COVID-19 Response in MENA: The challenges and opportunities for the banking sector and financial inclusion

By Tohid Atashbar, Senior Economist, of the Majlis Research Center

The Middle East and North Africa (MENA) region is currently facing a double shock: COVID-19 and declining hydrocarbon prices. At the same time, policymakers in the region are facing an additional burden of how to maintain the distancing measures required to contain the disease while keeping the economy open to protect it from a severe recession and lethal poverty.

Many customers of the banking sector have been gripped by job losses and declining profits as the virus continues to spread throughout the entire region. Reports from the International Monetary Fund (IMF)^[i], the World Bank (WB)^[ii] and other global institutions show that the MENA economy is bracing for its biggest slump in decades, mainly because of the new coronavirus outbreak and also low oil prices. Average estimates suggest that there will be up to a 5-percent contraction in the gross domestic product (GDP) for all MENA countries, while oil-exporting nations in the region could be hit by negative GDP growth of up to 7.5 percent. MENA countries that are classified as “fragile and in conflict situations” will face a staggering shrink in GDP of 13 percent in 2020.

MEMA under double-shock pressure: selected economic indicators (percent of GDP)

Source: Regional Economic Outlook, July 2020, International Monetary Fund

In such a grave situation, banks are facing growing demands for financial relief from both their routine customers and the general public, and regulators have been encouraging and even forcing them to intervene to contain the crisis. That intervention could entail negative or positive side effects both on the operations and the balance sheets of the banks, depending on the type and quality of the regulation used.

This piece seeks to take a deeper look into how the banking sector in some selected economies in the MENA region have responded to the COVID-19 pandemic and what the challenges, as well as the opportunities, are arising from the pandemic.

Iran: A paradigm shift in the monetary-policy framework

While facing two concomitant shocks afflicting all MENA countries—the COVID-19-related issues (decline in the demand side of the total production plus health- and social-protection costs of COVID-19) and the general fall in international oil prices (due to a slump in the global economy, which is mainly another byproduct of the pandemic)—Iran is grappling with a third shock: a significant decline in oil exports, resulting from the United States’ sanctions.

The triple shock has left Iran with an unprecedented fiscal deficit (8-10 percent of GDP) and a rise in inflation (largely due to a sharp fall in the value of the Iranian rial). This has prompted a radical change in the country’s monetary policy as the government moves away from its exchange-rate anchoring system to an inflation-targeting (IT)^[iii] framework.

The Central Bank of Iran (CBI), also known as Bank Markazi, has been pursuing such a reform for several “decades”. However, and only after being hit hard by the triple shock, the bank has moved to implement various simultaneous policy actions to reach that objective. Those policy actions include a deepening of financial markets, launching open market operations (OMO) for the first time and setting up an interest-rate corridor as the main operating target.

Along with implementing a paradigm shift in the monetary system, banks in Iran have also introduced a “digital/application-only policy” for some banking activities (including some essentially non-banking activities such as utility-bill payment services). That has increased the number of users for both electronic and mobile banking services (up to a 20-percent surge in usage and a 5-percent increase in the number of subscriptions, according to some estimates).

The CBI has also raised its cap on electronic and/or online transactions accommodated through an inter-bank and intra-bank network called SHETAB (Interbank Information Transfer Network), as it seeks to reduce the circulation of physical currency and banknotes and to discourage unnecessary branch referrals. In the meantime, Iranian banks have also allowed moratoriums on nonperforming loans (NPLs).

Source: Global Financial Development Database (GFDD 2019), the World Bank Group

Iraq

The Central Bank of Iraq (also known as CBI) has encouraged electronic payments to contain the spread of the virus while instructing vendors to suspend commissions that accrue on such payments for a period of six months. The top Iraqi lender has also announced a moratorium on interest and principal of debts owed by small and medium-sized enterprises in the country. The bank has instructed^[iv] lenders to cut the interest accrued on loans from 4.8 to 3.5 percent for loans between 1 million IQD (Iraqi dinar) and 20 million IQD and from 6.3 to 4 percent on loans between 21 million IQD and 1 billion IQD.

The bank has also asked lenders to consider offering extended grace periods to borrowers active in the tourism and hospitality industry to give them more time to recover from the impacts of the pandemic.

Iraq is also offering beneficiaries of the “One Trillion Initiative”, a financing project launched in 2015 to support small and medium-sized businesses, to receive 5 million IQD in interest-free loans, while accepting physical assets of their businesses as collateral to alleviate the impact of COVID-19.

Lebanon

The COVID-19 pandemic has exacerbated the already acute economic crisis affecting Lebanon. The crisis has also exposed the inadequacies existing in Lebanon’s social-protection system, known as the National Poverty Targeting Program (NPTP).

Banque du Liban (BDL) (the central bank of Lebanon) issued its circular 547^[v] in late March, allowing struggling entrepreneurs and businesses to have access to loans while enabling banks to expand the coverage of their five-year, no-interest credits to existing customers. The circular enables Lebanese banks to grant loans to companies that are unable to pay the salaries of their employees, mainly because of debts accumulated since the start of pandemic or liabilities that will accrue in the coming weeks.

Since November 2019, Lebanese banks have introduced measures on capital controls as well as a series of limits on foreign transfers. The BDL circular, however, allows some loans under special circumstances, both in dollars and in the Lebanese lira, for which zero interest can be agreed. The loans will be allowed to mature in five years starting June 1, 2020.

In return, the BDL will compensate banks and financial institutions by launching five-year, zero-rate US-dollar credit lines, the total worth of which would equal the value of exceptional loans granted by the banks to businesses under the current circumstances.

Qatar

The Qatar Central Bank (QCB) has launched its Qatar Mobile Payment System (QMP), providing a new and safe method for carrying out immediate electronic payments. Through the new system, the QMP aims to allow its customers to use an electronic wallet on their mobile phones to carry out P2P (peer-to-peer) payments and pay for goods and services, while enabling withdrawals and cash feeds for electronic wallets all at the same time. To further enhance financial inclusion in the small Persian Gulf country, the new system enables all customers to open wallets simply by using electronic applications.

Source: Global Financial Development Database (GFDD 2019), the World Bank Group

The QCB has also issued^[vi] a package of more than 25 circulars and recommendations instructing banks and financial institutions on how they should cope with the risks related to the spread of the new coronavirus. It has put in place a series of mechanisms to encourage banks to defer repayments on loans and other liabilities of the private sector for a period of six months. The bank has also extended a deadline for giving information on US reportable accounts belonging to the Qatari financial institutions to help them cope with the pandemic.

The QCB also plans^[vii] to use technologies such as blockchain, the distributed ledger, and fintech (financial-technology) solutions to further streamline banking operations during the pandemic.

That comes as a major lender in Qatar, the Qatar Development Bank (QDB), has adopted^[viii] various precautionary measures to mitigate the economic impacts of the virus. The program, fully backed and guaranteed by the Qatari government, seeks to cover the most critical short-term payments carried out by private-sector employers, including those related to staff salaries and rental fees.

Qatar Islamic Bank (QIB) has come up with its own ideas, including diversified e-banking initiatives and provision of interest-free loans to private companies, while Qatar International Islamic Bank (QIIB) is also contributing^[ix] to the Arab country’s COVID-19 relief program. Additionally, Qatar Financial Centre (QFC) has devised^[x] numerous guidelines (Smart Work Guidance for Employers, Return to Work Guide) and facilities (Stakeholders COVID-19 Initiatives, Support Measures for Firms, Rate Change for Late Payment Charge and Compensation) to help the government confront the economic shocks resulting from the disease.

Conclusion

The COVID-19 pandemic, described by some as the World War Corona (WWC), has already been recognized in many countries as the gravest health emergency facing the world in the modern era. The economic impacts of the virus in the MENA region have been bitterly felt through declining oil prices and lower exports of energy from the region.

The banking sector in MENA (central banks and the banking system in general) has contributed to regulated or voluntary support and guarantee programs by the governments to alleviate the financial and health burden of the virus while trying to turn the threat into an opportunity.

Many banks have already started to encourage digital services for both customers and those employees who can carry out their jobs from home. By offering fully digitized (digital-only) banking services, banks will ensure that both daily and exceptional processes continue to function with minimal disruptions while expanding the electronic inclusion of their services.

Banks across MENA have been using the pandemic-related restrictions as an opportunity to improve and expand the reach and depth of their traditional and emerging electronic services.

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