Banking in the Middle East
Author: Anwar Ali
Publication Date:
01 Jan 1957
eISBN:
9781451968590
Language:
English
Keywords:
SP; balance of payments; credit expansion; national income; banking system; bank advance; private bank; treasury bill; national bank; Commercial banks; Bank credit; Credit; Bank deposits; Foreign banks; Middle East; state bank
Download PDF (2 MB)

Modern banking in the Middle East dates from the second half of the last century. The Ottoman Bank in Turkey, established in 1863, is, perhaps, the oldest modern banking institution in the area. Banking has made slow but steady progress ever since, the progress depending upon the pace of economic development in various countries and of the transition from predominantly barter to semi-market economies. More recently, with the emphasis placed on economic development in a number of countries, there have been definite efforts to extend banking services and diversify banking institutions. However, the improvement has by no means been uniform. In some countries, for example, a nomadic way of life still survives, and there is no regularly organized banking system or paper currency. Thus, while progress in recent years has been steady, the banking structure of the Middle East still reflects, on the whole, the economic backwardness of the area and the limitations of domestic banking.

Abstract

Modern banking in the Middle East dates from the second half of the last century. The Ottoman Bank in Turkey, established in 1863, is, perhaps, the oldest modern banking institution in the area. Banking has made slow but steady progress ever since, the progress depending upon the pace of economic development in various countries and of the transition from predominantly barter to semi-market economies. More recently, with the emphasis placed on economic development in a number of countries, there have been definite efforts to extend banking services and diversify banking institutions. However, the improvement has by no means been uniform. In some countries, for example, a nomadic way of life still survives, and there is no regularly organized banking system or paper currency. Thus, while progress in recent years has been steady, the banking structure of the Middle East still reflects, on the whole, the economic backwardness of the area and the limitations of domestic banking.

Modern banking in the Middle East dates from the second half of the last century. The Ottoman Bank in Turkey, established in 1863, is, perhaps, the oldest modern banking institution in the area. Banking has made slow but steady progress ever since, the progress depending upon the pace of economic development in various countries and of the transition from predominantly barter to semi-market economies. More recently, with the emphasis placed on economic development in a number of countries, there have been definite efforts to extend banking services and diversify banking institutions. However, the improvement has by no means been uniform. In some countries, for example, a nomadic way of life still survives, and there is no regularly organized banking system or paper currency. Thus, while progress in recent years has been steady, the banking structure of the Middle East still reflects, on the whole, the economic backwardness of the area and the limitations of domestic banking.

Various causes have retarded progress in the development of banking. The basic cause has been the primitive, underdeveloped, and, until comparatively recently, the almost self-contained nature of the economy in many countries of the region. Nearly 80 per cent of the people live upon agriculture and practice primitive methods of cultivation that yield extremely low crops.1 Much of the agricultural produce does not enter the market but is consumed by the producers or bartered for services and other necessities. The monetization of the economy is thus, in varying degrees, incomplete.2 The majority of the countries export primary commodities and are dependent upon imports for most of the finished consumer goods that they need. Industrial development is in its early stages. Average per capita income is low and the margin for savings limited.

Table 1.

Comparison of Money Supply and National Income of Middle Eastern Countries, 1954

article image
Sources: The money supply data are from International Monetary Fund, International Financial Statistics; Syrian Council on Money and Credit; and State Bank of Ethiopia. The national income data for Egypt are from Ministry of Finance, Budget Report for 1956–57 (Cairo); for Ethiopia, from State Bank of Ethiopia; for Iran and Iraq, from United Nations, Statistical Office, Department of Economic and Social Affairs, National and Per Capita Incomes of Seventy Countries in 1949 Expressed in United States Dollars (New York, October 1950); for Lebanon and Turkey, from United Nations, Statistical Office, Department of Economic and Social Affairs, Statistics of National Income and Expenditure (New York, May 1956); for Pakistan, from State Bank of Pakistan; for Syria, from Bureau des Documentations Syriennes et Arabes (Damascus).

1952.

1949.

Year ended March 31, 1954.

Mass illiteracy, varying degrees of instability, and the religious attitude toward usury are other factors that have affected the growth of banking. The attitude toward interest is undergoing a change (a distinction is now usually drawn between usury and bank interest), but the rural peasantry is still prejudiced. In the past, the habit of putting savings into hoards of precious metals, or even of currency, has been deeply ingrained. Although there is some evidence that the relative importance of savings in this form has declined in recent years, there is still a strong preference on the part of those who can save and of the small wealthy class to invest their savings in land, real estate, or merchandise. This tendency is attributable largely to the expectation—prevalent for centuries in lands of insecurity and uncertainty—of quick and large profits on capital risks. The tendency to invest in land or real estate is widespread. In Syria, for example, it has been estimated that in the four-year period, 1950–53, nearly 56 per cent of gross private investment was in housing construction. In Turkey, 44 per cent of the total private investment in 1955 was related to construction; and in Egypt, the value of new private buildings (excluding the value of land) accounted for about 50 per cent of gross capital formation during 1954.3 Thus, while it is true that the over-all volume of savings is limited, the important point is that quite a large proportion of whatever savings accrue is not institutionalized and channeled into uses that add significantly to productive capacity.

Another institutional factor responsible for the slow growth of banking has been the absence of any organized system of indigenous banking practices.4 In these circumstances, all the pioneering work in the introduction and development of modern banking was performed by foreign banks, mostly British and French. Foreign banks showed their first interest in the area mainly in the wake of colonial penetration by their countries, but they continue to occupy an important and useful position. Without minimizing the extremely valuable contribution they have made, it might be stated that, since the main objective of their activities has been related to the commercial sector, their operations have been concentrated in a few business centers, have been generally conservative, and have been confined mainly to the financing of foreign trade. As a result, there has been little conscious effort to attract deposits, to spread banking activities in the interior of a country, or to diversify banking operations. Agricultural finance has, in general, been neglected. On the whole, these shortcomings should be interpreted as reflecting the deficiencies of domestic banking rather than as a criticism of foreign banks. At the same time, it seems necessary for foreign banks to readjust their policies to the needs of a changing situation.

With the hard core of a sound banking structure laid by foreign banks, banking in the Middle East has, more recently, received a powerful stimulus from the political and economic changes taking place in that area since World War II. With the achievement of independence by a number of countries, increasing attention is being devoted to economic development. Several countries have embarked upon programs of basic development (e.g., Turkey, Pakistan, Iran, Egypt, Iraq, and Syria). Assisted by fiscal and other incentives provided by national governments, private enterprise has begun to show a marked response toward productive investment. These changes necessarily call for a new approach toward savings and the extension and diversification of banking institutions.

Commercial banking has undergone a rapid expansion in many countries in recent years. A number of new private commercial banks (mostly local) have been established; moreover, some governments have taken the initiative in establishing commercial banks and have subscribed at least part, if not all, of the capital. Available information suggests that in a number of countries a considerable volume of business is now being handled by local banks.

In view of the almost complete absence of organized capital markets in the Middle Eastern countries, most governments have set up specialized financial institutions to provide medium-term and long-term capital for agriculture and industry, as well as short-term financing to agriculture. Except in one or two countries, the activities of these institutions have been limited so far; but with experience the institutions may be expected to play a more active and vital role in the future.

Recent banking trends in eight of the Middle Eastern countries, particularly during the postwar period, are discussed in the present paper. The eight countries are Egypt, Ethiopia, Iran, Iraq, Lebanon, Pakistan, Syria, and Turkey, which embrace about three fourths of the area’s total population. In the main, it is proposed to deal with (1) commercial banking, (2) the special financial institutions that have been set up to provide agricultural and industrial credit, and (3) central banking, including a general appraisal of the monetary situation.

I. Commercial Banking

General pattern

The banking structures of the Middle Eastern countries differ widely. In both Iran5 and Ethiopia, the state-owned central banks (the Bank Melli Iran, established in 1927, and the State Bank of Ethiopia, established in 1942) perform commercial banking functions in addition to their government functions.6 In Iran there are 5 private commercial banks, of which 1 is a foreign bank, but these account for only about one tenth of total bank business. Ethiopia has branches of 2 Italian banks whose activities are of minor importance. Apparently, the paucity of local private commercial banks in both countries has been the main reason for the combination of central and commercial banking functions in the 2 state-owned institutions. Private commercial banking has, however, shown signs of growth in Iran in the last few years.

In the other countries of the area, commercial banking is mainly in private hands, and branch banking is the invariable rule. Among the countries where private banks predominate, the business of these banks has increased significantly in Lebanon and Turkey (Table 2). The principal commercial banks in Turkey include 10 Turkish banks and 5 foreign banks. The I Bank (partly state-owned) is the largest. Of the foreign banks, the largest and oldest is the French and British controlled Ottoman Bank, which also operates in Egypt, Iraq, and Jordan. Mention should also be made of the state-owned Sumer Bank, which participates in industry, and the Eti Bank, which operates state mining enterprises. These banks, although performing some commercial banking functions, are really in the nature of holding companies and are a by-product of the state capitalism introduced in Turkey in 1934.

Table 2.

Data on Commercial Banking, Middle Eastern Countries, 1948–541

(In millions of U.S. dollars for deposits, advances, etc.)

article image
Sources: International Monetary Fund, International Financial Statistics; data from Syrian Council on Money and Credit and from State Bank of Ethiopia.

To convert data in national currencies into U.S. dollars, the current par value has been used, except for Syria, Lebanon, and Iran, for which the current rate applying to most or all transactions has been used. In the preparation of this table, it was thought preferable to use a uniform rate for conversion of data for different periods mainly because this procedure makes the percentage changes in terms of local currency equivalent to those in terms of dollars.

Data for State Bank only.

Approximate figure.

1953.

1950.

Includes government deposits with the Bank of Syria and Lebanon.

May include advances to public institutions and government.

Data for 1952 and 1954.

May include small amounts of time deposits with the Central Bank.

Egypt has 26 commercial banks, of which 11 are foreign.7 The largest is the domestically owned Bank Misr, which was founded in 1920. In addition to its normal commercial banking operations, this bank has been active in the promotion of industrial enterprises. As a result of an overextension of its industrial participation, it met with a temporary crisis in 1939. The central bank of Egypt is the National Bank of Egypt,8 a private bank, which has limited its commercial banking activities since 1951, when it was legally vested with central banking functions.

Pakistan has 32 “scheduled” banks9 with 251 branches, which are mainly centered in the larger towns. Only 5 of these banks are incorporated in Pakistan, but their branches number 152. There are also 50 “nonscheduled” banks, whose activities, however, are of minor importance. The Government sponsored a commercial bank in 1949, the National Bank of Pakistan, and holds 25 per cent of its share capital.

This bank has made rapid progress and is now the largest commercial bank in the country.

There are 7 commercial banks in Iraq, of which 5 are foreign. The largest is the government-owned Rafidain Bank, established in 1941, which, until recently, also acted as banker to the Government. The availability of substantial government deposits for its commercial operations has enabled the Rafidain Bank to consolidate and strengthen its position in recent years. With effect from September 1, 1956, all fiscal agency functions have been transferred to the Central Bank of Iraq.10

In Lebanon, a country of 1.4 million people, there are 35 banking institutions, of which 16 are foreign banks.11 In addition, there are a number of small institutions, which are either discount houses or engage in money lending at high rates of interest. Syria had 19 banks in 1955, and all of the 10 larger ones were foreign. One of the foreign commercial banks, the Bank of Syria and Lebanon, acts in both Syria and Lebanon as banker to the Government, and holds substantial public funds which have been important for its commercial operations. With effect from September 1, 1956, however, Syria has established an independent central bank (see Part III, below).

The record of banking in the Middle East has been relatively free of bank failures. The predominance of strong foreign banks, and the conservative but sound traditions they have established, have been the main contributing factors. Another factor, however, has been the general prevalence of branch banking in the area. The presence of a few large banks with a number of branches has imparted general strength to the banking system in most countries. But one drawback to the system has been that credit, instead of flowing from the large towns to outlying places, has generally tended to be concentrated in the large towns at the expense of the smaller centers and rural areas.

Even in the countries where private banking predominates, the shortcomings of domestic banking are now being remedied through state initiative. But for the prestige and support lent to the newly established local institutions by official participation, they might not ordinarily have been in a position to extend their activities successfully within relatively short periods. In their day-to-day operations, these banks are understood to function on purely commercial lines and free from government interference or directions. As an objective of policy, they are making banking services available to larger sections of the population by opening a network of branches in the countries concerned.

Recent growth in bank deposits and credit

Since the end of World War II, banking resources in the Middle East have been rapidly expanded as both deposits and advances have increased (Table 2). Although the growing use of banking facilities by the business community has been an important factor in this expansion, the recorded figures for some countries should also be interpreted as, in fact, a reflection of the inflationary pressures that have been at work.

In Turkey, bank deposits and advances increased steadily between 1948 and 1950, but thereafter they expanded much more rapidly when the monetary situation assumed an inflationary trend. Over the period 1948–54, commercial bank deposits increased more than 200 per cent (from $339 million to $1,052 million) and credit to the private sector by about 350 per cent (from $297 million to $1,333 million). In the other seven countries, bank deposits increased during the same period by 22 per cent (from $1,171 million to $1,424 million); on the other hand, credit to the private sector rose by 107 per cent (from $523 million to $1,081 million). As a result, the liquidity of the banking system declined sharply. The increase in credit in these seven countries was mainly in order to support higher levels of economic activity. The disparity between the rates of growth of deposits and of credit is of considerable importance for the future.

In most countries—particularly Pakistan and Egypt—time deposits rose faster than demand deposits. In Pakistan, time deposits increased from 16 per cent of total deposits in 1948 to 29 per cent at the end of 1954, and in Egypt from 8 per cent to 22 per cent. In Egypt, there was a considerable shift from demand to time deposits, since total deposits fell slightly during the period. Time deposits continued to be low in Turkey, Iran, Lebanon, and Ethiopia. Despite the substantial increase in time deposits for the area as a whole, they were only 19 per cent of total deposits at the end of 1954.

A major factor in the increase in bank deposits was the expansion in the economies of many countries. Even more important in certain countries were the large government outlays accompanied by central bank financing of these expenditures. The substantial increase in bank deposits in Turkey must be largely attributed to this factor. The same also applies to Pakistan and Iran, although in a smaller degree. In Lebanon, the increase in deposits presumably included a considerable inflow of capital from the oil-producing countries of the area. In Egypt, the decline in bank deposits reflected the contractionary effect on the money supply of large balance of payments deficits during the period under review. More recently, under the impact of fiscal deficits, bank deposits in Egypt have begun to increase.

Relative importance of currency and demand deposits

In assessing the relative importance of currency and deposits in the Middle East, the figures relating to the ratio of demand deposits to money supply, given in Table 3, are pertinent. These figures underline the fact that, with the exception of Turkey and Lebanon (the Lebanese figures are somewhat influenced by the inclusion of government deposits), there continues to be a strong preference in the Middle East for currency instead of bank deposits. The slow growth of the banking habit is evident. In Egypt and Pakistan, the decline between 1948 and 1954 in the ratio of demand deposits to the money supply is affected somewhat by the larger growth of time deposits, which have been excluded from Table 3. In Turkey, on the other hand, while there has undoubtedly been a change in banking habits, the apparent improvement in the seven-year period should be regarded with some reserve, as the increase in demand deposits is presumably related to the large increase in bank credit in that country.

Table 3.

Ratio of Demand Deposits to Money Supply, Middle Eastern Countries, 1948 AND 19541

(In per cent)

article image

Based on data in Tables 2 and 9. In 1954, ratio of demand deposits to money supply was 31 per cent for India, 71 per cent for the United Kingdom, and 80 per cent for the United States.

Money supply and demand deposits include government deposits with the Bank of Syria and Lebanon.

1952 data.

Heavy concentration on short-term credit

The activities of commercial banks throughout the Middle East are concentrated heavily on short-term credit, and the banks carry only small investment portfolios. Indeed, in most countries, the demand for short-term loans and advances is so high relative to available deposits that there is little room for more diversified investments. In December 1954, the ratio of advances and bills discounted to deposits was 56 per cent in Pakistan, 64 per cent in Iran, 71 per cent in Egypt, and 86 per cent in Iraq. The situation in this respect is somewhat unbalanced in Syria, Lebanon, and Turkey, where advances considerably exceed private bank deposits; the ratio for Syria was 273 per cent, for Lebanon 103 per cent, and for Turkey 127 per cent.12

Lebanon is in a special position in this respect for it finances a not inconsiderable portion of the transit trade for neighboring countries. Its additional needs for short-term credit are met by drawings of the foreign banks on their head offices abroad and by the use of government deposits for the commercial operations of the Bank of Syria and Lebanon. In Syria, the gap between the low level of bank deposits and the substantially larger credit needs of the private sector has been filled in the past in much the same manner as in Lebanon, but the need for measures to raise the level of deposits is apparently more urgent in Syria than in Lebanon. During 1954 and 1955, there was also a large and perhaps excessive expansion of credit to the private sector in Syria, and the monetary authority, the Council on Money and Credit, intervened to arrest this trend. In Turkey, the substantial increase in commercial bank credit is part of the prevailing inflationary situation, supported by central bank accommodation.

Commercial bank credit in the Middle East is related mainly to the financing of foreign trade. Apart from accommodation made available to shippers, banks extend credit primarily to merchants on the pledge of stocks, and they insist on the usual margins. Most of the advances—nearly 90 per cent—are secured. The provision of working capital to industrial establishments, although still limited, is growing in importance. While complete and accurate data for an analysis of bank advances are lacking, the data in Table 4 are illustrative of the general picture.

Table 4.

Distribution of Commercial Bank Loans and Advances for Selected Countries in the Middle East, December 19541

(In per cent)

article image

Based on data from State Bank of Pakistan, Bulletin: Ministry of Finance of Turkey; and Syrian Council on Money and Credit.

Does not take into account advances by the Sumer and Eti Banks to government-controlled industrial and mining establishments. These two banks are actually holding companies.

Includes the operations of the Agricultural Bank, which is classified as a commercial bank because of certain normal commercial banking operations that it undertakes.

The activities of commercial banks play an insignificant role in most Middle Eastern countries in the financing of agricultural operations or of the marketing of agricultural produce. This is one of the serious drawbacks from which bank operations suffer in that area. Further-more, there is no organized link between the banking systems and the indigenous money markets, mostly moneylenders. Agriculturists seek loans mainly for consumption purposes and pay exorbitant rates of interest to moneylenders. In view of the undeveloped state of indigenous money markets and the social feeling against moneylenders, little attempt has been made to establish a link between them and the banking systems and thus to enlarge the credit base. In the circumstances and appropriately enough, the main reliance in the field of agricultural credit is being placed on special financial institutions and the promotion of cooperatives, to the extent feasible.

Bill markets

The small volume of bills held by banks in most Middle Eastern countries indicates that bills do not play any important role in the short-term money markets. Lebanon, with its strong emphasis on foreign trade, constitutes a notable exception; bank credit in that country is generally related to the discounting of bills. In most of the countries, however, there is a need to develop a bill market, and central banks could usefully address themselves to this task.13 In particular, by showing a greater readiness to rediscount agricultural bills (possibly at rates more favorable than the normal rediscount rates), central banks could induce commercial banks to provide reasonable facilities for agricultural marketing operations. Such a development would not only enlarge the functions of the commercial banks in a desirable and neglected field; it also would enable the specialized agricultural credit institutions to concentrate their activities more on the extension of medium-term and long-term credit for agricultural development.

Investments in government securities

Middle Eastern commercial banks do not hold any substantial portfolios of government securities. An exception is Pakistan, where, at the end of 1954, commercial bank holdings of government securities constituted nearly 45 per cent of bank deposits. Most Middle Eastern countries have not, so far, embarked upon any large-scale public debt flotations, and, in any event, the scope of such operations would undoubtedly be severely limited by the existing volume of bank advances relative to deposits. This situation suggests that public debt operations, if undertaken, may require considerable support from the central banks.

Interest rate structure

The foregoing survey brings into sharp relief the question of interest rates in the Middle East, from the standpoint both of the stimulus they give to saving and of the cost of credit. Interest rates are generally low within the banking system and high outside of it. The general pattern of interest rates on bank deposits and advances is indicated by the data in Table 5.

Table 5.

Interest Rates on Commercial Bank Deposits and Advances, Yields on Government Bonds, and Central Bank Discount Rates, Middle Eastern Countries, December 1955

(In per cent)

article image

Interest on notice deposits, 1 per cent.

Bank Mein Iran rate on 31-day bills. For 45-day bills, 7 per cent; and for 90-day bills, 8 per cent.

Legal maximum rate. Latest market discount rate, 5.23 per cent, February 1956.

112 per cent on six-month deposits.

For industrial and agricultural purposes, 31 per cent.

Legal maximum rate.

October 1955.

Raised to 6 per cent in June 1956.

The lowest rates prevail in Pakistan and Egypt. The larger banks in the countries of this area, with the exception of Turkey, Syria, and Lebanon, usually pay no interest on sight deposits. In Egypt, the interest rates on notice deposits were reduced in January 1955 by members of the Egyptian Bankers Association from 2−212 per cent to 1 per cent, and on time deposits from 334−4 per cent to 212 per cent. In view of the almost stationary level of bank deposits in Egypt and the growing needs of the private sector, the propriety of making a substantial reduction in interest rates appears doubtful. It would not be unlikely for interest rates in Egypt to harden in the future, in view of the large development program envisaged and the support which the banking system may be expected to provide to the Government’s borrowing program.14 In Syria and Iraq, interest rates showed a tendency to rise during 1954 and 1955, and it is believed that the banks were thereby able to attract more deposits.

In general, interest rates are lower in countries where deposits are adequate to meet the short-term requirements of trade and business (e.g., Pakistan, Egypt, and Iraq) and higher in countries where the demands of the private sector exceed deposits (e.g., Syria, Turkey, and Lebanon). In the latter group of countries, the prevailing rates are hardly equilibrium rates, for in both Syria and Lebanon the use of government deposits to meet the credit needs of the private sector considerably eases the shortage of funds; in Turkey, maximum rates are fixed by law. In Iraq, too, normal interest rates might have been higher if government deposits had not been available to the Rafidain Bank for its commercial advances.

At first sight it is not a little surprising that interest rates should be low in an area where the level of savings is inadequate. The explanation is found in the narrowness of the sphere within which commercial banks operate in most countries and the conservative safety margins that are normally required. As the demands for financing exports and imports can be satisfied from available deposits, there has been little need to attract larger deposits by offering higher rates. In the past, the ability of the foreign banks to draw on their head offices abroad to meet seasonal needs has also been a contributing factor; but this is of diminishing importance now, except possibly in Syria and Lebanon. Finally, the governments and central banks in some countries have encouraged a policy of low interest rates by commercial banks.

It is possible to maintain that a higher level of interest rates could attract into the banking system some savings which presently go into landed property, real estate, or hoards. This would also have a healthy effect on capital formation. To be effective, however, such a policy might call for an increase in interest rates so substantial that it would probably be resisted on political, social, and fiscal grounds. In the circumstances, most governments are likely to rely on tax incentives for promoting particularly desired industrial and other investments; but such policies, while desirable in themselves, are likely to be limited in effect.

The over-all level of deposits and advances, coupled with the rate of their growth, suggests the desirability of a suitable increase in interest rates, accompanied by an extension of banking services, if progress is to be maintained without adverse effects on monetary stability. If the rapidly growing needs of the public sector are also taken into account, such action appears to be clearly indicated. In particular, governments would be well advised to pursue a policy of extended savings banking through their post office systems.15 It needs to be emphasized that, despite improvement in recent years, savings in most Middle Eastern countries are far too low. On the other hand, because of the general dependence on irrigation for supporting the agricultural economy, capital requirements are larger than in most of the less developed countries. The need for higher savings is thus obvious. In this connection, it also should be emphasized that the maintenance of a reasonable degree of monetary stability constitutes an essential prerequisite to the achievement of a higher level of savings. Inflation is likely not only to divert available savings into real estate, merchandise, or hoards, but also to distort the whole pattern of development, thus defeating the very objectives that development is intended to serve.

The recent trend in some countries toward time deposits suggests the possibility that commercial banks may be in a position to satisfy part of the medium-term requirements of the capital market. In view, however, of the presence of government-controlled specialized institutions in this field and of the fact that, in the interest of a rapid promotion of industry and agriculture, interest rates are being subsidized, the direct activities of commercial banks in this field appear likely to remain limited.

II. Special Financial Institutions

Because of the absence of capital markets in the Middle East and the limited ability of commercial banks to provide support to agriculture and industry, the governments of nearly all these countries have sponsored special financial institutions for these purposes. Many of these institutions are a product of the postwar period and draw their resources from sources other than ordinary bank deposits. Their activities may be judged from the figures given in Table 6.

Table 6.

Paid-Up Capital, Loans and Advances, and Interest Rates of Banks in Middle Eastern Countries

article image

Short-term rate for cooperatives.

Medium-term rate for cooperatives.

For both agriculture and industry.

On loans to industry for a maximum period of seven years.

On loans to agriculture, extended for three to five years.

The Bank was established to be a depository of funds held by the Plan Organization and to carry out its banking transactions. Its charter includes the provision that it give financial assistance to private institutions engaged in production connected with the development program, but the bank has not been active in that capacity.

Outstanding at end of February 1955.

Originally established as the Agricultural and Industrial Bank of Iraq, the Bank was divided into the Agricultural Bank and the Industrial Bank in 1940. However, the law regulating this division was not put into effect until 1946.

Outstanding at end of March 1954. Loans are limited to $8,400 per borrower.

Of this amount, $3.2 million was equity in investments.

The loanable funds are to be allocated two fifths to agriculture, two fifths to industry, and one fifth to real estate. The Bank is expected to obtain from the Bank of Syria and Lebanon up to LL 25 million (not exceeding LL 10 million in any one year), subject to guarantee by the Government.

Outstanding at end of December 1955.

Total loans up to the end of December 1955.

For medium-term and long-term loans only.

It has been proposed that the paid-up capital be raised to about $20 million. Six per cent of the proceeds of the agricultural production tax (yield about $0.5 million annually) would be allocated to the Bank for this purpose.

On loans against mortgage of crops, 6 per cent; on other loans adequately mortgaged, 3 per cent for one year and 4 per cent for two years.

Two and a half per cent on medium-term credits up to five years for purchase of agricultural equipment; 3 per cent on long-term credits up to 20 years; and 7 per cent on short-term credits of less than one year for financing crops. All these rates are subject to a revenue tax of 15 per cent.

Five per cent on credits for small housing construction and 7 per cent on credits for other construction, plus a revenue tax of 15 per cent.

Agricultural credit

In the field of agricultural credit, notable advances have been made in Turkey and Egypt. In Turkey, the first agricultural credit institutions were small local cooperative banks which merged in 1888 to form the Agricultural Bank of Turkey. This is perhaps the oldest local credit institution in the area. With its present 418 branches and agencies, the Bank has made an effective contribution to the development of agriculture. Its activities have undergone a marked expansion since World War II, when Turkey undertook an active program of agricultural expansion, accompanied by land reforms. The credits extended by the Bank and the cooperatives which it supports rose from LT 31 million in 1937 to LT 641 million in 1951 and LT 1,961 million in 1954. A considerable portion of this credit is in the form of crop loans. In addition to the Agricultural Bank, the Agricultural Equipment Establishment, whose capital is provided by the Government, supplies to cultivators equipment on credit. Between 1950 and 1953, it financed the purchase of tractors (11,011), harvesters (2,261), fertilizers, etc., with a total value exceeding LT 200 million.16

In Egypt, the Agricultural Credit and Cooperative Bank in 1931 took the place of the Agricultural Bank of Egypt (established in 1902), which ceased operations in 1930 as a result partly of the difficulties arising from the Five Feddan Law of 1913, which forbade foreclosures in respect of ownership of land of five feddans or less and thus made it impossible to grant credit on the security of such small holdings. The new bank was exempted from these limitations. For its working capital, it depends upon a special appropriation of LE 9 million made available to it by the Government at a special rate of 1 per cent, and upon loans from the National Bank of Egypt. Its loans and advances have been increasing steadily in recent years; they amounted to LE 16.4 million in 1953, LE 17.4 million in 1954, and LE 19.5 million in 1955. Its operations, however, are heavily concentrated upon short-term advances, and in each of the years referred to its medium-term and longterm loans were less than LE 0.5 million. Most of the advances are related to the supply of fertilizers, improved seeds, and other agricultural equipment. Over the years, the bank has made a significant contribution to the raising of agricultural productivity. In addition, it undertakes, on behalf of the Government, the procurement of cereals which, in the main, is not financed by commercial banks.

In the other countries the provision of agricultural credit has, so far, received inadequate attention. The financial institutions that have been set up are of recent origin, and the complexity and magnitude of the task involved indicate that it will be some time before they are able to extend their activities significantly. The absence of an active cooperative movement in most countries further limits the ability of these institutions to reach the agriculturists. Some of the institutions have also been confronted with legal difficulties in making medium-term and long-term loans on the security of land. In a number of cases, the existing laws were intended to save landowners from having their land expropriated by moneylenders; they have, in fact, made it impossible to negotiate loans. Suitable changes are being made to exempt the new institutions from such technical and legal difficulties.

While the basic factor restricting agricultural production is the very low capital investment in land, experience shows that the mere establishment of financial institutions may not by itself be enough. In order to make the operations of financial institutions really meaningful, it is equally important to carry out comprehensive programs of agricultural development and to introduce agricultural extension services. To persuade the villager to seek greater efficiency, to use new methods, fertilizers, improved seeds, etc., is not only a technical and a banking problem, but also a social one.

Industrial credit

In the field of industrial finance, the new institutions (almost all of which have been established within the last eight years) have done fairly useful work within the limitations imposed by the circumstances in which they operate. In some countries, e.g., Iran and Iraq, the financial resources available to the public authorities and the concentration of industrial development in the public sector have limited the scope of the operations of the new institutions.

The official policy in Turkey during recent years has been moving away from etatism (state capitalism) to the encouragement of private investment. To this end, the Industrial Development Bank was established in 1950; it is under private control and makes available loans and expert advice to industrial undertakings. Part of its capital was privately subscribed and the rest borrowed from the Central Bank or made available from U.S. aid (ECA counterpart funds); in addition, loans in foreign exchange ($18 million) were made available by the International Bank for Reconstruction and Development (IBRD). The Industrial Development Bank seems to be proving remarkably successful; its loans outstanding at the end of 1954 totaled $49 million, and 266 enterprises had benefited from its operations.

The equity investments of the Bank Misr in Egypt (see Part I) in 1954 amounted to LE 10.8 million. The activities of the newly established Industrial Bank have, so far, been limited. Although the volume of loans made by the Industrial Finance Corporation in Pakistan has not been large, this has not been a factor limiting industrial expansion, for nearly $250 million has been invested in privately owned industrial establishments in the last seven years. The Government of Pakistan is contemplating the establishment of a private industrial bank on the Turkish model with the assistance and cooperation of the IBRD.

Among the aspects of industrial finance in the Middle East that deserve mention, the foremost is the fact that, in most countries, it is important to overcome the shyness which limits the participation of private capital in industrial ventures, and to build up an entrepreneur class. In order to attract private capital into the industrial field, it may be necessary in some instances for the State to sponsor certain projects itself in association with private capital, or to admit private capital after the projects have started functioning. The experience of Pakistan in this respect has been valuable. Second, in most countries, the financial institutions should be well equipped to offer technical advice concerning the projects they are expected to finance.

Finance is an important factor limiting the scope of the activities of both agricultural and industrial banks. Unable to attract sufficient deposits or to borrow in the local markets, these banks have looked mainly to their governments or central banks for financial assistance. In essence, therefore, their activities have to depend chiefly on central bank credit which has to be rationed within an over-all program of development. In such a situation, the utilization of the local currency proceeds of U.S. commodity aid programs, which are available to most countries in the Middle East, could provide a valuable base for the provision of agricultural and industrial credit on a more adequate scale than is presently the case. It is clear, however, that, in order to achieve self-reliance in the long run, the basic problem of developing capital markets needs to be tackled. This question is essentially linked with the establishment and growth of savings institutions—e.g., savings banks, life insurance institutions, investment houses—in which nearly all Middle Eastern countries are deficient and to which increasing attention must be given. Furthermore, the special financial institutions which have been set up have been content, so far, to play the role of a distributive agency. It is perhaps time that, instead of merely looking to their governments or central banks for financial support, they should also make a serious effort to attract time deposits and to tap the money markets, as far as possible, at suitable rates of interest.

III. Central Banking

Central banking in the Middle East is of recent origin, most central banks having been established within the last 15 years.17 The principal need in most countries was for agencies to manage the currency and foreign exchange reserves, to act as banker and creditor to governments, and to promote the growth of banking. This was met in Iran and Ethiopia by the establishment of banks to perform both central banking and commercial banking functions. In Syria, until the Central Bank of Syria was established on September 1, 1956,18 and in Lebanon, limited central banking functions have been exercised by a commercial bank, the Bank of Syria and Lebanon (BSL), which has acted as banker to both Governments, managed the currency, and in Syria was also custodian of commercial bank reserves.19 In Egypt, comprehensive central banking functions are vested in a private bank which has restricted its commercial banking activities in order to reduce active competition with other banks.20 Turkey, Iraq, and Pakistan have set up separate central banks.21

This brief description of central banking arrangements indicates that central banking is still in an evolutionary stage in the Middle East. Banking itself is still at an early stage of development, and money markets, in the real sense, hardly exist in most of the countries in the area. Under these circumstances, the role of most central banks has, so far, centered around currency and exchange management and the provision of banking facilities to their respective governments. In Iran and Ethiopia, the central banks have also contributed directly to a rapid growth of commercial banking services.

Most of the central banks have not, so far, played any significant role as bankers’ banks. This has been due to the undeveloped state of money markets, the conservative policies of commercial banks (coupled with their relatively liquid positions in some countries in the past), and, until recently, the generally static economic conditions of most countries. However, with the recent attempts to foster indigenous banking and in view of the rapidly increasing credit needs of the public and private sectors in most countries, central banks may be expected henceforth to play an increasingly important role in that capacity.

In countries where commercial banking is mainly in private hands, but where central banking functions have been entrusted to a commercial bank, the need for the establishment of separate central banks has begun to be felt. An improvised arrangement under which a commercial bank, itself guided by the profit motive and actively engaged in competition with other banks, is also entrusted with central banking functions, can hardly be expected to function smoothly at all times. Furthermore, such an arrangement cannot inspire the necessary confidence in the banking system as a whole. It is perhaps partly with such considerations in mind that Syria established the Central Bank of Syria. The speeches made when the Bank was established also suggest, however, that a full-fledged central bank has come to be regarded as one of the hallmarks of national sovereignty and independence.

As the concluding portion of this paper indicates, monetary and price stability have, so far, been fairly well maintained in the area as a whole. The main expansionary trends in some countries stem from large government outlays on economic development (mostly on long-term schemes of basic development), unaccompanied by a commensurate growth in real savings and an adequate inflow of capital. In the circumstances, heavy reliance has been placed on central bank financing of development expenditures. Except in the oil-producing countries, this is likely to remain the key problem facing most central banks in the Middle East. It is pertinent that, under the stress of this problem and profiting from the experience of the last few years, most governments and central banks are beginning to give increasing attention to the formulation of more definite monetary policies involving closer coordination in the fiscal and credit fields.

Currency management

The statutes of most central banks in the Middle East require that the central banks maintain proportional reserves of gold and foreign assets (Table 7). On the whole, these reserve requirements permit as much flexibility as is consistent with the maintenance of currency stability. The locking up of minimum reserves in the manner required by these statutory limitations may impose a rigidity upon the currency system that in certain emergencies might be harmful, especially in countries such as those in the Middle East where current exchange earnings are likely to be affected by wide fluctuations in production and in prices. There is a certain lack of logic in a rule that forbids the use of reserves for the purpose for which they have been accumulated, i.e., the protection of the value of the currency. In these circumstances and in order to provide for necessary flexibility in the note issue, the reserves actually held must in practice usually exceed the prescribed minimum. However, in countries where the masses of the population are illiterate, prudence requires that special precautions be taken to establish and maintain their confidence in the note issue; and the legal reserve requirements are apparently intended to provide the assurances necessary for this purpose. In Iraq, the minimum cover in gold and foreign exchange is as high as 70 per cent; in view, however, of Iraq’s growing oil reserves, this requirement is not likely to affect the flexibility of the note issue. In some countries, a temporary suspension of the statutory requirements is permitted in certain circumstances. The provision embodied in the statutes of Pakistan and Lebanon, which permits the central bank to include short-term commercial and agricultural bills as part of its statutory reserve, not only permits flexibility in the note issue and in bank credit, but also encourages the development of a bill market.

Table 7.

Currency Cover of Central Banks in the Middle East

article image

Commercial Bank Reserves

Except in Lebanon and Ethiopia, the commercial banks are required to maintain minimum reserves with their central banks. These minimum reserves vary from 2 per cent on time deposits and 5 per cent on demand deposits in Pakistan to about 15 per cent in the other countries (Table 8). In prescribing reserve ratios, most countries draw no distinction between time and demand deposits; with the growth of time deposits, however, such a distinction may be desirable. The reserve requirements have not, so far, been put to any effective use as a tool of monetary policy, and their primary objective has been to ensure safety of deposits and bank liquidity. In a few cases, however, the ratios have been varied; reserve requirements in Syria were raised from 10 per cent to 15 per cent in 1955 when commercial bank advances showed an undue increase, and in Egypt they were lowered from 15 per cent to 1212 per cent in 1954 when commercial banks were in need of more funds. In Iran, interest of 1 per cent is allowed on bank reserves, and in Iraq, one third can be lodged in the form of government securities. In Turkey, bank reserves are deposited with the Amortization Fund,22 which uses them for the financing of state-owned enterprises, a practice which is scarcely consistent with the purpose for which such reserves are required. In view of the limited use made of the discount rate by Middle Eastern countries and the narrow scope for open market operations, variable reserve ratios could be used by central banks as an instrument of monetary policy with considerable effect. This suggests a wider and more flexible delegation of powers to central banks in prescribing reserve requirements as the needs of the situation warrant.

Table 8.

Reserve Requirements of Commercial Banks in the Middle East

article image

Judging by the requirements of the private sector in Iran and the high interest rates prevailing outside the banking system, the level of excess reserves on deposit with the Bank Melli Iran is somewhat surprising. Apparently, however, prospective borrowers do not have an adequate security to offer and the newly established commercial banks are unwilling to take undue risks.

Commercial banks’ deposits with the Central Bank and their total holdings of government paper at the end of 1955 comprised 28 per cent of their deposit liabilities. But this percentage does not reflect correctly the position of reserves held against deposits, since the total of government paper also includes reserves that are maintained against legally required capital reserves. Separate data on reserves maintained against deposits alone are not available.

In some of the Middle Eastern countries, commercial bank advances undergo a marked seasonal variation, which is greatest in the winter months (October-March). On the other hand, bank liquidity is highest in the period April-August. The banks are thus in need of some accommodation from the central banks in the busy winter months and need suitable avenues for short-term investments in the slack season. Egypt and Pakistan (and to some extent, Iraq) are typical instances. Ordinarily, open market operations and the availability of treasury bills could play a useful role in such a situation because of the automaticity with which the seasonal stringency of funds could be relieved in the winter months and short-term investments provided in the slack season. However, because of the absence or narrowness of government security markets, which itself is due mainly to the low level of bank deposits, open market operations are at present not of any significance except, perhaps, in Pakistan. Treasury bills are issued in Egypt and Pakistan, but their volume is limited. The low rates of interest at which treasury bill tenders are accepted may have been partly responsible for the low offerings by commercial banks. In these countries, there is some further scope for developing treasury bill markets, provided interest rates are suitable; but, at least for the time being, the development of such a market would be intended to meet the needs of the short-term money market rather than to satisfy the Governments’ cash requirements. In most other countries, e.g., Lebanon, Syria, Turkey, the issuance of treasury bills does not, in present circumstances, appear feasible.

Role of discount rate

The discount rate has, so far, played a minor role in most Middle Eastern countries. While a few changes in the rate have been made in certain countries, its significance as an instrument of monetary policy has not been important. For one thing, the short-term money markets in the area are hardly analogous to their counterparts in more developed countries; and for another, the very nature of commercial bank operations in the Middle East, with their heavy emphasis on the export sector, does not call for the frequent use of the discount rate. Thus, in Pakistan, Iraq, Iran, and Ethiopia, the discount rates have undergone no change in the postwar years. In Egypt, except for a few months in 1952 (July-October) when the discount rate was raised by 12 per cent, it has remained unchanged at 3 per cent since 1951 when the National Bank of Egypt began to quote a rate. In Syria, the discount rate was raised on a selective basis in 1955 from 3 per cent to 314−312 per cent, but the increase was not large enough to be fully effective. In Turkey, it was raised from 3 per cent to 412 per cent in June 1955 and to 6 per cent in June 1956. In view, however, of the somewhat deep-seated inflationary situation in Turkey, an increase in the discount rate is hardly likely to be effective unless accompanied by other far-reaching measures involving a cutback in investment, deficit financing, and the over-all volume of credit.

The generally low discount rates in the Middle East are a reflection of the low interest rate patterns within the banking system and are indicative of a desire to follow cheap money policies. There is thus a conflict between the provision of cheap credit (including the governments’ own credit needs) and the need to stimulate savings. The discussion of interest rates earlier in this paper indicates that it may be useful for central banks to review their discount rate policies. For the promotion of development with stability, the balance of advantage seems to be with policies that promote a larger flow of savings, and to that extent place less reliance on central bank financing.

In present circumstances, the traditional weapons of monetary policy cannot be expected to play any significant role in Middle Eastern economies. The main reliance in controlling credit will continue to be placed on measures of selective credit control.23 Within these general limitations, the recent fall in bank liquidity in most countries suggests that variable reserve ratios and changes in discount rates (whenever considered necessary and appropriate) are henceforth likely to prove more effective than they might have been in the past.

Banking control

Banking control is exercised on a limited scale in most countries in the area, but increasing attention is being given to it in view of the establishment in recent years of a number of local banks, some of which have given indications of unsound banking practices. In most countries, commercial banks are required to render periodic returns to the central banking or monetary authorities. In a number of countries, there is a need for comprehensive banking legislation independent of the company laws which presently apply also to banks. Pakistan has partially met the deficiency through a special law (the Banking Companies’ Control Act), which vests in the State Bank wide powers of inspection and banking control in order to ensure the development of sound banking practices. Iraq, and more recently Syria and Iran, have passed comprehensive legislation to regulate the establishment and activities of commercial banks. Encouragement of the growth of sound commercial banking throughout the economy is a subject that needs greater attention on the part of central banks in the Middle East.

IV. General Appraisal of the Middle Eastern Monetary Situation

The statutes of most central banks in the Middle East place particular emphasis on maintaining the value of currencies and the maintenance of monetary stability. An evaluation of the position in this respect would embrace the whole field of fiscal operations, balance of payments, and monetary policy; and this would require a more comprehensive study than can be attempted here. The figures given in Table 9 for the years 1948–54 relating to money supply and the activities of the banking system are, however, illustrative of the general picture, which may usefully be supplemented by some notes on recent trends in particular countries.

Table 9.

Money Supply, Volume of Bank Advances to the Public and Private Sectors, Movement of Gold and Foreign Exchange Reserves, Price and Cost of Living Indices, 1948–54

(Money supply and bank advances in millions of U.S. dollars)1

article image
Sources: International Monetary Fund, International Financial Statistics; Syrian Council on Money and Credit; Syrian Monetary Agency; and State Bank of Ethiopia.

See footnote 1, Table 2.

Data for State Bank of Ethiopia.

1953.

Averages of export and import price indices for 1950 and 1954.

1950.

May include advances to public institutions and the Government.

The decline includes also the loss occurring because of the devaluation of sterling and the Indian rupee in September 1949.

Figures are for 1952 and 1954.

1949.

Retail price index.

Price trends in the Middle East during the postwar period necessarily have to be considered in the light of wartime developments. During World War II, almost all Middle Eastern countries experienced inflation, to a greater or lesser extent, owing to the increased pressure on domestic resources unaccompanied by any corresponding inflow of supplies. This increased demand took the form of heavy direct military expenditures or purchases by the armed forces and larger export surpluses resulting from greater demand for products of the area. Various forms of price and other controls were attempted, but these failed to prevent substantial price increases. By 1948, however, the cost of living was rising less steeply and a reasonable degree of price stability was restored. Larger availabilities in the postwar period, coupled with the availability of substantial exchange reserves accumulated by most countries during the war, helped restore prices (which during World War II had risen threefold to tenfold) to a level more in line with world prices. The raw materials boom in 1950 and 1951 (resulting from the Korean war), which also affected import prices, again introduced inflationary pressures for a time, but by the middle of 1952 its effects had subsided. During this period, a number of countries increased duties on raw material exports in order to minimize the inflationary impact of the commodity boom.

In more recent years, it appears that, except in Turkey, where a fairly serious inflation continues, monetary stability has been rather well maintained in the area. The volume of bank advances to the private sector has, in general (and with the exception of Turkey), supported the genuine needs of expanding economies. In countries where the money supply has risen at a fast pace, this has been accompanied by substantial central bank financing of public expenditures (Turkey, Pakistan, and Iran).

More specifically, in Egypt, Iraq, Syria, Lebanon, and Ethiopia, there has been a remarkable degree of monetary stability. Iraq has enjoyed the happy position of being able to finance its large public outlays almost entirely from its growing oil income. Thus, while the money supply has increased, it has been possible to maintain price stability ever since 1952 through a liberalization of imports. Prudent fiscal and commercial bank policies and ability to draw on large exchange reserves accumulated during World War II enabled Egypt to maintain monetary and price stability during the period under review. As in some of the other countries, the task of monetary management is likely to become more difficult in Egypt, once the development program gets under way and the exchange reserves are depleted.

In Syria, there was a considerable expansion of commercial bank credit in 1954 and 1955, which, coupled with a bad harvest, seemed to threaten monetary stability. Although price stability was maintained, it was achieved at the expense of a considerable use of exchange reserves. Bank advances were in no small measure related to consumer installment credit. To meet the situation, the Council on Money and Credit took measures, including selective credit control, imposition of margins on the opening of letters of credit, and a slight increase in the discount rate. As a result of these measures and a better harvest in 1956, the position has since been restored to normal. In Pakistan, substantial government outlays on development, accompanied by public debt operations financed by the banking system, including the central bank, have been the main factors leading to an increase in the money supply. In the initial stages, monetary stability was maintained by drawing on sterling balances, but as these were depleted, prices of consumer goods began to rise substantially during 1954. The situation has since been relieved by U.S. assistance and rising domestic production. In Iran, as well, substantial budgetary deficits financed by central bank accommodation have been the main cause of the inflationary trend. The situation has improved as a result of U.S. assistance and the resumption of oil production.

The foregoing survey indicates that the record of the monetary authorities in maintaining monetary stability has, with one or two exceptions (e.g., Turkey), been satisfactory. As stated earlier, the main threat to monetary stability arises, or is likely to arise, from too rapid programs of expansion undertaken by the public authorities. This essentially involves a task of matching projected outlays with available resources, both domestic and foreign. To lift the level of real savings by a combination of fiscal and monetary policy is part of this problem. The central banks in various countries have repeatedly drawn attention to the dangers inherent in the undertaking by public authorities of programs more ambitious than the availability of real resources warrants. Whether the voice of the central banker will prove effective remains a question. It is clear, however, that a more effective coordination of fiscal and monetary policies appears indicated. Amidst the understandable urge for economic and social development, realism on the part of the fiscal authorities and the level of foreign aid are likely to be the principal factors in maintaining economic development with monetary stability and thus avoiding social discontent.

*

Mr. Anwar Ali, Director of the Middle Eastern Department, is a graduate of the University of the Punjab. He was formerly Joint Secretary in the Ministry of Finance of Pakistan and Director of the Pakistan State Bank and the National Bank.

1

As an exception, Egypt’s crop yields are among the highest in the world, but the pressure of population on land is considerable.

2

The ratio of money supply to national income serves as some guide to the extent of monetization achieved in the economies of different countries. The relevant data for 1954, summarized in Table 1, show that the ratio varies from 7 per cent in Ethiopia to 51 per cent in Lebanon.

3

The investment data for Syria are from the International Bank for Reconstruction and Development, The Economic Development of Syria (Baltimore, 1955); for Turkey, from the United Nations, Department of Economic and Social Affairs, Economic Developments in the Middle East, 1945 to 1954: Supplement to World Economic Report, 1953–54 (New York, 1955); for Egypt, from the National Bank of Egypt, Economic Bulletin, Vol. IX, No. 1 (Cairo, 1956).

4

Although the exact origin of banking is hidden in antiquity, the earliest evidence traces it to the Middle East. The practices of safekeeping and savings banking flourished in the temples of Babylon as early as 2000 B.C. Furthermore, clay tablets discovered in the ruins of Babylonia indicate that credit instruments used in the ninth century B.C., in the form of promises and orders to pay gold and silver coins, were the forerunners of the promissory notes and bank checks used today. (E. W. Boehmler, R. I. Robinson, F. H. Gane, and L. C. Farwell, Financial Institutions, Homewood, Illinois, revised edition, 1956.) These practices did not, however, develop in the Middle East through the ages, and the only living remnants today of the ancient art of banking are perhaps the sarrafs in Iraq, whose activities now are of only secondary importance.

5

Banking in the modern sense was introduced in Iran in 1889 with the establishment of 3 foreign banks, 2 of which were British and 1 Russian. The British banks have since ceased operations. The Iranian banking law discriminates against foreign banks.

6

The Bank Melli Iran operates 158 branches and agencies. The State Bank of Ethiopia has 15 branches.

7

The Egyptian Government decreed in January 1957 that the British and French banks operating in Egypt should be sequestered and that all banks operating in Egypt should take the form of Egyptian limited liability companies.

8

The National Bank of Egypt was established in 1898 as an Egyptian company with half of its capital of £1 million subscribed in London. It was empowered to issue banknotes, make advances to the Government, discount bills, and receive deposits. Egyptian Law No. 571 of 1951 changed the de facto position of the National Bank as a central bank into a de jure position. The Bank remained a private company and, while not being called upon to withdraw from commercial banking, was asked not to open small accounts. The Governor of the Bank is appointed by the Minister of Finance from among two nominees of the Bank’s Board of Directors.

9

A “scheduled” bank is a joint stock bank having a paid-up capital and resources of PRs 500,000 (US$105,042) or more and included in the “second schedule” to the State Bank of Pakistan Order, 1948. Banks with smaller capital and resources are called “nonscheduled” banks.

10

Prior to September 1, 1956, it was called the National Bank of Iraq. The accounts of the Development Board, whose cash balances have recently been sub-stantially larger than those of the Government, have always been maintained with this Bank.

11

The banking profession in Lebanon is entirely free and unregulated. Anybody, Lebanese or foreign, can at any time open and operate a bank without any requirements in regard to the legal form of business or minimum capital. Banking transactions are considered as acts of commerce, and persons and corporations carrying them out as merchants.

12

The quoted ratios are liable to some error since in some countries figures for bank investments are not available separately. However, these investments are known to be small.

13

Pakistan has under consideration an interesting proposal regarding the establishment of discount houses for expanding the money market. In essence, the scheme visualizes the establishment of discount houses by local firms and moneyed individuals. Commercial banks are to participate in the capital subscription and provide rediscounting facilities at concession rates. The State Bank will, in turn, provide rediscounting facilities to commercial banks. It is stipulated that discount houses should discount bills of trade but not be allowed to accept deposits. The Planning Board has recommended the scheme to the State Bank of Pakistan for further study.

14

Since this paper was written, interest rates on bank deposits have shown a tendency to rise in Egypt. It is too early to indicate relevant data as interest rates may take some time to stabilize at any particular level.

15

Of the eight countries under discussion, only three (Egypt, Iraq, and Pakistan) have postal savings banks. The rates of interest on deposits are as low as 2 per cent in Egypt and Pakistan and 3 per cent in Iraq. Outstanding deposits at the end of 1954 were LE 26.4 million in Egypt (against LE 29.5 million in 1948), PRs 329 million in Pakistan, and ID 2.3 million in Iraq. Only Pakistan issues post office savings certificates.

16

United Nations, Department of Economic and Social Affairs, Economic Developments in the Middle East, 1945 to 1954: Supplement to World Economic Report, 1953–54 (New York, 1955).

17

Central Bank of the Republic of Turkey, 1931; Bank Melli Iran, 1928; Da Afghanistan Bank, 1941; State Bank of Ethiopia, 1942; State Bank of Pakistan, 1948; National Bank of Iraq, 1949 (now called Central Bank of Iraq); National Bank of Egypt, 1951 (de jure status as central bank).

18

Until the establishment of the Central Bank, the Council on Money and Credit determined monetary policy. Exchange reserves were kept by the Exchange Office.

19

The concessions enjoyed by the Bank of Syria and Lebanon (earlier known as the Bank of Syria) date back to the French occupation of Syria and Lebanon. The BSL was granted the right of issue, and it took over the agencies of the Ottoman Bank and the privileges held by that bank in Syria and Lebanon under Turkish rule. The 1939 Conventions (due to expire in 1964) determine the present relationships between the BSL and the Syrian and Lebanese Governments. The BSL has the sole right to issue notes and to receive and hold government deposits. Syria has since terminated the Convention, subject to the payment of an agreed compensation to the BSL.

20

For details, see footnote 8. Necessary coordination between the National Bank of Egypt and the Ministry of Finance is provided by the Supreme Committee which is presided over by the Minister of Finance and whose decisions are final.

21

The State Bank of Pakistan took over in July 1948 the functions previously exercised by the Reserve Bank of India—established in 1935. Forty-nine per cent of the State Bank’s capital is privately subscribed.

22

The banks have the option of depositing their reserves with the Amortization Fund or investing them in government bonds. They have preferred the Fund, since this enables them to earn a higher return.

23

This has reference to the use of selective credit controls as purely short-term expedients. For the general use of such controls in developing economies, see I.G. Patel, “Selective Credit Controls in Underdeveloped Economies,” Staff Papers, Vol. IV (1954–55), pp. 73–84.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Papers
IMF Staff papers: Volume 6 No. 1
Author: International Monetary Fund. Research Dept.
Volume/Issue:
Volume 1957: Issue 002
Publisher:
International Monetary Fund
ISBN:
9781451968590
ISSN:
1020-7635
Pages:
179
DOI:
https://doi.org/10.5089/9781451968590.024