Rising Competition and Global Interest: The Shifting Dynamics of the Middle East Banking Sector

The UAE stands out as one of those regions where there is still a very clear growth outlook for corporates, which really translates into growth for the banking sector overall as well

The Middle East journey has been a multi decade journey. In terms of growth especially across the banking sector, there have been a lot of interesting things which have happened during and post Covid. In many ways, the Middle East region has demonstrated tremendous growth in several aspects with the ability to not just attract the banking sector but the entire ecosystem.

From enabling companies to set up their headquarters in the region to attracting talent, there has been incredible progress made in the last three to five years, where prior to that a major part of the ecosystem was managed out of key financial hubs such as London, New York, Singapore and Hongkong but much of it now is brought on shore and managed locally. And it is only going to grow exponentially from here on going forward.

The larger part of the growth coming, especially during Covid, and post Covid, has been driven by the forward-looking strategies implemented by the UAE government. From aligning the work week similar to the global markets, regional initiatives such as the golden visas that boost further investment in the region, especially Dubai being an evolving hub for family offices, to also having regulatory frameworks with the aim of significantly expanding public-private partnership projects throughout the country, these initiatives have been implemented within a significant timeframe unlike any other part of the world, making the UAE stand out as one of the leading markets for growth.

The Middle East banking sector is a competitive landscape which is going to get a lot more intense. We see globally, banks are looking at GCC as a growth region a lot more intently. While these are positive aspects in terms of the region being a key growth driver in the global scenario, it also attracts more competition and hence more investments from global banks into the region.

On the other side, we do see the local banks becoming more regional. They are not just within the GCC, but are looking to expand to other markets as well.

Thus, as seen from the results of the 2024 Greenwich Excellence Awards for the Middle East Banking Sector, it is going to get a lot more intense with further investments in capabilities, digitisation, sustainability for multitude of years.

The UAE leads

The UAE stands out as one of those regions where there is still a very clear growth outlook for corporates, which really translates into growth for the banking sector overall as well. A big part of that growth is interestingly in the existing markets or GCC markets. While there are sufficient opportunities to expand beyond the region, however there is enough growth to be tapped on within the region as well.

The regional banks with their presence in several other markets in the GCC has the ability to connect within those markets and this is going to be one of the leading growth drivers. This also enables foreign banks to collaborate within the regional ecosystem of supply chains and drive flows through important corridors that are really coming up like China into Middle East, Southeast Asia into Middle East, India into Middle East. The ability for foreign banks to support those flows is an integral part of the growth story of the region itself.

It is no surprise that the regional banks probably have more embedded relationships with corporates in this region specifically given the heritage and legacy to their relationships. But what has really changed is the focus from regional banks to not just rely on their balance sheet strength, but to build their product capabilities in Transaction Banking, across global markets, capital markets and thus be able to compete head-to-head with the foreign banks in the region.

Compared to the rest of the world, the Middle East banking sector is one of the leading sectors that is growing significantly for the past three to five years. It has been a secular growth story, especially post Covid and going forward, we do expect our forecast for the region is going to be one of the bright spots not just in 2024 but for years to come.

Role of sustainability in banking

Look at how sustainability has played a key role in the banking sector, we have again seen a very structural or a secular increase in terms of recognizing sustainability as an important target or goal from the buy side perspective. While the data we have been tracking shows that the numbers have been going up consistently in a structured manner in large corporates but less so with a similar trajectory in mid corporates. Across all large and mid-corporates, more than half of them have a clear sustainability target.

Especially regionally with COP 28 and several other sustainable initiatives including the recently announced 10-year Blue Residency visa, sustainability values have trickled into the finance function, allowing people to put the right financial structures and incentives behind ESG goals. Additionally, almost 50 per cent average year-on-year growth of regional banks being most active in approaching clients on sustainability.

In comparison, foreign banks, are slightly more active due to the nature of their product capabilities, being able to bring a global perspective across industry verticals around the world, that has given them a leverage to drive the narrative on ESG a lot more. However, the interesting trend, which we see year on year basis, is that the regional banks has stepped up significantly. The gap between foreign banks and regional banks used to be quite significant in the past and this is becoming narrower by the day also owing to the initiatives and proactive steps taken by the UAE leadership in the region.

Additionally for the banking sector, digital expertise will play a key role in the growth of local banks. Digitisation is a very critical factor in terms of how corporates think about their banking provider. In the past the weightage given to digital as a selection criteria for banks used to be less than 50 per cent. However today, it has changed and it is around 66 per cent which is just a one-year growth.

Digitisation of customer experience as well banking tools now features as one of the top three criteria of how clients think about their banking providers here. While there are several trends we see leading in 2024 -25, however the top three can be summarised as personalised UX/UI, seamless integration capabilities and product/platform capabilities (real time payments, predictive analytics, forecasting).

Changing trends

With the changing client behaviour, banks also are changing equally. The regional banks have evolved from just focusing on lending and financing, and are now on par when it comes to digital capabilities to compete effectively on the business. While corporates might have a better relationship with some of the regional banks, largely because they have been banking with them for decades, however if a bank is able to deliver better capabilities through their digital platform channels, corporate clients are ready to make that switch from their incumbent banking partner.

With a competitive environment, the regional banks have also stepped up in terms of investing in their digital capabilities not just the channels but also undergoing digitalisation of their core internal infrastructure and their product offering as a multi-year journey.

Gaurav Arora is Global Head of Competitor Analytics at Coalition Greenwich and author of Middle East Banking: Competition Ignites on Servicing Corporates. Views expressed are his own and do not reflect the newspaper's policy.