'MEMBERS of the WTO deserve much credit today.... (the Agreement) will bring new opportunities and greater security and predictability for investors in banking, insurance and other activities in the financial services sector,' said WTO Director-General Renato Ruggiero when he announced the WTO Financial Services Agreement in July 1995. The Agreement may be a solid show of support for the principles of progressive liberalisation in a world-wide sense, but will it have any real impact on the GCC banking sector?

Before we look at the impact on GCC banking, let us first look at the background of the WTO in general and its Financial Services Agreement in particular.

The World Trade Organisation (WTO) came into being on 1 January 1995 after absorbing the 48-year old GATT. All GATT members are eligible to join WTO. The list of founding members includes 81 GATT members. Another 50 countries are expected to join WTO in the near future.

At the end of the marathon Uruguay Round of GATT negotiations in December 1993, some 76 countries had submitted proposals on financial services in their schedule of commitments. However, the extent of proposed liberalisation was not considered sufficient by some industrialised countries, notably the US, which threatened to take an MFN exemption unless the members agreed to offer more non-discriminatory access in their financial services sector. After two more years of negotiations and some improvement in schedules of commitment, an agreement eventually had to be announced without the US. In mid-1995, a total of 29 nations signed the WTO Financial Services Agreement, which is expected to be implemented for an initial period up to 1 November 1997.

Many executives in financial services who were not fully conversant with the nature of multilateral negotiations under GATT/WTO expected a standardised accord offering its members access to each other's markets.

Having recently implemented a fairly standardised set of terms and conditions for the Basle Agreement on Capital Adequacy, they expected a similar set of clearly defined rules and regulations from signatories to the WTO Financial Services Agreement.

The reality, unfortunately, is a lot different. A central concept in the WTO is for all present and future members to enter into specific commitments in the form of lists of concessions to ensure at least a minimum level of commitment by every member.

Hence, the objective at GATT/WTO was to achieve relative improvements in each member country, with only limited reference to how close or far each member country stood from an optimum level of liberalisation. This approach is a far cry from that of establishing a set of universally acceptable principles for allowing non-discriminatory access and then implementing them in each member country.

The end result is not difficult to surmise.

The signatories of the WTO Financial Services Agreement significantly vary from each other in terms of the proposed liberalisation of financial services. At one end of the spectrum the EU, which already has a liberal regulatory environment, confirmed 'its readiness to maintain in full their offer of open access and operating conditions based on national treatment on an MFN basis At the other extreme are countries with highly regulated markets that were prepared to countenance only marginal improvements. For example, India offered to raise the limit on new bank licences from five to eight a year; the Philippines offered 10 new commercial bank licences for foreign bank branches in the period 1995 - 2000.

Even the statement by WTO announcing the agreement conceded its shortcomings, noting that 'because the commitments vary so widely, it is difficult to generalise on their practical significance.'

In the above context, the commitments offered by GCC states were somewhat limited. Kuwait is the only GCC country that has signed the Financial Services Accord, but its liberalisation proposals fall short of the commitment to 'open access and operating conditions' made by the EU countries.

Bahrain and the UAE are not signatories to the Financial Services Accord, but as GAIT members they submitted a schedule of commitments offering some liberalisation in their financial services sectors during the Uruguay Round. As Bahrain and UAE are now full members of WTO, these commitments are binding.

In general, the commitments made by the GCC states in the context of the Uruguay Round, or as signatories to the WTO Financial Services Accord, will make these markets only marginally more accessible for other WTO member countries from August 1996. Notwithstanding the positive impact of the above, the banking sector will remain relatively highly regulated in the GCC region even after August 1996.

In these circumstances, the experience of the EU in liberalising its internal market in financial services may be instructive.

After spending years attempting to harmonise their regulations in the financial services sector, the European Commission (EC) decided to take the route of a 'single banking licence' to liberalise financial markets in the EU countries.

This entitled all EC banks to an automatic right to expand their business in the other countries of the EU without reference to regulatory authorities. Perhaps the first step towards an eventual universal opening of the GCC financial services sector could be a 'single GCC banking licence'. In addition to liberalising market access for the banks of the GCC itself, at the very least, such a step may also support the cause of regional integration in a highly fragmented GCC banking sector.

Nadeem Muitaba is senior vice-president responsible for corporate strategy at the Gulf Investment Corporation in Kuwait.

This article represents his personal views and is not the official view of the GIG Group.

Glossary of Terms

Interim Agreement: Financial Services Agreement is viewed as an 'interim' agreement valid for only 18 months after the ratification deadline of 30 June 1996, after which all governments will be free to review their positions.

Schedules of Commitment: The financial services schedules, each of which amounts to a legally enforceable, binding undertaking on the part of the member concerned, contain commitments which define the conditions for access to the market.

Most Favoured Nation (MFN): This guarantees that a member will not discriminate among members supplying a service.

National Treatment: Guarantees that governments through their regulations and laws do not discriminate in favour of domestic service providers at the expense of foreign-owned service providers.

MFN Exemption: Where Members are unable to guarantee MFN treatment in a particular service activity they are allowed to claim an 'MFN exemption' in that specific service activity.