The Initial Conditions for Pension Reform
recognized not to promote efficient intermediation, have not been lifted. The incentives to liberalize are also weak because of government ownership of the nonbanking real estate sector and the treatment of government-owned banks as conduits of funds to state-owned enterprises. In conclusion, there are a few countries in the region where the banking sector appears sufficiently sound and regulated to form a base for both a funded pension pillar and investment of the reserves of state-run defined-benefit schemes.16 Stress tests of banks in the region over the past several years, analyzing the effects of credit, interest rate, and exchange rate shocks, indicate that a core of commercial banks in Jordan, Morocco, and Tunisia are relatively resilient to both interest rate and exchange rate shocks but are moderately exposed to deterioration in portfolio credit quality.17 Simultaneous shocks would likely have more serious impacts, which highlights the need for effective macroeconomic management. Banking systems elsewhere in the region exhibit somewhat stronger vulnerabilities to exchange rate shocks or deteriorations in portfolio quality, have significant exposures to a single borrower (for example, reliance on government bonds in Lebanon), or are too weak to intermediate new funds effectively. In all cases, the challenge remains the ability of banks to lend funds at medium and long terms for investment purposes.
The Insurance Industry The insurance industry has experienced growth in many Middle East and North African countries over the past few decades, but with assets below 5 percent of GDP in most cases, the contribution to financial intermediation is still limited.18 Annuity markets are underdeveloped across the board. In fact, a large majority of assets within the insurance sector are technical reserves of the property and casualty insurance business and therefore much more likely to have to be held in liquid instruments. Only Morocco can claim an insurance sector of any reasonable size (see table 2.4).19 Life insurance, which has the potential to provide insurance companies with long-term funds for investment, represents only a small percentage of the total insurance market. Egypt and Morocco have the largest share of life insurance premiums, at 31 and 29 percent of total premiums, respectively, followed by Lebanon. In the other countries, life insurance premiums are below 15 percent. Factors such as ownership structure, fiscal incentives, cultural norms, and investment opportunities limit development of the market. The structures of the insurance and banking industries have similarities: state dominance in a few countries, with correspondingly weak regulatory frameworks, and dispersed structures in others, with no clear
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