos can breed opportunity at the right price points.

The current economic climate is a test for GCC financial institutions. With care and consideration, they can continue to assist their clients through these difficulties and position themselves for the recovery.

This article originally appeared in March 2020 on Forbes ME online.

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Jorge Camarate

Jorge Camarate

Partner, Strategy& Middle East

Dr. Antoine Khadige

Dr. Antoine Khadige

Principal, Strategy& Middle East

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