Central Bank: Global Perspective - Assignment Example

Central Bank: Global Perspective Central Bank: Global Perspective The GCC banking sector has largely reformed in its structure and financial sector in the recent times owing to the newly formulated regulations that govern its operations. The structure of GCC is currently dominated by other small domestic and foreign banks that function to meet the banking service needs of the populace (Frederic & Stanley, 2011). They also offer financial services to potential investors both from the local and foreign market. However, the banking sector among the Islamic states still remains to be underdeveloped and lags behind in embracing technological advancement in the industry when compared to the European Union. This can be partially attributed to the fact that their culture has not been much into using the banking services for their financial needs. The size of the banking sector in the Persian Gulf is relatively small but with the increased exploitation of natural resources such as oil and petroleum products and exporting these items to other parts of the world has significantly increased money in circulation among the United Arab Emirate states. Consequently, the financial capacity and economic potential is significantly higher than that in EU (Frederic & Stanley, 2011). In the recent past, the assets of the GCC banking sector has experienced a remarkable growth at a very fast rate that was later curtailed by the emergence of the global financial crisis. The crisis halted asset accumulation and steady growth but was not largely affected as was the case with the European Union and United States. After the crisis, GCC experienced a much faster recovery than other unions and got back on track to financial soundness. Since the recovery, countries that are member states of GCC have since experienced a significant positive impact to their respective economies. Despite being at different levels of economic development, the states have been able to establish a common objective on monetary policies, a move that has resulted in financial integration, leading to high profitability (Malcolm, 2010). For the union or banking sector to achieve its ultimate objective, it is important that the governing regulations converge at some point. With such an organized corporate structure, management of the joint banking sector becomes attainable and a successful ventures (Malcolm, 2010). After the economic recovery, assets in the banking sector within member states have progressively and sustainably increased over the years with effective policy management. However, the level of development still varies significantly between GCC countries with reference to the banking sector’s assets, with Bahrain enjoying the largest share while Oman has the least shares. These disparities have, however, not affected the overall activities of the GCC central bank due to well-crafted policies and management structures. One of the primary objectives of the Gulf Cooperation Council (GCC) is to create a monetary union for its members. This has been its primary goal since its inception years in the early 1980s. Significant progress has since been made in the regional economic integration program. All member states of GCC have no restrictions to mobility of capital and labor as the operation of GCC is being harmonized and by the year 2008, the member states established a common market. With the establishment of such a union, the states are obligated to form policies and criteria for other new prospective entrants into the monitory union and further establish an exchange rate regime for their single trading currency (the US dollar peg). The union has however been forced to content with the global economic recession, rising inflation and the fluctuating economic cycles from the United States (Ravi, 2005). From the experience of other successful monetary unions in the international market, GCG can get insight and resourceful information needed to provide guidance on how to conduct its operations. Currently, there are only five monitory unions in the world, three of which are in Africa; one in the Caribbean while the other is in Europe. In all these unions, a new common monetary system was established save for South African Common Monetary Area (CMA); where the South African rand is the common currency. The overriding advantage that GCC has over other unions is the fact that the member states have many similarities bringing them together hence making the operations of the union significantly manageable. These factors include a common language, culture and similar historical background. They also undertake a similar economic venture, which is the exploitation of oil and exporting the oil products with the exception of Bahrain (Ravi, 2005). The GCC has removed all the barriers between member states in a bid to facilitate business operations among the citizens. The national GDP has since escalated with the effective management of the union and implementation of friendly business policies. In 2008, the heads of the central bank decided to create a new central bank referred to as the Gulf Central Bank (GCB) that was mandated with the responsibility of determining the currency union. At the present, the new currency has been named ‘khaliji’ pegged (Ravi, 2005). The Gulf Cooperation Council is similar to the European Central Bank in the sense that they both offer services in the banking and corporate business sector such as clearing checks and balances. Both institutions can also administer discount loans. They also use their staff members to analyze trends in the global financial market. This provides very resourceful information that can be used in the formulation of monetary policies. Both institutions seek to collect vital data on local business activities within their area of jurisdiction to be able to deliver the required services relative to the market’s needs. Some of the differences that are evident between the two institutions are that while the GCC is based in the United Arabs Emirates, the European Central Bank is based in Europe and operates under the policy of the Euro zone (European Union, 2003). The other difference between GCC and ECB is that ECB is governed by the European law while the GCC operates under the Persian Gulf states council. The ECB is also more inclusive in the sense that it has shareholders and stock capital. It consists of 18 EU member states and stands as one of the largest currency areas of the world (European Union, 2003). GCC is restricted to the Islamic monarchies of the UAE, Bahrain, Kuwait, Oman, Saudi Arabia and Qatar. Some of the most important objectives and functions of the GCC Central bank include: The core objective of the GCC is establishing a common currency, given that the union was a collaboration of various state parties with different trading currency, there was need to establish a common currency that all the other states could relate with and this lead to the agreed common currency referred to as ‘khaliji’ pegged. With the establishment of a common currency regime, the central bank could roll out its plans to grant national support to institutions in GCC countries (Malcolm, 2010). Formulating regulations in various fields such as finance, trade and administration; the central bank is mandated with the responsibility of providing policies and rules to control various trading activities among member states. These regulations are applied to a wide array of other economic fields to monitor their progress and contribution towards the economy of the Persian Gulf states (Malcolm, 2010). The GCC central bank is also mandated to take charge of the joint ventures of the state members and keep and provide financial records for the same whenever need arises. This works to build the economy of the participating states and increase their bargaining power on the international market. Having joint ventures works to establish a strong collaboration among the states; it also makes it possible to establish big projects that could not be initiated by any one country on its own. The other objective of the union is to encourage the cooperation of the private sector. This has been made possible by providing business loans along with financial support and collaterals to member states at very friendly rates. This works to promote the development of the corporate sector as investors and entrepreneurs have the opportunity to initiate business projects as the central bank offers financial support, viable business plans and consultative services. The GCC also works to promote unity and strengthen ties between their people. With the various states converging their resources, it is likely that they will establish a close association, which is vital for the economic growth of the region and its stability. Hence, GCC directly or indirectly helps in building strong ties among the Islamic monarchies in the Persian Gulf. With the prevailing peaceful coexistence among member states, foreign investors will be attracted to invest in this economy and hence increase the money that is in circulation and that which is in the central bank reserves (Malcolm, 2010). The close ties established also worked to create unified military presence, for instance the Peninsula Shield Force that worked to create a formidable force against any opponent infiltrating the Peninsula and the Persian Gulf. The Peninsula Shield Force was established from the Cooperation Council for the Arab States of the Gulf. Its objective was to defend the countries allied to the GCC from military aggression from a foreign state against any of the member states. The GCC central bank played a central role in providing funds for the over 40,000 joint military troops aimed at safeguarding the interest of the member states and protecting their vital resources from being exploited by potential competitors (Malcolm, 2010). Despite the domestic economic stability shielding the banking system from the worst global financial crisis experienced in the recent times, it is evident that GCC central bank has become vulnerable to other risks in the corporate world such as facing high risks of credit concentration due to the high financial demands from the GCC countries in the recent years, leading to an internal financial crisis on its credit reserves. Increased shares of loans to the government are also creating a worrying trend mostly in the UAE. There is a significant financial need for government-owned projects that has significantly affected the financial capacity of the banking sector (Ravi, 2005). The stringent regulation and the supervisory nature of the banking sector in GCC have largely affected their potential to support private investment and loan services. Its high capital requirements and sophisticated procedures and protocols that need to be followed and abided by to the latter have fundamentally incapacitated its ability to assist residents of the middle and low class. Being governed by an expansive leadership structure substantially derails its ultimate objective of servicing the citizens; however, only members with big projects and collaterals benefit more from the banking services. In conclusion, it is evident that the GCC union has had a positive impact on the member states in as far as economic empowerment is concerned. From the literature review, it is evident that the pros for GCC central bank far outweigh its cons owing to the significant contribution that it has had in significantly transforming the participating states by initiating many development programs and providing employment opportunities to citizens. The upgraded banking sector has also provided insightful financial assistance and the guidance needed to propel business ventures to another level of economic stability and sustainability. Despite the fact that the GCC is frequently disrupted by political interfaces, wars and fluctuating oil prices, the economy has stabilized and has the capacity to recover swiftly in case of interference or financial regression arising from an external forces. References European Union (2003). The Middle East and North Africa. Routledge. p. 1297. ISBN 1857431324 Frederic S. M. & Stanley G. E. (2011). Financial Markets and Institutions (7th ed.). Canada: Pearson Malcolm C. Peck (2010). The A to Z of the Gulf Arab States. New York: Scarecrow Press  Ravi S. S. (2005). Asian Strategic And Military Perspective. Lancer Publishers. p. 375. ISBN 817062245X. Read More