What is a financial market?
A financial market is a spectrum term which means a marketplace where buyers and sellers trade in assets in the form of stock, currencies and derivatives. The demand and supply forces determine the price of these assets.
Depending on what is traded, there are mainly two types of financial markets:
1. Capital market – where securities like bonds, stock, etc. are traded. They are for long-term investment.
2. Money market – where high-liquidity items like US Treasury bills, currencies, etc. are traded. They are for short-term investment with equal chances of big gains and big losses.
Why is financial market important?
The financial markets mobilize domestic savings and foreign capital for productive investments. The economic growth of any country depends on the efficiency of its financial markets. An ineffective financial market would mean that you are not exploiting all opportunities and an inefficient one will cripple you and not let you compete on a global scale.
Its level of sophistication:
• Encourages Foreign Direct Investment (FDI)
• Allows domestic corporations to raise funds for growth and expansion
GCC Market Structure Overview
Developing their financial markets has been a priority for GCC since 2002. Their vision has mainly been to promote the development of local marketplaces like UAE market structure and Kuwait market structure, and to make the GCC countries a financial hub in the region. With the oil prices dropping and the depletion of the oil reserves, the GCC region has no choice but to diversify its economy for a sustainable growth.
Current GCC Market Structure
The Saudi Arabia market structure, though solid (none of the banks collapsed in the aftermath of the Global Financial Crisis in 2008-09), still lacks sophistication. Most domestic companies even now use their retained earnings or traditional bank loans to finance their growth activities. When compared to their Asian and Latin America counterparts, the region forms only 0.8% of the global capital volume says a Deutsch Bank report.
The share of GCC countries is even lower with only 1% says an IMF report. The weak share of the UAE market structure is due to the government’s heavy engagement in the economic activities and the weak private sector.
In order to measure the financial marketplace development, the ratio of financial assets to the GDP is used. The GCC’s 0.8% share of the global financial market to its 1.7% share in the global GDP shows a skewed size of the financial sector.
The Kuwait market structure, however, shows that the financial sector plays a significantly higher role, 14% to be precise, in its share of GDP. For GCC, on a whole, finance chips in only 6% of GDP.
The current GCC capital structure shows that not only are the countries behind in terms of economic potential internationally, but also relative to the development in the region.
Identified problems with the GCC Market Structure
• High banking concentration, especially in the Saudi Arabian market structure, due to limited access for private players. Domestic and public monopoly has led to poor investment environment and restrictive policies. Gradually though, the policies are being revoked to encourage liberalization.
• The weak competition which has led to high prices, fewer varieties of financial instruments, poor services, etc.
• Stock markets in GCC have been far behind in terms of international standards with a concentration on the largest sector in Saudi Arabia. The stockmarket plays a major role in Saudi Arabia capital structure, contributing to 61% of the total domestic financial asset.
• Since it is easy to earn money from government projects, individual entrepreneurship is not supported and financial institutions do not play their part in allocating venture capital and risk.
Though the liberalization and privatization of the GCC market structure are already under way, the GCC region still has to go a long way. Based on an IMF report, they should focus on the following financial sector reforms:
• Strengthen demand and supply
• Reduce government participation and open up to foreign competition
• Enhance the bank regulatory and supervisory framework
• Develop efficient and effective capital instruments for financing
Author is an expert at Marmore MENA Intelligence (a subsidiary of Kuwait Financial Centre ‘Markaz’). Marmore provides MENA and GCC market structure reports and country specific reports for Saudi Arabia, UAE, Kuwait, Oman, Qatar, and Egypt.