MIDDLE EAST AND NORTH AFRICA REGION GCC COUNTRY UNIT Competition in the GCC SME Lending Markets: An Initial Assessment GCC Knowledge Series Sharing Innovative Solutions in RAS Business Disclaimer © 2016 The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This document is a product of the staff of the International Bank for Reconstruction and Development/ the World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the executive directors of the World Bank or the governments they represent. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org.  ACKNOWLEDGEMENTS i indebted to Rolf Behrndt (Practice Manager, Acknowledgements World Bank Group); Mariana Iootty De T Paiva Dias (Senior Economist, World Bank his report was written by Pietro Calice Group); Martha Martinez Licetti (Lead (Senior Financial Sector Specialist Specialist, World Bank Group); Georgiana and Task Team Leader, World Bank Pop (Senior Economist, World Bank Group); Group), Paolo Buccirossi (Consultant) and Prof. Xavier Vives (IESE Business School, and Roberto Cervone (Consultant), under University of Navarra) for their guidance and the guidance of Nadir Mohamed (Director, comments on an earlier draft of this report. GCC Countries, World Bank Group) and the supervision of Jean Pesme (Practice The authors thank the authorities of the Manager, World Bank Group). Gulf Cooperation Council (GCC) countries for their hospitality and support during field The authors thank the following advisors for work in October and November, 2015, as their valuable comments: Alfonso Garcia well as to all stakeholders interviewed for Mora (Director, World Bank Group); Martin this study. Cihák (Advisor, International Monetary Fund); Paul Moreno Lopez (Program A special thanks goes to the GCC Country Leader, World Bank Group); Jamal Al-Kibbi Management Unit of the World Bank (Program Manager, World Bank Group); Group, particularly Sami Ben Daamech; Firas Raad (Country Manager, World Bank Abdulrahman Abdullah AlDeraibi; Maher Group); Maria Vagliasindi (Program Leader, Abu-Taleb; Abdel Rahman Abu Zaid; World Bank Group); and Ali Abukumail Shereen Alsaad; Hana Mahmoud Abo Al (Senior Private Sector Development Samh; Hala Bishara; and Dunia Al-Salahat; Specialist, World Bank Group). The authors and colleagues of the Finance and Markets also acknowledge the input provided by Global Practice, especially Marjorie Espiritu, the Central Bank of Kuwait and the Qatar for their invaluable support and assistance. Central Bank. Finally, the authors are ii COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT Abbreviations and Acronyms AECB Al-Etihad Credit Bureau BCSB Bank Credit and Statistical Bureau System BDB Bahraini Development Bank C3 Three-bank concentration ratio C5 Five-bank concentration ratio CBB Central Bank of Bahrain CBK Central Bank of Kuwait CBO Central Bank of Oman CBUAE Central Bank of the United Arab Emirates GCC Gulf Cooperation Council ICN International Competition Network ITC Information, Technology and Communication KSA Kingdom of Saudi Arabia KD Kuwait Dinar MENA Middle East and North Africa NFSD National Fund for SME Development ODB Oman Development Bank OECD Organization for Economic Cooperation and Development PCB Private Credit Bureau PCR Public Credit Registry QCB Qatar Central Bank QDB Qatar Development Bank QR Qatar Dirham SAMA Saudi Arabia Monetary Agency SME Small and Medium Enterprise SOE State-owned Enterprise SRI Saudi Arabia Riyal UAE United Arab Emirates TABLE OF CONTENTS iii Table of Contents EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v CHAPTER 1: INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SCOPE AND OBJECTIVES OF THE STUDY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ANALYTICAL FRAMEWORK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Blocking or limiting entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Creating discriminatory market conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Limit business strategy options and incentives to compete. . . . . . . . . . . . . . . . . . . . . . . . . 8 Limit consumers’ ability to choose. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 STRUCTURE OF THE REPORT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 CHAPTER 2: SME BANKING IN THE GCC COUNTRIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 NUMBER OF BANKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 OWNERSHIP STRUCTURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 MARKET CONCENTRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 MARKET POWER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 CHAPTER 3: ASSESSMENT OF RULES AND REGULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 STATE-SPONSORED INITIATIVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 The current status of state-sponsored initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Possible policy improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 LICENSING CRITERIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Current status of licensing criteria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Options for improving the licensing system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 PRICE CONTROLS AND RESTRICTIONS ON BANK ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . 30 Current status of price control and activity regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Options for easing price controls and activity restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . 34 ACCESS TO CREDIT INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 The current credit information sharing infrastructure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Options for improving access to credit information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 BARRIERS TO CUSTOMERS’ MOBILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Current status of early settlement fees and explicit deposit insurance schemes. . . . . . . 46 Options for improving customers’ mobility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 iv COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT CHAPTER 4: ASSESSMENT OF THE COMPETITION LAWS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 AN EFFECTIVE COMPETITION LAW SYSTEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 COMPETITION LAW REGIMES IN THE GCC COUNTRIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Existence and scope of competition law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Exclusions and exemptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Independence of competition authorities and cooperation with central banks. . . . . . . . 56 Investigative powers, sanction policy and leniency program. . . . . . . . . . . . . . . . . . . . . . . 57 Merger control regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 OPTIONS FOR IMPROVING COMPETITION LAW SYSTEMS . . . . . . . . . . . . . . . . . . . . . . . . . . 60 CHAPTER 5: WHERE DO WE GO FROM HERE? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 LIST OF TABLES Table A1: Main Factors Potentially Affecting Competition in SME Lending Markets . . . . . . . . . . x Table 1: Main State-Sponsored Initiatives in the GCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Table 2: Approval Time and Possibility to Appeal a Rejection Decision. . . . . . . . . . . . . . . . . . . . . 27 Table 3: Initial Capital Requirements (Values in US$, Millions). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Table 4: Institutional Framework of PCBs and PCRs in the GCC Countries. . . . . . . . . . . . . . . . . . 38 Table 5: Competition Law in the GCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 LIST OF FIGURES Figure 1: Banking Sectors in the GCC: CR3 and CR5, 2003 - 2013. . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 2: Banking Sectors in the GCC: H-statistic, 2010 - 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 3: Banking Sectors in the GCC: Lerner index, 2003 - 2013. . . . . . . . . . . . . . . . . . . . . . . . . . 19 Figure 4: Minimum Initial Capital Requirements for Conventional Domestic Banks. . . . . . . . . . . 30 Figure 5: Percentage of Firms (over Total Population) Covered by PCBs and PCRs in the GCC. 39 Figure 6: Percentage of Individuals (over Total Population) Covered by PCRs and PCBs in the GCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Figure 7: Percentage of Firms and Individuals (over Total Population) Covered by PCBs and PCRs in the GCC, MENA (GCC Countries Excluded) and OECD Countries. . . . . . . . . . . . . 40 EXECUTIVE SUMMARY v accounts and of reliable credit histories. Executive Summary Banking systems are large, but lending is highly concentrated on large borrowers. The countries of the Gulf Cooperation Banks perceive SMEs as having a higher Council (GCC) have articulated a vision credit risk, and therefore demand higher for sustainable economic development risk premiums or collateral requirements. that highlights the need to diversify the Financing alternatives outside the banking productive base to reduce dependence on sector are limited. Policy interventions in the hydrocarbon sector and create more recent years have partly mitigated access employment opportunities for their young problems but have not addressed the root and growing population. Small- and medium- causes. sized enterprises (SMEs) are central to this agenda. The GCC hosts an estimated Weak competition in the banking sector is a 675,000 formal SMEs that account for 25 particular supply-side factor that constrains percent of employment. This is significantly SMEs’ access to bank credit in the GCC. below the global average SME employment International experience shows that bank contribution of 40 percent. While GCC SMEs competition promotes access to finance operate predominantly in the trading and and improves the efficiency of financial construction sectors, their presence in more intermediation without necessarily eroding valued-added manufacturing sectors remains the stability of the banking system. However, limited. bank competition in the GCC is among the lowest in the world, largely due to strict entry Access to finance is one of the main requirements, restrictions on bank activities, obstacles to the growth of SMEs in GCC relatively weak credit information systems, economies. Only an estimated 11 percent and a lack of competition from foreign banks of SMEs in the GCC have access to credit, and nonbank financial institutions. This is and about 40 percent of them identify lack compounded by a relatively large presence of financial access as a major constraint. of state-owned banks. Improving bank Although bank lending is the main source competition could play a pivotal role in the of financing for GCC firms of all sizes, SME GCC strategy of economic diversification and lending penetration is very low, with an increased access to finance for SMEs. average of 2 percent of total loans, compared with 13 percent in non-GCC Middle East and This report draws on fieldwork and available North Africa (MENA), for example. literature to assess competition in the GCC SME lending markets. Governments in all SMEs’ limited access to financing reflects economies play a major role in the banking the interaction of demand, supply, sector as promoters, owners, regulators and institutional, regulatory, and other policy supervisors. Banking regulation is designed factors. Apart from obstacles arising from to achieve important social and economic unfavorable investment climates, SMEs face goals, and it is generally recognized that several nonfinancial barriers related to their greater competition yields positive returns own capacities, including a lack of financial to national economies and consumers. This vi COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT initial competition assessment gauges the State-owned banks tend to enjoy scale and scope of potential impediments important advantages, including access to competition caused by specific rules to lower cost of funding and a lower and regulations as well as by particular perceived level of risk among investors components of the institutional framework and depositors, that may negatively affect in the GCC. In particular, this report (i) ranks competition and reduce benefits for SMEs regulatory and institutional factors under and their customers. the principle of maximizing the benefits State-sponsored ■  initiatives launched of competition; (ii) highlights alternative across GCC countries to bridge the arrangements that can meet the desired SMEs’ financial access gap may interfere policy objectives while lowering impediments with a level playing field in the banking to competition; and (iii) identifies avenues for industry. In principle, market failures and a more detailed evaluation. imperfections in SME credit markets in This report analyzes how some key rules the region provide a rationale for direct and regulations as well as institutional government intervention. State-sponsored arrangements for the enforcement of loans at subsidized rates, either through competition law in the GCC may affect specialized institutions or through competition in the SME lending markets. commercial banks, and credit guarantee Rules and regulations may produce four schemes are among the most common principal types of negative effects on measures adopted to address the under- competition. They may (i) limit the possibility provision of credit to SMEs. While valuable of entry or expansion in a market; (ii) per se, these state-sponsored initiatives create discriminatory operating conditions potentially distort the level playing field amongst market players; (iii) limit business and displace private operators. strategy options, either by prohibiting Current ■  bank licensing criteria may certain competitive actions or by reducing potentially stifle competition. GCC rules the incentives to compete; and (iv) limit and regulations outlining the licensing consumers’ ability to choose. An effective process are not always clear. Clear rules competition law system underpins a pro- on approval times and the possibility of competition regulatory framework, and the appealing a rejection are lacking in half implementation of competition policies of the GCC countries. Some countries depends on institutional arrangements. have residual restrictions on licenses An inappropriate competition law system and branches that limit banks’ entry and may exacerbate the competitive distortions expansion. More generally, initial capital introduced by rules and regulations. requirements in the GCC are much higher The report’s main findings follow: on average than in comparable countries. This may reduce market contestability and The ■  state maintains a significant direct prevent small-scale banks from entering and indirect presence in the ownership the market. of banks across all GCC countries. EXECUTIVE SUMMARY vii Some ■  GCC countries set interest rate about banks’ riskiness, compensating for ceilings on customer loans, thereby reputational effects enjoyed by larger and reducing the signaling power of market state-owned banks. Deposit insurance prices in the allocation of capital resources. schemes are largely present in the GCC, While interest rate ceilings may be but their design and implementation vary justified in the absence of competition, across countries, with potential negative in the long run price restrictions suppress implications for competition. market signals and may lead to decreased Competition ■  law systems in the GCC may quantity and quality of loans supplied to need strengthening. Although all but SMEs. one of the GCC countries have adopted Credit ■  information coverage varies across explicit rules to protect competition, GCC countries, and some employ cut-off public awareness of the pro-competition thresholds for loan reporting. The degree provisions set in the relevant legislation is of cross-sectorality and credit data memory limited. Criteria for distinguishing between also varies. Existing credit information anti-competitive conduct and legitimate sharing mechanisms provide both positive behavior are not clearly delineated. State- and negative information about SMEs, owned entities and firms subject to state but their reliability and timeliness are direction and supervision are generally not assured. Credit information sharing excluded from the application of the mechanisms appear non-discriminatory, competition law. While the banking sector yet the risk of distortion to competition is not explicitly exempted, the applicability arising from vertical integration is present. of competition law may be obscured ■  Existing regulations appear to constrain by the large presence of state-owned SMEs’ ability to switch banks to access banks, and the fact that banks are subject more suitable financing options. to public oversight. The independence Regulations on early settlement fees are and authority of institutions overseeing heterogeneous across GCC countries, competition may need strengthening. but suggest that, in general, SMEs incur Rules governing merger control are not costs when switching banks. Regardless always clear, and appropriate working of their amount, early settlement fees relationships between competition and closing charges introduce significant authorities and central banks may need to frictions in the SME lending markets and be fostered. may impair entry and expansion insofar The findings of this report have several as they discourage SME borrowers from policy implications. This report identifies a closing their existing lines of credit and number of areas where relevant regulations moving to another bank. Safety against and institutional frameworks may impede bank default is another factor pertaining competition in GCC SME lending markets, to customers’ choice. Deposit insurance and require further investigation. Specifically, schemes may positively affect switching the report identifies eight broad policy areas by influencing customers’ perception where further analytical work is warranted. viii COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT ■  Third, policymakers should review Depending on the country context, the process through which banks additional and more specific policy areas may initiate or expand operations to would need to be considered. ensure greater clarity and transparency. ■ F  irst, governments in the GCC should Market contestability could be improved conduct a detailed assessment of by removing potential obstacles and the anticompetitive effects of public increasing clarity and transparency in ownership in the banking sector. If an the bank licensing process. Competition assessment reveals that state-owned prospers when competitors perceive that banks impede competition, a competitive entry is viable: contestability acts as a neutrality principle between state-owned disciplining device on banks and mitigates banks and private operators could be their market power, even if actual entry enforced. Possible solutions range does not occur. from privatization to measures aimed ■  Fourth, GCC governments can consider at mitigating the likely anticompetitive the potential benefits of introducing a effects of public ownership, such as (i) tiered approach to prudential regulation. reforming the corporate governance Tailoring the application of rules and and oversight framework of state-owned regulations based on the size, complexity banks to strengthen transparency and and other characteristics of banking accountability; and (ii) amending all explicit organizations is a useful way to implement provisions and business practices that a tiered banking regulatory system that could further distort the market. encourages entry without exacerbating ■  Second, policymakers should consider risks. In particular, revising capital measures to ensure that state-sponsored guidelines to encourage entry of small- initiatives do not distort competition in scale banks may positively affect market the banking sector. In principle, state- contestability in the SME lending markets. sponsored initiatives to support SME’s ■  Fifth, policymakers in the region should access to finance should be designed consider regulations limiting banks’ in a way to set non-discriminatory strategic options. For example, interest participation conditions and establish rate ceilings that suppress interest rates business relationships between SMEs and below free-market levels act as focal points banks. Optimal state-sponsored initiatives and facilitate collusion. As a result, banks encourage banks to compete against may ration credit, which privileges some each other and prospective borrowers SME borrowers and leaves most high- to shop around for their preferred credit risk SMEs unserved. As banks advocate provider. A full competition assessment of the need for a risk-based approach to current state-sponsored initiatives aimed lending, understanding the potentially at supporting SME financial access is negative impact of interest rate ceilings on warranted to identify gaps with respect to competition is especially relevant. international best practices. EXECUTIVE SUMMARY ix ■  ixth, GCC governments could S Finally, ■  GCC governments could assess the credit information sharing consider further evaluating banking environment to explore potentially rules, institutions and enforcement of discriminatory access conditions. competition policy to improve SMEs’ Although existing credit bureaus and access to financing. This report finds that credit registries appear to be generally the independent of authorities vested well-received among banks, their role with the authority and power to enforce could be strengthened. Extending competition law should be strengthened. credit information coverage, improving In the same vein, formal cooperation timeliness and reliability of information, arrangements between competition promoting regional and international authorities and central banks could be harmonization, and undertaking initiatives established to clarify the division of aimed at connecting credit history labor in the area of competition. Legal registries with other sources of relevant amendments to expand the scope of financial and credit data would produce the competition law and/or the purview significant pro-competitive effects. of the competition authority could also be considered. Soft law instruments ■  Seventh, governments could increase concerning the definition of the relevant customers’ mobility. SMEs can stimulate market, the scope of antitrust prohibitions, interbank competition by comparing the criteria to be employed to grant banks and switching if they are not exemptions, and the criteria to assess satisfied with their current bank. Reducing mergers, could also be considered. switching costs could influence this Revising the conditions that trigger an behavior. GCC governments may obligation to notify mergers is another therefore consider introducing explicit option. Finally, GCC governments should regulatory provisions that prohibit develop and implement initiatives that banks from charging closing fees. increase stakeholders’ awareness of the GCC governments could also promote importance of competition among banks knowledge-sharing in this area to develop and its positive effect on SME access to common practices and tools that improve finance and economic growth. customers’ mobility. Deposit insurance schemes might also be introduced or Table A below summarizes the critical factors reformed to improve their coverage potentially limiting competition in the GCC and avoid discrimination among banks. SME lending markets for each country. Formal deposit insurance schemes may affect switching by influencing customers’ perception about banks’ risk of default, compensating for reputational effects enjoyed by larger and state-owned operators. x Table A1 - Main Factors Potentially Affecting Competition in SME Lending Markets (by Country) Bahrain Kuwait Oman Qatar KSA UAE State ownership The state has a The state directly The state has The state has The state has a The state holds significant stake in controls Kuwait important stakes important stakes share in all five majority shares two out of three Finance House. in five major local in all five largest major local banks. in two of the five major local banks. banks. local banks. Cross- largest local banks. shareholding linkages exist among banks, which may soften competition. State-sponsored Tamkeen, the main The National Participation Not relevant. Not relevant. Not relevant. initiatives state-sponsored Fund for SME to the credit supporting SME initiative Development guarantee access to finance addressing the currently scheme provided under-provision collaborates with by the Oman of credit to SME only a few banks. Development through a credit The experimental Bank is restricted guarantee scheme, phase may have to two banks only. is restricted to left distortions. Islamic finance only. Licensing criteria Not relevant. The licensing The licensing Explicit restrictions The licensing The maximum process is process is apply to foreign procedures do number of characterized by characterized by entry. Initial capital not include clear branches of areas of discretion areas of discretion requirements are deadlines for foreign banks and no clear and no clear set at a relatively approval and there is capped. No deadlines on deadlines on high level. is no possibility to deadlines are set approval times. approval times. appeal a rejection for approval and Initial capital Initial capital decision. the possibility to requirements are requirements are appeal a rejection set at a relatively set at a relatively decision is not high level. high level. allowed. Limitations to Limitations to Furthermore, foreign ownership foreign ownership important apply. apply. limitations to foreign ownership COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT apply. Price controls and Not relevant. Ceilings on loan Explicit ceilings on Ceilings on loan Not relevant. Not relevant. restrictions on interest rates and loan interest rates interest rates and bank activities tenure apply. are set. tenure apply to Restrictions apply consumer loans to banks with Conventional respect to sales banks are no of insurance longer allowed to EXECUTIVE SUMMARY products. operate Islamic finance through an Islamic window. Access to credit Not relevant. Lack of accurate The private Not relevant. SIMAH, the private Not relevant. information credit information credit bureau credit bureau, on SMEs is a major provides basic is controlled constraint. Ci- information on by a subset of Net, the private credit history by licensed banks. credit bureau, SMEs. However, This may raise cannot collect and no advanced vertical integration disseminate credit services – e.g. issues and distort information on cross-sectorial competition SMEs, while the information and between member facilities offered credit scoring – and non-member by the public are offered. banks. Credit credit registry reports may do not meet the allow for an quality standards excessive degree necessary for of transparency, banks to effectively lowering banks’ address the incentives to information compete. asymmetry in lending markets. Ci-Net member banks may be granted a preferential treatment. xi xii Barriers to Though kept at Early settlement Early settlement Early settlement Early settlement Early settlement customers’ relatively low fees and fees and fees and fees and fees and mobility levels, early termination fees termination fees termination fees termination fees termination fees settlement fees are not capped are not capped are not capped are not capped are not capped at and termination at zero. This, at zero. This, at zero. This, at zero. This, zero. Furthermore, fees are not combined with combined with combined with combined with no formal deposit capped at zero. demand-side demand-side demand-side demand-side insurance scheme issues (e.g. low issues (e.g. as low issues (such as low issues (such as low exists. financial literacy) financial literacy) financial literacy) financial literacy) may negatively may negatively may negatively may negatively affect customers’ affect customers’ affect customers’ affect customers’ propensity to shop propensity to propensity to propensity to shop around. shop around. shop around. around. A formal deposit Furthermore, no insurance scheme formal deposit exists, but is insurance scheme not currently exists. operational. Institutions and There is no Although the The Authority The Competition Although the The banking enforcement of comprehensive legal framework for Consumer Protection and Competition sector is explicitly competition policy competition for competition Protection may Anti-Monopoly Protection Council exempted from law and an law enforcement not be able Committee may is fully operational, the application of independent has been set up, to pursue its lack sufficient no cooperation competition law. competition the Competition objectives due legal authority to agreement exist authority. Protection to insufficient intervene in the between the Authority is not resources and banking sector. Council and fully operational experience. SAMA. yet. COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT CHAPTER 1 | INTRODUCTION 1 This is significantly below the global average CHAPTER 1 | INTRODUCTION of 30 SMEs per 1,000 people, accounting for 40 percent of employment. GCC SMEs dominate in the trading and construction T he countries of the Gulf Cooperation sectors, and have room to grow in Council (GCC) require growth and manufacturing, where they comprise only 5, vibrancy among small- and medium- 12, and 14 percent of total SMEs in the UAE, sized enterprises (SMEs) to diversify KSA and Bahrain, respectively (Hertog, 2010). their economies and generate employment.1 Limited access to finance is a key obstacle to The GCC’s current economic model, charac- the growth of SMEs in the GCC economies. terized by a reliance on oil as the main source Only an estimated 11 percent of GCC of export and fiscal revenues, imported, SMEs have access to credit, resulting in an low-wage labor in the private sector, and a estimated credit gap of US$ 250 billion.3 concentration of economic activity in the low About 40 percent of SMEs identify lack skilled non-tradable sector, has failed to pro- of financial access as a major or severe duce the kind of viable tradable sectors and constraint. Although bank lending is the main diversified economies that these countries source of financing for firms of all sizes, SME need going forward. A key challenge for GCC lending penetration is very low in the GCC countries is to generate private sector jobs to countries. SME loans in the UAE represent employ a young and rapidly growing popu- only 4 percent of all lending; in the KSA, lation. In this context, SMEs provide an ideal Kuwait and Oman, they account for 2 percent channel through which GCC countries can of all lending; in Bahrain, 1 percent; and in foster private sector-led, higher value-added Qatar, 0.5 percent (Seetharaman, 2015). This economic growth. compares with an average of 13 percent in An estimated 675,000 formal SMEs in the non-GCC MENA countries (IMF, 2014). region represent a potent source of job SMEs’ lack of access to finance in the GCC creation and economic diversification.2 reflects demand, supply, institutional, About 90 percent of SMEs are located in the regulatory, and other factors.4 Apart Kingdom of Saudi Arabia (KSA), 5 percent from obstacles arising from unfavorable in the United Arab Emirates (UAE), and the investment climates, SMEs face several rest are spread throughout the remaining nonfinancial barriers related to their own GCC countries. In KSA, SMEs comprise 95 capacities, including a lack of financial percent of registered companies, compared accounts and reliable credit histories. with 90 percent in Oman and Kuwait, and 75 Although banking systems are large, loan percent in Qatar. On average for the whole concentrations are high, reflecting the GCC, there are 16 SMEs per 1,000 people, focus of banks on large borrowers. Banks accounting for 25 percent of employment. perceive SMEs as having higher credit risk, 1. The GCC includes Bahrain, Kuwait, Oman, Qatar, the and therefore demand higher risk premiums Kingdom of Saudi Arabia, and the United Arab Emirates. 2. International Finance Corporation (IFC) Enterprise 3. Ibid. Finance Gap Database. 4. See Rocha et al., 2011; IMF, 2014. 2 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT or collateral requirements. Financing for the GCC economies: a background alternatives outside the banking sector paper prepared for this study provides are limited. Nonbank financial institutions, strong evidence that reducing both market such as microfinance institutions, leasing concentration and market power in the companies, and private equity or venture banking sector boosts economic growth of capital firms, remain underdeveloped. Policy financially dependent firms, and this impact interventions in recent years to improve is magnified for SMEs (Caggiano and Calice, SMEs’ financial access have partly mitigated 2016). access problems but have not addressed the Competition brings about improvements in root causes. bank efficiency. There are two views on the Weak competition in the GCC banking direction of causality between competition sector particularly constrains SMEs’ ability and efficiency. One view, attributed to Hicks to obtain bank credit.5 Theory makes (1935), argues that monopoly power allows ambiguous predictions regarding the banks to relax their efforts and increase their effect of competition on access to finance, cost base, predicting a positive link from especially for firms. On the one hand, competition to efficiency. The alternative competition can reduce the cost of finance view posits that better managed and more and increase the availability of credit, efficient firms can secure larger market ultimately contributing to stronger economic shares, leading to more market concentration growth (Besanko and Thakor, 1992; Pagano, and less competition. In this case, causality 1993; Guzman, 2000; Carbó-Valverde et al., would run from efficiency to competition 2009). On the other hand, in the presence of (Demsetz, 1973). Although studies examining information asymmetries and agency costs, the link between concentration and efficiency competition can reduce access by making find mixed results,6 the overwhelming it more difficult for banks to internalize the majority of more recent studies employing returns from investing in lending, especially direct measures of competition conclude that for opaque clients such as SMEs (Rajan, 1992; competition enhances bank efficiency.7 Petersen and Rajan, 1995). Although the Competition does not necessarily undermine relevant empirical literature does not clarify the stability of the banking sector. Many entirely this ambiguity, more recent evidence academics and especially policymakers based on direct measures of market power have stressed the importance of franchise as opposed to traditional market structure values for banks in maintaining incentives indicators suggests a significantly positive for prudent behavior (Keeley, 1990; Marcus, association between competition and access 1984; Matutes and Vives, 2000). Yet others to finance, including for SMEs (Beck et al., have highlighted opposite effects where 2004; Claessens and Laeven, 2005; Carbó- bank competition lowers interest rates Valverde et al., 2009; Love and Martinez- Peria, 2012). These findings are confirmed 6. See Berger (1995); Goldberg and Rai (1996); and Berger and Hannan (1998), among others. 5. For a general discussion of competition in the financial 7. See, for example, Turk-Ariss (2010); Lin et al. (2010); sector see, for example, World Bank, 2013, and Claessens, Schaeck and Cihák (2008); Delis and Tsionas (2009); and 2009. Demirgüç-Kunt et al. (2004). CHAPTER 1 | INTRODUCTION 3 in the economy, making borrowers safer of state-owned banks (see Al-Hassan et al., and reducing risks to the banking sector 2010). The GCC banking sectors continue to (Boyd and De Nicoló, 2005). More recently, be characterized by significant public and some authors have shown that these two quasi-public ownership, though the extent of contrasting effects can be reconciled in public ownership varies considerably, ranging models implying that an intermediate level of between 11 percent in Kuwait to 41 percent competition may be optimal (Martinez-Miera in UAE. Moreover, the state intervenes and Repullo, 2010). The extant empirical directly in SME credit markets through evidence obtains mixed results related to several state-sponsored initiatives. the relationship between competition and Improving bank competition may play a financial stability, although recent studies pivotal role in the GCC’s strategy to diversify show that the impact of competition on their economies and increase SMEs’ access stability is not linear, and crucially depends to finance. Greater bank competition on the financial infrastructure of a country, can improve the efficiency of financial the quality of its prudential regulation intermediation without undermining financial and supervision, and overall bank capital stability. GCC governments can shape adequacy.8 Importantly, policy bodies such bank competition through their actions as as the OECD Competition Committee have regulators and enablers of a market-friendly suggested that to promote banking stability and information environment, ensuring policymakers should design and apply better that implementation is supported by sound regulations and supervisory practices rather institutional arrangements. The purpose than limit bank competition (OECD, 2011). of this study is to provide insights into the The GCC banking sectors operate under degree of competition in GCC SME lending monopolistic competition. Both structural markets, uncover possible distortions to and direct measures of bank market power competition originating from the current indicate that the GCC banking systems are regulatory and institutional framework, among the least competitive in the world. and suggest further investigative work in a Moreover, comparisons over time indicate number of policy areas. that competition has not improved; in many cases, it has actually worsened. This is largely due to stricter entry requirements, SCOPE AND OBJECTIVES restrictions to bank activities, weak credit OF THE STUDY information systems, and lack of competition SMEs comprise a broad variety of businesses from foreign banks and nonbank financial in terms of activity, size and risk profile. They institutions (Al-Muharrami et al., 2006; range from small corner shops to locally- Anzoategui et al., 2010). This pattern is established branches of multinationals, exacerbated by a relatively large presence and from start-ups and to well-established 8. See, for example, Beck et al. (2004) ; Bretschger et al. ventures. OECD economies typically define (2012) ; Schaeck et al. (2009) ; Berger et al. (2009) ; Beck et al. (2006) ; Anginer et al. (2012) ; Jimenez et al. (2013); Uhde SMEs using a combination of three metrics: and Heimeshoff (2009); and Beck et al. (2013). 4 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT number of employees, annual turnover and There are several ways competition may balance sheet size. Conversely, most GCC be impeded in a market. Among others, countries lack a uniform official definition competition distortions may originate of SME. Some countries have introduced from (i) laws, regulations and institutions; definitions only recently, and detailed and (ii) implementation behavior; and (iii) the comparable historical information is not behavior of market participants. Clear rules available. For the purpose of analyzing are a prerequisite for healthy competition. competition in GCC SME lending markets, Laws and regulations can alter market this study follows as closely as possible the dynamics and prevent or restrict competition definition of SME adopted by banks in their among market players. Inadequate internal operations. Microenterprises with governance and institutional arrangements self-employed persons fall largely outside the (or their lack thereof) might hamper scope of this study. competition. Implementation behaviors, including the exercise of regulatory, SMEs demand access to three basic services supervisory and sanctioning powers, and the commonly provided by the banking system: enforcement of laws and regulations, might savings, borrowing and payments. These also negatively influence competition. A basic services are usually referred to as typical example is the unequal enforcement retail banking.9 Depending on their size and of rules in the presence of unaccountable type of business, SMEs may also require and non-transparent areas of discretion. products and services commonly belonging Another example is how crisis situations, such to the area of corporate banking, such as failing banks, are handled.11 In addition, as trade finance products (e.g. letters of firms that are not monitored act in ways credit, factoring).10 The focus of this study that increase their profits but harm society, at the product level is on both secured including collusion, predatory or exclusionary and unsecured financing in all possible behaviors, abuse of market power and forms provided by banks to SMEs. Given anticompetitive mergers. the generally unsophisticated nature of the GCC’s SME sector, as well as the dearth of This report uses the analytical framework alternative forms of bank financing such as described above to provide an initial leasing and factoring, this initial competition assessment of competition in the GCC SME assessment focuses implicitly on overdrafts, lending markets. Governments in the GCC, loans and bank credit lines. like in the rest of the world, play a major role in the banking sector as promoters, owners, regulators and supervisors. GCC 9. Individuals essentially rely on personal current accounts, governments recognize the importance which encompass several services such as allowing payments of banking regulation in achieving social to be received and made, providing credit, and holding deposits. SMEs, on the other hand, may use a slightly more complex set of services, such as business current accounts, term deposit accounts, overdrafts, loans, equity and asset 11. For example, allowing a failing bank to merge with a financing. larger one might be a quick and safe solution to a stability 10. Corporate banking encompasses a wider variety of problem, but it could create or strengthen a bank’s dominant products, from treasury and cash management services to position, thereby increasing the risk of the bank abusing its asset management and underwriting. position. CHAPTER 1 | INTRODUCTION 5 and economic goals, but could do more collected through desk-based research to promote competition in the banking and in-person stakeholder interviews sector to deliver economic benefits. This conducted from June through December initial assessment helps to gauge the 2015. The most relevant secondary sources scale and scope of potential impediments were reviewed, including existing sectorial to competition caused by relevant rules studies, periodic analyses and the academic and regulations and by the institutional literature. Whenever possible, researchers framework. Without compromising the GCC’s evaluated primary sources of information, social and economic policy objectives, this including banking laws, central banks’ assessment ranks regulatory and institutional circulars, notices, and guidelines. In-person options under the principle of maximizing interviews helped to complement the sector the benefits for competition, highlighting analysis, validate information collected, and alternative arrangements that can meet the identify critical competition issues. Interviews desired policy objectives with potentially also helped to uncover gaps in the awareness less detrimental effect on competition, of competition policy issues stemming and paving the way for a more detailed from existing regulations and institutional evaluation. arrangements. Interview participants included representatives of (i) central banks Specific topics explored in this study include and financial regulators; (ii) commercial (i) restrictions to competition resulting from banks; (iii) representatives of SMEs (i.e. banking sector rules and regulations; (ii) the associations, chambers of commerce); exercise of discretion by relevant institutions; (iv) other relevant institutions, including and (iii) the role of institutional arrangements credit bureaus and specialized institutions for the enforcement of competition law supporting SME access to finance; and (v) prohibitions and merger control.12 The report competition authorities. does not provide an in-depth assessment of potentially anticompetitive conduct by While this report aims to serve GCC market participants. It also does not include policymakers responsible for improving an in-depth assessment of the quality of the SMEs’ access to finance through regulation, institutional arrangements for supervision it considers the interactions of a broad and regulation of the banking sector.13 range of actors, including bank regulators However, it analyzes the main institutional and supervisors, competition authorities, features that could be conducive to and relevant ministries and agencies. The anticompetitive behavior. study is also relevant to a broader range of policymakers whose policies and actions This initial competition assessment builds influence financial access. Although the on existing studies and utilizes information report does not directly target banks and financial services providers, it is based on the 12. Only rules and regulations that specifically apply to the principle, strongly supported by the empirical banking sector (and competition laws) are reviewed. 13. Some jurisdictions, such as the United Kingdom, mandate evidence, that private financial services that regulators or supervisory authorities pursue competition policy objectives too. 6 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT provision is key to sustainable financial access can hinder the achievement of efficiency, for SMEs.14 quality, innovation, financial access and financial stability typically associated with greater competition. This competition ANALYTICAL FRAMEWORK15 assessment reveals the potential constraints to competition caused by some regulations Governments play a major role in the and by the competition law enforcement banking sector as promoters, owners, system. This assessment employs a two- regulators and supervisors. Economics pronged analytical method to evaluate provide good reasons for the government lending competition in the GCC: one that to assume an active role in the sector to evaluates rules and regulations, including address market imperfections such as costs implementation behaviors; and another that and uncertainties associated with (i) acquiring assesses the competition law infrastructure, and processing information, (ii) writing and with special focus on the institutional enforcing contracts, and (iii) conducting arrangements to enforce competition policy. transactions. These market imperfections While rules and regulations analyzed in this may create situations in which the actions report pertain directly to the SME lending of a few people or institutions adversely markets, the institutional framework has influence many other people in society. wider ramifications and concerns the way Government intervention in the sector competition policy is enforced in general. through prudential regulation and direct involvement, such as by supporting state- Rules and regulations have the potential to owned financial institutions and programs, is negatively impact competition in four ways. needed to maintain financial stability, protect They may: consumers and investors and, increasingly, to (a) limit the possibility of entry or expansion promote financial access. in a market; Governments face the difficult task of (b) create discriminatory conditions choosing the best form of intervention to amongst market players; achieve intended policy objectives. In recent (c) limit business strategy options, either years, many countries have initiated reforms by prohibiting certain competitive to improve the quality of regulations and actions or by reducing the incentives to enforcement institutions to minimize the compete; and extent to which national economies are subject to command-and-control forms of (d) limit consumer’s ability to choose. regulation. Impediments to competition, These concepts are discussed in detail below. which can arise from poorly designed or excessively stringent regulations as well as from weak enforcement mechanisms, 14. See, for example, World Bank Group (2014b). 15. This study adopts the methodological framework from the OECD (2007; 2010). CHAPTER 1 | INTRODUCTION 7 Blocking or limiting entry of entry. For instance, a regulation that imposes a certain minimal initial capital may Blocking or limiting entry is probably the deter potential suppliers from entering the most detrimental competitive distortion. market. Similarly, licensing provisions that When shielded from potential competition, impose significant entry sunk costs limit the banks’ market power increases. Banks may possibility of entry (Djankov et al., 2002), such then have the ability and the incentive to as when a prospective new bank has to fully protect their rents (Harbord and Hoehn, deploy its ITC infrastructure before obtaining 1994). Regulation can significantly alter a license to operate. entry conditions in a market. Restrictive Rules and regulations may affect entry to government policies create direct barriers the extent they create unclear or conflicting to entry when they set a maximum number rules or entail an unpredictable and arbitrary of firms that are allowed to enter a certain enforcement of laws. These circumstances market or, in the case of the banking market, increase the cost of entry, and may they do not clearly specify the criteria for particularly influence the decision to enter a issuing a license. In some cases, governments foreign market as they increase transaction grant exclusive rights to a single firm, thus costs (Djankov et al., 2003). Limitations to creating a legal monopoly (Demsetz, 1982). entry of foreign firms may also result from Granting exclusive rights and fixing the restrictive trade policies (Levine, 2006). number of licenses completely prevents High exit costs can also deter entry. effective entry. Even if the entrant can Economic agents incorporate the cost of circumvent the entry limitation by offering exiting a market or downscaling operations products similar (and substitute) to the one in their ex-ante entry decisions (Siegfried subject to licensing, this would not alleviate and Evans, 1994). Exit is not easy in banking. concerns with the license regulation since Shareholders may exit by selling shares, the entrant would be forced to offer less but a bank must continue operations until attractive products and could not compete its obligations to the depositors can be directly with the licensed firms (Lott, 1987). unwound. Effective resolution regimes The only form of entry that these regulations for distressed financial institutions may, allow is entry by acquisition, whereby the new therefore, have important competitive firm enters the market by acquiring one of implications. the licensed firms.16 Even if the number of licenses is not capped Creating discriminatory market by the existing regulation, the conditions conditions that firms must fulfill to obtain a license may impede, delay or reduce the scope Rules and regulations may create discriminatory conditions among market 16. Some regulations may prevent this type of entry if players by providing a competitive they exclude secondary markets in which licenses can be traded. This would not constitute entry from a competition advantage to a subset of firms. This can be perspective since the number and relative size and market share of competitors would not change. the outcome of (i) subsidies and incentive 8 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT policies that are not correctly designed; (ii) of more efficient firms if the existing rules uneven enforcement of regulatory provisions; shield some firms from competition. This and (iii) regulation designed to be applicable further decreases productivity (between- to firms according to subjective criteria rather firms effect); than the type of service materially provided, incentivize ■  firms in dominant positions causing firms competing in a partially to adopt anticompetitive foreclosing overlapping product and service space to be strategies that further depress the existing subject to a different set of rules. level of competition in the market. These The presence of state-owned enterprises foreclosing strategies may generate short- (SOEs) in the market might disadvantage and long-term effects, such as leading to private competitors. The concept of SOE supra-competitive prices (e.g. service fees covers a wide range of entities sharing the and interest rates) in the short and medium feature of government control, which can be terms, and also reducing the incentives exerted through various tools such as share of smaller firms to invest in innovative ownership, direct assignment of works or products (e.g. on-line banking, new credit simply activities carried out by a government schemes) or production processes (e.g. agency. SOEs normally enjoy privileges faster creditworthiness screening, tailored and immunities that not available to their business support) over the long term. competitors. These privileges and immunities give them a competitive advantage that may Limit business strategy options alter the competitive process. State-owned and incentives to compete banks, for example, may be perceived as a safer, more stable option, and have access Regulations may limit businesses’ strategy to cheaper deposits (Sappington and Sidak, options by (i) constraining players’ pricing 2003). decisions (e.g. ceilings or floors on interest The lack of competitive neutrality potentially rates); (ii) setting standards that impede the alters banks’ behaviors. In particular, the lack supply of products or services that would of competitive neutrality may: find an adequate demand, given customers’ preferences and budget constraints; (iii) alter ■  the incentives of firms enjoying a limiting banks’ freedom to advertise products competitive advantage as they do not or choose distribution channels (e.g. internet) need to strive to win over competitors. that best suit their competitive strategy; (iv) This in turn may induce these firms to restricting other business tactics that banks adopt less efficient technologies or might employ to attract customers, for organizations. Managerial slack reduces example longer tenure and grace periods the level of productive efficiency and when extending loans to SME. causes significant waste of scarce resources (within-firm effects); Some regulations do not directly limit the set of strategies that firms can adopt, but reduce impede ■  the redistribution of demand from their incentives to undertake competitive the incumbent, inefficient firms in favor actions. In some sectors, governments, CHAPTER 1 | INTRODUCTION 9 rather than adopting a classical command- or from some given suppliers, for example and-control model of regulation, ask market when salaries of public employees must participants to engage in some form of be wired through a specific bank. These self-regulation. While this is a more flexible constraints may disadvantage buyers that regulatory tool, it entails some concrete purchase different goods or services outside competitive risks. The need to exchange a certain area or from different suppliers (e.g. views and information on issues pertaining through state-subsidized incentive schemes to self-regulation provides firms with the or special partnerships). This restriction gives opportunity to engage in collusive behavior, suppliers market power over a specific set coordinating prices or other strategic and of buyers, thereby increasing their ability to operative choices. Fostering collusion and raise prices. In these circumstances, firms are coordination may also result from rules that less responsive to the competitive pressure force firms to exchange information on sales that would force them to improve the quality and prices or that require or encourage firms of their offer or increase the variety of goods forming cooperatives or consortia for joint and services provided (Fishman and Rob, marketing of products. 2003). The exemption of some activities from Regulations can influence buyers’ ability to competition law may significantly reduce switch suppliers by intervening on switching or even eliminate competition across firms. costs. The costs associated with switching In these cases, regulation does not limit banks can be too high, in both monetary businesses’ strategy options but increases and non-monetary terms. This may occur them, explicitly allowing firms to engage in by forcing buyers to enter into long-term anti-competitive practices that are prohibited contracts or requiring them to undergo a by competition laws in other sectors or to complex set of regulatory requirements when other players (Becker, 2007). they intend to change suppliers (Kim et al., 2003). In the banking sector, for example, Limit consumers’ ability to choose early settlement fees on loans and closing charges for current accounts are a typical Regulations may affect consumer decisions example of switching costs capable of in a way that limits their ability to choose dampening competition. Similarly, inherent among competing suppliers. Consumers complexity of both the banking products play a fundamental role in making markets themselves and the associated fees may work well: when consumers are in a position discourage customers from shopping around to make informed, well-reasoned choices, for alternatives. firms strive to offer products and services that *** best meets their needs at the lowest possible price. Underserved demand segments may To develop an understanding of the potential attract new entrants. constraints to competition in the GCC SME lending markets of different types of rules Rules and regulations may confine customers and regulations on competition, this study to purchasing some services in a given area 10 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT discusses a set of rules and regulations anti-competitive conduct may allow grouped under the following categories (see incumbents to (i) erect strategic barriers to Chapter 3):17 entry or expansion; (ii) limit firms’ ability to choose the most effective business strategies State-sponsored initiatives supporting (a)  or curtail their incentive to compete; (iii) SME access to finance: rules concerning disadvantage some market agents; and (iv) the participation of market players in create artificial switching costs that restrict state-sponsored programs; features of the buyers’ capacity to select the most government schemes. convenient offer in the market. The same Licensing criteria: features of the licensing (b)  detrimental effects may stem from the process and extent of discretionary power absence of an appropriate merger control of the regulator; explicit limitations on regulation. new licenses and branching; limitations to Banking has traditionally been considered a ownership; initial capital requirements. special sector requiring a different treatment Price controls and restrictions on bank (c)  under competition law. Historically, scholars activities: interest rate controls; line-of- and policymakers believed that prudential business restrictions. regulation and competition law could (d)  Credit sharing information environment: product divergent and conflicting effects.18 quality of credit information; accessibility Thus, the aims of prudential regulation at non-discriminatory conditions; factors had to be considered prevalent and inform that may facilitate anticompetitive competition law enforcement of bank behaviors by banks. activities. This implied exceptions to the general competition rules and specific Customers’ mobility and propensity (e)  institutional arrangement for enforcement. to shop around: early settlement fees; explicit deposit insurance schemes. There is now a general consensus that a well-functioning competition legal system is *** essential to the protection and promotion An effective competition law system of healthy competition in the banking underpins a pro-competition regulatory sector and does not preclude prudential framework. Implementation of competition regulation. While the specificities of banking policies depends on institutional have to be taken into consideration in the arrangements. An inappropriate competition implementation of competition policy, this legal system may exacerbate competitive does not justify a general exemption from distortions introduced by rules and competition law prohibitions or a significant regulations. For example, the absence or shake-up of the institutional arrangement inadequate enforcement of rules prohibiting presiding competition policy (ICN, 2005; OECD, 2006). 17. The choice of rules and regulations analyzed in this report reflects the findings of the relevant empirical literature that has investigated the main sources of low bank competition 18. See Carletti and Hartmann (2003), Carletti and Vives in the GCC. See Al-Muharrami et al., 2006; Anzoategui et al., (2007) and Carletti (2008) for a review of the literature and 2010; and Al-Hassan et al., 2010. the policy debate. CHAPTER 1 | INTRODUCTION 11 Competition law comprises a set of The ■  market structure resulting from the rules concerning the prohibition of anti- merger, together with other relevant competitive behavior. Conduct that distorts market conditions, leads to a collusive or eliminates competition is grouped into equilibrium (coordinated effects). two broad categories: (i) anti-competitive The ■  two merging firms gain or strengthen agreements and (ii) abuses related to market a dominant market position or, even if dominance. Anti-competitive agreements they do not become dominant, are very include naked cartels that aim at fixing close competitors, and their merger would prices, allocating markets or customers or remove an essential competitive constraint restricting output. Collusion may also be and allow the new entity to exert market achieved through facilitating practices, such power unilaterally (unilateral or non- as the sharing of competitively sensitive coordinated effects). information. Other anti-competitive The ■  merger enables the new entity to agreements include vertical arrangements, such as exclusive contracts of resale price acquire control of an essential input that maintenance that restrain the ability of might be used strategically to foreclose or one of the parties to compete freely in the marginalize rivals (foreclosure effects). market. Abusive behavior refers to actions undertaken by a dominant firm or group of STRUCTURE OF THE REPORT firms to exclude rivals. In some jurisdictions, excessive pricing by a dominant firm is This assessment of the competition in the considered exploitative abuse. GCC’s SME lending markets proceeds as Competition law also includes the ex-ante follows: control of mergers and acquisitions. The Chapter ■  2 presents the SME banking structure of the market may be altered when markets in the GCC by discussing the one firm acquires control over another, or number and ownership patterns of banks, when two previously independent firms and evaluating measures of concentration form a jointly-controlled new entity. In many and market power. jurisdictions, one or both of the parties Chapter ■  3 presents the results of an initial involved in such operations is obliged screening of selected areas of regulatory to notify a competition authority before intervention that affect SME lending undertaking it, when some conditions hold. markets. The analysis concentrates on key The competition authority then has the areas where restrictions to competition power to block or authorize the merger, can be identified. The chapter is organized subject to some conditions and depending in five sections, each focusing on a on whether the notified operation is likely to specific set of rules and regulations. Each substantially lessen competition. This kind of section begins with an explanation of negative impact on competition can result the analytical framework, and proceeds from three different circumstances: with an evaluation of the current status of 12 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT regulation. Each section concludes with a of the institution entrusted with the power summary of potential policy options. to enforce competition law and its relation with the central bank; the adequacy of Chapter ■  4 evaluates the effectiveness of competition authority’s investigative and competition laws in the GCC countries. sanction powers and the existence of a Emphasis is given to the scope of leniency program; and the existence of a competition law prohibitions as they merger control regulation. apply to the banking sector; the proper application of criteria to potentially anti- Chapter ■  5 concludes by highlighting areas competitive conduct; the identification where further analytical work may be of well-defined efficiency criteria to grant warranted. exemptions; the degree of independence CHAPTER 2 | SME BANKING IN THE GCC COUNTRIES 13 their operations are very limited. Since CHAPTER 2 | SME BANKING March 2014, the Central Bank of Kuwait IN THE GCC COUNTRIES (CBK) has permitted foreign banks to operate multiple branches (previously limited to a single outlet), but the effects NUMBER OF BANKS of foreign banks’ expansion have not yet materialized. Oman: ■  At the end of 2014, there were 16 O utside of Bahrain and UAE, all GCC commercial banks, including seven locally countries are characterized by a incorporated institutions and 9 branches of relatively low number of active banks. foreign banks. Two of the licensed banks are specialized credit institutions (Oman Housing Bank and Oman Development ■ Bahrain: As of July 2015, Bahrain hosted 28 Bank).21 In 2012, banks already active licensed retail banks, including 13 locally were allowed to offer Islamic banking incorporated banks and 15 branches of services. Two banks have started full- foreign banks.19 Both conventional and fledged operations based on Islamic Islamic banks operate in the country. The banking principles, while six banks have total size of the retail banking sector is established windows for practicing Islamic expanding. However, no new retail banks banking. The latest entrant in the market, have entered the market for several years Bank Sohar, was licensed in 2006. In and no inquires by prospective entrants 2013, two active banks (HSBC and Oman have been registered recently. The Central International Bank) merged, and other Bank of Bahrain (CBB) seems to be in favor consolidation processes are expected in of possible consolidation in the sector. The the near future. The two banks with the three largest banks (Ahli United Bank of largest branch networks, Bank Muscat and Bahrain, Bank of Bahrain and Kuwait and HSBC Bank, are domestically owned. Ithmaar Bank) are domestic.20 Qatar: ■  There are currently 11 domestic Kuwait: ■  There are 10 domestic commercial banks and seven branches of foreign banks (five conventional and five Islamic commercial banks.22 The 11 domestic banks), one specialized bank (Industrial banks consist of 10 commercial banks, Bank of Kuwait) and 12 foreign bank comprising six conventional banks and four branches (including one foreign Islamic Islamic banks. There is one bank (Qatar bank branch). Both the number of Development Bank) focusing on SMEs. branches of foreign banks in Kuwait and 21. Oman Housing Bank provides soft financing mainly to low and middle-income nationals to build or purchase 19. CBB Register, available at http://www.cbb.gov.bh/assets/ residential property, whereas Oman Development Bank CBB percent20Register/CBL-July2015.pdf, retrieved on 15 caters to private sector investors focusing on small projects. December 2015. 22. See directory, available at http://www.qcb.gov.qa/ 20. Ahli United Bank of Bahrain and Bank of Bahrain and English/SupervisionApproach/LicensingAndRegistration/ Kuwait are conventional banks; Ithmaar Bank is an Islamic Documents/Banks_Directory_Dec2014_En.pdf, retrieved on bank. 15 December 2015. 14 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT In 2011, the Qatar Central Bank (QCB) Bahrain: ■  The government has a significant stipulated that conventional banks would stake in two of the three major banks. have to cease offering Islamic banking The Social Insurance Organization26 and services by the end of year. No new bank the Pension Fund Commission of Bahrain licenses have been granted in recent have a 13.3 percent and 18.8 percent stake years.23 QCB does not actively encourage in the second largest bank of Bahrain new entrants, but exceptions are possible (Bank of Bahrain and Kuwait), respectively on a reciprocity base and few inquiries by while the Kuwait Investment Authority prospective entrants have been registered. owns 18.7 percent. Ithmaar Bank – the The three largest banks active in Qatar third largest bank – has 25.4 percent in (Qatar National Bank, Commercial Bank Bank of Bahrain and Kuwait. The Bahraini of Qatar and Qatar Islamic Bank) are Ministry of Finance has a minority stake domestically owned. in Ithmaar Bank (1.38 percent), whose majority shareholder (45.7 percent) is the KSA: ■  only 12 locally incorporated Dar Al Maal Al-Islami Trust, an Islamic commercial banks operate in the KSA, holding company founded by Saudi Prince whose population stands at about 29 Al Faisal. Ahli United Bank is owned by million. Since 2005, the Saudi Arabia the government of Kuwait (22.7 percent of Monetary Agency (SAMA) has gradually shares) and by the Bahrain Pension Fund granted 12 licenses to foreign banks to (9.7 percent). establish a branch in the country. However, foreign branches remain niche players. Kuwait: ■  Compared to other GCC countries, state ownership in the banking sector UAE: ■  In 2015, a total of 46 commercial appears to be less pervasive. There is one banks operated in the country, of which bank – Kuwait Finance House – which is 22 are locally incorporated, and the rest controlled by the government through a are foreign branches.24 Foreign banks are combination of direct (10.5 percent of total generally permitted to operate a maximum shares) and indirect shares (other public of eight branches, but exemptions are institutions and authorities hold a 38.4 possible subject to special permission. percent stake). Oman: ■  The government holds significant OWNERSHIP STRUCTURE shares in five major banks. The government directly owns 23.6 percent Banks’ ownership structure in the GCC shares of Bank Muscat, the largest bank of countries is characterized by the direct and Oman. Another 14.8 percent is controlled indirect control of the state.25 by various pension funds and the Authority 23. Barwa Bank was established in Qatar in 2009. See for Social Insurance. A 24.8 percent stake http://www.qcb.gov.qa/English/SupervisionApproach/ LicensingAndRegistration/Documents/Registered_Banks_ Dec2014_En.pdf 24. See http://www.centralbank.ae/en/index. 26. The Social Insurance Organization is the official php?option=com_content&view=article&id=149&Itemid=97, authority responsible for providing social insurance services last accessed on December 2015. to all individuals covered by Pension Civil Law and Social 25. All data refers to December 2015. Insurance Law in the Kingdom of Bahrain. CHAPTER 2 | SME BANKING IN THE GCC COUNTRIES 15 in the National Bank of Oman is also namely National Bank of Abu Dhabi indirectly attributable to the government. (41.2 percent of shares) and Abu Dhabi Qatar Commercial Bank controls 34.9 Commercial Bank (38.4 percent of shares). percent of National Bank of Oman’s Emirates National Bank is owned by the shares. A 26.8 percent of total shares of Investment Corporation of Abu Dhabi Bank Dhofar are indirectly controlled by (38.6 percent of shares), while the Dubai the government (through pension funds Islamic Bank is owned by the Investment and Public Authority for Social Insurance). Corporation of Dubai (a sovereign The government also owns a 12.3 percent wealth fund owned by the government share in Bank Sohar. of Dubai). First Gulf Bank shares, instead, are dispersed among several private Qatar: ■  The government holds large stakes companies. in all five largest local banks in the country. The Qatar Holding LLC (a public global State-owned banks might benefit from investment house established in 2006 by preferential treatment. Compared to the Qatar Investment Authority) holds the privately-owned banks, state-owned banks largest share in Qatar Commercial Bank in general benefit from a lower cost of (16.7 percent) and in Doha Bank (16.7 funding (a cost advantage) as a result of their percent). The Qatar Investment Authority special relationship with other state-owned holds 50 percent of Qatar National companies, and a lower perceived level of Bank and 17.4 percent (largest share) of risk among investors and depositors. Hence, Qatar Islamic Bank. Finally, Masraf Bank the presence of state-controlled entities in is controlled by the Qatar Holding LLC the market can distort the playing field. A (11.9 percent), Government of Qatar (9.3 full assessment of the impact of state-owned percent), Qatar Foundation (3.6 percent) banks on competition may be warranted to and Qatar National Bank (3.3 percent). ensure that a competitive neutrality principle According to stakeholder interviews, major between state-owned banks and private Qatari banks have cross-shareholding operators is in place and operational. If not, linkages. possible solutions to mitigate the potential anticompetitive effects of public ownership KSA: ■  The government has shares in all five range from privatization to a set of measures largest banks. Of particular mention are aimed at, including: the National Commercial Bank, owned through the Public Investment Fund (44.3 reforming ■  the corporate governance percent of shares) and the Public Pension and oversight framework of state-owned Agency (10 percent); and Bank Riyad, of banks to strengthen transparency and which the Public Investment Fund owns accountability, and ultimately level the 21.8 percent while another 9.2 percent is playing field;27 owned by the Public Pension Agency. designing ■  and implementing government- UAE: ■  The government holds majority sponsored initiatives (see Chapter 3.A) shares in two of the five largest banks, 27. See, for example, World Bank Group (2014a). 16 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT capable of alleviating the problem of move the market equilibrium closer to higher cost of capital for non-SOEs; the monopoly solution, even when cross- ownership does not involve controlling introducing ■  a formal deposit insurance positions (Spiegel and Gilo, 2003; Gilo, scheme (discussed in chapter 3.E) insofar 2000; O’Brien and Salop, 2000; Maxwell et as it may contribute to increase customers’ al., 1999).28 A detailed assessment of the confidence in non-SOEs; and potential competitive distortions introduced amending ■  all explicit provisions and by this practice, which is present in particular influencing business practices that, in Qatar, may be warranted. combined with the presence of SOEs, could further distort the market. For example, in some GCC countries public MARKET CONCENTRATION employees are mandated to receive their salaries through a specific bank, usually a Banking sectors in all GCC countries are state-owned bank. characterized by high levels of market concentration. Figure 1 below shows the Cross-ownership linkages among banks may evolution of 3-bank (C3) and 5-bank (C5) also weaken incentives to compete. The concentration ratios for each GCC country effects of cross-ownership on competition over the period 2003 to 2013, benchmarking have been widely investigated in the it against OECD and non-GCC MENA.29 economic literature: cross-ownership can FIGURE 1: Banking Sectors in the GCC: CR3 and CR5, 2003-2013 110% C3 C5 100% 90% 80% 70% 60% 50% 40% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates OECD MENA (GCC excluded) Source: Global Financial Development Database, World Bank 28. Empirical research confirms these theoretical findings: for example, Trivieri (2007) analyzes the Italian banking market in the period 1996–2000 and finds that banks involved in cross-ownership compete less aggressively than other national credit institutions. 29. Ck is computed as the sum of the market share of the k largest firms. Hence, C3 is the sum of the market share of the three largest banks, whereas C5 is the sum of the five largest ones. CHAPTER 2 | SME BANKING IN THE GCC COUNTRIES 17 Ratios are computed considering market in 2013, C5 continues to be very high and shares in terms of total assets in the banking above both the OECD and the MENA sector, hence they are not specific to SME average. banking operations. Specific information Qatar ■  has the highest concentration ratios, for SME banking is not publicly available. with C3 and C5 around 90 percent and 100 However, in-person interviews indicated that percent, respectively, in 2013. a significant portion of financing to SMEs come mostly from large local banks. Thus, ■ KSA shows stable C3 and C5 indexes. concentration in SME lending markets is C3 is lower than the OECD average (76.0 likely to be higher than what is observed percent vs. 70.8 percent in 2013), whereas for the banking sector as a whole. Country- C5 is slightly above it. specific details follow below. UAE ■  has seen an increase in both C3 and Bahrain: ■  Both C3 and C5 are well above C5 starting in 2009. C5 is now 83.6 percent, the OECD average. In recent years, C3 has standing above the OECD average come closer to the MENA average yet C5 (70.8 percent) and close to MENA’s (86.9 has remained considerably higher. percent). Kuwait: ■  The country shows very high and stable C3 and C5 indexes, which are above MARKET POWER the OECD average. C3 was close to MENA level, while C5 has progressively increased Banking sectors in the GCC economies since 2008. operate under monopolistic competition. ■ Oman: Notwithstanding a reduction of C3 Non-structural and direct measures of market from 83.3 percent in 2006 to 69.8 percent power, such as the H-Statistic and the Lerner FIGURE 2: Banking Sectors in the GCC: H-statistic, 2010 - 2013 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2010 2011 2012 2013 Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates OECD MENA (GCC excluded) Source: Global Financial Development Database, World Bank 18 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT index (see below) computed on bank-level Lerner indexes in the GCC countries are data, indicate that GCC banking systems significantly and persistently higher than the have relatively low levels of contestability. OECD and MENA benchmarks and show a Comparisons over time indicate that more prominent increasing trend.31 Figure 3 competition has not improved and in many below presents the evolution of the Lerner cases has actually worsened. index over the period 2003-2013 for the six GCC countries, and benchmarks it against H-statistics calculated for the GCC countries the average value measured in the OECD are significantly lower than the OECD and and in the MENA countries (GCC region MENA benchmarks.30 Figure 2 compares excluded). As the figure indicates, for all GCC the H-Statistic for the banking sector in countries the Learner Index is well above the each of the six GCC countries to the OECD competitive level (zero), and has increased in average and the average for MENA countries recent years. Moreover, banking sectors in all (GCC region excluded) during the period GCC countries appear to illustrate a trend of 2010 to 2013. None of the GCC countries increasing market power that is stronger than shows an H-Statistic close to 1, which would the similar trend observed in the OECD and signal perfect competition. Both OECD and the MENA region. Qatar, the only country MENA averages – used as a benchmark showing a trend inversion in 2011, still ranks – are significantly closer to 1. No sign of high in terms of banks’ market power as improvement of this metric can be identified measured by the Lerner index. for GCC countries. 31. The Lerner Index (Lerner, 1934) is a popular measure of market power in empirical research. The level of market power of a firm is measured by the difference between the firm’s price and its marginal cost normalized by prices. The 30. The Panzar-Rosse indicator (Panzar and Rosse, 1977, index ranges from a low of 0 to a high of 1. Under perfect 1982, 1987), often called H-Statistic, is one of the most competition (no market power), firms price at marginal costs widely applied indicator of competition in the banking sector. and the index is equal to zero. Higher values imply greater It measures the elasticity of banks revenues relative to input market power. The Lerner Index has been in use since prices. Under perfect competition, an increase in input prices mid-1930s. However because of the difficulty in assessing raises both marginal costs and total revenues by the same marginal costs, its application to banking sector is relatively amount, hence the H-statistic equals 1. Under monopoly, an recent (Florian, 2014). Furthermore, it is important to note increase in input prices results in a rise in marginal costs, a fall that the use of the Lerner Index in banking poses some in output, and a decline in revenues, leading to an H-statistic problems. For example, typically it is calculated with no less than or equal to 0. When the H-statistic is between 0 consideration for risk. Both the Lerner Index and market and 1, the system operates under monopolistic competition. concentration are endogenous and determined by more However, it is also possible for the H-stat to be greater than 1 fundamental variables, such as entry conditions and the in some oligopolistic markets. degree of product differentiation. CHAPTER 2 | SME BANKING IN THE GCC COUNTRIES 19 FIGURE 3: Banking Sectors in the GCC: Lerner index, 2003 - 2013 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 03 04 05 06 07 08 09 10 11 12 13 20 20 20 20 20 20 20 20 20 20 20 Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates OECD MENA (GCC excluded) Source: Global Financial Development Database, World Bank 20 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 21 them focus on startups and early stage CHAPTER 3 | ASSESSMENT finance, a segment of the market that banks OF RULES AND REGULATIONS do not typically serve due to its inherent riskiness. Many initiatives, however, are open to established businesses. Direct loans at STATE-SPONSORED INITIATIVES subsidized rates, either through specialized institutions or through commercial banks, State-led initiatives to bridge the financial and credit guarantee schemes are among access gap of SMEs may have important the most adopted measures to address the implications for competition in the banking under-provision of credit to SMEs. sector. To foster competition, state The main provisions regulating the most interventions should be designed in a way to important support schemes for SMEs minimize distortions to a level playing field are assessed below on the basis of the and to avoid displacing private operators. analytical framework presented in Chapter In principle, it is advisable to design these 1. To identify possible negative effects on initiatives to facilitate the establishment of competition, this section focuses on business relationships between SMEs and rules ■  concerning banks’ participation in commercial banks. the initiative, insofar as they may create Optimal state-sponsored initiatives discriminatory conditions amongst market encourage banks to compete against each players; and other, and prospective borrowers to shop specific ■  features of each scheme, which around for their preferred credit provider. may unduly restrict banks’ business Competitive mechanisms perform best strategy options, soften their incentives to when the credit risk of a project applying to compete, or restrict SMEs’ ability to shop a support scheme is assessed by the bank around. that will grant the credit. If this is the case, different banks may be able to offer different conditions according to their risk appetite. The current status of state-sponsored Similarly – from a competition policy initiatives perspective – caps on interest rates are to be preferred to fixed interest rates to ensure Table 1 summarizes the main state-sponsored that banks can go below suggested interest initiatives aimed at improving financial access rates if willing to do so. Furthermore, it would for SMEs in each GCC country. be advisable for competition authorities to In Bahrain, the most important state- closely monitor the market so that state- sponsored initiative addressing the under- sponsored initiatives do not contribute provision of credit to SMEs is Tamkeen. to the creation of focal point for banks to Tamkeen was set up in 2006 and supports coordinate their behaviors. SMEs in accessing credit by means of a Many state-sponsored initiatives have been program confined to Islamic banks only. The launched across GCC countries. Some of program offers SMEs a 50 percent subsidy on 22 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT Table 1: Main State-Sponsored Initiatives in the GCC Bahrain Kuwait Oman Qatar KSA UAE Name Tamkeen32 National Oman Qatar KAFALAH36 Khalifa Fund;37 Fund for SME Development Development Dubai SME38 Development Bank;34 Riyada Bank35 33 Type Islamic Conventional Conventional Conventional Islamic Conventional Direct Yes, between Yes, up to Yes, up to 1 n/aæ… n/a Yes financing BHD 5,000- 80 percent million OMR 250,000 of projects per loan value (max KD (ODB) 500,000 per company) Credit Up to 50 n/a Yes, up to 50 Yes, up to 80 Yes, up to 80 Yes guarantee percent of the percent of the percent of percent of the scheme principal principal the principal principal (case by case assessment and portfolio program) Participation Open, but Currently a Selected Open, all Open, all Selected banks requirements mostly few banks banks active banks active banks partners BDB (currently 2 banks, will increase to 5) Source: Elaboration based on publicly available data and stakeholder interviews the profit rate charged by the bank providing (about US$ 6.5 billion) to be used both to the loan, and guarantees the bank 50 percent extend direct credit to selected SMEs and of the principal. Bahrain Development Bank for training initiatives. After an experimental (BDB) is the most important partner of phase where NFSD collaborated with Tamkeen. one bank only, it now partners with a few domestic commercial banks. The project In Kuwait, the government is actively trying is restricted to existing SMEs that are 100 to improve SMEs’ access to finance through percent Kuwaiti-owned, which can approach the recently established National Fund for either NFSD or the partner banks to take part SME Development (NFSD). To this purpose, in the scheme. NFSD can support projects NFSD has been endowed with KD 2 billion up to a pre-defined size and directly finance up to 80 percent of the project value at a flat 32. See http://www.tamkeen.bh/en/ two percent interest rate, while the remaining 33. See http://nationalfund.gov.kw/en/ part is financed by the partner bank at a 34. See http://www.odb.com.om/ 35. See http://www.qdb.qa/English/Pages/default.aspx “market” rate. According to information 36. See http://www.sidf.gov.sa/en/Achievements/Pages/ SmallandMediumEnterprises.aspx collected, NSFD operates by directly 37. See http://www.kfgateway.com/en transferring funds to the bank account of 38. See http://www.sme.ae/English/pages/default.aspx CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 23 the SME borrower, thus de facto granting in the scheme cannot charge an interest rate relatively cheap liquidity to the commercial higher than seven percent. Eligibility criteria bank, which finances the remaining 20 and the main features of the scheme are percent of the project, while retaining credit clearly detailed. QDB does not deal directly risk on its books. with prospective borrowers, but encourages SMEs to shop around for their preferred Oman has established several concurrent bank. Participation in the scheme is open to initiatives to improve access to finance for all banks, and the process to enter into the SMEs, and there is an ongoing effort to framework agreement with the QDB seems harmonize them. Among state-led support transparent and objective. The approval of initiatives, the Oman Development Bank projects submitted by partner banks under (ODB) plays an important role. ODB is a the portfolio scheme is automatic up to a licensed government institution with the pre-agreed total exposure ceiling, provided specific mandate to support SMEs. According that eligibility criteria are met. to stakeholder interviews, ODB’s operations are heavily regulated. In particular, ODB can In KSA, the Kafalah Guarantee Program is directly extend subsidized loans and offer the main vehicle aimed to improve SMEs’ working capital facilities within pre-specified access to finance. This is a public-private limits. At the same time, ODB can partner partnership SME credit guarantee scheme with other commercial banks and offer credit spearheaded by the Saudi Industrial guarantees on their SME credit facilities. Development Fund (SIDF), a specialized Currently, ODB is offering its guarantee state-owned bank backed by the Ministry of scheme through two partner banks only. Commerce, to promote economic growth According to information collected, there and SMEs’ access to finance within KSA in is another SME credit guarantee program partnership with commercial banks. Under operating in Oman, managed by the Public the Kafalah Guarantee Program, commercial Authority for Small and Medium Enterprises banks are guaranteed 80 percent of the Development (Riyada). The latter program loan principal for tenures up to seven years. seems to enjoy a wider acceptance due Unlike the homologous initiatives in other to more favorable financial terms and the GCC countries, there is no set cap on the existence of a longer moratorium period profit rate. Stakeholder interviews indicate than the original ODB scheme. Riyada also that participation is open to all banks that manages a direct lending scheme. meet certain requirements and agree to an injection of capital into the program. Banks In Qatar, the Qatar Development Bank (QDB) are willing to participate to benefit from a is the most important initiative undertaken by reputational element while actual usage the government to reduce the SME financial of the program varies among institutions. access gap. QDB’s main tool is a partial credit The Kafalah Guarantee Program has guarantee scheme. Within this scheme, QDB been operating for the past ten years. Its offers banks a guarantee on up to 80 percent governance structure is currently undergoing of the principal of approved SME loans. In major reforms. exchange for the guarantee, banks partaking 24 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT In UAE, different Emirates have devised The experimental phase during which NFSD their own initiatives to support SMEs. In entered into a framework agreement with just Abu Dhabi, the Khalifa Fund supports SMEs one bank, Gulf Bank, was highly critical from mainly through direct lending, for which it a competition point of view. However, Gulf has credit administration agreements with a Bank did not compete with any other bank limited number of banks. The Khalifa Fund to win potential clients asking for support also operates a credit guarantee scheme from NFSD for some time. The first-mover with a cap on the interest rate. In Dubai, advantage that Gulf Bank has gained could the Dubai SME offers a similar guarantee have long-lasting anticompetitive effects. scheme. The recent extension of the program to other domestic banks represents an important step Possible policy improvements to help level the playing field, yet distortions may still be present as a result of the design Initiatives to enhance access to finance of the experimental phase. for SMEs are reported to be successful Similarly, in Oman, extending partnerships in Bahrain; however, introducing funding with ODB to other commercial banks could programs for conventional banks could improve competition. Clarifying the role and stimulate competition with Islamic banks the functions of the ODB is also advisable. to the benefit of SMEs. According to As in Kuwait, the existence of a framework stakeholder interviews, Tamkeen is currently agreement between one of the main state- helping reduce the financial gap by led supporting initiatives and selected SMEs. Nonetheless, access to Tamkeen commercial banks is highly critical from a programs is limited to Islamic banks only. competition perspective. Current plans to As some products are offered by both extend partnership to five banks might be conventional and Islamic banks, this may insufficient to ensure a level playing field alter the level playing field in the market between all banking institutions. To foster and decrease the possibility for SMEs to banks’ participation in the agreement and select their preferred bank. Furthermore, avoid displacing private operators, it is the 50 percent subsidy of the profit rates particularly important to set clear, transparent charged by banks might reduce the incentive and objective eligibility rules. In addition, the for SMEs to shop around, thus reducing role of ODB in the sector appears ambiguous competitive pressure on banks, and lead as it both competes and partners with to higher prices. A detailed assessment of commercial banks. Clarifying its mandate the Tamkeen and whether its current design and adopting a more coherent corporate and implementation negatively impact governance framework could improve its competition may be warranted. effectiveness. The main state-sponsored supporting The scheme provided by QDB has many initiative in Kuwait would benefit from active desirable features; however, extending the participation of more commercial banks to scheme to more banks and lifting the cap avoid a negative impact on competition. on interest rates might further improve CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 25 competition among banks. Through its various competition problems. In particular, credit guarantee program, QDB provides such regulations can limit entry for deserving the right incentives to SMEs to shop around. institutions, i.e. those who pass the “fit and The application process to the scheme proper” test, create an uneven playing field is transparent and the criteria objective, or limit firms’ business options. making the risk of potential discrimination A transparent licensing process minimizes unlikely. However, as in other GCC countries, possible distortions to competition. The the scheme is currently open only to a process should clarify all phases of the small subset of partner banks, and the total licensing procedure, including a detailed maximum allowance guaranteed differs timeline of the application process and among banks. This situation may have explicit requirements to provide feedback discriminatory effects that might limit the to unsuccessful applicants. The possibility ability of some banks to compete. Therefore, to appeal the decision of the licensing it would be advisable to extend the scheme authority in case of rejection further improves to other banks and reduce the risk of the predictability of the licensing process coordination among banks. and reduces the scope for discriminatory decisions (Carletti and Vives, 2007). The LICENSING CRITERIA process is also improved by avoiding specific bans that discriminate among different types This section discusses licensing regulations of banks and preclude their entry. in the GCC SME banking sectors, screening Regulations that set limits on new licenses for possible sources of competitive concern. and branching may create explicit barriers Financial institutions must go through a to entry and expansion. For instance, relatively complex procedure to obtain a setting different requirements for a license license to provide banking services. This according to the bank’s type can alter the is justified on both financial stability and level playing field and prevent entry in the consumer protection grounds. The procedure market. Limitations on branching, both in is usually regulated by the central bank or terms of complexity of the procedure and financial regulator and encompasses a variety number of branches, also constitute barriers of steps.39 As discussed in the analytical to expansion. framework, bank licensing criteria may raise Limitations on banks’ structure and ownership may pose further barriers to entry. 39. Licensing criteria constitute one of the Core Principles Different forms of establishments may have for Effective Banking Supervision (Principle 5) issued stricter requirements that impose high costs by the Basel Committee on Banking Supervision, which represent the minimum standard for a sound prudential on some categories of banks and prevent regulation and supervision of banks. Principle 5 states that the licensing authority has the power to set criteria and their entry in the market, or force prospective that at the minimum the licensing process should assess the entrants to consider a limited set of business ownership structure and governance of a bank, its strategic and operational plans, internal controls, risk management strategy options. Similarly, foreign entry may and financial projections. An initial capital amount is also stipulated for all banks. See Basel Committee on banking occur through acquisition of an established Supervision (2012). 26 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT bank and its brand. However, this option may Rules and regulations describing the not be available if explicit limits on ownership licensing process are clear in Bahrain by foreign entities are in place. and Oman, while there are difficulties in identifying relevant information for the other Banks must comply with minimum initial GCC countries. A clear licensing process equity capital requirements to start needs detailed rules regarding at least the operations. However, requirements that are following aspects: (i) timing of the application too high may create unsustainable up-front and possibility to appeal rejections; (ii) costs for potential entrants and negatively amount of licensing fees; (iii) procedure for affect the capacity of firms to compete in the opening branches; (iv) explicit restrictions; market.40 (v) legal form to be adopted; and (vi) initial The following section delineates in more capital amounts. In Bahrain and Oman, these detail the possible constraints to competition aspects are described adequately within the introduced by licensing criteria in the GCC CBB Law and Rulebook and the CBO Law, and provides options on how to successfully respectively.41 These sources provide detailed reduce those obstacles. It addresses the information on the licensing process and following aspects: can be easily consulted online. In Kuwait, ■ characteristics of the licensing process; the CBK Law specifies legal form and capital requirements, while a CBK Circular explicit ■  limitations on new licenses and describes information on branches and branching; restrictions.42 In Qatar, the QCB Law lacks ■ limitations to ownership; and information on branches and licensing fees, ■ initial capital requirements. while capital requirements are specified in the license application form. In addition, the QCB Law is not available on the QCB Current status of licensing criteria website.43 Regarding KSA and UAE, the In all GCC countries, central banks are whole description of the licensing process is essentially responsible for the licensing inadequately detailed.44 process. In Bahrain, Oman, Qatar and UAE, the central bank is the only institution 41. CBB Law and Rulebook available at http://cbb. responsible for the licensing process. In complinet.com/cbb/microsite/, retrieved on 4 December 2015. CBO Law available at http://www.cbo-oman.org/, Kuwait, the central bank is in charge of the retrieved on 4 December 2015. process together with the Ministry of Finance, 42. CBK Law and CBK Circular available at http://www.cbk. gov.kw/en/legislation-and-regulation/cbk-law/Law-intro.jsp which exercises a formal role. In KSA, SAMA and http://www.cbk.gov.kw/en/images/section-3-10-2734-2. pdf. is responsible for the process together with 43. The QCB Law can be found at http://www.almeezan. the Council of Ministers and the Ministry of qa/LawPage.aspx?id=4782&language=en. 44. The lack of transparency in the licensing application Finance. process in KSA is also highlighted in a recent report by the IMF (2013). For KSA, see SAMA Banking Control Law available at http://www.sama.gov.sa/en-US/Laws/Pages/ BankingLaws.aspx. For the UAE, see the Union Law No. (10) concerning the Central Bank, the Monetary System and Organization of Banking available at http://centralbank.ae/ 40. See Neuberger (1998). pdf/OffGazetteB.pdf. CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 27 Consistent with a transparent licensing In some cases, limitations on new licenses process, there are rules on both approval and branching have been lifted; however, time and the possibility of appealing a restrictions for foreign banks still apply rejection in Bahrain, Oman and Qatar, in Qatar and UAE. In most cases, the whereas in Kuwait, KSA and UAE, these rules procedures to open a branch are similar are lacking. Table 2 summarizes these rules. to those to issue a first-time license. For In Bahrain and Qatar, the Governor of the example, in Kuwait an “economic feasibility central bank must issue a decision within 60 study” has to be submitted to CBK both days after the submission of the required when applying for a bank license and when documents by the applicant. In Oman, the opening a branch. In Bahrain and Oman, the same decision has to be issued within 120 opening of new branches is not subject to a days. Then, if the central bank rejects the new licensing procedure.45,46 In KSA, the Law application, it shall notify the applicant of does not impose limits on branches for either the reasons for the refusal and the period of national or foreign banks.47 Qatar and UAE time to appeal the decision. In this respect, employ the following exceptions with regard Qatar provides a clear written deadline (15 to foreign banks: days from the date of notification). In Kuwait, Qatar: ■  QCB explicitly prohibits foreign the approval time is not specified by the CBK investors from entering the banking sector. Law. Nevertheless, stakeholder interviews There are seven foreign banks registered report that rejections by the CBK can be in Qatar that entered the market between appealed before an administrative court. the 1950s and the 1970s.48 Currently, foreign banks may obtain licenses to undertake offshore operations within the Table 2: Approval Time and Possibility to Qatar Financial Center. However, such Appeal a Rejection Decision operations are typically outside the area of SME banking. Country Approval Possibility time to appeal a UAE: ■  The Central Bank of the UAE rejection (CBUAE) sets specific limits on foreign decision banks expansion. In particular, foreign Bahrain 60 days Yes banks can open a maximum of two Kuwait N/A Yes 45. According to the Rulebook issued by CBB, Oman 120 days Yes conventional banks can operate Islamic windows without requesting a separate license. CBB Rulebook, Volume 1, Qatar 60 days Yes Part A, High Level Standards, LR Licensing Requirements, LR-1 Requirements to Hold a License, LR-1.4 General Saudi Arabia N/A No Requirements for All Conventional Banks, LR 1.4.1. 46. Stakeholders reported that CBO has encouraged creation of national branch networks over the last years. UAE N/A No 47. However, Art 11 of the Saudi Banking Control Law states that national banks need the approval of SAMA to Source: Elaboration based on central banks’ open a new branch. Saudi Banking Control Law available at data and stakeholder interviews http://www.sama.gov.sa/en-US/Laws/Pages/BankingLaws. aspx, retrieved on 4 December 2015. 48. See Muharrami (2009). 28 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT branches per Emirate, with exceptions own up to 100 percent of business entities granted on a case by case basis, mainly in the banking, corporate investments after mergers. Alternatively, foreign banks and exchange sectors, provided that a can also be established within the Dubai license is issued by the Kuwaiti Ministry of International Finance Center, where they Commerce and Industry.49 However, the are regulated by the Dubai Financial criteria for issuing a license are not always Service Authority. However, these banks clear and transparent, increasing the risk that focus on corporate services and they discretionary power may distort the level only cater to a minority of SMEs, often playing field. Similarly, in Oman the relevant subsidiaries of international companies. Ministry may increase the maximum equity share held by non-nationals to 70 percent.50 With respect to the bank’s ownership Finally, UAE laws impose a minimum of structure, there are limits on foreign 60 percent of national shareholding for ownership in Kuwait, Oman and UAE. CBK commercial banks. An exemption is granted sets limits on foreign ownership of domestic to other GCC banks, which are allowed to banks, whereas commercial banks must acquire controlling stakes in UAE banks and have a minimum national shareholding of financial institutions.51 49 percent. Exemptions are possible: in Kuwait, foreign banks may be authorized to 49. See Law No. 8 Regulating Foreign Capital Direct Investment in Kuwait (22 April 2001), available at http:// www.kuwaitemb-australia.com/files/direct_investment.pdf , retrieved on 25 November 2015. 50. See Royal Decree No. 56/2003 amending the law of the foreign capital investment issued by Royal Decree No. 102/94, available at http://www.chamberoman.com/En/ Content.aspx?SecNo=54#2, retrieved on 25 November 2015. 51. See Putnis (2014). CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 29 Table 3: Initial Capital Requirements (Values in US$, Millions) Country Conventional Islamic bank Foreign bank domestic bank Bahrain52 $ 53 - - Kuwait53 $ 246 $ 246 $ 49 Oman54 $ 249 $ 249 $ 51 Qatar55 $ 275 - $ 275 KSA56 $ 0.66 $ 0.66 - UAE57 $ 27 - $ 50 Source: Elaboration based on central banks’ data and stakeholder interviews Most GCC countries have high initial capital to bank type. With the notable exception of requirements and generally apply distinct KSA, initial minimum capital requirements conditions to domestic and foreign banks. are on average higher in the GCC countries Table 3 shows these requirements according than in MENA and OECD countries. Figure 4 compares initial minimum capital amounts for conventional domestic banks in the GCC 52. See CBB Rulebook, Volume 1, Part A, High Level Standards, LR-2.5 Condition 5: Financial Resources, LR-2.5.1., countries with MENA and OECD averages.58 available at http://cbb.complinet.com/cbb/display/display. Oman, Bahrain, Kuwait, Qatar and UAE html?rbid=1820&element_id=4220, retrieved on December 4, 2015. show higher requirements than MENA and 53. See CBK Law No. 32/1968, Chap. 3: Organization of Banking Business, Sec. 1: Establishment of Banks, Article OECD averages, with KSA’s requirements 57, available at http://www.cbk.gov.kw/en/legislation-and- lower. Kuwait, Oman and Qatar have by regulation/cbk-law/chapter-three.jsp, retrieved on December 4, 2015. far the highest initial capital requirements 54. The values for Oman in the table are retrieved from an interview with CBO officials. The Omani law states that amounting to US$246 million, US$249 million capital requirements for domestic and foreign banks amount and US$275 million, respectively.59 to US$51 and US$7.8 million respectively. See Oman Banking Law, Chapter 3 on Financial Requirements of Licensed Banks, Article 60 available at http://www.cbo-oman.org/, retrieved on December 4, 2015. 55. See the License Application Form – National 58. MENA countries in the figure do not include Jordan, Bank and foreign branch available at http://www.qcb. Gaza-West Bank and Syria where information is lacking. gov.qa/English/Legislation/Instructions/Documents/ Statistics on MENA exclude the six GCC countries. OECD BankInstructions/2013/13-025-01.pdf, retrieved on 4 countries in the figure account for all OECD but Australia, December 2015. New Zealand and the USA, and the base limit imposed by the 56. See Banking Control Law, Article 3, page 2 available European Central Bank (ECB) is taken as a standard for EU at http://www.sama.gov.sa/en-US/Laws/Pages/BankingLaws. countries. aspx, retrieved on 4 December 2015. 59. For Kuwait, see CBK Law No. 32/1968, Chapter 3: 57. The values for the UAE in the table are retrieved from Organization of Banking Business, Section 1: Establishment an interview to the CBUAE. The UAE law states that capital of Banks, Article 57, available at http://www.cbk.gov.kw/ requirements for domestic banks amount to US$10 million, en/legislation-and-regulation/cbk-law/chapter-three.jsp, but the CBUAE has reported to encourage a much higher retrieved on November 25, 2015. For Qatar, see the License minimum paid-up capital. See Union Law No. (10) concerning Application Form – National Bank and foreign branch the Central Bank, the Monetary System and Organization of available at http://www.qcb.gov.qa/English/Legislation/ Banking, articles 79 and 80, available at http://centralbank. Instructions/Documents/BankInstructions/2013/13-025-01. ae/pdf/OffGazetteB.pdf, retrieved on December 4, 2015. pdf, retrieved on November 25, 2015. 30 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT FIGURE 4: Minimum Initial Capital Requirements for Conventional Domestic Banks 300 250 USD MILLION 200 150 100 50 0 Saudi Arabia OECD MENA Countries UAE Bahrain Kuwait Oman Qatar (NON- GCC) Source: Elaboration on central banks’ data Options for improving the licensing licenses can be considered limits to entry system or expansion. Restrictions on branches can be considered limits to expansion that Introducing a clear timeline for both the reduce the competitive pressure exerted on approval time for an application and the larger banks. Such limits reduce competitive possibility to appeal a rejection decision pressure and allow existing operators to may increase transparency in the licensing enjoy a higher degree of market power. process and enhance competition. As Contestable markets, instead, promote discussed, uncertainty in the approval competitive market outcomes, even in the process may discourage potential applicants absence of actual entry. from entering the banking sector, particularly Lifting foreign entry restrictions in Qatar and small-scale banks that are subject to greater UAE might improve competition and assure constraints. The central banks of Bahrain, efficient entry in the SME banking industry. Oman and Qatar set clear rules for the timing In Qatar and UAE, important restrictions to of the application process. Moreover, the entry and expansion remain. In particular, possibility to appeal the rejection of the foreign banks are prevented from entering central bank lowers the risk of discrimination the market or to take advantage of all among applicants. Therefore, it would be potential business opportunities. These advisable to apply similar rules in Kuwait, limitations are not offset by the presence of KSA and UAE as well. offshore centers in both countries. In UAE, As a general rule and subject to maintaining for instance, competitive pressure by banks financial stability, it might be appropriate established within the Dubai International to explore lifting existing restrictions on Finance Center does not appear to be licenses and branches in order to increase relevant to the SME segment. The same market contestability. Restrictions on holds for the Qatar Financial Center. CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 31 Therefore, restrictions in Qatar and UAE may industry or segment of the economy. be lifted to increase contestability in the Governments may also use interest rate caps market. Central banks can implement other to protect consumers from usury. However, measures, such as clarifying the rules for these forms of price control may suppress granting exceptions to the maximum limit on market signals or decrease the quantity or the number of foreign branches. This would quality of services supplied to SMEs. For enhance the transparency of the process, and example, in the case of price ceilings, the in turn benefit competition, reducing the risk least creditworthy borrowers would not be for discrimination. served.60 Explicit caps may also act as focal points and facilitate coordination among A tiered approach to prudential regulation banks (Knittel and Stango, 1987).61 can also increase market contestability. As discussed, initial capital requirements in Relevant rules and regulations typically the GCC, especially in Kuwait, Oman and define banks’ permissible activities and their Qatar, are much higher on average in the supervision. As part of their operations, GCC countries than in MENA and OECD commercial banks routinely set interest countries. Tailoring the application of rates, lend to various sectors of the economy generally applicable rules and regulations and offer a wide range of products. These based on the size, complexity and possibly activities can vary according to a bank’s other characteristics of banking organizations chosen business model and strategy. Overly is a useful way to implement a tiered banking strict regulation on bank activities can limit system, where entrance is encouraged banks’ business options. without exacerbating system risks. Revising Line of business restrictions may be capital guidelines to encourage the entry of detrimental for competition. In addition small-scale banks could particularly improve to banking products, commercial banks’ contestability in the SME banking markets, offering may include insurance, securities, given the comparative advantage that small and other financial services. There might banks may enjoy in serving local markets and be several reasons to restrict such activities. individual borrowers. For instance, allowing banks to differentiate their lines of business may increase the PRICE CONTROLS AND possibility for conflicts of interest (Walter, 1985), raise the risk of moral hazard (Boyd RESTRICTIONS ON BANK et al., 1998), and make banks too complex ACTIVITIES to monitor (Barth et al., 2006). Furthermore, cross-selling can lead to bundling of different All forms of price controls may alter products, a practice that incumbent banks competition in the banking industry. Price may eventually use to exclude smaller controls can involve interest rate floors or ceilings as well as caps on fees and 60. Lending to SMEs, given their higher riskiness, naturally commissions. Setting interest rate caps can advocates for a risk-based approach. be a tool to provide support to a specific 61. Rey and Tirole (2013) suggest that price caps may increase the risk for collusion by providing focal points. 32 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT players from competition.62 However, overly- Oman: ■  According to stakeholder restrictive regulation is not always optimal. interviews, commercial banks can set Barth et al. (2006) find that restricting bank interest rates freely in Oman, with one activities is negatively associated with bank notable exception: CBO fixes a ceiling on development and stability. Claessens and personal and housing loans to 6 percent.63 Klingebiel (2001) show that when markets This ceiling has been gradually lowered are sufficiently contestable, a wider scope over time (it was 8.5 percent in 2008). 64 for financial services provision by financial Qatar: ■  Stakeholder interviews suggest that institutions is pro-competition. rates on loans usually range between 8 and 10 percent, but can go as high as 18 Current status of price control to 20 percent for cash advances. QCB sets and activity regulations an interest rate ceiling on personal loans against salary (currently at 6 percent) and The central banks of Kuwait, Oman and Qatar on credit cards (12 percent). Moreover, the set interest rate ceilings on customers’ loans, QCB Law prevents banks from extending while no specific rules seem to be present for the maturity of these loans by more than other GCC countries. Country-specific details one year. follow, below: KSA: ■  Stakeholder interviews indicate that Bahrain: ■  There are not general interest no caps on interest rates apply to SMEs rate ceilings. According to stakeholder and the corporate segment. Moreover, interviews, CBB has lifted most of the price all fees, costs and administrative charges regulations previously in force. that the creditor has to recover from the ■  Kuwait: CBK sets the discount rate and borrower must not exceed the equivalent ensures that certain rates on both short of 1 percent of the amount of financing or and long term loans do not exceed it. SRI 5,000 (US$1,333), whichever is lower.65 Stakeholders interviews indicate that the UAE: ■  Information from stakeholder maximum interest rate currently applicable interviews suggests that commercial is the CBK discount rate plus 2.5 percent banks do not face caps on interest rates and plus 4 percent for short and long term chargeable to SMEs. loans, respectively. Rules and regulations in all GCC countries except Kuwait do not impose restrictions on 63. CBO Circular of 2 October 2013 available at http:// www.cbo-oman.org/circulars/2013/bm1112.pdf 62. For example, a bank with market power in banking 64. CBO Circular of 4 April 2012 available at http://www. products (service A) and facing actual or potential cbo-oman.org/circulars/BM_1093.pdf competition in insurance products (service B) prices an A-B 65. Regulations for Consumer Financing, Section 2, bundle in a way that makes it impossible for equally efficient Article 9, available at http://www.sama.gov.sa/en-US/Laws/ one-service rivals selling service B to compete. See Nalebuff BankingRules/Regulations percent20for percent20Consumer (2005) and Heidhues (2007) for more details on “exclusionary percent20Finance percent20- percent20 percent20Final bundling”. percent20 percent2030-6-2014.pdf CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 33 particular lines of business of commercial Licensed banks can act as insurance banks. These banks can generally offer both agents (but not as brokers) through the financial and insurance services, with some Bancassurance arrangement69 and sell rules specific to the country in which they basic insurance products such as life and operate. An exception is Kuwait, where there general insurance.70 As a rule, banks may are significant restrictions on cross-selling of partner with a maximum of two insurance products. The most relevant aspects detailed companies, one for life insurance and one per country follow: for general insurance, and they cannot sell the same line of products of two distinct Bahrain: ■  CBB does not restrict Bahraini insurance companies. banks from offering financial and insurance products.66 Among the services regulated Qatar: ■  QCB does not restrict Qatari banks for conventional bank licensees, the from offering both financial and insurance CBB Law includes dealing with financial products. The Instructions on Supervision instruments and operating collective and Control issued by QCB provide banks investment undertakings. Insurance sold with rules and limits on multiple business through banks known as Bancassurance is lines.71 With respect to financial products, growing considerably, and Bancassurance banks can issue and manage investment partnerships have flourished. accounts; market the units of investment in mutual funds and portfolios; apply for ■ Kuwait: As reported in stakeholder a license to establish investment mutual interviews, Kuwait imposes a number funds; and sell foreign companies’ stock of restrictions on bank activities and to domestic customers. With respect CBK can exercise significant discretion to insurance products, banks can sell regarding banks’ ability to implement a such products on behalf of insurance competitive strategy. For instance, relevant companies outside Qatar provided they stakeholders indicate that banks cannot include the activity of marketing insurance sell insurance products.67 CBK must also in their Art. of association and obtain the previously approve any new fee a bank approval from the Ministry of Economy wants to charge, regardless of its amount. and Commerce. Both national and foreign Oman: ■  CBO allows banks to undertake banks should include the insurance activity several line of business activities.68 in their commercial register in Qatar. 69. Circular MB 971 of 9 May 2004. Available at http:// www.cbo-oman.org/circulars/Crclrs_1till932.pdf page 535. 66. CBB Rulebook, Volume 1, LR-1.3 on definition of 70. Guidelines issued by the Ministry of Commerce regulated banking services http://cbb.complinet.com/cbb/ and Industry Regarding the Sale of Insurance Products by display/display.html?rbid=1820&element_id=4220 Banks”. Available at http://www.cbo-oman.org/circulars/ 67. Nonetheless, it is reported that sometimes banks can Crclrs_1till932.pdf page 537. provide insurance tied to financial products upon customer’s 71. See Instructions of Supervision and control Part (VII), request. available at http://www.qcb.gov.qa/English/Legislation/ 68. Art 5 of Oman Banking Law. Available at http://www. Instructions/Documents/BankInstructions/2013/07-04.pdf, cbo-oman.org/info_law.htm retrieved on October 1, 2015. 34 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT ■ KSA: According to available information other. Generally, in the GCC countries there and stakeholder interviews, SAMA does is the possibility for conventional banks to not significant restrict the activities of offer Islamic products or to open Islamic Saudi banks, but financial services other “windows”, with one notable exception. In thank banking remain relatively limited. Qatar, QCB has recently decided to close the “Islamic banking windows” of commercial UAE: ■  According to available information banks. Since 2011, therefore, there are few and stakeholder interviews, CBUAE banks exclusively licensed to practice Islamic does not seem to prevent banks from banking activities in Qatar, and the main engaging in non-banking financial services ones are the Qatar Islamic Bank, the Masraf and market, for example, financial and Al Rayan Bank and the Qatar International insurance products. Islamic Bank. Some evidence suggests that the development of Islamic banking can boost Options for easing price controls competition and financial inclusion. Surveys and activity restrictions indicate that 23 to 24 percent of the adult population in KSA cite religious reasons Governments may consider removing for not having a bank account (although restrictions on interest rate ceilings where this share is negligible in the other GCC present to reduce the risk that SMEs are countries).72 Islamic banking is found to be underserved. Some GCC countries set positively related to financial inclusion: while ceilings to hold interest rates below their Arab countries in general tend to exhibit free-market levels. Banks consequently may lower levels of financial inclusion, Islamic ration credit, privileging some borrowers and banking is associated with a lower incidence leaving most high-risk borrowers unserved. of self-exclusion and with a lower share of The removal of interest rate ceilings is firms citing access to finance as a significant especially relevant for SMEs, as banks obstacle (World Bank Group, 2014b). advocate the need for a risk-based approach Islamic banks are distinguished by the to lending. The most relevant issues and presence of a Sharia Board, and operate recommendations at the county level are on the basis of the Islamic business law. described below: They use Sharia-compliant contracts for ■ Kuwait: CBK might rule out ceilings on their business. These banks contribute to both short- and long-term loans. Interest the diversification of the banking offer. rates ceilings may create allocative According to stakeholder interviews, there inefficiencies and contribute to the under is some degree of substitutability between provision of credit to SMEs. Existing products offered by conventional and restrictions on loan tenure aggravate the Islamic banks and the two groups may situation and might be waived too. exercise a competitive pressure on each Oman: ■  CBO might progressively reduce till complete elimination the ceiling on 72. Global Findex Database. personal loans. CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 35 Qatar: ■  QCB might gradually eliminate and foreclosing entry.74 Existing banks are caps on interest rates (depending on more likely to adopt bundling practices. In the type of loan), factoring in financial addition, the fact that some products act stability. Although they serve to reduce as a gateway for others, as for example are potential rates’ volatility, these caps can accounts for loans, may exacerbate the unnecessarily limit banks’ strategy options, negative effect of bundling on firms’ entry negatively effecting competition. (Koderisch et al., 2007). Lifting line of business restrictions in Kuwait might improve market competition ACCESS TO CREDIT by attracting new banks. CBK imposes INFORMATION limitations to business strategy options that may undermine competition. It is advisable Accurate information about a customer’s to lift such limitations to stimulate entrance financial situation enables banks to extend of new competitors in the long term. In credit effectively to customers. Information addition, to prevent the risk of exclusionary asymmetry in credit markets can lead bundling and other anticompetitive practices to the well-known problems of adverse by incumbent banks, it is advisable to selection and moral hazard. In the absence strengthen the role and monitoring activities of accurate information about potential of competition authorities (see Chapter 4). customers’ risk profiles, banks may be forced Allowing conventional banks in Qatar to to use less reliable information, resulting in open Islamic banking windows may increase credit being over- or under-provided. As a entry and diversification in the SME banking result, providers may cease to offer certain industry. Since conventional and Islamic products to customers for whom they cannot products can be considered substitute, the accurately assess risk. Quality, reliability and decision of the QCB to close such windows accessibility of credit information among may constitute a barrier to expansion. Further active banks and for prospective entrants research may be needed to understand significantly affects how competition unfolds the level of competitive pressure that in the banking market. conventional banks exert on Islamic ones. Credit information sharing mechanisms such Enforcement of competition law is critical to as private credit bureaus (PCBs) and public prevent the bundling of practices that deters credit registries (PCRs) can help to lower competition. Bundling practices may affect barriers to entry and level the playing field. consumers’ ability to assess products’ costs The longer a firm operates in a market, the and features, thus hampering switching73 more it may improve its knowledge about borrowers’ creditworthiness.75 Incumbents are at an advantage in mitigating adverse selection, while challenger banks face a 74. See Nalebuff (2004). 73. See, among others, Kühn et al. (2005), and Prince and 75. See, for example, Stiglitz and Weiss (1981) and Greenstein (2014) Bonaccorsi di Patti and Dell’Ariccia (2001). 36 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT higher risk of supplying less creditworthy acquisition of creditworthy borrowers with borrowers. This may deter entry and limit a long track record.80 Furthermore, when appetite for expansion. Equally important, credit information is readily available, banks the information advantage on borrowers’ may compete by developing products behaviors may allow incumbents to cross- that better meet the needs of prospective subsidize between new and existing clients.81 Customers may benefit insofar as clients, as well as between less and more credit information sharing schemes mitigate creditworthy ones.76 Credit information applicants’ credibility problems in conveying sharing mechanisms such as PCBs and PCRs their creditworthiness to potential lenders may mitigate incumbents’ advantage and (Watt, 1977).82 lower barriers to entry and expansion. PCBs Open, non-discriminatory access to PCBs and PCRs can also lower entry barriers by and PCRs is a necessary condition for pro- increasing borrowers’ incentives to repay competitive effects to materialize. PCBs debts77 and compensating for poorly and PCRs operate through a network performing legal systems, for example.78 arrangement and are natural monopolies; Widespread availability of high quality economies of scale and scope make them information on borrowers’ credit history can not easily replicable by new entrants.83 positively affect competition by improving Access must not be restricted and not both banks’ commercial strategy options conditional on the basis, for example, of and buyers’ ability to choose. Credit banks’ prevailing ownership (i.e. public or information sharing mechanisms may private), nationality (i.e. local or foreigner), reduce the costs banks face in establishing or status (i.e. existing or new entrant).84 a new relationship.79 In particular, PCBs In particular, vertical integration between and PCRs may increase competition for the banks and PCBs may increase the risk of discriminatory access conditions to credit information, whereby shareholders are granted more favorable terms. Furthermore, 76. Since new entrants do not have the same informational endowment of incumbents, as well as the same cost and customer structure, they cannot compete with firms pricing below costs (Petersen and Rajan 1995). 77. PCBs and PCRs act as a discipline device insofar as they increase the cost of insolvency by affecting borrowers’ ability to access credit in the future (Padilla and Pagano, 2000). This, in turn, increases debt repayment (Jappelli and Pagano, 2006) and reduces adverse selection, which would 80. See Jaffee and Russell (1976); Diamond (1989) and positively impact challenger banks. Gehrig and Stenbacka (2007). 78. The inefficiency of courts in enforcing creditors’ 81. Consumers would switch towards products that create rights may reduce the scope for entry and expansion in the value for them. See Jappelli and Pagano (1999). market (La Porta et al., 1997). By mitigating ex-ante lenders’ 82. Absent credit information infrastructures, it is unlikely information asymmetry on borrowers’ creditworthiness, PCBs that lenders entering in a new relationship can overcome and PCRs may act as a substitute for weak enforcement rivals’ conflict of interests in providing relevant information mechanisms and mitigate entry deterrence (Brown et al., (Padilla and Pagano, 1997). 2009). 83. The more sources connected to the network, the 79. See Klemperer (1995). However, while a borrower may greater the data coverage. Scale and scope economies affect provide evidence of a good payment history, it is almost credit information coverage and, in turn, its relevance. Open impossible for lenders to verify whether it hides less favorable access to PCRs would be advisable (Ferretti, 2015). information. 84. Jappelli and Pagano (2002). CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 37 vertical integration may give raise to financial institutions, retailers or utilities is foreclosure85 or exploitative abuses.86 collected and reported;89 Information sharing on banks’ commercial memory, ■  i.e. the time span covered by strategies may promote collusive practices. credit information reports;90 PCBs and PCRs store information on accuracy ■  of collected data (including borrowers’ credit history, including loans frequency of database updates);91,92 and other financial facilities. Disclosure of commercially sensitive information (e.g. conditional ■  access to credit information, interest rates and tenures applied) to i.e. restricting access on the basis competitors may facilitate collusion. Greater of discriminatory conditions such as transparency supports collusive practices by applicants’ nationality (local or foreigner), facilitating the detection of cartels’ deviations ownership structure (private or public), or (Gehrig and Stenbacka, 2001; Odudu, 2011). status (new or existing); The following section assesses the impact discriminatory ■  membership or usage of PCBs and PCRs on competition in the costs, i.e. the application of differentiated GCC SME lending markets. The section costs to obtain PCBs’ membership or addresses the following aspects: (i) quality of exploit credit information, with respect credit information; (ii) accessibility at non- to applicants’ nationality, prevailing discriminatory conditions; and (iii) factors that ownership structure, status; may facilitate anticompetitive behaviors by vertical ■  integration (between credit banks. To this purpose, the analysis considers information infrastructures and banks); the following dimensions: practices ■  facilitating collusion, i.e. whether coverage, ■  i.e. whether both SMEs and the scope of credit information is such individuals are covered, and to what to promote potential collusive practices extent;87 aimed at restricting competition in the ■  dosage of positive and negative banking sector. information;88 cross-sectorality, ■  i.e. whether information 89. Information variety may improve the estimation of on borrowers’ creditworthiness from other borrowers’ likelihood of insolvency (Hainz, 2011). 90. Credit information infrastructures with long-lasting memory promote entry by alleviating adverse selection by allowing for a more exhaustive assessment of prospective 85. Raising rivals’ costs in the downstream market is an clients’ creditworthiness and by acting as a discipline device example of anticompetitive practices aimed at excluding and increasing borrowers’ incentive to repay. Since switching competitors by preventing them from accessing an input or is driven by creditors with a good and long track-record, by creating a cost disadvantage for them (Giannetti et al., longer memory also promote competition by supporting 2010). borrowers’ mobility. 86. PCB’s shareholders may exploit their market power 91. PCRs and PCBs should be subject to frequent, even when commercializing access to credit information to other real time, updates to ensure that the information provided is members, for example by setting reports’ or ratings’ prices at representative of the ability of borrowers to repay debts. supra-competitive levels (Vickers, 2005). 92. The possibility to identify individuals and SMEs 87. The application of cut-off thresholds for loan reporting unambiguously is a relevant determinant of accuracy. For can greatly reduce coverage (Bertola et al., 2006). example, in developing and emerging economies, single 88. Positive information refers to the provision of records SME ID numbers or VAT numbers do not exist and most about creditworthy borrowers in addition to those of bad SMEs operate informally, making it difficult to link available payers. information to them (World Bank, 2014). 38 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT The current credit information sharing with the central bank playing an oversight infrastructure role in both countries. Central banks’ representatives sit on the board of both PCBs All GCC countries have credit sharing and PCRs in Bahrain, Kuwait, and KSA. In information mechanisms in place. With the Kuwait and UAE, the Ministry of Commerce exception of Kuwait, where both a PCB and and Industry and the Ministry of Finance, a PCR operate, all other GCC countries have respectively, have concurrent supervisory either a PCB or a PCR. Oman, Qatar and powers. Table 4 below summarizes the UAE established a PCR under the respective governance features of credit sharing central banks. Bahrain and KSA have a PCB, information schemes in the GCC countries. Table 4: Institutional Framework of PCBs and PCRs in the GCC Countries Bahrain Kuwait Oman Qatar KSA UAE Type Private Credit Private Credit Public Credit Public Credit Private Credit Public Credit Bureau Bureau Registry Registry Bureau Registry Public Credit Registry Name Benefit Com- Credit Bank Credit Qatar Credit SIMAH Al Ethiad pany Information and Statistical Bureau Credit Bureau Network of Bureau System (AECB) Kuwait (Ci-Net) CBK Ownership Privately- Ci-Net is State-owned State-owned Privately- State-owned structure owned by owned by owned by ten fourteen CBK and a local banks banks consortium of 14 banks and other financial institutions Legal Bahrain Emir Decree New regula- Decision No Credit Federal De- framework Credit No 2 of 2011 tion 5 of 2008 information cree Law No. Reference BM/ bG/ law 2009 under 6 of 2010 Bureau Code 53/9/2011 Royal Decree of Practice No. M/37 Supervisory CBB CBK CBO Qatar Central SAMA CBUAE Power Bank Ministry of Finance Role of Central CBA licenses CBK CBO controls QCB controls SAMA’s reps sit AECB directly Bank the PCB representative the PCR the PCR in the board of reports to chairs the the PCB the Board of Reps of CFF board of Ci- Directors of sit on the Net CBUAE board Source: Elaboration on publicly available data and stakeholder interviews CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 39 Credit information coverage appears to be infrastructures across GCC countries (Figure significantly heterogeneous across countries 5 and Figure 6) and with respect to possible and cut-off thresholds apply in some cases. In benchmarks such as OECD and MENA general, PCBs and PCRs collect and provide countries (Figure 7) may be explained by the information on both SMEs and individuals, diverse and overall recent maturity of the irrespective of the size of the credit various PCBs and PCRs in the region, as well facility. The heterogeneity of information as by the following country-specific elements: FIGURE 5: Percentage of Firms (over Total Population) Covered by PCBs and PCRs in the GCC 2.5% 2% 1.5% 1% 0.5% 0% Bahrain Kuwait Qatar Oman Saudi Arabia UAE Coverage Firms (% population) Source: World Bank. Doing Business Indicators, 2016 FIGURE 6: Percentage of Individuals (over Total Population) Covered by PCRs and PCBs in the GCC 35% 30% 25% 20% 15% 10% 5% 0% Bahrain Kuwait Qatar Oman Saudi Arabia UAE Coverage Individuals (% population) Source: World Bank. Doing Business Indicators, 2016 40 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT FIGURE 7: Percentage of Firms and Individuals (over Total Population) Covered by PCBs and PCRs in the GCC, MENA (GCC Countries Excluded) and OECD Countries 80 70 60 50 40 30 20 10 0 OECD High Income MENA (GCC excluded) Bahrain Kuwait Oman Qatar Saudi Arabia UAE Source: World Bank. Doing Business Indicators, 2016 ■ Kuwait: The PCR collects data about both that assigns a creditworthiness score to individuals and SMEs, but only for facilities individuals and companies. exceeding an amount equivalent to Kuwait: ■  The PCR of Kuwait represents US$46,000. The PCB, instead collects data an exception insofar as it only provides on individuals only. negative data. On the other hand, UAE: ■  The PCR cannot provide information Ci-Net, the PCB, provides information when aggregate exposure is greater than on the amount, type and tenure of loans an amount equivalent to US$4 million. provided as well about the conditions of Interviews reveal that this threshold is financing products other than loans. Data considered low for the UAE context and on ongoing legal disputes, individuals’ may exclude a significant number of SMEs incomes and companies’ shareholders from the reporting system. and related entities are also collected. Non-performing loans are recorded into Qatar: ■  A threshold applied though it was a separate database. The PCB does not removed in 2012. provide, however, scoring services on Credit sharing information schemes provide borrowers’ creditworthiness. extensive and detailed credit reports Oman: ■  The Bank Credit and Statistical covering both positive and negative Bureau System mainly collects data about information. Details for each country are individuals and SMEs’ credit history. provided below: Inquiries on credit information are also Bahrain: ■  Benefit Company provides recorded. For individuals, the PCR also information for five product categories: collects employment history. Scoring loans, credit cards, charge cards, overdraft services about borrowers’ creditworthiness limits and mortgages. In 2008, the Bureau are not supplied. However, interviews Scorecard Service was launched – a service reveal that a scoring service exists and it is CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 41 shared only with CBO. For nonperforming provide a rating service on borrowers’ loans, the lender’s name is also provided. creditworthiness. However, interviews revealed that a scoring service is planned Qatar: ■  The Qatar Credit Bureau provides to be implemented in 2016. information with respect to both SMEs and individuals. Positive and negative The degree of cross-sectorality and credit information is collected only with respect data memory varies across the GCC to loans. Conversely, according to countries. Country-specific details are interviews, deposits and transfers are not provided below: covered. Bahrain: ■  Benefit Company collects KSA: ■  SIMAH collects data about firms’ and information from retailers, utilities and individuals’ credit and payment history, other non-bank financial institutions. national security number, and accounts. Negative payment records are stored for Inquiries on credit information are also five years. recorded. The PCB does not offer scoring Kuwait: ■  PCR and PCB store data on services about borrowers’ creditworthiness. SMEs and individuals forever and for five However, interviews point out that this years, respectively. Ci-Net complements is in the pipeline. According to available information collection, including from information, the lender’s name is also retailers, utilities and other non-bank reported, allowing the identification financial institutions of individual banks extending each Oman: ■  The PCR provides data only for credit facility (a feature discouraged by international best practices due to the banks. Credit history reports cover the past associated risk of collusion). Bespoken two years, while information is kept in the reports can be produced based on record for ten years. applicants’ requests. Qatar: ■  Currently, the PCR only provides ■  UAE: Al Ethiad Credit Bureau develops data for credit facilities by banks. It is simplified and full credit information planning to start collecting information reports for both individuals and from retailers and utilities in the near corporates. The simplified report future. Qatar credit data covers the last contains information on credit score, three years. total outstanding balance, total overdue, ■ KSA: SIMAH collects data from telecoms, number of default contract, summary car rental, insurance, and other financial of number of credit facilities requested, companies. SIMAH’s credit reports provide active, rejected or closed and a summary data for two years. of all active contracts belong or related to UAE: ■  AECB collects data from telecoms the subject. The full report also contains companies. There is a plan to increase details about payment history for each information coverage to tax records and credit facility and applications with utilities in next years. AECB credit reports lending institutions. The PCR does not 42 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT provide data for two years, while negative Bahrain: ■  The PCB is owned and operated files are kept for five years. by fourteen banks.94 Each member of Benefit Company has the right to access Interviews with relevant stakeholders suggest credit information at fair and identical there is an opportunity to analyze more conditions. Auditing and firewalling closely the reliability and timeliness of credit mechanisms are reportedly in place to information. Records of the Qatar Credit prevent shareholder banks from accessing Bureau are updated every three months. commercially sensible information on In UAE, credit information is updated on a their competitors. An annual flat fee, monthly basis and CBUAE plans to increase equal for all applicants, applies to access the frequency of information update. In credit information. The value of the usage Kuwait and UAE, some banks are concerned fee varies according to the scope of about the exhaustiveness of the data the required credit information (though provided by the PCR, while in Oman, banks shareholders and other members pay emphasize the importance of scoring services the same fee). Products concerning on borrowers’ creditworthiness. Since corporates’ or individuals’ credit up-to-date credit data is crucial to mitigate information are sold at the equivalent of adverse selection, real-time updates may be US$2,600 and reports on both firms and appropriate. individuals at US$5,300. PCBs and PCRs in the GCC counties appear Kuwait: ■  Ci-Net (the PCB) is controlled by to abide to a general obligation of non- a consortium of banks and other financial discrimination, however currently available institutions, together with CBK. Ci-Net information does not completely prevent provides credit information to its members the risk of distortions to competition. contingent on the payment of membership Both types of credit information sharing and usage fees that are not publicly schemes generally grant members’ access available. Usage fees are lower for Ci-Net at “transparent and non-discriminatory shareholders. Credit information is fully conditions”. However, all PCBs are vertically disclosed only when related to applicants’ integrated with banks. In principle, vertical clients. Inquiries on rivals’ clients give integration may generate an uneven only access to aggregate exposure. playing field and lead to foreclosing Limited information is available on access practices.93 Furthermore, information on conditions and commercial practices. access conditions (including in some cases information on fees levied) could not always Oman: ■  All licensed banks under the OCB’s be retrieved. Country-specific information is supervision can access the PCR conditional presented below: on payment of membership and usage 93. A typical example would be the imposition of differentiated fees for owners and regular members. However, the imposition of equal but very high fees may distort competition. Banks that own a share in the PCB will be able to recoup part of the cost incurred for accessing 94. Member banks include non-shareholders. Participation information (for example through dividends), while to the PCB is mandatory in Bahrain and all request for credit competitors would carry the entire burden. facilities must be reported to the credit bureau. CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 43 fees. Interviews reveal that usage fees significantly across GCC countries. Cut-off approximate US$7,000. amounts with respect to loan reporting may exacerbate such heterogeneity. Qatar: ■  Access to Qatar Credit Bureau is open for all its members upon payment of Generally, GCC credit sharing information a membership and usage fee. Interviews mechanisms provide for a good level of point out that these fees apply uniformly cross-sectorality of PCBs and PCRs. However, within the banking sector but may differ the extent to which different sectors are with respect to other sectors. Fees are not considered by PCBs and PCRs varies publicly disclosed. across countries. Since an increase in cross- sectorality positively impacts competition, KSA: ■  The PCB is controlled by 10 national GCC countries could consider sharing banks. Credit information is available to knowledge to foster the emergence of more all members within KSA, including non- extensive cross-sectorality. shareholders. Membership and usage fees apply. The latter may vary according to the Credit information memory might be applicants’ requests. However, usage and extended as PCBs and PCRs mature. With membership fees are not disclosed and few exceptions, PCBs and PCRs generally limited information is available on access store credit information for a time-span conditions and commercial practices. ranging from two to five years at most. Since pro-competitive effects grow as credit UAE: ■  The PCR applies a yearly subscription information memory increases, it might be fee for all the licensed and supervised beneficial to consider an extension of PCBs’ banks having the right to access credit and PCRs’ depth where needed. information. This fee is approximately US$5,400. A variable fee for inquiries also Improvement to the reliability of credit applies and varies according to applicants’ information might benefit most GCC inquiries. Short reports cost US$19 for countries. The quality of credit information individuals and US$40 for corporates. The could be complemented with up-to-date cost of long reports varies from US$39 for evidence on borrowers’ creditworthiness, individuals to US$149 for corporates. which would have a positive spillover effect on competition. However, most Options for improving access to credit GCC countries seem to have difficulty information collecting evidence regarding credit information updates. Where available, Stakeholder interviews indicate that cross- evidence on update frequency suggests country cooperation on credit information room for improvement. To this aim, it might harmonization could help to overcome the be beneficial to improve transparency on observed heterogeneity in PCB and PCR evidence pertaining to update frequency, coverage, improve and harmonize PCB and and to foster knowledge sharing to promote PCR standards, and boost competition. best practices across the region. Credit information coverage seems to vary 44 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT Apparently discriminatory access mitigate the risk of anticompetitive effects conditions to credit information may arising from vertical integration. Chinese warrant further scrutiny. Most PCBs and walls are examples of remedies that might be PCRs make credit information available at taken into consideration. non-discriminatory conditions. However, Enforcement of competition law is critical to apparently discriminatory rules seem to apply deterring collusive practices that may arise in some countries. The lack of disclosure from information sharing. In light of potential of access fees, lower usage fees for PCBs’ anticompetitive behaviors, the design of shareholders, information granularity varying PCBs and PCRs should carefully address according to the membership status, and information scope to balance adequately information released only to domestic pro- and anti-competitive effects. However, members are examples of rules that could ex-ante regulation of PCBs and PCRs is not distort the playing field. GCC governments sufficient to prevent information sharing from may consider eliminating discrimination on promoting collusive practices. Independent access conditions between shareholders and antitrust authorities and effective competition other operators. law enforcement shall complement the There are potential concerns about market design of PCBs and PCRs to deter potential power exercise with respect to PCB products collusive practices to the detriment of that are sold at prices unlikely to reflect competition (Porter, 2005). production costs. An example is y the supply of reports covering both individuals and firms at a price that is twice that applying for BARRIERS TO CUSTOMERS’ reports entailing only firms or individuals. MOBILITY Linking information on individuals and companies appears particularly important for The ability of customers to switch among SMEs. Since it seems unlikely that production suppliers is crucial to foster healthy costs increase proportionally with the scope competition amongst banks. Laws and of reports, it might be worth providing regulations may raise barriers to switching, additional evidence as to whether such or fail to remove existing ones. Switching practices hinder competition. costs – both monetary and non-monetary – are a typical barrier that can weaken the Where PCBs are in place, mitigating effectiveness of consumers’ competitive remedies for vertical integration might help pressure on firms (Klemperer, 1995). This to avoid potential anticompetitive effects. section examines whether and to what extent Vertical integration between banks and banking sector regulation affect SMEs’ PCBs could promote foreclosure practices mobility in the GCC. The analysis focuses that result in an uneven playing field among on some of the most relevant dimensions of market actors. This effect might be amplified switching from the consumer perspective. in the presence of discriminatory access conditions to PCBs. Thus, governments may Customers’ inertia coupled with the want to consider potential remedies that presence of strong incumbents may limit CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 45 entry and expansion and negatively impact 1987). To address these potential competitive competition. Consumers’ inertia is expected concerns, the following dimensions are to increase with effective and perceived examined with respect to rules and practices switching costs (Farrell and Klemperer, pertaining to early settlement fees: 2007). Borrowers’ inactivity may lead to ■  xistence and extent: i.e. whether early e incumbents’ exercise of market power that, in settlement fees apply, and to what extent, turn, may ease cross-subsidization practices in case borrowers decide to close their line between existing and prospective customers of credit; (Campbell et al., 2011). Excessive pricing for communication: ■  i.e., how early settlement back-book customers allows attracting new ones by pricing below costs. Since challenger fees are disclosed to borrowers; and banks face different cost and customer ■ ceilings: i.e. whether regulation imposes a structures with respect to incumbents’, cross- cap to the amount of early settlement fees subsidization may deter firms’ entry and that may apply in case borrowers decide to expansion. switch to an alternative bank. Borrowers’ propensity to switch suppliers The presence of well-designed deposit is closely related to their ability to access insurance schemes may encourage and assess products’ features and costs. competition in the banking sector.95 Bank Relevant information concerning products’ safety is a relevant dimension for consumers’ features and charges must be easily available choice (Jagelaviciene et al., 2006). Deposit at no cost. To this aim, best practices insurance schemes may affect switching by suggest that banks shall communicate influencing customers’ perception about relevant information – such as interest rates, banks’ risk of default, compensating for installment rate conditions, early settlement reputational effects.96 In particular, they may fees and ancillary fees – clearly and timely to reduce consumers’ biases by mitigating the customers (OECD, 2011b). perception that large and/or state-owned Early settlement fees may prevent entry and incumbents offer stronger guarantees in expansion by discouraging borrowers from case of default. Thus, the presence of a terminating their lending contract. Fees to formal guarantee on deposits may positively close a loan or a line of credit may prevent borrowers from shopping around and 95. Increased rivalry for deposits induced by deposit insurance may be excessive in some circumstances. Excessive switching to alternative suppliers (Anderson competition may occur because of the externality of a and Renault, 1999). If so, entry and expansion social cost of failure (Matutes and Vives, 2000b) or because deposit insurance allows weak institutions to bid for deposits may by inhibited due to the difficulty to aggressively and induces sounder competitor to respond in kind on the face of strategic complementarity of deposit compete for customers (Nilssen, 1992). rate competition (Matutes and Vives, 1996). This would Indeed, new entrants may be discouraged create increased systemic risk. However, considering the current level of competition in the GCC countries and the by the fact that although they can offer more relative stability of the banking systems, introducing deposit insurance schemes appears desirable. In any case, insurance valuable services, the disbursement of early premiums should be risk-based in order to prevent too much settlement fees may dissuade borrowers from risk taking (Matutes and Vives, 2000b). 96. See, among others, Fombrun and Shanley (1990), Kim abandoning their current lender (Klemperer, and Choi (2003), and Bijlsma and Van der Wiel (2015). 46 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT contribute to the creation of a more level disclosure obligation. Country-specific details playing field, provided that the scheme does are provided below: not directly or indirectly favor some banks ■ Bahrain: There are no specific regulatory (e.g. national banks) over others (e.g. foreign provisions on fees applicable to SMEs in banks) and does not impose a too onerous the event they terminate a line of credit cost that deters entry or expansion (Beck, with their bank. According to stakeholders 2002).97 With respect to deposit insurance interviewed, switching costs are relatively schemes, the following dimensions are low; however early settlement is infrequent assessed: among SMEs. Conversely, switching ■ existence: i.e. whether explicit deposit costs appear regulated with respect to insurance schemes exist to protect individuals, with CBB ruling on caps and consumers’ money in case of banks’ disclosure of early settlement fees.98 default; Kuwait: ■  Stakeholder interviews revealed ■ participation: i.e. rules affecting banks’ that in general no early settlement fees are participation and funding requirements levied on SMEs closing their lines of credit with respect to deposit insurance schemes; earlier. Any new fee introduced by a bank and (including any fee related to customers switching) shall be disclosed and justified ■ coverage: i.e. the scope of deposit before CBK, which is responsible for insurance schemes in terms of approving or rejecting its introduction. indemnification provided with respect Furthermore, banks are required to clearly to deposits’ amount and products’ specify to consumers all the charges characteristics. related to a purchased product.99 Current status of early settlement fees KSA: ■  According to the information and explicit deposit insurance schemes retrieved during interviews, Saudi banks can apply early settlement fees to SMEs. In Regulation on early settlement fees for fact, fees charged appear to be extremely SME loans is heterogeneous across the heterogeneous. In some circumstances, GCC countries. Interviews with relevant banks may charge up to the entire stakeholders and desk research revealed nominal value of the loan, or a variable that the level of adoption of early settlement amount proportional to the residual loan fees by banks varies widely across the GCC duration and unamortized portion. There countries. The same observation applies to are provisions mandating disclosure the heterogeneity of regulatory provisions addressing early settlement fees and related 98. CBB Rulebook, Volume 1, Part A, Business Standard, 97. The larger the population of banks contributing to the CM-8.6.2. Available at: http://cbb.complinet.com/cbb/ deposit insurance scheme and the broader the perimeter of display/display.html?rbid=1820&element_id=4606 . the provided insurance, the stronger the effect on customers’ 99. CBK’s circular issued on October 16, 2006. Available switching and the development of a level playing field at: http://www.cbk.gov.kw/en/images/section-15-10-2750-1. amongst firms (Shy et al., 2014). pdf. CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 47 to customers of all fees related to a ■ Oman: The government established purchased product. 100 the Bank Deposits Insurance Scheme in 1995.103 According to relevant stakeholder ■ O  man, Qatar, and UAE: Like Bahrain, interviews and desk research, amendments specific rules on early settlement fees for to the scheme were introduced in 2000 SMEs (or companies) do not appear to and in 2010 to incorporate best practices. exist. However, early settlement fees for individuals are regulated and central banks ■ Qatar: Qatar does not have a deposit mandate the scope of early settlement insurance scheme but is planning to fees and impose ceilings. No specific introduce one. Interviews also revealed disclosure requirements to individuals that the government is planning to adopt about early settlement fees appear to be an Islamic deposit insurance framework present. based on Sharia principles to address the increasing scale of operations of Islamic The development of deposit insurance banks. Given the implicit guarantee schemes has varied across GCC countries. offered to borrowers by government Deposit insurance schemes exist, or existed ownership in banks, stakeholders also in the past, in most GCC countries. Their indicated that market operators do not governance generally shows different consider deposit insurance schemes to be arrangements: relevant for credit to SMEs. Bahrain: ■  A deposit insurance scheme, KSA: ■  SAMA introduced a deposit the so-called Compensation Scheme, insurance scheme, the so-called Saudi was established in 1993 and was recently Arabian Deposit Protection Fund, in 2015. amended by a 2010 resolution of CBB.101 The new scheme relies on ex-ante funding, ■ UAE: UAE does not have a deposit as did previous deposit insurance scheme. insurance scheme. In response to the recent global financial crisis, an ■ Kuwait: Currently, the country has no implicit deposit insurance scheme was formal deposit insurance scheme in place. implemented temporarily from 2008 to However, the government fully guarantees 2012. all types of deposits in local banks.102 In countries where a deposit insurance scheme is adopted, participation and funding involve a variety of arrangements: 100. SAMA, Banking Consumer Protection Principle, article 8 – June 2013. Available at: http://www.sama.gov.sa/en-US/ Laws/ConsumerProtectionRules/Banking percent20Consumer percent20Protection percent20Principles.pdf. 101. CBB Resolution No 34/2010 http://www.cbb. gov.bh/assets/Consultations/Regulation percent20in percent20respect percent20of percent20protecting percent20Deposits percent20and percent20Unrestricted percent20Investment percent20Accounts percent20E. pdf and CBB Volume 1, Part A, CP module. Available at: http://cbb.complinet.com/cbb/display/display. html?rbid=1820&element_id=4220 . 103. Royal Decree 09/95 and Regulation BM/REG/39/5/95. 102. Law No. 30/2008 published in the Kuwait Gazette on Available at: http://www.cbo-oman.org/circulars/ 3-11-2008 (Appendix No. 895). Crclrs_1till932.pdf . 48 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT Bahrain: ■  The Compensation Scheme is equivalent of US$52,000. The insurance open to domestic and foreign banks (both applies independently from banking local subsidiaries and branches). The products’ characteristics. scheme relies on two sources of funding: ■ KSA: The recently adopted Deposit the Conventional Banks Fund and the Protection Fund covers bank deposits up Islamic Banks Fund. Both funds involve to an amount equivalent to approximately a non-refundable contribution for an US$53,000. Insurance covers deposit aggregate amount of US$158.9 million and accounts independently of their US$52.9 million, respectively. In both cases, characteristics. banks shall provide their contribution over a period of fifteen years in proportion to Options for improving customers’ the size of their eligible deposit accounts. mobility Oman: ■  Participation to the scheme is mandatory for all licensed banks, both Where rules and regulations exist, they reveal local and foreign, operating in the that SMEs should pay to switch to another Sultanate. Both CBO and licensed banks bank. However, best practices suggest that provided the initial capital for the scheme, no early settlement fees should be levied which amounts to US$13 million. Each year, (UK Department for Business, Innovation and licensed banks contribute to the fund for Skills, 2015). Positive early settlement fees, an amount equal to 0.05 percent of the though relatively low, may exacerbate at the total value of their eligible deposits. CBO margin transactional costs and represent contributes half of the total premiums paid a psychological barrier to switch (Dubé et by member banks each year. al., 2009). Best practices may be valuable ■ KSA: The Saudi Arabian Deposit Protection references to review and reform current Fund, introduced in 2015, is funded by a arrangements for early settlement fees. special fund capitalized for this purpose. Rules on early settlement fees concerning personal loans may offer a benchmark for Where deposit insurance schemes are the development of a specific regulatory implemented, they often offer a limited framework for SMEs. Early settlement fees coverage in case of banks’ default. The most for personal loans seem to be regulated in relevant aspects are detailed per country: detail in most GCC countries. Such rules ■ Bahrain: The Compensation Scheme may represent a further stimulus for the protects all types of deposit accounts held development of best practices concerning by foreign and local banks regardless of SMEs’ switching procedures. Ceilings on the currency. In case of default, insurance early settlement fees for personal loans is will cover up to the equivalent of an example of regulation whose adoption US$39,000 per account. should be carefully considered in the light ■  Oman: The Bank Deposits Insurance of its potential anticompetitive effects. Scheme offers limited coverage to Conversely, ex-ante disclosure to individuals depositors for a compensation up to the CHAPTER 3 | ASSESSMENT OF RULES AND REGULATIONS 49 about products’ fees is a best practice that websites, the employment of sophisticated could be adopted to foster SMEs’ mobility. communication practices, and the adoption of more advanced analytical frameworks. Knowledge-sharing across GCC countries to address differentiated arrangements The adoption of explicit deposit insurance for SMEs’ early settlement fees may be schemes could be encouraged. The strengthened based on international introduction of a deposit guarantee scheme best practices. International practices may improve conditions for competition, provide a source of stimulus for the provided that the deposit guarantee scheme development of innovative and effective is well designed and does not directly or practices for consumers’ switching, such indirectly favor some banks (e.g. national as the development of price comparison banks) over others (e.g. foreign banks). 50 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT CHAPTER 4 | ASSESSMENT OF THE COMPETITION LAWS 51 rights in any specific decision, most obviously CHAPTER 4 | ASSESSMENT in bank merger reviews, or policy changes. OF THE COMPETITION LAWS Moreover, should technical expertise be necessary for competition decisions, this could be addressed through formal AN EFFECTIVE COMPETITION or informal consultations of the financial regulator by the competition authority. LAW SYSTEM Clearer separation would address some T here is a general consensus in academic of the factors that could impede effective and policy circles that full application of competition policy in the banking sector. competition law in the banking sector The efficacy of a generally-applicable by a national competition authority is competition law requires a proper blend of desirable and is compatible with effective flexibility and strictness.107 Rules concerning prudential regulation.104 Generic legislation, firms’ conduct typically prohibit anti- which applies to a large number of firms competitive agreements and abuses of with different interests, tends to exhibit dominance. These categories are very broad. greater stability and avoids the tendency Hence, competition law enforcers must have for regulation to operate for the benefit of the ability to differentiate behaviors that the regulated industry. In contrast, selective are likely to distort competition from those competition rules encourage sectoral that firms undertake for efficiency reasons. lobbying and are more vulnerable to industry Rules that are too rigid and prohibit certain capture.105 conducts (e.g. below-cost pricing) without requiring a thorough analysis of the specific Competition law enforcement should be legal and economic context may dampen in the hands of an independent authority competition. Competition authorities that has a clear and coherent mandate; is should have the possibility of applying a explicitly mandated to protect competition; rule of reason to most potential antitrust is shielded from political and economic infringements and guarantee the parties influence; and is separated from the financial the right to prove that their strategies are regulator.106 Separation from prudential motivated by efficiency justifications. At oversight does not mean that the financial the same time, hard-core anti-competitive regulator would have no say in competition: agreements, such as price-fixing or bid- the prudential authority could have some rigging, should be pursued firmly. Exemptions to competition law prohibitions should be objectively justified and granted 104. For a discussion see, for example, Carletti and Hartmann (2003); ICN (2005); Claessens (2009); Vickers (2010); and OECD (2011). 105. See Becker (1976, 1983); Laffont and Tirole (1991); Posner (1988, 1974) Stigler (1971). 106. For a discussion of the importance of having a 107. The importance of this as well as of other features competition authority that is independent from the of an effective competition policy regime discussed in this government see, for example, Høj (2007); Oliveira et al. section are elaborated in Buccirossi et al., (2009; 2011) and in (2005); Rey (2003); Voigt (2006). the literature therein cited. 52 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT only if the exempted conduct benefits Sanctions can be used strategically to fight consumers in ways that offset the negative cartels through the adoption of leniency consequences of a lower degree of programs. Leniency programs grant a competition. Some conduct that restricts sanction reduction, up to immunity, to firms competition, especially agreements, might that cooperate with a competition authority be necessary to improve the production or by disclosing an undetected cartel or by distribution of goods or to promote technical providing evidence that can be used to or economic progress. Hence, they might be successfully prosecute it. Such programs exempted. have proved effective in fighting cartels. However, they can be counterproductive Competition authorities must be endowed if not well-designed. An effective leniency with adequate investigative powers program requires a generous treatment only to uncover anticompetitive behavior. for the first leniency applicant and a clear and Competition law infringements, especially predictable application of the more favorable cartels, can be very difficult to detect and to treatment to the applicants (Buccirossi and prove. Conspirators employ sophisticated Spagnolo, 2006, 2007; Spagnolo, 2004). methods to reach and execute coordination and to conceal evidence of their wrongdoing. Merger control regulation should guarantee A competition authority can defy cartels only that competition authorities are promptly if it has the power to inspect the companies’ informed of operations that might alter premises and to obtain relevant information competition. Mergers and acquisitions from market participants. could have anticompetitive effects by making it profitable for a leading firm to Competition law enforcement must be exercise power unilaterally, or by increasing coupled with an effective sanction policy. the likelihood that firms in a market could The main purpose of competition law is to successfully maintain a collusive outcome. deter anti-competitive conduct. Firms are In the case of SME lending markets, the rational decision makers. They refrain from question for antitrust analysis is whether as committing an antitrust infringement only a result of a merger banks are likely to raise if the expected negative consequences of prices with respect to small business loans. the illegal conduct outweigh the expected Merging parties should have an ex-ante profits. Antitrust sanctions have to be obligation to notify a merger. This obligation sufficiently harsh to tip the balance in favor of must arise when some objective conditions compliance, but it is also important to ensure are satisfied. International best practices that expected sanctions are proportional indicate that these conditions may refer to to the social harm caused by the anti- the turnover of the merging parties, or total competitive behavior.108 assets in the case of banks.109 108. See Connor, (2006) and Landes, (1983) for a discussion 109. See, for example, Buccirossi et al. (2014), and Gonzalez of this topic. and Benitez (2009) for a discussion. CHAPTER 4 | ASSESSMENT OF THE COMPETITION LAWS 53 This chapter assesses the effectiveness of the Qatar in 2006, Kuwait in 2007, UAE in 2012 competition law system in the GCC countries and, most recently, Oman in 2014. In Bahrain by considering the following elements: some competition-related provisions are set in Law No. 35/2012, which contains a The ■  scope of competition law prohibitions number of consumer protection measures. as applicable to the banking sector Table 5 summarizes the main elements of ■  Proper application of per se and rule of the national competition laws in the GCC. reason criteria to potential anticompetitive It reports the reference number of the legal conducts source, the denomination of the institution authorized to enforce its provisions, and the Identification ■  of well-defined efficiency Art.s that discipline the main competition- criteria to grant exemptions related issues. Independence ■  of the institution entrusted Stakeholder interviews reveal weak with the power of enforcing competition enforcement of competition laws across law and its relation with the central bank GCC countries. Parties interviewed, including Adequacy ■  of the investigative and sanction the competition authorities, reported powers attributed to the competition no enforcement activity in the banking authority and the existence of a leniency sector. Banks’ representatives showed program little awareness of the prohibitions set in ■  Existence of an obligation to notify the competition law and of the existence mergers between banks, the conditions of an ex-ante merger control regime. that trigger this obligation and the criteria For instance, many market participants adopted to assess the competitive effects reported that mergers among banks can be of a notified merger scrutinized only by the central bank or by other sectoral regulators. None mentioned a notification obligation to the competition COMPETITION LAW REGIMES authority despite the presence of one. IN THE GCC COUNTRIES Hence, although the relevant provisions have been formally set, they seem insufficient to effectively prevent anti-competitive conduct Existence and scope and to discipline structural changes that of competition law may hinder competition. This state of affairs may be due to limited capacity at relevant All the GCC countries except Bahrain institutions, the existence of large segments have enacted a competition law. KSA was of economic activities that are subtracted the first country in the region to adopt a from the application of the law, or to competition law in 2004, and amended it insufficient independence of the competition in 2014.110 Other countries followed suit: authority vis-à-vis economic and political interests. 110. As of October 2015, further amendments are being discussed. 54 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT Table 5: Competition Law in the GCC Country Source Competition Authority Agreements Abuses Merger Bahrain Law No. 35/2012 Directorate of Consumer Art. 13 Art. 14 - Protection Kuwait Law No. 10/ 2007 Competition Protection Art. 4 Art.4 Art. 8 Authority Oman Royal Decree No. Authority for Consumer Art. 8 Art. 9 Art. 10 Art. 11 67/2014 Protection Qatar Law No. 19/2006 Competition Protection Art. 3 Art. 4 Art. 10 and Anti-Monopoly Committee KSA Royal Decree No. Competition Protection Art. 4 Art. 5 (see Art. 6 M25/2004 (amended Council also Art. with Royal Decree No. 4) 24/M 2014) UAE Federal Law No. Competition Regulation Art. 5 Art. 6 Art. 9, 10, 11 4/2012 Committee Source: Elaboration on publicly available data and stakeholder interviews Lack of enforcement activity impedes the rules contain instances of prohibited conduct identification of criteria needed to distinguish that are not aligned with international best between anti-competitive conduct and practices. legitimate behavior. The wording used to define prohibitions set in the relevant laws Exclusions and exemptions is insufficient to identify precisely which conduct is considered illegal and under GCC competition laws frequently exclude which circumstances. This is a feature from their application a large number of common to all competition legislations business operations and/or companies. across the world. Hence, in all jurisdictions These exclusions may significantly hinder the the exact scope of the prohibitions is mainly generally positive impact of competition on delineated through case law. The proper the economy. interpretation of competition rules can be ■ Bahrain: Relevant legislation excludes further enhanced through the adoption of from its application medicines, health soft law instruments, such as notices and related goods and services, as well guidelines. Currently, it appears that these as professional services concerning sources of guidance are lacking in the GCC, medicines, engineering, law, accounting creating uncertainty. This uncertainty is and insurance (Art. 1). exacerbated by the fact that substantive CHAPTER 4 | ASSESSMENT OF THE COMPETITION LAWS 55 Kuwait: ■  Art. 6 declares that the UAE), the general exemption granted to competition law does not apply to facilities SOEs and entities subject to state direction and projects owned and managed by the or supervision may affect competition in state. It also excludes activities designed the SME banking sector. Chapter 2 showed to facilitate economic activities, such as that all GCC governments have direct or cooperation among companies in laying indirect control of a large number of banks. down standard specifications, and the Moreover, the central bank oversees all banks collection and exchange of statistics and in all the GCC countries. Great uncertainty information about a particular activity. exists on whether banks, especially those owned or controlled by the state, are subject Oman: ■  The provisions of the competition to the provisions of national competition law are not applicable to the activities laws. This uncertainty was confirmed in relevant to the public facilities fully owned interviews with stakeholders. or controlled by the Sultanate of Oman (Art. 4). Rules concerning exemptions to antitrust prohibitions are not always objectively Qatar: ■  Art. 6 declares that the provisions identified and related to the achievement of of the Competition Act do not apply to efficiency-related objectives. The competition sovereign ventures of the state, or acts of authority is not often entrusted with power institutions, authorities, companies and to grant an exemption. Country-specific entities directed or supervised by the criteria set in the competition laws to grant state. an exemption to the antitrust prohibitions ■ KSA: Art. 3 of the Competition Act and the authority empowered to do it are establishes that the provisions of the Law summarized below. apply to all firms working in Saudi markets Bahrain: ■  The consumer protection law except public corporations and wholly does not envisage exemptions to the state-owned companies. antitrust prohibitions. UAE: ■  The competition law excludes from Kuwait: ■  The competition authority may, its application conduct and activities upon a request by the interested parties, carried out by state-owned establishments allow certain practices, agreements, and by any institution that has been contracts and decisions that might restrict granted an exception by the government. competition when the expected benefit The government also has the right to to consumers exceeds the negative exempt entire sectors, activities and effects of restricting competition (Art. 5). businesses as it deems fit from time to This provision seems in line with good time. Currently, the financial sector is practices; however, it must be noted that it among the excluded sectors (Art. 4 and concerns both agreements and abuses of Annex). dominance. While the banking sector is not explicitly Oman: ■  The competition authority has excluded from the application of national broad powers of exemption that might competition laws (with the exception of 56 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT cover entire businesses. Although an Independence of competition exemption formally requires the existence authorities and cooperation with of potential consumer benefits, it can central banks be granted to pursue objectives that may be at odds with efficiency purposes, Many GCC competition authorities lack such as the development of SMEs or the sufficient independence, which could unification of the terms and conditions hamper their ability to conduct balanced governing trade, delivery of commodities case reviews. We describe the relationship and payments (Art. 5). between the competition authority and the government in each country below. ■ Qatar: Certain bids, agreements or contracts that limit competition may ■ Bahrain: The Consumer Protection be exempted from the scope of the Authority is a Directorate of the Ministry of substantive prohibitions, when it is in the Commerce. interest of the consumer. The power to Kuwait: ■  The Competition Protection grant these exemptions is in the hands of Authority is formally independent, however the Minister of Business and Trade (Art. 5). it is affiliated to the Ministry of Commerce ■  KSA: The Competition Protection Council and Industry. may choose not to apply the competition ■ Oman: According to Art. 1 of Royal Decree law prohibitions to practices and No. 26/2011 the Authority for Consumer agreements in violation of competition if Protection has a legal persona and enjoys the expected benefits of such practices financial and administrative autonomy. and agreements to firms and consumers However, Art. 1 of the Royal Decree No. exceed the negative effects of restricting 53/2011 establishes that the Authority is competition (Art. 4); attached to the Council of Ministers. UAE: ■  The Minister of the Economy, ■ Qatar: The Competition Protection and following a recommendation of the Anti-Monopoly Committee is tantamount Competition Regulation Committee, to a government department, directly and upon a request from the parties, reporting to the Ministry of Economy and can exempt a party or parties from the Commerce. The Committee is constituted restrictive agreements or practices related by decision of the Prime Minister, at the to a dominant market position from proposal of the Minister of Business and abiding by the substantive antitrust rules, Trade. provided that the parties can prove such ■ KSA: Art. 8 of the competition law qualifies restrictive agreements or practices related the Competition Protection Council as to a dominant position will strengthen “independent”. However, the Competition economic development, improve the Protection Council is chaired by the performance and competitiveness of Minister of Commerce and Industry, firms, develop production and distribution is located in the same Ministry, and is systems, or realize specific benefits for comprised of representatives of various consumers (Art. 7). ministries and the business community. CHAPTER 4 | ASSESSMENT OF THE COMPETITION LAWS 57 UAE: ■  The Competition Regulation Kuwait: ■  The Competition Protection Committee is chaired by the Authority has the power to receive notices, Undersecretary of the Ministry of Economy. applications and complaints; undertake The Council of Ministries determines the investigation and search actions; collect membership of the Committee, regulates evidence; and investigate agreements, its working arrangements and sets the contracts and practices that are harmful to remuneration of its members. competition (Art. 10). Information based on interviews ■ Oman: The Authority for Consumer indicates that a working relationship Protection’s personnel is entrusted with between the competition authorities power to scrutinize and audit all relevant with the corresponding central banks is acts (Art. 13) and to access relevant lacking in the GCC countries. In many premises and gather information required countries, competition authorities and in the investigation process (Art. 14). sectoral regulators frequently enter into a ■ Qatar: Art. 9 of the competition law memorandum of understanding to cooperate authorizes the Committee to enter the and exchange information. This form of places of business and facilities of an cooperation enables the central bank and the offender in order to search and examine competition authority to avoid overlapping documents and registers. responsibilities and conduct, and to execute KSA: ■  Art. 11 establishes that the their respective duties more efficiently. Cooperation may need to be reinforced, employees of the Competition Protection particularly in the assessment of mergers, Council have the capacity of judicial since a higher degree of concentration may control, and may review all records, files simultaneously hinder competition and and documents of the firms concerned financial access as well as financial stability that are relevant to the complaint, and can and overall efficiency. obtain copies of relevant information. ■ UAE: The competition law does not specify Investigative powers, sanction policy the investigative powers attributed to the and leniency program Competition Regulation Committee. Sanctions and penalties applicable to Competition authorities in GCC countries antitrust infringements vary significantly seem to have sufficient investigative powers across GCC countries. Both pecuniary and to effectively perform their functions. criminal sanctions are envisaged to punish The power of each country’s competition infringers as summarized below. authority to collect evidence and ascertain infringements is summarized below. Bahrain: ■  A prison sentence for a period of no more than five years and a fine not Bahrain: ■  Art. 17 of the relevant legislation exceeding BD 5,000 (US$13,200), or either provides that officers of the Directorate penalty, can be inflicted upon anyone of Consumer Protection, designated by who violates the consumer protection law the Minister, have the power to inspect provisions (Art. 21). relevant premises. 58 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT ■ Kuwait: Art. 19 sets a fine not exceeding UAE: ■  Art. 16 provides that whoever the larger of KD 100,000 Dinars violates the provisions of both Artt. 5 and (US$329,000) or an amount equal to the 6, shall pay a fine of minimum Dh 500,000 value of the illegitimate gains achieved for (US$135,600) and maximum AED 5 million violations of Art. 4. (US$1,356,000). ■ Oman: According to Art. 19, whoever The level of pecuniary sanctions seems violates the substantive competition largely inadequate to deter potential provisions stated under the law shall be violators. Although in most cases the fine is imprisoned for a term not less than three coupled with the disgorgement of the illicit months and not exceeding three years profits, the overall expected sanction appears and with a fine equal to what was gained significantly below the gains that firms can thereby in terms of profits from selling the obtain from undertaking anti-competitive products subject of the violation, or any of conduct, especially when engaging in explicit the aforementioned penalties plus a rate collusion. For instance, in Kuwait de facto the not less than 5 percent and not exceeding illicit gains constitute the maximum sanction 10 percent of the total annual sales of the an infringer may be called to pay. Criminal products subject of the violation, and that sanctions can be an effective deterrent in were gained by the violator during the last Bahrain and Oman. However, they seem fiscal year. appropriate only for hard-core cartels. For ■  Qatar: Art. 17 provides that anyone other antitrust infringements, such harsh committing an antitrust infringement punishments may induce firms to adopt an shall be fined not less than QR 100,000 excessive prudential attitude and forego (US$27,360) and not more than QR 5 efficient strategies fearing that they may million (US$1,368,000). In all cases, the misjudged as anti-competitive. Courts shall undertake to confiscate the Leniency programs have not been adopted profits resulting from the contravention, in GCC competition law systems. In and any other profits the offender may Oman, Qatar and UAE, the law prescribes have obtained by means of unlawful a minimum sanction, which prevents the competition. implementation of a leniency program ■  KSA: According to Art. 12 each violation that generously treats the first firm that of the provisions of the competition law cooperates with the authority to the shall be subject to a fine not exceeding existence of a secret cartel. In all the other 10 percent of the total turnover or not countries, the adoption of a leniency exceeding SRI 10 million (US$2,656,000). program does not seem to require an The law also establishes the right of the amendment of the law. victims of an antitrust infringement to obtain a full compensation; in this respect the infringers shall reimburse all profits achieved as a resulted of the violation; CHAPTER 4 | ASSESSMENT OF THE COMPETITION LAWS 59 Merger control regime the market structure, the ease with which other firms enter the market, and any other A merger control regime exists in all GCC criteria determined by the Council. countries with the exception of Bahrain. The only exceptions where the notion of Firms that intend to conduct a merger or dominance is related more directly to that of an acquisition are obliged to notify the market power are Qatar and UAE: competition authority. As already pointed out, it is not clear whether this obligation Qatar: ■  Art. 1 defines “control” or applies also to banks since they are subject “dominance” as the power of a person, to the supervisory power of the central bank. or group of persons acting together, to dominate the market and effectively In any event, the conditions triggering this to influence prices and the volume of obligation are not objectively defined. In products on offer, while their competitors most cases the obligation exists only if the have no power to prevent this. new entity resulting from the merger acquires a dominant position, and this position is ■ UAE: Art. 1 defines a “dominant position” ascertained considering only market shares, as a position whereby any establishment which is not best practice. In particular: can, by itself or in collaboration with other establishments, control or affect the Kuwait: ■  Art. 1 defines control (equivalent relevant market. to dominant position) as a condition in which a person or group of persons acting None of the competition laws in GCC together directly or indirectly control the countries clarify the criteria that the market for products by acquiring more competition authority must use to assess the than 35 percent of the volume of the competitive effects of a proposed merger, or relevant market. the type of decisions it can make in response to an assessment. In some cases, it seems Oman: ■  “Domination” is defined as the that the competition authority can only ability demonstrated by any individual or approve or block the merger depending on a group of people directly or indirectly whether a predefined market share threshold cooperating in the control over the is passed. Competition authorities seem concerned market, which means acquiring to lack the power to approve the merger a rate exceeding 35 percent of the volume imposing specific conditions and obligation. of a particular market (Art. 1). The only exception is UAE, where the law KSA: ■  Art. 2 defines “domination” as a explicitly admits this possibility. The main situation whereby a firm or a group of firms relevant provisions in each country are are able to influence the market prevailing summarized below. price by controlling a certain percentage ■ Kuwait: Art. 8 provides that individuals of the total supply of a commodity or or juridical persons who wish to acquire service in the relevant industry. The assets, property rights, or benefits; to regulations shall specify this percentage form unions, amalgamations, mergers; according to specific criteria, which include or combine the management of two or 60 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT more persons in such manner as to lead market, and which may create or promote to control or to increasing the existing a dominant position, the relevant control of a particular market, shall notify establishment shall submit a request for the Authority. The latter shall examine the approval to the Ministry at least thirty days notice and make a decision based on the before the date of the operation. analysis of the costs and benefits of the merger process. OPTIONS FOR IMPROVING Oman: ■  Any entity that acts in a way COMPETITION LAW SYSTEMS resulting in concentration of assets of more than 50 percent of the relevant Competition law systems in the GCC market shall submit a written request to countries could be significantly improved. the Authority, which shall decide on the Although all the GCC countries have request within a period not exceeding introduced formal rules aimed at protecting ninety days (Art. 19). competition, the current enforcement ■  Qatar: Art. 10 provides that persons systems have yielded limited expected who wish to acquire assets or rights of benefits. It is important to ensure the creation ownership or use, to buy shares, to set of truly independent competition authorities, up mergers or unite bodies run by two or as well as to substantially reduce the scope more juridical persons, in such a way as of activities excluded from the application of to control or dominate the market, must competition law and/or from the purview of notify the Committee. The Committee the competition authority. shall examine the notification and issue To improve prospects for competition a decision within a period not exceeding in SME banking, GCC governments are ninety days from the date of receiving the advised to delineate clearly the roles and notification. responsibilities of the competition authority ■  KSA: Firms involved in merger operations and the central bank. Competition authorities or firms desiring to acquire assets, would be the only institution responsible proprietary rights, usufructs or shares, for the enforcement of competition rules in which cause them to be in a dominating banking, including granting exemptions and position, shall notify the Council in writing scrutinizing mergers; central banks would at least sixty days prior to completion contribute to the enforcement activity via of the same. The Council may review all consultation. necessary information prior to deciding to An effective competition law minimizes approve or reject the notification (Art. 6). the scope for preferential treatment and ■ UAE: Art. 9 provides that to achieve the discretion towards specific banks and economic concentration operations financial institutions. Competition law should in which the overall share of the treat banks controlled by the state, as well establishments exceeds the proportion as any other state-controlled economic of the overall transactions in the relevant initiative, the same as all private entities. CHAPTER 4 | ASSESSMENT OF THE COMPETITION LAWS 61 Specific rules for exemptions may require The ■  economic criteria that a competition two conditions: first, these sectors subject to authority adopts to decide on an exemption form a well-defined and closed application for an exemption, and the list; second, the legal monopolist could be potentially anti-competitive practices still subject to the provisions of competition that benefit from such an exemption law when it operates in any other sector even (e.g. clarifying that cartels can never be if economically related to the excluded one. exempted) Competition authorities might also consider The ■  economic criteria that the competition the adoption of soft law instruments to authority adopts to assess a notified clarify the scope of the law and the criteria merger and to identify necessary employed for its enforcement. Competition remedies, if any: the guidelines may spell law is more effective if firms incorporate out the different criteria to be adopted in their decisions the limits set in the law’s for horizontal, vertical and conglomerate substantive provisions. Hence, it is important mergers and the theories of competitive for firms to correctly anticipate which conduct harm applicable to them. would be considered anti-competitive. A The success of a competition policy depends clear ex-ante definition of the criteria that in part on deterring potential infringements; guide a competition assessment help prevent expected sanctions should be adequate manipulations and provide firms and their and proportional to the potential social legal counsels with an information that is harm caused by anti-competitive conduct. indispensable to defend themselves against Competition authorities might consider allegations considered unfounded. Hence, developing a more structured sanction competition authorities in the GCC might policy that allows them and the courts issue guidelines on the following topics: to contemplate all relevant factors when The ■  delimitation of relevant markets: deciding on the type and amount of the this is a crucial step in many competition sanction to be inflicted. This policy may assessments and vital to the extent that be divulged to all interested parties both the application of some provisions require to improve transparency and to dissuade the calculation of market shares firms from undertaking illegal behavior. Competition authorities may improve the The ■  interpretation of the substantive effectiveness of their sanction policy by provisions concerning agreements introducing a leniency program which, as and abuses of dominance defining revealed by experience in other jurisdictions, the applicable theories of competitive is a powerful tool to fight secret cartels. harm: in particular, it is important to clearly distinguish vertical and horizontal Policymakers might consider amending agreements and, among the latter, merger control regulation by setting between hard-core restrictions and objective conditions that trigger the other cooperation and specialization agreements 62 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT obligation to notify a concentration. a number of potentially anticompetitive Notification thresholds based on objective mergers may not undergo a screening by metrics tend to be preferred according to the competition authority. The subsequent international best practices (ICN, 2002). merger could be detrimental to consumer Parties’ turnover or asset values do not welfare, for example by resulting in require subjective calculations and are higher prices, lower quality, or decreasing usually easily collected by the merging innovation. On the other hand, if thresholds parties. When thresholds are based on these are not high enough, there might be an objective criteria, they can vary according excessive number of notifications, imposing to type required. Pre-merger notification unnecessary transaction costs on both thresholds can be based on the world- the merging parties and the competition wide turnover of the merging parties, on authority. The optimal pre-merger notification the aggregate domestic turnover or both thresholds can be defined by minimizing (total assets in the case of banks).111 Some the sum of the actual costs imposed on the countries further require that the turnover competition authority and the parties when of the target firm must exceed a certain a merger has to undergo an ex-ante review threshold. The actual level of the thresholds and the expected opportunity cost of a non- is important. If thresholds are set too high, notified merger with anti-competitive effects. 111. The aggregate turnover of the merging parties is defined as the turnover of all merging firms, that is the combined turnover of the acquiring group plus the turnover of the acquired firm. CHAPTER 5 | WHERE DO WE GO FROM HERE 63 to their own capacities, including a lack CHAPTER 5 | WHERE DO WE GO of financial accounts and reliable credit FROM HERE? histories. Banking systems are extensive, but the high concentration of loans reflects banks’ focus on large borrowers. Banks T his study has investigated competition perceive SMEs as higher credit risk, and in the SME lending markets in demand higher risk premiums or collateral the GCC countries by scrutinizing requirements. Financing alternatives outside potential impediments to competition the banking sector are limited. Policy arising from relevant rules and regulations interventions in recent years have partly imposed by the government. Rules and mitigated access problems but have not regulations may (i) limit the possibility of addressed the root causes. entry or expansion in the market; (ii) create One particular supply-side factor constraining discriminatory conditions among market SMEs’ ability to obtain more bank credit in players; (iii) limit banks’ business strategy the GCC is weak competition in the banking options; and (iv) constrain SMEs’ ability to sector. Research shows that bank competition choose. The study has also examined the in the GCC is among the lowest in the world, quality of the competition law system in the largely due to stricter entry requirements, GCC countries. Inappropriate competition restrictions to bank activities, relatively law systems may exacerbate the competitive weak credit information systems, and lack distortions potentially introduced by rules of competition from foreign banks and and regulations. nonbank financial institutions. This pattern is SMEs are central to economic diversification exacerbated by a relatively large presence of and employment generation in the GCC. state-owned banks. Given the growing body Most of the external financing SMEs need of evidence showing that bank competition to grow, invest and innovate is expected to promotes access to finance and improves come from banks, which dominate financial the efficiency of financial intermediation intermediation in the GCC. Yet SME bank while not necessarily eroding the stability lending penetration in the region remains of the system, improving bank competition only 2 percent of total loans on average, could play a pivotal role in the GCC strategy compared for example to 13 percent in non- of economic diversification and increased GCC MENA countries, and it is hindering access to finance for SMEs. the growth and development of the SME In conclusion, this assessment identifies eight segment. broad policy areas where relevant regulations Limited SME financial access outcomes in and the institutional framework may impede the GCC reflect the interaction of demand, competition in the GCC’s SME lending supply, institutional, regulatory, and other markets, and where additional investigative policy factors. Apart from obstacles arising work may be warranted depending on the from unfavorable investment climates, SMEs country context. These areas are described face several nonfinancial barriers related below. 64 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT ■  irst, governments in the GCC could F improved by removing potential obstacles consider assessing the anticompetitive and increasing clarity and transparency in effects of public ownership in the the bank licensing process. To reap the banking sector. Should this test give benefits of competition, it is important positive evidence, a competitive to create a clear perception that entry neutrality principle between state-owned is possible: contestability would act as a banks and private operators could be disciplining device on banks and mitigate enforced. Possible solutions range from their market power, even if actual entry privatization to a set of measures aimed does not occur. at mitigating the likely anticompetitive ■  Fourth, governments in the GCC effects of public ownership, such as (i) could look at the potential benefits reforming the corporate governance from introducing a tiered approach and oversight framework of state-owned to prudential regulation. Tailoring banks to strengthen transparency and the application of relevant rules and accountability; and (ii) amending all regulations based on the size, complexity explicit provisions and influencing business and possibly other characteristics of practices that could further distort the banking organizations is a useful way market. to implement a tiered banking system, ■  Second, policymakers might ensure that where entrance is encouraged without state-sponsored initiatives do not distort exacerbating risks in the system. Revising competition in the banking sector. In capital guidelines to encourage entry principle, it is advisable to design state- of small-scale banks, in particular, may sponsored initiatives in a way that non- positively affect market contestability in discriminatory participation conditions the SME lending markets. are set and that business relationships ■  Fifth, policymakers in the region between SMEs and banks are established. might investigate potential regulatory Optimal state-sponsored initiatives restrictions limiting banks’ strategic encourage banks to compete against each options. For example, interest rate other and prospective borrowers to shop ceilings may hold interest rates below around for their preferred credit provider. their free-market levels and act as focal A full competition assessment of current points, facilitating collusion. As a result, state-sponsored initiatives aimed at banks may ration credit, privileging some supporting SME financial access would be SME borrowers and leaving most high- warranted to identify gaps with respect to risk SMEs unserved. As banks advocate international best practices. the need for a risk-based approach to ■  hird, policymakers could review the T lending, understanding the potentially process through which banks are allowed negative impact of interest rate ceilings on to start or expand their operations to competition is especially relevant. ensure greater clarity and transparency. Market contestability in principle could be CHAPTER 5 | WHERE DO WE GO FROM HERE 65 ■  ixth, it might be appropriate to S ■  Finally, additional investigative work undertake an in-depth assessment of might be beneficial in the area of the credit information environment to rules, institutions and enforcement of explore possible risks of discriminatory competition policy. The findings of this access conditions. Although existing credit initial competition assessment suggest that bureaus and credit registries appear to be the role and independence of the authority generally well-received among banks, their entrusted with the power to enforce role could be strengthened. Important competition law could be strengthened. To pro-competitive effects might derive this end, formal cooperation arrangements from extending coverage, improving between competition authorities and timeliness and reliability of information, central banks to clarify the division of promoting international harmonization, labor in the area of competition could be and undertaking initiatives aimed at considered. Legal amendments might be connecting credit history registries with introduced to reduce the areas of activity other sources of relevant financial and currently excluded from the application of credit data. competition law and/or from the purview of the competition authority. Moreover, Seventh, ■  governments could increase soft law instruments concerning the customers’ mobility. SMEs can increase definition of the relevant market, the competition among banks by comparing scope of antitrust prohibitions, the criteria their products and services and switching to be employed to grant exemptions, if they are not satisfied with their current and the criteria to assess mergers might bank. Reducing switching costs might be introduced along with a more refined contribute to this. Explicit regulatory sanction policy and well-designed leniency provisions preventing the application programs. Revising the conditions of any closing fee may help to lower that trigger an obligation to notify switching costs. Knowledge sharing in mergers might also be an option. Finally, this area across GCC countries would policymakers could consider developing help to develop common practices and and implementing advocacy initiatives that tools to improve customers’ mobility. increase stakeholders’ awareness of the Deposit insurance schemes might also be importance of competition among banks introduced where they do not currently and its positive effect on SME access to exist or reformed where they have been finance and economic growth. established to improve their coverage and avoid discrimination among banks. Formal deposit insurance schemes may affect switching by influencing customers’ perception about banks’ risk of default, compensating for reputational effects enjoyed by larger and state-owned operators. 66 COMPETITION IN THE GCC SME LENDING MARKETS: AN INITIAL ASSESSMENT REFERENCES 67 Barberis, N., Thaler, R., 2003. 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