Investment Banking And Security Market Development Does Finance Follow Industry Understanding the GCC Market Structure

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Understanding the GCC Market Structure

What is a financial market?

The financial market is a spectrum term meaning the market where buyers and sellers trade assets in the form of stocks, currencies and derivatives. The forces of supply and demand determine the price of this asset.

Depending on what is being traded, there are mainly two types of financial markets:

1. Capital market – where securities such as bonds, stocks, etc. are traded. traded. They are for long term investment.

2. Money market – where items with high liquidity such as US Treasury bills, currency, etc. traded. They are for short-term investments with equal opportunities for big profits and big losses.

Why are financial markets important?

Financial markets mobilize domestic savings and foreign capital for productive investment. A country’s economic growth depends on the efficiency of its financial market. An ineffective financial market means you are not exploiting all the opportunities and an inefficient market will paralyze you and prevent you from competing on a global scale.

Sophistication level:

• Encouraging Foreign Direct Investment (FDI)

• Allows domestic companies to raise funds for growth and expansion

GCC Market Structure Overview

Developing their financial markets has been a priority of the GCC since 2002. Their vision is mainly to promote the development of local markets such as the UAE market structure and Kuwait market structure, and make the GCC countries the financial center in the region. With falling oil prices and depleting oil reserves, the GCC region has no choice but to diversify its economy for sustainable growth.

Current GCC Market Structure

Saudi Arabia’s market structure, while solid (no banks collapsed after the Global Financial Crisis in 2008-09), is still lacking in sophistication. Most domestic companies even now use retained earnings or traditional bank loans to finance their growth activities. When compared to their counterparts in Asia and Latin America, these regions make up only 0.8% of global capital volume according to a Deutsch Bank report.

The share of GCC countries is even lower at only 1% according to the IMF report. The weak part of the UAE’s market structure is due to the heavy involvement of the government in economic activities and the weak private sector.

To measure financial market developments, the ratio of financial assets to GDP is used. GCC’s 0.8% share of global financial markets to its 1.7% share in global GDP indicates a skewed financial sector size.

The structure of the Kuwaiti market, however, indicates that the financial sector plays a much higher role, at 14% to be precise, in its share of GDP. For the GCC, as a whole, the financial chip is only 6% of GDP.

The current GCC capital structure shows that not only are countries lagging behind in terms of international economic potential, but also relative to development in the region.

Issues identified with GCC Market Structure

• The high concentration of banking, especially in the Saudi Arabian market structure, is due to the limited access of private players. Domestic and public monopolies have resulted in a poor investment environment and restrictive policies. But gradually, the policy was lifted to encourage liberalization.

• Weak competition leading to high prices, less variety of financial instruments, poor service, etc.

• The stock market in the GCC is far behind by international standards with a concentration on the largest sector in Saudi Arabia. The stock market plays a major role in Saudi Arabia’s capital structure, accounting for 61% of total domestic financial assets.

• Because it is easy to get money from government projects, individual entrepreneurship is not supported and financial institutions do not play a role in allocating venture capital and risk.

Last word

Although the liberalization and privatization of the GCC market structure has already taken place, the GCC region still has a long way to go. Based on the IMF report, they should focus on the following financial sector reforms:

• Strengthening demand and supply

• Reduce government participation and open up foreign competition

• Improve the regulatory and supervisory framework of the bank

• Develop efficient and effective capital instruments for financing

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