Europe Arab Bank recently hosted its second Financial Forum at the London Stock Exchange, entitled ‘Managing the Crisis: the response of the MENA regulators’. Moderated by the journalist and broadcaster John Humphrys, the forum featured guest speakers HE Dr. Umayya Salah Toukan, the Governor of the Central Bank of Jordan, and HE Mr. Farhat Omar Bengdara, the Governor of the Central Bank of Libya. Libya and Jordan’s governors gave their thoughts on the impact of the downturn, including their approaches to managing the crisis and views on prevention in the future. The debate on global financial reform has induced widespread interest in the re-regulation of global financial markets and the future of the banking industry as a whole, according to EAB.

EAB is a wholly-owned subsidiary of Arab Bank plc. The Group has a global network of over 500 branches and subsidiaries, in 30 countries across five continents. The Bank provides a ‘Bridge to MENA’, linking Europe with the Middle East and North Africa by combining local knowledge, support and banking facilities with international experience, industry knowledge and product expertise. The market is rapidly expanding, as Europe succumbs to a temporary operation-impeding, one-size-fits-all solution, while MENA looks forward at how to prevent and control risk starting from a date in the past. This is where the difference lies.

A view from Jordan

Jordan is a jurisdiction where ‘events and ideas are still evolving’ (according to Toukan himself), a stellar example of conservative banking. HE Dr. Umayya Salah Toukan, the Governor of the Central Bank laid out the four major issues faced by Jordan:

1 Fragile and unsustainable recovery
The signs of sterilisation and recovery gave rise to concerns that recent indicators may have resulted from unprecedented fiscal measures, according to Toukan. Exit strategies need to be put in motion while striking the balance between, on the one hand, not exiting too early and repeating the mistakes of the Great Depression, and on the other, ensuring that private sector demand is robust enough to meet public sector stimulus. Running alongside these issues is the concern that if inflation accelerates, interest rates will have to rise in an untimely manner.

We were reminded that the declining dollar may be a factor in protectionist measures, and Toukan re-iterated just how crucial it was to avoid a 1930s-style disaster. Speaking with great expertise and prudence, Toukan revealed that one of the conclusions from the IMF meeting in Istanbul was that a co-ordinated future of global action was needed to address macro-economic challenges and existing internal and external imbalances, and the responsibility for this ought to be placed on the US, Europe and China.

2 Going back to basics
Serious damage has been done, Toukan admitted, and the speculative frenzy by global banks has been a main factor in the free-fall. HSBC chairman Stephen Green’s famous ‘the industry collectively owes the real world an apology’ quote, couldn’t have been more timely, and the Jordanian governor accepted it with nigh-on aplomb. The order of the day must be ‘back to basics’ rather than disguising the problems with a ‘business as usual’ shroud.

3 The regulatory regime
Regulators opted to deregulate and rely on self-regulation, and IMF surveillance failed. In contrast, the design of the new regime gives a larger mandate to certain banks while leverage ceilings, capital adequacy requirements and compensation schemes don’t reward excessive risk-taking and central banks will have to be micro and macro-regulators. The two related risks of the new regime entail taking in the larger mandate itself and that of over-regulation and its impact. He described the more substantive role of the new regime as anchoring not only inflation, but also confidence. The problem lies far deeper than in the figures according to Toukan, and it’s essential that faith is restored for credit to flow and for the economy to function.

4 The future of international institutions
The G20 has acknowledged the growing impact of developing countries such as India, Brazil and Saudi Arabia, according to Toukan and as a result, the design of the new order will take longer. The post-WWII order was designed in some two weeks, and it is essential that MENA has a role in the new evolving order. Increasingly conservative policies of banks leaves countries better placed than when this crisis kicked off, and but there are still serious economic challenges  to be dealt with, namely fiscal discipline, macro-economic reform, and harmonisation between countries.

Policy framework needs to be taken more seriously, according to Jordan’s governor. Political and social reform should be pursued with an open mind, and the rule of law and freedom of expression are essential to the investment climate. Policy framework in Jordan has touched on this over the past ten years, with pre-emptive steps to maintain confidence and restore a healthy banking system.

Libya’s recovery
HE Mr Farhat Omar Bengdara outlined the positives of Libya’s recovery, recalling that in spite of early comparisons with the 1930s, the crisis seemed to be unwinding faster than anyone expected. Stability and recovery are underway, and the processes in place seem to be strong. The banks reacted swiftly, protectionist measures did not spread and policy-makers became more aggressive; measures were used to instill public confidence, sure, but it wasn’t all optimistic.

Can central banks sustain the current monetary policy of low interest rates, injection-assisted liquidity and inflationary pressure? Could government and the central banks continue to support the banking sector and continue making bailout plans? Will consumer confidence be restored? Expected growth has not been as strong as at the end of previous recessions, and unemployment is expected to remain high for some time in Libya. The recovery is unlikely to be uniformly V or W-shaped, as the form of recovery depends on how and when countries exit the policies implemented. Modestly, Bengdara explored Libya’s positive position in terms of growth and depth of crisis, talking down their ample liquidity and early shifting to government bonds and long-term maturities.

The crisis reaffirmed the belief that we need a well-sequenced approach with broad-ranging programmes in place to modernise the central banking systems. This includes an upgrade of monetary policy framework, structure and supervision. The governor reminded us how one country’s problems have a knock-on effect on others, and emphasised the importance of an international address of shortcomings to identify holes in regulatory framework. Libya’s plans to build a solid and efficient banking system are in good stead, with the country currently in a far more comfortable position than many; Bengdara remained understated about Libya’s surplus, dignified even.

The road ahead
Conservative banking is the way forward. Cash ought to be kept for local needs, while maintaining a small ratio of strategic investment with some banks but a lower-risk strategy. Collective punishment should be avoided where possible, as punishing banks not at fault fails to redress the balance.

Liquidity and leverage ratios make it difficult for banks to be profitable, but the regulators have to – according to both Bengdara and Toukan – be careful not to kill financial innovation. Pessimism and uncertainty are far more than a public façade for the problems faced, but the rest of the world can take much from Libya and Jordan’s approaches.