<mark>quotas, and interest rates caps. Special rules may apply for lending for agriculture and housing projects</mark> and applications. Those policies may have a limited impact on nominal lending rates and lendingdeposit spreads because: (i) banks may charge higher lending rates for projects that do not benefit from directed credit schemes, (ii) bank competition is low and overhead cost is relatively high, and (iii) sovereign risks is significant.

<u>Middle East and North Africa</u><sup>20</sup>

# **Major Trends**

Nominal lending interest rates have been generally low and falling in the region. The median lending rate declined to 8.1% in 2017 from 10.3% in 2003 but intra-regional heterogeneity has been observed, with high interest rates in the Arab Republic of Egypt, Lebanon, and Tunisia.

In addition, Middle East and North Africa (MENA) overall has relatively low lending-deposits spreads. While the spread for MENA countries was 5.7% in 2017, on average, it was 7.4% in the rest of the world in the same period. However, spreads in the region have been steadily increasing since 2012, and in countries like Djibouti, the spread reached 10% in 2017.

# **Major Challenges**

Macro-fiscal conditions associated with high public financing needs and inflationary pressures are challenges to the reduction of lending rates in some countries. Countries like Lebanon, Egypt, Tunisia are maintaining high interest rates to stabilize their currencies, contain inflation or to finance the public sector, which is crowding out the private sector from the credit market. As a result, banks’ net claims on government is rising to 66% of domestic credit as of November 2018.

A lack of competition impedes innovation and financial inclusion, although its impact on lending rates is unclear given the general lack of access to financial services. The median bank asset concentration of the top three banks in MENA stood at 74.8% of total banking assets in 2017, while the global median of developing countries stood at 60.5% in 2017. Moreover, some countries (e.g., Gulf Cooperation Council -GCC- countries, Iraq, Tunisia, Egypt) have large state ownership (direct and indirect) in the banking sector, which may be associated with an unlevel playing field and limited competition due to significant advantages enjoyed by the state-owned banks (SOBs), including implicit guarantees, lower cost of funding, and privileges in providing services to the public sector. Moreover, regulatory frameworks are not always conducive to the development of non-bank financial service providers and the entrance of foreign institutions.

# **Policy Overview**

Credit infrastructures are being developed in various MENA countries, but more efforts are required for the region to catch up with best practices from an overall low starting point. Improvement was observed across the region in recent years. For example, Egypt passed the Secured Transactions Law in November 2015, launched an electronic secured transactions registry and <u>passed the Law of</u>

> 20 This regional section is based on substantive inputs provided by Syed Mehdi Hassan, Djibrilla Issa, and Haocong Ren (FCI-MENA), and Emmanuel Pinto Moreira (MTI-MENA).

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