You are on page 1of 12

Arab Monetary System

Student ID: ____________________________


Student Name: _________________________

Table of Contents
Introduction......................................................................................................................................3
How Financial System works in Arab Countries.............................................................................4
Interest Rate Policy......................................................................................................................4
Monetary Credit Management.....................................................................................................5
Measures to Enhance Competition..............................................................................................6
Monetary Policy in Arab Countries.............................................................................................6
Capital development policies...........................................................................................................8
Stability of political environment....................................................................................................8
Conclusion.......................................................................................................................................9
References......................................................................................................................................11

Arab Monetary System


INTRODUCTION
In this essay, we are going to discuss the Monetary system of Arab countries. The core purpose
of this discussion is to explore the structure of the Arab Monetary system by which the all
financial transactions, financial institutions and banks are working. In the last decade, especially
with the Arab countries, as well as the construction of a modern financial sector made major
progress. Many countries in the Arab world to economic and financial reform, economic
development and stability and increase financial stability often crack rapidly in response to rapid
globalization needs to be associated with. For the most part, fiscal and monetary authorities have
implemented a program of financial sector liberalization. The participation of these programs,
interest rates, banks and other financial institutions foreign financial sector liberalization and
privatization of growing competition and include slowly opens.
Differential role of institutions in the performance of the development at that time fairly well
established historical and experimental results. A generally acceptable definition of the rules of
the game are in the society or more formal constraints that shape human interaction that is, Jesus
was. As a result of the political, social or economic structures, human exchange them privileges.
Institutional laws evolve through time and change the way shapes societies is the key to
understand the historic change to the same.
As a general purpose, are an integral part of the financial sector policies, institutions, resulting in
financial savings could increase the level of a modern and efficient economy's degree of financial
system to facilitate the emergence of aims. To ensure that these resources are allocated
effectively requires that investors and investment have access to financial resources. And provide
the best and high quality financial services at a lower price. The process of financial sector
policies in the depth of the financial system, supporting the goal of a nationally integrated and
modernized and international users demanded by the economy, with the goal of providing
alternatives. Since such a monetary policy more effectively in the economy through money

market is held, directly or indirectly on the market-based financial sector policies, as well as the
development of monetary policy makers must be the same.
Moreover, the financial system are linked to the real economy naturally. Thus, the presence of a
strong financial sector policies to parental regulations and that is implemented by the new
supervisory agencies is necessary to ensure. In fact, as the financial sector in the Arab States in
what has been a key factor behind the improvement report recently parental rules and supervision
it is to strengthen the Arab Monetary Fund by supervisory institutions.

HOW FINANCIAL SYSTEM WORKS IN ARAB COUNTRIES


The financial system is working in Arab countries in an efficient manner. The efficiency of this
system is based on the structure of financial system working Arab countries. Pricing on the
market and the financial institutions, as well as quantitative or financial services, without
restrictions to their administrative efficiency increases on the surface of the emerging is. In
addition, performance is also compared to the results due to unencumbered competition. The
efficiency of the system is based on three things, which are interest rate policy, monetary and
credit managing, Measure to Enhance Competition.
Interest Rate Policy
Based on the flexible market interest rates to an efficient allocation of available financial
resources, mobilization financial savings play an important role in the promotion and a central
vehicle through which financial sector is competition. For the most part, real interest rates are a
more important policy makers more than pre-reform period in the period after the reforms. For
the most part, credit expansion, which fixes the price level and external macroeconomic stability
in many Arab countries, under pressure from the threat of putting on the imbalance of the
accounts is a continued over long periods. As a more rapid development and slow growth of
credit deposits to encourage real interest rates were negative in the period of reforms of the post
still this was especially true. When the effect of negative real interest rates were common in
periods pre-reform credit directly to many of the Arab countries in the control of the application
is limited.

Positive real interest rates were maintained, on the contrary, the progress of reforms compared to
slow credit early. This increase in the reaction rate of growth for the development of financial
instruments and institutions welcomed calls by Arabs and Arab banks become more effective the
role of Central Bank liquidity provider is collected after a reduction as users. The above analysis
strongly suggested that as a result, an essential condition for successful reform programs in Arab
countries, positive real interest rates was the adoption of macroeconomic policies and careful.
The cost of money in a financial institution in the Arab financial liberalization program is
affected by complex ways. First, the removal of credits and control interest rate risks more
properly price allowed for banks. Because they usually add interest rate margins of control in
landing pre-reform period due to the very low set. Most of the Arab Bank loan portfolio of nontraditional threats, as well as prominent new borrowers to extend the second, in the period after
the reforms risk premium rose again. As competition in the credit markets slowly relative to the
overall pressure above the deposit markets increased in the third, was cast on the interest margin.
Monetary Credit Management
Almost all Arab financial officials recently have taken the steps to reducing administrative
restitutions. The proportion of currency reserves fell after reforms, while in the process of
financial liberalization in the Arab world in General, money, financial assets and an increase in
the ratio of debt to the private sector of GDP was associated. In addition, According to Eltoni
(2003), financial sector reforms, and many Arab countries, already significant improvement in
financial credit brought about a set that illustrated. In this way, the influence of financial sector
reforms in the key financial post in the era of financial reforms on the behavior and credit
collections in establishing targets was taken into account.
Even as credit growth, financial liberalization with financial institutions deposits after a period of
reduced growth occurred. This trend could partially explain the following. Pre-reform period
reserves and credit both fell. The decline in the repression of the former is voluntary financial
portfolio reflect a response. At the beginning of a gradual reform portfolio adjustments new
liberal financial situation was working. In contrast, credit for an additional period of reforms of
development credit with direct control was reviewed by demand. Once the credit and expanded
direct control was removed, it is more rapidly to meet the demand for credit by the Arab financial

institutions answered. The country's external accounts and an increase in the non-pressuring
prices and affected.
Measures to Enhance Competition
Banking financial reforms embarked upon in Arab countries were generally oligopoly market
structure structures. As a result, the speed of adjustment of status and the rate of change in the
conduct of monetary policy conduct lending often slow and slowly adjust the margin between the
rate of deposit and lending. Interest rate liberalization and competition to increase the positive
impact on financial competition, seems to occur with a lag effect.For the financial sector in the
Arab States, and in some cases still is characterized by concentration on banking. For example,
all of the 25 largest Arab Bank, Arab Bank, about 59% 46% total 65% of the total loan, and a
total of 56 percent of the total accosts total assets. Six Arab countries, Saudi Arabia, Egypt, and
banking sectors, the United Arab Emirates, Kuwait, Lebanon and Morocco, around 75% of total
assets and the total of all banks of the Arab reserves 80 per cent. In addition, the three largest
banks in Saudi Arabia's total assets and reserves is about 40 percent from 35 percent. On the
other hand, there are about 70 percent of the total assets, while four banks in Lebanon only Arab
financial sector's 7 represents the Lebanese financial sector. Seven banks in Bahrain and the
United Arab Emirates 40, 40% of the total assets of the six banks, while there are more than the
Arab is not in part 3.
Monetary Policy in Arab Countries
Conduct of monetary policy in consultation, most Arab central banks traditionally Bank access to
specific ceilings and window directly on instruments. However, financial liberalization and
monetary policy, interest rates and credit collections i.e., indirect instruments, market-based
instruments, instead of directly through the administrative fixing of interest rates the ability to
manage through is required.

However, the experience of Arab States immediately after financial liberalization, credit growth,
otherwise in line with the need for control to point directly to the development of the villagers to
use bank deposits, basat (1996). While an initial financial instruments needed to implement
indirect positive real interest rates, unless they were supported by a temporary credit ceilings
based has been used. The Arab money markets in the presence of a mutual Bank reserves to
ensure a well-functioning financial market authorities need to be involved. The Arab central
banks and financial market gradually role vis--vis the principal market maker for support due to
what is the switch. This new capability, and on the move, while the Central Bank reserves, the
Arab money markets in emerging market participants in anticipation of the withdrawal of my
decision to leave is surpluses. Thus, indirect monetary instruments for the development of money
markets in the era of reform post a positive and necessary step. There is a need for more attention
to the growing volume of Islamic finance is an important financial policy challenge. It's
important to organize and Islamic financial institutions the question how best to monitor is
created. The original traditional Islamic financial institution (non-Islamic) banking business to
compete with conventional banks in this way, a legal and financial policy designed to keep
within the code of ethics is to the environment. In General, such as at the end of the Islamic
organization, principal financial and their neither deposits nor return is investment risk guarantee
are common.
This mode shows the operation of Islamic financial institutions need to close supervision and
regulation. Over the past thirty years, the experience was the opposite. In fact, many Arab
countries as the Islamic banks in less than his counterpart of traditional banking supervision
needs to be targeted. Islamic financial institutions are subject to the same risks facing the
traditional banks. The influence of saliency and profit dangers and effects can be a false
economy. In addition, the lack of relevant skills and uniform between the Islamic banking
operations employees quality accounting and tax rates are set by the absence of finance, complex
methods is involved. For the most part, to organize and Islamic financial institutions supervision
basla rules are suitable for. However, these institutions are less than traditional bank counterparts
possibly heart could under the requirements.

CAPITAL DEVELOPMENT POLICIES


Arab capital markets, a sound regulatory framework, including the development of
organizational and technological improvements within a number of needs. The private sector
share of the economy is a conducive macroeconomic environment to increase. And information,
accounting standards, and tax reform to improve the pricing property rights, is to strengthen the
army through the market. In the end, political stability is essential for the development of Arab
Stock Exchange volume. Money and capital markets, monetary authorities in the development of
many Arab Middle and long term financial savings mobilization, increase the augmenting
financial sector , than in the conduct of monetary policy through the service are provided and
more indirect devices attracting foreign capital, it is necessary to improve the need is accepted.
In this context, almost all the Arab countries to the development of its capital market on high
level. Despite this relatively new stock exchange in the Arab countries and other developing
countries, but the role of the private sector in comparison with the rapidly increasing demand for
equity investment is growing, as is the extension are usually small. However, there are still a
number of Arab countries, with a stock exchange. So far in Saudi Arabia is the largest Arab
equity market capitalization of more than 70 billion US dollars, followed by Egypt and Kuwait
with nearly 29 and 27 by the us with $ billion respectively. The number of listed companies in
the Arab capital markets, which is a positive sign, although at its peak while the shares were not
trading in the market, they must not trade, was the Declaration value indicating.
For the most part, corporate money and capital markets securities and secondary market for
government bonds to link to as an important vehicle to expand the depth of the financial sector or
emerged as an engine for are not. One of those privatization campaign in the period of rapid
structural changes in the banking sector, and to support the global economy in order to compete
effectively in the financial sector can be effective by empowerment.

STABILITY OF POLITICAL ENVIRONMENT


A major source of uncertainty for the financial sector of the Arab institutional is instability in a
political atmosphere. Political instability for the financial sector in General and the business
environment is considered to be particularly harmful for. Examples of institutional ambiguity are
common in the Middle East: political violence, civil war, foreign occupation and attacks, is a

social and political unrest. In this way, political instability that result in loss of life or property
rights, infrastructure and physical property damage due to a lack of basic distraction of
uncertainty. Cross-country studies show that political stability, as well as institutional
bureaucracy are linked to financial sector performance with quality, agility and is associated
(Kneef , 1995). According to Albadwa, 1999, institutional and political factors on the
performance of the financial sector in the Arab countries, the effects of two sets of indicators
used to assess. First, there is an absence of corruption, institutional quality initiative to protect
the rights of property and on the implementation of the UN-brokered accord is certificate. Other
civil and regional wars set of indications, such as political instability reflects various aspects of
unconstitutional change of Governments in violent riots and civil and military operations and
employees of their junior year. Albadwa in the Arab world, institutional quality is defined by the
above factors the worst institutional support, particularly for the financial sector and investment
in the region, compared to the world as any other mentioned that have closed. He also said
problems with a range of enforcement and the protection of the rights to property as well as the
most harmful of the Arab financial sector performance and were a serious obstacle to investing in
Arab countries. Historically, the most serious in the world of the Arab world, one of the armed
conflict has been the place for. In addition to the Arab-Israeli conflict, with all its wars and
struggle to resist occupation of Arab countries are influenced by three major wars: 1980s, 1990s,
and several violent types of political dissent in Lebanon and the Sudanese civil war, the civil war,
such as 2003 is also included. Therefore, the argument that the Arab world, as the world's most
politically unstable regions, the quality of institutions is weak in the region is one of the shows.
These results are serious implications for stability and performance of the Arab financial
institutions.

CONCLUSION
Arab financial sector reform is an important role in the Organization and demonstrated that the
positive experience of the Arab financial sector liberalization process is in effect. It also stressed
the strong vision and the success of the financial sector reforms, institutional reforms effective
ingredients are very important for. Most of the significant improvement in the financial reforms
already implement financial credit collections, many Arab banking sectors is due in full.
However, there is also plenty of room for further improvement over the next few years, for

example. These countries have contributed to many of the Arab Bank's foreign currency reserves,
domestic currency deposit ratio and also will experience a migration from short term change, he
will experience extreme right now for the possibility that long-term deposits and their banking
counterparts. Syria, Algeria and Yemen, for his financial reforms, in the early stages, scope for
Arab countries, in addition, the improvement of institutional structures in even more. The effect
of the financial reforms in Arab countries is definitely a notable as shown by the price of the real
interest rate and interest margins on raw-uz-Zaman. However, there is room for further
improvement measures to enhance competitiveness and administrative costs during the next
several years as more a lack of intervention are adopted. For the most part, based on the financial
instruments market in the process of developing the Arab central banks and some are still maintain
that direct. Moreover, prudent fiscal and monetary policies by the Central Bank try Arab and parental
regulations and monitoring measures to maintain financial stability through was employed. However,
most Arab Stock Exchange compared to small developing countries new and underdeveloped, but
left quickly when other private sector role is increasing and the demand for equity investment is
increasing, as are added. Lastly, the argument that the Arab world, as the world's most politically
unstable regions, the quality of institutions is weak in the region is one of the shows. These are
serious implications for performance, stability and Arab financial institutions.

REFERENCES
Arab Monetary Fund, 2003. Topics and Issues in Prudential Regulations and Supervision: the
Recommendations of Arab Prudential Regulations and Supervision Committee, (in Arabic), AbuDhabi
Bisat, A., 1996. Financial Reform in Middle-Income Arab Countries: Lessons from the
Experience of Other Developing Economies. Paper presented at the Workshop on Financial
Market Development, Arab Monetary Fund and the Economic Research Forum for the Arab
Countries, Iran and Turkey, Abu Dhabi, UAE, 25-27 May.
Elbadawi, I, 1999. The role of Institutions and Governance on the Private Investment, in
Institutional Reform and Development in the MENA region, ERF & API, Egypt.
Eltony, M. N., 2003. Quantitative Measures of Financial Sector Reform in Arab Countries,
Paper presented to the International Conference on Financial Development in Arab Countries
organized by United Arab Emirates University, College of Business & Economics and the
Islamic Bank for Development, Institute for Research & Training, Abu Dhabi, 1-3 April.
Eltony, M. N., and N. Al-Mutairi, 2000. Economic Development and Financial Deepening
Revisited: A Case Study of Kuwait, The Journal of Energy and Development, Vol.
XXVI, No. 1, Autumn, pp. 127-138
Fry, M., 1988. Money, Interest, and Banking in Economic Development. Baltimore: The
Johns Hopkins University Press,.
Gertler, M., 1988. Financial Structure and Aggregate Economic Activity: An Overview,
Journal of Money, Credit, and Banking, Vol. 20, August, pp. 559-88
Jbili, A., V. Galbis, and A. Bisat, 1996. Financial Systems and Reform in the Gulf Cooperation
Council Countries. Paper presented at the Workshop on Financial Market Development, Arab
Monetary Fund and the Economic Research Forum for the Arab Countries, Iran and Turkey, Abu
Dhabi, UAE, 25-27 May.

Knack, S and P. Keefer, 1995. Institutions and economic Performance: Cross Country Tests
Using Alternative Institutional Measures, Economic and Politics, Vol. 7, No. 3:207227.
Shaker, F., 2001. Re-engineering Arab Banks to Meet Changes of Banking Tomorrow,
Paper presented at the Conference on Prospects & Future of Banks and Globalization
Challenges, Kuwait.
Sundararajan, V., 1985. Debt-Equity Ratios of Firms and Interest Rate Policy: Macroeconomic
Effects of High Leverage in Developing Countries, Staff Papers, International Monetary Fund,
Washington D.C., Vol. 32, September, pp. 533-44.