Countries in North Africa and the Middle East are at various stages in the development of their credit markets. All are growing, but the factors that have and will continue to influence this are varied and can range from local legislation and cultural considerations to the position of major players in local market and country’s economic situation.  This article will provide a snapshot of credit market development in the region, paying particular attention to Algeria, Tunisia, Turkey and Saudi Arabia & the Middle East.

Current credit market status

The Middle East is a mosaic of very varied countries in terms of their population, economic growth, political climate and banking industry maturity; however, there are some common trends that can be identified throughout the region. The most mature market is Turkey, where, along with stable economic conditions and falling interest rates (and mortgages), the consumer credit market is accelerating. Most of the banks have high targets for acquisitions and branch openings, and the Presidency and general elections taking place this year are expected to inspire further growth, although analysts state that the stable economy should remain unaffected.

Saudi Arabia and UAE are the next most mature markets after Turkey in terms of credit development, although Jordan and Egypt are also advanced compared to the rest of the area. Generally, in Middle East countries, the consumer credit market is growing rapidly as long as there is a climate of stability in the individual country. This is clearly the case in Saudi Arabia as banking credit has grown by over 40% in the last eight years, and consumer and credit card loans have grown by over 80% over the same period. Jordan has enjoyed a capital and investment inflow due to the war in Iraq and the market has grown rapidly in maturity and size as a response. Egypt is one of the largest markets in the region, with a population of over 75 million and a strong upward economic mobility in its social ranks.

There is also a lot of progress being made in the other Gulf Cooperation Countries as well as Lebanon and Pakistan. Lebanon in fact, used to be the banking capital of the region before the civil war relegated it to the rank of a less sophisticated banking market.

In Algeria, consumer credit has seen recent development and most credit activities are dominated by corporate and mortgage lending, with the majority of local banks being state-owned.

In Tunisia, the consumer credit industry is managed only by retail banks, and the regulator is blocking consumer credit development outside of the traditional retail banking institutions. Consumer credit is still a minor industry compared with corporate credit (tourism, building, agriculture) and represents less than 10% of total market exposures (compared to 25% in Morocco). 50% of top banks in Tunisia are state owned and have very traditional attitudes to lending.

By comparison, Morocco is the most mature market in the Maghreb region, with a long established consumer credit bureau and scoring practices already in place for consumer credit decision making. The two top players are Wafasalaf and SGMB-Eqdom, with more than 50% of the market between them. Consumer and leasing credit institutions have developed local credit incident databases (GPBM, APSF) and are owned by the top banks.

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Legal frameworks and compliance policies

In the Middle East, the legal frameworks vary. However, in most countries, there is enough commitment from central banks to change legislation to allow banking industry growth. In countries where the legal framework is too restrictive, serious reforms are being made or are under consideration. Mortgage laws are being passed in most countries where there is enough stability to allow serious real estate purchasing with very long terms.

The different legal frameworks account greatly for the booming banking industries in Bahrain and the UAE. The fact that these countries enjoy legal climates more in line with international practices allowed them to take the lead in the region once Lebanon lost its crown in that arena following the war.

Throughout the Middle East, and although deadlines vary and often get extended, Basel II compliance and international anti-money laundering compliance is required from financial institutions.

The Basel II approach is gaining more importance in Turkey, which is regulated by the Banking Regulations and Supervision Agency (BDDK) and the government. It will be mandatory for all banks by January 2008, with the advanced IRB approach mandatory in January 2009. The BDDK acts as the major regulatory body to determine the necessary legal framework to ensure confidence and stability in the financial markets in Turkey, and in Tunisia, Banque Centrale de Tunisie is the local regulator, which has to give prior agreement to all credit activities. Algeria has a mixture of not only capital market banking principles, but due to some smaller banks still being Islamic, Islamic banking principles* are followed here.

Since early 2006, Banque Centrale de Tunisie in Tunisia has encouraged local institutions to comply with Basel II requirements. However, most banks are currently at the stage of looking at Basel II implications. In comparison, the Bank Al Maghrib in Morocco requires banks to have a standard Basel II approach in place by 2008 and then the IRBA approach by 2012. In Algeria, there are strong regulations and, typical of this approach, the ‘Ministère des Finances’ has strong power of decision to authorise activities.  As a result, the Algerian market is difficult to enter and only French and Arabic banks are authorised at present.

Local credit bureaux

The development of credit bureaux is going to play a large part in the short-term of future credit market development in the Middle East. At present, credit reporting is in its early stages but stands to grow very fast as it is a hot issue. Currently, as well as Saudi Arabia, Experian is already involved in credit bureaux in Kuwait, Iran and Pakistan, with new ventures in the pipeline in Bahrain, UAE and Jordan. The Consumer Credit Bureau (KKB) in Turkey, which is an Experian client and uses our software and analytics, has been operational for about a decade now, and all of the banks and financial organisations are making the most out of the bureau data while lending. However, the bureau score and data could be enriched by value added services to provide the banks and financial organisations better decision making capabilities. At present, the KKB doesn’t act as a commercial bureau, which would be a valuable tool for the SME business of banks and financial institutions.

Conversely, in Tunisia, there is no credit bureau at present but local institutions are interested by the concept with the active support of the World Bank (IFC). The situation in Algeria is similar and the banking association is seriously considering a credit bureau, although there would be a great deal of work to do in terms of modernising systems and creating a local database before any work can commence. It would be difficult to implement a credit bureau without any external funding.

Issues and opportunities for the credit market (and bureau) development

Foreign investors have an appetite towards banks in Turkey, and many have already been acquired, to some extent, by foreign banks, which has led to a more competitive market. The government approved a mortgages law a few weeks ago and now mortgage lending is expected to become a major driver for both the Turkish finance sector and the bureaux operations.

In Tunisia, opportunities exist as a result of credit industry deregulation and also credit risk methodologies, with the help of development bank programs like KFW. Newcomers and French banks will continue to stimulate the market; for example, AttijariBank (the previously state-owned Bank du Sud) was recently bought by Santander and AttijariWafa Bank. AttijariBank joins UIB Tassil and UBCI, both of which have had foreign owners for the last 50 years in French banks Société Générale and BNP Paribas respectively.

For Algeria, the considerations include the fact that credit risk control policies from credit application to collections must be put in place, banks' IT systems must be centralised, and, as previously covered, banking management systems must see some modernisation.

In the Middle East, SME lending and mortgage financing are on the rise and most financial institutions in the area are looking into ways to improve their methods and approaches. In Saudi Arabia, the Saudi Credit Bureau (SIMAH) is studying the opportunity to establish a new commercial credit bureau for SMEs.

In terms of lessons that can drawn from the development of credit market and established bureaux in other parts of the world, Mr. Fatih Azaklı, Risk Analysis Manager of Garanti Payment Systems in Turkey, provides his views during an interview, for the purposes of this article: “Although every country has its own unique type of development and is considerably different in terms of legal environment, it is possible for emerging markets to establish tested and robust systems and concepts from developed markets. Therefore, the development process in emerging markets can be much shorter. However, sometimes it is an advantage to start from scratch rather than integrate an old fashioned system.”

Credit risk and fraud

Credit reporting is needed more and more throughout the Middle East as all credit and consumer lending is increasing and it is down to the efforts of institutions to limit and control their exposure to risk. Fraud does not yet have a big impact in the region but it is widely believed that, as western banks are becoming more and more sophisticated in their fraud controls, traditional fraud is moving into the region. Although overall fraud is not alarmingly high, the growth rate throughout the region is quite worrying. Therefore, many institutions are already looking into ways to prevent or control fraud. At present, most fraud is transactional but growth rates are similarly high in application fraud also.

In recent times, banks in Turkey have evolved considerably in terms of risk management. Many financial institutions have automated risk management and credit decisioning capabilities, either developed in-house or by a third party vendor like Experian-Scorex.  Nowadays, other sides of credit risk like customer management and fraud are becoming hot topics. Mr. Azaklı of Garanti Payment Systems comments:, “Our portfolio is now established and we have faced several different risk factors so far. We check IDs, verify by phone calls and sometime use site visit operations for certain types of applications. Of course, with instant credit projects, fraud risk might be critical. We are now working on building fraud scorecards and systems to prevent that.”

There is some transactional fraud in Turkey, although the country implemented the new ‘chip & pin’ technology as soon as it was available, which has resulted in almost an 80% fall in fraudulent transactions. With regards to application fraud, figures are generally lower than markets like the UK and US and in-house tools have been developed by institutions to deal with this. Banks like Garanti Bank, as Mr Azaklı continues, “take advantage of new technologies to keep fraud at a minimum and supply (our) customers with the most secure products”.

In Algeria, as the main banks are stated-owned, risk has been a secondary concern for a long time as people have been understandably focussed on other priorities. However, with foreign banks entering into the market, risk has been a more serious consideration in the last couple of years. At present, credit activity in Tunisia is dominated by corporate financing, and banks’ utilise a manual, deep financial analysis. There is no credit decision automation or credit scoring, except for the UIB and UBCI overseas operations of French banks. Credit risk in Tunisia is mainly covered by high interest rates and local regulations, i.e., provisioning methods. In both Algeria and Tunisia, fraud is not a tangible concept, and interest rates and credit policies (warranties) seem to cover high-risk levels.

*Islamic Banking

A key characteristic of the Middle East is the important presence of Islamic banking. Islamic banking is also enjoying substantial growth and must be regarded a significant part of the financial industry future of the region. Islamic banking is governed by its own Shariah compliant laws that are monitored by different Shariah boards for all individual financial institutions.  The main attributes of Islamic banking are the prohibition of interest, of asymmetric information and of all kinds of gambling and games of luck. The worldwide total assets of Islamic banking are estimated between 300 and 400 billion USD and 70% of that impressive number is in this region. The sustained growth rate of 15% shows that Islamic banking will continue being an important part of banking in the region for the foreseeable future.

This article has been produced with contributions from experienced local Experian-Scorex consultants. If you wish to discuss any of the content, please email us and we will put you in touch with the relevant contact.

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