IslamicFinance.de

Rohit Chawdhry, portfolio manager of Bahrain Islamic Bank, analyses the issue of overbanking in the Gulf region and the institutions anticipating mergers in the February issue of The Middle East. He concludes that all state plans fostering project developments are not covered by a sufficiently large banking sector. The Institute of International Finance estimates there are about USD 1.9 trillion worth of projects under way in the region, making the GCC one of the largest project finance markets in the world. But analysts estimate that the present project finance, which includes bank lending, bond and equity issuance, has a funding shortfall of at least $900bn, if not more. To create banks which are able to shoulder a greater proportion of the financing needs of projects under construction, by state and private investors is the challenge of the policy makers.

The degree of overbanking is different in the GCC. While there is unambiguous evidence that the UAE and Qatar are overbanked, the banking sector in Saudi Arabia stands relatively under-banked considering the size of the population and credit penetration rates. With the exception of the UAE, where credit to GDP ratio is around 103%, the rest of the GCC region has a credit to GDP ratio in the range of 55–65%, with Saudi Arabia being an outlier at 41%. Overbanking usually leads to phases of consolidation/mergers/acquisitions.