The financial services sector is a key pillar in the drive to diversify economies across the GCC. The importance of diversifying has been brought into even sharper focus over the past year as a consistently subdued oil price (despite the best efforts of Opec and others) has significantly impacted the growth of regional economies.

In a developing banking market, with operators and customers at varying levels of complexity and maturity, tighter liquidity (some of it caused by external forces) has stressed a number of financial institutions. It is to the credit of both regulators and leading banks that the sector has emerged relatively unscathed from the experience.

Structural reform

The financial services sector has been directly and indirectly impacted by lower oil prices. Government spending has been reduced, as has spending by GCC investors and tourists. In a relatively overbanked market, some investors have identified synergies and potential savings. It is increasingly likely we will see consolidation and accelerated structural reform over the next 12 months.

Established banks face a number of explicit and implicit threats, ranging from new and emerging external threats such as cyber security to existing and recognised risks such as conduct and regulatory changes.

Like other private sector businesses, banks are under pressure to make a return for their stakeholders, whether that is dividends for shareholders or improved job satisfaction for employees. As GDP growth slows, banks and other financial institutions are also being affected by impairments and non-performing loans, while being mandated by the government to support the growth of small and medium-sized enterprises. Regulatory changes, imposed on a global, regional and local level, will have significant implications for the financial services industry.

IFRS 9 will take effect on 1 January 2018. While many banks have considered the potential impact on impairment levels, many have not yet fully assessed the likely impact on how they will price and arrange loans, sell investments and manage financial assets. Approaching this challenge positively – and soon – will almost certainly bear fruit in the long run.

For financial services institutions, VAT will be complex and time-consuming

The full impact of value-added tax (VAT) on the financial services sector remains unclear, and will remain so until both the GCC framework and the various national VAT legislation is released for public comment. Planning will be critical. With VAT implementation widely assumed to start in early 2018, preparation time is limited. For financial services institutions, VAT will be complex and time-consuming. As a tax on transactions, VAT will affect all areas of business, from information technology systems to legal, human resources to marketing, and procurement to finance. Many banks are starting to ramp up for this significant fiscal development.

Careful planning

Banks are likely to have supplies at various VAT rates. Ordinarily, it would be expected that fees for services would be standard (5 per cent) rated.  Transactions involving moving money are likely to be VAT exempt. International transactions may be zero-rated or outside the scope of VAT. A bank that provides both taxable (whatever the rate) and VAT-exempt services will be required to calculate how much VAT it is entitled to recover.

Central banks should continue to strengthen their anti-money laundering and counter-terrorist financing frameworks

Careful planning will be critical to limit the amount of blocked VAT costs – where VAT-exempt supplies do not allow for VAT on costs to be incurred. The exact amount will depend on the unreleased legislation; international practice varies from fixed percentages to reasonable or special methods that may require negotiation with the tax authority.

Research recently performed by the UK’s Financial Conduct Authority suggests that some global financial institutions are – somewhat controversially – citing tighter anti-money laundering (AML) requirements as the reason for exiting business relationships with entire countries or classes of customer, with correspondent banking a particular focus. While good conduct is vitally important, ‘de-risking’ in this way could threaten access to global financial markets.

The 2016 Basel AML Index ranks countries according to their risk of money laundering and terrorist financing. All the GCC countries compare favorably to global norms, with all exceeding the global average and Qatar leading the pack.

Nevertheless, central banks should continue to strengthen their AML and counter-terrorist financing frameworks to increase confidence and trust in the region’s financial systems and enhance global business relationships.

Some banks, in the wake of proliferating, stringent and far-reaching global regulation, are struggling to balance risk management with growth. The continued focus on getting the balance right by ensuring regulatory compliance and incorporating that compliance into banks’ ‘business as usual’ operations  – often through the use of innovation – will ensure the continued relevance and strength of financial institutions across the GCC.

Emilio Pera is partner and head of financial services at KPMG Lower Gulf