(MENAFN- Muscat Daily) Despite its depth the GCC financial sector has not produced the expected inclusive growth-enhancing benefits signalling a 'quality gap' with respect to the rest of the world according to a World Bank report.
The region has fallen short in providing access to financial services for their population the report says. SME lending in the region amounts to just two per cent of total credit which is the lowest in the world and has not improved in recent years the 'Improving the quality of financial intermediation in the GCC countries' note said.
The World Bank suggests that improving the quality of financial intermediation in GCC economies is a balancing act between enhancing access and preserving stability.
'SMEs perceive the lack of external financing as a serious obstacle to business expansion. Available credit tends to be heavily concentrated favouring a few large and well-established firms especially in the real estate and oil and gas sectors. GCC countries exhibit one of the world's highest ratios of top 20 exposures to total equity [at about 180 per cent].'
According to the report the level of financial deepening in the region is less effective than in other regions when it comes to generating long-term economic growth.
The financial sector in GCC countries is bank-based and with the exception of UAE and Bahrain have penetration rates well below that of advanced economies.
Total banking-sector assets stood at 144 per cent of GDP in UAE and over five times GDP in Bahrain at the end of 2013.
By contrast in Oman with the smallest banking sector in the region total bank assets amounted to about 60 per cent of GDP.
The report said the 'new normal' that GCC economies now face characterised by lower oil prices provides an opportunity to introduce far-reaching reforms in the financial sector to address the 'quality gap'.
The report noted that the impact of lower oil prices on banking systems is likely to be muted in the near term but downside risks are likely to increase over time.
'Second-round effects of lower oil prices on economic activity could weaken asset quality liquidity and profitability but the speed of adjustment is likely to vary across countries. GCC banking systems will be affected by the decline in oil prices given the strong correlation between non-oil growth and government spending but they should remain resilient owing to their high capital'.
The report further emphasised that financial stability is not enough for GCC economies to reap the benefits of economic diversification and there is a dire need for inclusive financial development.
'A successful reform agenda for the coming years will necessarily be a balancing act. Enhancing access to the existing depth requires a combination of policies aimed at improving the environment for financial intermediation'.
It said the World Bank Group is well positioned to assist GCC countries in improving the quality of financial intermediation.
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