According to a recent IMF, World Bank and Arab Monetary Fund report, 40% of Arab banks are experiencing “a significant decline” in the scale of correspondent banking relationships. The report shows 167 terminated accounts in 2015 compared to 71 in 2012.
Most of the banks cutting business relations with their Arab partners are US banks—41% of lost CBRs—followed by European financial institutions.
Correspondent banks receive deposits, make payments on behalf of, or handle other financial transactions for customer banks in countries where they do not maintain a presence. Not being able to maintain CBRs has a direct impact on a bank’s capacity to conduct trade in foreign currencies and receive remittances from abroad. In the real economy, some of the first victims of this situation are local money transfer operators, other remittance companies and small and midsize export enterprises.
The report, which surveyed 216 banks in more than 17 Arab countries, identified several causes for the loss of CBRs, including an overall decline in the risk appetite of foreign financial institutions as well as the increasing amount of regulatory and supervisory measures required to maintain CBRs.
“Legal and compliance officers are not paid to take risks, so if you have 150 international partners and you think one might ruin your reputation with, for example, a money transfer to ISIS (Daesh), you obviously cut off the relationship,” stated a banker from the capital markets department of a major Lebanese bank that had had three major accounts terminated in the US.
For most Arab banks affected by the loss of CBRs, finding a replacement can be difficult.
“To avoid losing CBRs and being excluded from the international financial system, some local banks chose to stop operating with certain people, communities or economic sectors,” said Dr Ali Awdeh, director of the research department at the Union of Arab Banks (UAB). “This sort of financial exclusion is very worrying.”
The UAB, as well as local banking associations, is lobbying to maintain a dialogue with its international banking partners.