Middle East institutions must take note. Strong corporate governance prevents individuals from overriding the cumulative assessments of the management team. It ensures that effective risk-management procedures are used to create a sensible balance between risk and reward, and that policies are in place to ensure action is taken. The region’s institutions lag behind the rest of the world in ensuring that such systems are in place.
The Union of Arab Banks will introduce a set of corporate governance guidelines for the region in 2008. Although such a code of practice is voluntary, banks should choose to implement it, in turn improving their ratings, customer numbers and investor confidence.
The era of low-interest, high-risk borrowing is gone. Investors and project clients in the region need to redefine their expectations, led by banks, whose authoritative and transparent analysis of risk accurately predicts interbank lending rates and the availability of liquidity.
This will ensure investors do not receive any unwelcome shocks in the future.