Three themes shaping GCC financial services

By Jorge Camarate, Christina Hedra, Krzysztof Ignaciuk and Mahmoud Al-Salah


Governments in the GCC region know that a strong, resilient financial services sector is critical to economic development and reform. In 2019 there has been steady progress on regulation, consolidation, and digitization. These three themes are connected, reinforce each other, and help the sector mature.

Regulation is the first theme. On the regulatory front there have been significant changes that demand large-scale investment in new technologies to ensure compliance. Although these changes require considerable effort, they are helping GCC financial sectors to develop rapidly, adopt leading practices, and thereby pave the way for sustainable economic development.

In particular, there has been increased regulatory scrutiny regarding anti-money laundering (AML) and know- your-customer (KYC) compliance. The Financial Action Task Force (FATF), an intergovernmental organization, started a new round of mutual evaluations across the GCC in 2018. These reviews focus on the strength of AML regulations, how central banks operate, regulators’ effectiveness, and the extent of banks’ compliance with regulations. These are difficult reviews. Failure to pass can lead to being cut off from the global financial system.

In preparation for these reviews, regulators have increased scrutiny of banks, levying fines when necessary. The Central Bank of the United Arab Emirates has imposed fines ranging from $13,600 to $1.36 million. This past summer the Qatari regulator fined First Abu Dhabi Bank $55 million for obstructing an investigation into suspected market manipulation.

Along with the FATF review, global correspondent banks, which must comply with a variety of global regulations and standards, are demanding that GCC banks also observe these regulations. If they do not, the global correspondent banks will not do business with them, thereby denying GCC banks access to critical elements of the global financial markets such as US dollar clearing facilities.

GCC regulators have responded with a change in mindset. Previously the approach was often focused on improving ease of doing business for the many foreign individuals and companies attracted to the region. Now regulators understand that banks under their purview must know more about their customers and the source of funds.

Consolidation of financial institutions is the second theme. Most GCC financial sectors are fragmented, with Saudi Arabia the notable exception. The UAE, for example, has over 40 banks—too many for the population and a strain on regulators. Another reason for consolidation is that the state owns, to some degree, many banks. Consequently, many governments, sovereign wealth funds and regulators regard consolidation as a step toward a stronger, more resilient financial sector.

There were several high profile mergers and acquisitions in the spotlight in 2019. In the UAE there was Noor Bank and Dubai Islamic Bank, and ADCB, UNB and Al Hilal; in Saudi Arabia, National Commercial Bank and Riyad Bank, and SABB and Alawwal; in Bahrain and Kuwait, Kuwait Finance House and Ahli United Bank; and in Qatar, IBQ and Barwa Bank.

Digitization is a third theme. New technology deployment is accelerating in banking globally, including in the GCC. Banks have partnered with FinTechs and invested in new digital solutions for their home markets. Mashreq Bank has launched NeoBiz, the first fully digital bank offering in the UAE exclusively aimed at small- and medium-sized enterprises. Banks have used digital to enter new markets, such as First Abu Dhabi Bank’s Saudi offering FAB KSA.

Banks are also being pushed to digitization because of increasing competition from nontraditional entrants. Neobanks, which are 100% digital and reach customers on mobile apps and personal computer platforms, are spreading. Bahrain Bank ABC has launched “Fatema,” which will interact with customers as if they are taking to an actual employee.

“Many governments, sovereign wealth funds and regulators regard consolidation as a step toward a stronger, more resilient financial sector.”

Jorge Camarate,Partner, Middle East

“Fatema” is powered by artificial intelligence (AI) and will talk to customers in a personalized manner. Xpence will soon launch the “Gulf region’s first neobank designed by entrepreneurs for entrepreneurs.” Other entrants include telecommunications operators which are offering digital wallets, such as STC Pay in Saudi Arabia and Viva Cash in Bahrain.

These three themes of regulation, consolidation, and digitization are related and mutually reinforcing. Until recently, the technology focus was customer-facing. However, improved back-office technologies means better compliance. For example, at present more than 90% of transactions identified as “suspicious” are wrongly reported. Despite this high error rate, banks must investigate each of these, which costs time and money. By contrast, an AI-driven algorithm that learns could significantly lower error rates. Similarly, technologies could identify customers in real time, facilitating KYC compliance.

Better back-office technologies can also facilitate M&A by improving pre-deal due diligence. As regulations become more rigorous, the need to understand AML risks will be critical to consummating deals. In a twist that neatly demonstrates the connection among these three themes, faster consolidation could lead to more cost efficiency and improved regulatory compliance through the creation of. shared utilities to manage common AML and KYC activities across multiple banks.

These three themes of regulation, consolidation, and digitization can strengthen the GCC financial sector and thereby promote economic development and reform.

This article originally appeared in the January 2020 issue of Banker ME.

About the authors

Jorge Camarate is a partner with Strategy& Middle East, part of the PwC network.

Christina Hedra and Krzysztof Ignaciuk of Strategy& Middle East, and Mahmoud Al-Salah of PwC Middle East, also contributed to this article.

Follow us