What is a financial market?

A financial market is a spectrum term meaning a market where buyers and sellers exchange assets in the form of stocks, currencies, and derivatives. The forces of supply and demand determine the price of these assets.

Depending on what is being traded, there are mainly two types of financial markets:

1. Capital market – where securities such as bonds, shares, etc. are traded. They are for long-term investment.

2. Money Market – Where highly liquid items like US Treasury bills, currencies, etc. are traded. They are for short-term investments with the same chances of big gains and big losses.

Why is the financial market important?

Financial markets mobilize domestic savings and foreign capital for productive investment. The economic growth of any country depends on the efficiency of its financial markets. An inefficient financial market means you are not exploiting all opportunities, and an inefficient one will cripple you and prevent you from competing on a global scale.

Your level of sophistication:

• Promotes Foreign Direct Investment (FDI)

• Allows national companies to raise funds for growth and expansion

GCC Market Structure Overview

The development of its financial markets has been a priority for GCC since 2002. Its vision has mainly been to promote the development of local markets such as the UAE market structure and Kuwait market structure, and to make the GCC countries a financial center in the region. With falling oil prices and depleting oil reserves, the GCC region has no choice but to diversify its economy in order to achieve sustainable growth.

Current structure of the CCG market

Saudi Arabia’s market structure, while solid (none of the banks collapsed after the global financial crisis in 2008-09), still lacks sophistication. Most domestic companies, even now, use their retained earnings or traditional bank loans to finance their growth activities. Compared to its Asian and Latin American counterparts, the region accounts for just 0.8% of global capital volume, according to a Deutsch Bank report.

The share of GCC countries is even lower at just 1%, says an IMF report. The weak share of the UAE market structure is due to the strong involvement of the government in economic activities and the weakness of the private sector.

To measure the development of the financial market, the relationship between financial assets and GDP is used. The GCC’s 0.8% share of the global financial market versus its 1.7% share of global GDP shows a skewed size of the financial sector.

Kuwait’s market structure, however, shows that the financial sector plays a significantly higher role, 14% to be precise, in its share of GDP. For GCC, we have full financial chips at just 6% of GDP.

The current capital structure of the GCC shows that the countries are not only lagging behind in terms of economic potential internationally, but also in relation to the development of the region.

Problems identified with the GCC market structure

• High bank concentration, especially in the Saudi Arabian market structure, due to limited access by private players. National and public monopoly has led to a poor investment environment and restrictive policies. Gradually, however, the policies are being rolled back to encourage liberalization.

• The weak competition that has led to high prices, less variety of financial instruments, deficient services, etc.

• Stock markets in GCC have lagged far behind in terms of international standards with a concentration in the largest sector in Saudi Arabia. The stock market plays an important role in the capital structure of Saudi Arabia, contributing 61% of the total national financial assets.

• Since it is easy to make money from government projects, individual entrepreneurship is not supported and financial institutions do not play their part in allocating venture and venture capital.

last word

Although the liberalization and privatization of the GCC market structure is already underway, the GCC region still has a long way to go. According to an IMF report, they should focus on the following financial sector reforms:

• Strengthen supply and demand

• Reduce government involvement and open up to foreign competition

• Improve the banking regulation and supervision framework

• Develop efficient and effective capital instruments for financing