Economic growth in the GCC countries has been high over the last decade and has been comparable to growth in the emerging markets, while it was considerably higher than in the world at large, said an expert.

In order to maintain such growth, the GCC requires a developed financial sector based on strong regulatory institutions, said Eckart Woertz, senior research fellow at the Barcelona Centre for International Affairs (CIDOB), in an article titled "Financial Aspects of GCC Unification Efforts",  published by Gulf Research Center.

Petrochemical plants, aluminum smelters, power plants, railway lines, housing programs, roads and airports – all these projects are in need of finance, while the rapidly growing population in the GCC countries has provided business for a substantial retail banking market.

These financing needs have met a relatively underdeveloped financial sector with only nascent regulatory institutions.

The GCC financial sector now, however, is characterised by a lack of bond and derivative markets, difficult access to credit for small and middle enterprises (SMEs), dominance of international banks in the project finance market, and heavily concentrated equity markets in terms of sectors and ownership, he said.

Sovereign Wealth Funds (SWFs) in the GCC own large foreign assets which they regard as a tool to safeguard economic diversification in the long term, said Woertz.

Funneling part of these offshore-based savings into domestic economies requires capacity building and absorption capacity in the real economy, but also diversified financial markets for the allocation of resources. They can also provide a base for the attraction of foreign capital, know-how, and business, while opening up new channels for local funds to invest abroad, he said.

The GCC countries have tried to cater to these needs by building financial centre projects, including the Dubai International Financial Center (DIFC), the Abu Dhabi Global Market, the Bahrain Financial Harbour (BFH), the Qatar Financial Center (QFC) and the King Abdullah Financial District.

The DIFC and BFH have a more international profile, while others like QFC focus more on the domestic market. However, besides complementarities, possible areas of competition have emerged, not only between the centres but also with their respective national capital markets that are under a different jurisdiction.

The GCC countries are also trying to establish themselves as a global hub for the growing Islamic banking market amid lingering questions about regulatory environment and international standards in the industry.

The countries need to increase liquidity and diversity of their capital markets, facilitate cross-border trading of securities, foster a nascent institutional investor class and strengthen and unify regulatory frameworks, to remove such shortcoming in the GCC financial sector and to fully capitalise on the benefits of greater integration. - TradeArabia News Service