(MEBG) – The recent merger between Al-Ahli Bank of Bahrain and United Bank of Kuwait may bring with it a transformation for the Middle East banking sector, with a shift from smaller family-run banks to larger, more complex operations. Some well-known names may even cease to exist in their current form.
Technology and increasing foreign competition will be the key drivers for future mergers. Why so? Larger banks, who are able to use technology to a greater extent, experience higher cost savings and economies of scale—a process much needed in the Middle East, where, in the opinion of some commentators, the banking sector has been stagnating.
The past two decades have been characterized by significant advances in communications and data processing. ATMs reduced the number of customer visits to the bank, software has enabled customer record keeping to be automated, and Internet and phone centers have made it possible to make financial transactions from the home or office.
In order to begin investing in the latest technology, there is a certain minimum capital requirement. Internet banking, for example, is strikingly expensive, and particularly if a bank chooses to host its site in-house—as many do for reasons of security and control.
Simply put, size sometimes does count. According to Mohammed Jalal, chairman of Al-Ahli Bank, said, “the merger between Al-Ahli and UBK will strengthen both institutions in terms of resources and market penetration, giving us a much improved competitive position in the GCC banking industry.”
As deregulation gathers steam in the Middle East, competition is likely to heat up. In part this is likely to be a result of foreign banks entering the arena, traditional banking services become offered by other players. This could involve circumstances where customers had credit accounts at various department stores and supermarkets, and facilities similar to those offered by British Airways, which arranges offshore accounts for wealthy customers.
Corporate alliance also brings with it greater financing potential. Since the GCC countries have substantial debt internationally, which have lowered their credit ratings, mergers between banks allows for greater capital and assets, thus ameliorating credit ratings and increasing loan endowments.
Mutual cooperation among banks is needed even if banks do not merge, so as to allow the banking sector to remain competitive and continue providing cost effective services that are essential to all customers.
But, although mergers are often beneficial to financial institutions, and in particular to those operating in the banking sector, they also bring with it a downside. Cultural issues often create problems amid merging companies’, as does rivalries between senior executives who are not fully satisfied with their allotment in the new company. Furthermore, managers in the IT department are responsible for implementing the newly created synergies and economies of scale, thus as systems and processes are merged, consumer service levels may fall behind in the initial months of the transition period.
Banks with talented workers, who those who specialize in specific fields, are among the most likely targets for mergers and acquisitions. In the case of UBK and Al-Ahli, the latter’s reputable service and retail-banking approach, balanced with the fortes of UBK, are likely to lead to an increased market share for the consolidated institution.
The success in the banking sector, which is considered among the most highly fragmented of industries, will depend on the banks’ ability to provide numerous and diverse banking services over the Internet and via cell phones. With competition for clientele becoming increasingly fierce, as consumers become aware of their numerous options—including the option to open accounts abroad, investments are required to build the merged institutions in such a way that they are technologically advanced, and also are able to handle increased consumer volume.