The Importance of Banking in Gulf Cooperating Economies

Abstract

Gulf Cooperating Countries (GCC) are in the process of strengthening and expanding financial markets in relation to listing, regulatory, trading and settlement procedures. Along with the opening up of markets to international investment, innovations that should enhance overseas investor interest include the development of meaningful GCC share returns and banking share returns indices. It is clear from almost four years of daily data, that unlagged GCC banking returns and GCC stock market returns are significantly and positively related. Over the longer term, they are also significantly cointegrated. The GCC banking industry is a major component of the GCC share market. Causality tests demonstrate that dual causality exists but stronger causality runs positively from GCC banking returns to GCC stock market returns. GCC banking stock returns are exogenous. The evidence supports the notion that, because of such interdependence it is vital for the economic health of the GCC, that their banking systems remain financially sound. However in order to relieve the mounting pressure on bank debt as oil revenues and repatriated funds dwindle, it is important that the stock markets be opened in due course to outside or non Arab international equity investment.