Journal of Financial Economics

REF 136 Mediterranean Finance

This article goes through the main phases of finance and trade in the Mediterranean during the Renaissance, following the international activity of the main Italian cities: Florence, Genoa and Venice. European international finance probably has its origins in the activities carried out on behalf of the Pontifical States as early as the 11th century. The Islamic world was, at the dawn of this "papal revolution", the centre of the Mediterranean. However, Islamic finance did not prevail in the Mediterranean, probably because it was unable or unwilling to move far beyond the limits that religion imposed on it. If Florentine banking marked the 14th century, Genoese finance outweighed in the 16th century Venice that prevailed in the 15th century. The dynamics that linked these cities to the shores of the Mediterranean gave rise to capitalism, especially financial capitalism. The great discoveries and in particular Vasco de Gama's voyage to India around the Cape of Good Hope created the conditions for the future decline of the Mediterranean.

South and East Mediterranean countries constitute a heterogeneous economic region. Economies differ when we look at the level and path of economic development, the structure of the productive sector or the development strategies put in place. Macroeconomic situation of all countries improved during the 2000s. But this positive dynamic reversed during the 2010s for most of the countries because of a three-pronged negative choc: spillovers from the European crisis, political tensions and, for oil-exporters, the fall in oil and gas prices. At end-2019, several countries have to deal with significant macroeconomic imbalances. Besides these imbalances, countries of the region face three common challenges: low trade integration, poorly diversified economies and a dysfunctional labor market.

This article, more political than academic, is based on three firm beliefs: first, Mediterranean finance is not homogeneous, as the Mediterranean area itself; second, most of the efforts, as far as Mediterranean finance is concerned, must be devoted to SMBs (Small and Medium Size Businesses); third, public international institutions, as well local banks, doesn't answer this second issue.

Are we obliged to be defeatist in these circumstances? Surely not, but at four conditions: (1) promote demographic and technological complementarity between the South and the North of the Mediterranean area; (2) focus more and more the public and private investments towards industries and geographical areas which are considered by all specialists as priorities; (3) multiply the “financial bridges” public and private who can help the financing of SMBs, especially in private equity; (4) in all these fields, keep in mind the south Mediterranean countries can be “bridge heads” of the finance of sub-Saharian African countries (and especially of the SMBs in these countries) which are, for the years to come, a fantastic lever of growth for the Mediterranean area, but also for Europe as a whole.

Through a diagnostic benchmark, this article aims to assess the state of financial integration in the Maghreb region and to present the role of the Maghreb Bank for Investment and Foreign Trade, recently activated, in the current regional context in deep mutation. The first part of the article advances elements of economic theory regarding the relationship between financial integration and macroeconomic performance. The second part presents the major trends in the development of financial systems in the Maghreb countries. The third part highlights the state of financial integration in the region. The fourth part analyzes recurring delays and major obstacles. By proposing alternative levers, the fifth part analyzes the nature of the responses, in particular through the strategic role of BMICE in promoting financial integration and supporting the ambitions of a financially integrated Maghreb area. By way of conclusion, the last part states the prerequisites and open avenues for strengthening financial integration in the Maghreb region.

The South of Mediterranean region is one of the top priorities for Europe. As such, the European Investment Bank (EIB) is a major financial partner, notably since the establishment of the Euro-Mediterranean Partnership and Investment Facility (FEMIP) in 2003. This represents nearly € 25 billion who were committed to support the development of the countries on the South, with a capacity to adapt to the needs. Initially focused on major public infrastructure projects, the EIB's activity gradually focused on supporting employment and the private sector, microfinance, with a priority to climate change and always a catalysing objective (public or private) to increase the leverage effect. The EIB always works in partnerships. However, the European approach is fragmented limiting the impact of European funding. This is the sense of the ongoing debate - EIB is contributing - to improve the European aid scheme beyond its borders.

This paper suggests studying the internationalization process of Moroccan banks from a different angle. Our analysis points out the deployment of the universal banking model whose success promotes the openness of Moroccan banks to African markets. Beyond the economic motivations commonly agreed, we believe that Moroccan banks' internationalization has aimed primarily to safeguard shareholders interests. These latter faced a major risk of bank stocks correction.

At the end of this internationalization process which lasted more than a decade, Moroccan banks are brilliantly distinguished by displaying one of the best long term returns of the global banking sector. This performance proves the relevance of the development model which relies largely on a recognized managerial know-how of more than a century of history.

This paper provides an up-to-date overview of the Turkish banking sector emphasizing its potential to generate value and to support sustainable growth. Since the main channel of financing businesses is bank loans in Turkey, business cycle as well as policy risks play an important part in diagnosing risks that the economy faces via banking. This paper establishes legal as well as recent policy frameworks relating to banking sector and claims that an array of recent policy choices might have increased its vulnerabilities. While part of these vulnerabilities was induced by Turkey's construction euphoria of the post-Lehman years, a non-negligible part was introduced by the government's erroneous understanding of rule of law and an increased discretion in regulating the market. In a nutshell, the recent outlook of Turkey's banking sector is weak, despite the well-orchestrated improvements of the early 2000s. So, Turkey might need a clean slate to re-vitalize her banking sector.

Since 2016 and with the support of international donors, Egypt has embarked on an ambitious program of economic reforms. The fluctuation of the Egyptian Pound and budgetary reforms have helped to slow down the deterioration of public finances. These measures have improved the country's economic prospects but at a high social cost. To reduce this cost and improve the socioeconomic indicators, we study the strengthening of the access of the private sector to the financing through the promotion and the diversification of the sources of financing. But despite the development of the Egyptian banking system, the banking penetration rate which was 14% in 2014 and rose to 33% in 2017 remains one of the lowest in the region. Only 4% of adults save in a formal financial institution. The contribution of the Islamic banking system and microfinance to the Egyptian economy could potentially alleviate social and financial exclusion, especially that of young people and women. The fight against social exclusion is therefore one of the major objectives of the Egyptian government and the international financial institutions. It would allow marginalized categories to participate in economic life and benefit from basic banking services. These individuals could thus contribute to growth, notably by reducing unemployment and poverty.

In order to understand the reasons for the economic and financial tension in Lebanon and to explore the possible issues, it is necessary to consider the functions of financial intermediation in Lebanon both from a theoretical perspective, because they present a extreme case of interweaving banking, fiscal and monetary risks, and from a political angle, because the alternative between their reconfiguration and their preservation is a decisive issue. In Lebanon, the financial system is intrinsically interwoven with the political system, of which it is one of the essential instruments. Its "resilience" is the result of a long political action that takes advantage of society's lack of immunity. Today, Lebanon is facing a major balance of payments crisis and hiding the losses while awaiting an unlikely miracle will only increase them and exhaust the last external assets of the country. It is therefore necessary to allocate losses and risks in a manner that is both socially just, and therefore politically justifiable, and economically oriented towards the restructuring of the economy in such a way that it is no longer structurally dependent on external flows of capital.

Financial systems of Southern Mediterranean Arab Countries have gone through deep transformations in the last two decades. The international financial crisis and political tensions in the region have has highlighted the strong resilience of financial systems, but also their internal weaknesses.

In this region, the effectiveness of the banking system in fulfilling its intermediation role is key to face the challenges linked to financing an accelerated and inclusive growth path. Developments in the structure of capital, the internationalization of banks and the emergence of Islamic banking have all contributed to this process. Notwithstanding, these financial systems remain dominated by commercial banks with classical finance business models, and capital markets have not yet reached maturity. These banking models have resulted in poor access of SME to funding, mainly as a consequence of the lack of alternative financial products.

Despite the progress in micro- and macro-prudential regulation, the challenge still remains for the banking systems to guarantee a sustainable financial stability. These challenges are linked to a great extent to the complexity of the implementation of the Bale III standards. This is compounded by the concerns arising from financial inclusion, managing fintech innovations and cybersecurity. The main concern of regulators is to strike a balance between internal priorities linked to financing growth and the transposition into internal regulation of increasingly strict international standards.

In the past insurance markets of the two Mediterranean banks maintained closed relationships. In time, these relations created technical and legal similarities. Today, these relations in the field of operations remain significant. This fact, in spite of important asymmetry related to the level of development, shows the utility of the contribution of the past relations and the current presence. In their progress, the markets of the South could take in the long-term a progressive evolution towards the level of markets of the North, which are mature and whose growth has become marginal. In the challenges of the markets of the South, the distribution of the activities between Life/Non-Life Insurance, which is not related to the income, is fundamental. A strategy and a suitable model of growth should make it possible to obtain results of positive development.

The demographic and employment challenges facing the African continent as a whole can only be addressed through the development of the private sector. Specifically, through the creation of new enterprises as well as the development of existing ones, whether they are start-ups, SMEs, or large established groups.

The core financing offer for African companies, traditionally provided through the sole banking sector, has seen the emergence of new financing channels over the last two decades, such as microfinance for start-ups (which has grown spectacularly thanks to digital technology), private equity funds and more recently venture capital.

The tangible achievements of several key private equity and venture capital players operating in Africa in terms of value creation and economic, social and environmental impact are now clearly established. These results should maintain the confidence of bilateral and multilateral development institutions, as well as the attention of African and European institutional and private players, in this industry.

The development of Islamic finance in the Maghreb countries faces today the question of the existence of a potential pool of customers. In fact, the population is apparently very sensitive to the religious argument regarding savings and financing. In addition, the population is still underbanked. The banking rate is only 30% on average in the region. The articulation between Islamic finance and retail banking in the Maghreb is therefore obvious. Some Islamic Gulf banks could perfectly consider geographic diversification and thus penetrate the retail banking market in the Maghreb countries.

However, the establishment of Islamic finance in the Maghreb should be very gradual. The Maghreb banking authorities will have to find a balance between the social demand for this kind of banks and the competition of these entrants in territories already occupied by conventional local banks which are not very aggressive. We first present an overview of Islamic finance in each of the Maghreb countries. We then examine the determinants of demand for Islamic banking services, taking Mauritania as an example. The latter, whose official name is "Islamic Republic of Mauritania" is undoubtedly one of the most advanced countries in the Maghreb in this area.

This paper argues for a transformation of finance to support the economic and social transformation of the Middle East and North Africa (MENA). The paper first documents the existing financial system in MENA. The system is heavily skewed toward banking, relative to non-banking services, such as stock and corporate bond markets, with significant heterogeneity across countries in the region. Second, the paper discusses the macroeconomic impact on the development of finance in MENA. The stance of macroeconomic policy has had important implications on the destination, profitability and quality of bank lending and the limited evolution of the financial system. Third, the paper explores the impact of technology on financial development, with particular attention to prospects for the development of fintechs in MENA. Entrenched incumbency of banks has limited the role of non-bank operators in fostering market contestability and fintech development. The paper is intended to be a call to the authorities and policy makers in MENA to break with the status quo and business as usual. More specifically, it underscores the need for a “moonshot approach” focused on establishing the foundations of a new digital economy in MENA and its role in promoting a well-functioning and inclusive financial economy to support the development needs of MENA.

Despite a steady increase in their outreach over the past decade, the countries of the Mediterranean basin continue to lag behind their neighbors in terms of breadth, scale, and diversity of their financial sectors. Across the whole region, a huge gap remains between the demand and provision of financial services: almost 100 million adults are still outside the formal financial system, and those segments of the population that are excluded from financial markets are also the most economically vulnerable. The political context (major political upheavals in 2011), the mistrust of financial actors towards the "bottom of the pyramid", the restrictive regulations surrounding microfinance and the lack of awareness of the financial offer by potential beneficiaries explain this limited financial inclusion. Nevertheless, in the wake of the Arab Spring, many governments have become aware of the importance of improving access to financial services, and are updating their regulatory frameworks. The arrival of new actors (mobile operators, agent networks, payment institutions) also promotes financial progress and innovation in the basin, and may soon allow Mediterranean countries to include their still excluded populations in the formal financial system

Migrants remittances to developing countries have reached $ 529 billion in 2018, which is more than Foreign Direct Investments (FDI) and three times the Official Development Assistance (ODA) to these countries. In some sub-Saharan African countries, they account for as much as 15 to 20 percent of Gross Domestic Product. Many econometric studies have focused in recent years on the impact of this massive flow of foreign capital on the development and growth of the beneficiary countries, with contrasting results depending on the case.

The first part of this article shows the benefits of draining these flows through the banking system (as opposed to other remittance channels) and turning them into bank savings. The second part explains how the Moroccan banking system has managed to capture the financial flows of the Moroccan diaspora, through examples such as that of Banque Populaire du Maroc, a pioneer bank in this field since the 1960s. Finally, the third part of this article highlights the new challenges posed by the generational evolution of the diaspora as well as the ongoing technological disruptions on the sustainability of this model.

Channeling financial savings to the productive sector is a central concern to finance the growth of the countries of the southern of the Mediterranean shore and to avoid resorting to external debt that could question the macroeconomic balance. Paradoxically, there is a lack of statistics regarding this region to understand financial savings.

Morocco is one of the countries that has undertaken the most important structural reforms of its financial system since the second half of the 1990s through the modernization of the legal and regulatory framework and technical infrastructure. However, changes in actors behavior are slow to manifest. The volume of financial assets drained by the Moroccan financial system is one of the largest in the southern Mediterranean region, but the latter remains largely dominated by financial firms. Few households hold financial instruments mainly because of their level of debt, income inequality and tax distortions.

The challenge for governments would be to broaden the base of savers, notably through the introduction of new financial instruments, financial education and the revision of the pay-as-you-go pension system.

The digital revolution affects almost every type of financial activity. This phenomenon leads regulators to supervise the new players who are constantly gaining popularity. The public authorities face complex imperatives to reconcile. On the one hand, they want to open the traditional legal framework in order to intensify competition by allowing Fintech start-ups to offer financial services to individuals and companies. On the other hand, the control of these risky activities is necessary to protect the consumer. France thus faces the challenge of building a legal framework that does not hinder the innovation of the Fintech. Given that Fintech operations are growing fast in the United Kingdom and the United States, it is relevant to ask whether their regulations could be used as models for France or whether a different regulation is needed. The study contributes to this issue through an exploration of the legal literature (English and American) and literature of financial economics.

The Islamic bond market has already proven its usefulness as a viable source of financing for both the private and public sectors. The Sukuk market has met a growing interest in the Muslim world and elsewhere over the past decade. Islamic bonds are flexible instruments that could be used to finance infrastructure projects. Recently, several African countries have adopted this type of Sukuk issuing and others have announced their willingness to issue these instruments in the near future. However, several challenges remain to be overcome in the continent so that Sukuk issuing becomes an additional alternative to finance the African infrastructure projects. This paper documents recent advances in sovereign Sukuk issues in sub-Saharan Africa. It also presents advantages of this instrument to finance infrastructure projects and challenges that should be addressed to boost this market on the continent.