Financial Services and the GATS in the GCC: Problems and Prospects

Determining the implied level of openness by GATS commitments

The GATS recognizes services trade via four channels, which it refers to as modes. Mode 1 is cross-border trade, where services originate in one country and are consumed in another country. Under mode 2, or consumption abroad, services are consumed by a consumer of one country in the territory of another country. Mode 3 refers to commercial presence of a supplier of the service in the territory of another country. Finally, mode 4, or presence of natural persons, covers labor movement from one country to deliver services in another country. All four modes are clearly relevant to the provision of financial services, with mode 3 having particular significance since it directly addresses the physical presence of foreign financial institutions, such as banks, in another country. In fact, recent GATS negotiations have been characterized by attempts to seek ambitious commitments on the supply of financial services through commercial presence abroad.

For designated service sectors, each member country is required to specify its commitments relating to market access and national treatment under each of the four modes of supply. The so-called Schedule of Commitments therefore contains eight entries per sector, listing any limitations on market access or national treatment under each of the four modes of services supply identified by the GATS.

Quantifying liberalization commitments under the GATS is an inherently subjective exercise. Country commitments are publicly available from the services database of the WTO. Following Harms, Mattoo, and Schuknecht (2003), we construct an index and assign a value of 0 to “unbound” entries (implying no commitments) under market access and national treatment for each of the four modes in a country’s GATS schedule. We enter a value of 1 if the schedule reports “none” reflecting unrestricted commitments. For modes 1, 2, and 4, a value of 0.5 was assigned for the cases of intermediate-level commitments due to the uncertain economic significance of these modes. However, since mode 3 is particularly important in the case of financial services, we employ a more varied approach and assign a value of 0.25 if the limitation is on licensing of new entry, 0.5 if foreign equity is limited to less than 50%, and 0.75 otherwise. The process is carried out for the banking and insurance sectors. Note that no limitations (the most open regime) under any mode and under market access and national treatment would correspond to an index value of 8. The most restrictive regime would be associated with an index value of 0.

The results are reported in Tables 6–8. So, for example, since the GATS commitments schedule for Bahrain for the insurance sector shows unrestricted commitments under modes 1 through 3 in both market access and national treatment, but no commitments under mode 4, the index value turns out to equal 6. Similarly, for the banking sector (we restrict our attention to lending and deposit operations only), the index value of 3.5 is obtained for both deposits and lending. Kuwait and the UAE do not have any commitments for insurance services in the GATS schedule and are therefore not numerically recorded in Table 6.

While consumption of financial services abroad by GCC consumers is free of restrictions, cross-border trade (mode 1) and commercial presence (mode 3) have more limitations. In banking, for example, GCC members other than Qatar and the UAE retain the right to impose restrictive measures on mode 1 trade. This could be a reflection of concerns over consumer protection, capital transfers, and regulation of suppliers that lack a solid reputation. Insurance services under mode 1 fare better probably because these services are highly internationalized and less risky to regulate. Mode 3, which is highly important for financial services, is the least open channel across the GCC, with every member listing limited commitments. Not unexpectedly, mode 4, which covers foreign labor flowing in to deliver services, remains the most tightly controlled channel across all countries of the GCC under both market access and national treatment.