Middle East IFC crown still up for grabs

After the outbreak of civil war in Lebanon in 1975, Bahrain took the mantle of the Middle East's financial hub from the Lebanese capital, Beirut. Bahrain’s capital, Manama, is regarded as having the best financial regulator in the Middle East and is favoured by banks looking to capitalise on its superior access to Saudi Arabia, the region’s biggest market. At present there are 409 financial institutions active in Bahrain.

In recent years, however, this status has been increasingly challenged by the establishment of financial centres in both Qatar and Dubai in the United Arab Emirates, with the latter being Manama's most well-publicised rival. The Dubai International Financial Centre (DIFC), a free zone governed by the Dubai Financial Services Authority, was established in late 2004 and in 2011 hosts about 800 institutions. Qatar followed hot on its heels with the inauguration of the Qatar Financial Centre (QFC) in March 2005, which is now home to 121 institutions.

Manama's response

In an attempt to fend off competition, Manama launched the $1.5bn Bahrain Financial Harbour in May 2007. This coincided with a fine-tuning of the country's regulations, which it was hoped would reposition Bahrain as an Islamic finance and insurance hub, as well as a key market for the funds industry.

“Our focus is now on niche markets such as Islamic banking, insurance, and capital markets,” says Mohammed Bin Essa Al-Khalifa, chief executive of Bahrain’s Economic Development Board. “We now have more than 2000 funds domiciled in Bahrain.”

Manama’s mutual funds industry is worth nearly $10bn. It has also built up the largest concentration of Islamic financial institutions in the Middle East, boasting 27 Islamic banks with $25.4bn in assets at the end of 2010, along with nine Islamic insurance companies.

Uprooted by uprisings

Industry insiders believe that Manama’s crown as the Gulf’s financial centre has slipped further following the political turmoil that has gripped the country since the first staging of pro-democracy protests on February 14, 2011. While bankers say that the full impact of this unrest is not yet fully apparent, the consensus is that the country's reputation as an expatriate-friendly, stable and tolerant environment has undoubtedly been tarnished.

The turmoil cemented French bank Crédit Agricole’s decision to converge its Dubai and Bahraini operations into a larger office at the DIFC. The bank's Middle Eastern operations had previously been headquartered in Manama, but over the past year it had been studying how best to streamline, and will now only maintain a small wealth management office in the Bahraini capital.

Unlike Bahrain, both Dubai and Qatar have managed to sidestep the uprisings sweeping across the Arab world this year. Many have been quick to point out that Bahrain’s loss will be Dubai and Qatar’s gain. However, other international heavyweights such as the French bank BNP Paribas and Japanese bank Nomura remain committed to basing their Middle Eastern business out of Manama.

Dubai's downfall

Dubai’s ambition to become the Middle East's leading financial centre has suffered its own setbacks. The bursting of the real estate bubble as a result of the financial crisis saw property prices in Dubai plunge by as much as 50% in 2009, from their peak in the third quarter of 2008. UAE banks were hurt badly by over-exposure to the sector, with many having as much as 35% of their total loan portfolio extended to real estate. 

“Dubai has its own problems,” says Goeksenin Karagoez, a credit analyst at rating agency Standard & Poor’s. “It is still unclear whether the price correction in the real estate market has come to an end or not. And there is still this debt overhang.”

Indeed, confidence in Dubai as a financial hub took a major blow in November 2009 when state-owned global holding company Dubai World announced it was seeking a six-month standstill on its $24.9bn debt. By mid-December 2009, Dubai announced that it had received a $10bn bail-out from its wealthier UAE neighbour, Abu Dhabi, helping it to narrowly avoid defaulting on a $4.1bn sukuk that was due to be repaid by Dubai World’s property subsidiary Nakheel in a matter of hours.

Credibility damaged?

Given the ongoing financial turmoil, it has been hard to assess the damage these events have caused to Dubai’s international credibility as a business and financial centre. While all the creditors to Dubai World got their principal investment back in the agreed debt restructuring – meaning there was no haircut on their outstanding loans – Dubai’s credit is now more expensive and this acts as a constraint on business growth. 

In December 2010, the DIFC slashed office rentals by up to 60% in a bid to boost the centre’s growth. It had seen an exodus of international investment bankers during the financial crisis, with many citing the prohibitively expensive operating costs. Under the new terms, annual office rents will range from Dh160 ($44) to Dh280 per square foot compared to previous costs of about Dh400 per square foot. According to the DIFC, the new pricing matrix has been benchmarked against other global financial centres to ensure it remains cost-competitive.

The calibre of the clientele that the DIFC has been able to attract in its relatively short history is still impressive, however. In 2011, eight of the world’s 20 largest asset managers reside there, as do four of the five largest global insurance companies.

Dubai’s world-class infrastructure and its status as a global hub for trade ensures that it has a unique selling point compared to its Gulf competitors. But while its success to date has outstripped that of the QFC’s, the picture could start to change in light of its debt issues and other ongoing problems.

Qatar's advantages

Lenders in the Middle East are now increasingly favouring countries that can fall back on solid and tangible assets such as Qatar’s gas reserves, which have been forecast to last about 150 years.

As the centre of one of the world’s fastest-growing economies, Qatar's capital Doha’s attractiveness as a new financial hub is going from strength to strength. In the five years that the QFC has been in operation, it has seen the government budget more than double in size, to more than $100bn. Doha’s landscape will also be significantly changed by the estimated $170bn investment in new projects leading up to the FIFA World Cup it will be hosting in 2022.

All this economic activity needs financial services infrastructure to support it, including project finance, corporate finance and insurance, as well as asset management. Philip Thorpe, chairman and chief executive of the Qatar Financial Centre Regulatory Authority (QFCRA), says that there is an ever-increasing demand for asset management given that Qatar's economy is generating such large pools of liquidity. It is expected that banks will start expanding into wealth management for high-net-worth individuals or cash management for large corporations. 

Since the start of 2010, the QFC has changed its strategy to focus on asset management, reinsurance (helping companies offset risk) and captive insurance whereby a company sets up an insurance arm to underwrite its own risks to save costs. Currently, between 60% and 70% of insurance premiums are reinsured outside the country and insurance for large corporates is almost entirely exported. The QFC has set its sights on becoming one of the top captive insurance jurisdictions in the world within the next few years.

Insuring the future

Bahrain already has a well-established insurance centre and Dubai has been pursuing the market in recent years, albeit with questionable success. Meanwhile Qatar’s financial services industry looks set to undergo a huge transformation but the introduction of a single regulator will be central to its continued development.

The unification of Qatar's three regulatory bodies – Qatar Central Bank, the QFCRA and the Qatar Financial Markets Authority, which regulates the Doha bourse – was first mooted in July 2007, but has been repeatedly delayed and there is still no clarity on its status. 

Local financiers say a single regulator would create a level playing field in the industry and help address the current gaps and inconsistencies in regulation. The credit crunch has shifted the spotlight back onto regulation and transparency across the world, but particularly in the Gulf, which is often perceived as being more opaque on these fronts. 

“The UAE has three regulators which raises some serious questions about oversight,” says Robert Ainey, chief executive of the Bahrain Association of Banks. 

Having to contend with multiple regulators serves as a deterrent to international institutions because of the lack of clarity and inefficiency this can bring. There are growing calls for the regulatory environment across the entire Gulf region to be more centralised, with the adoption of international standards of regulation and corporate governance.

Given that the competitive landscape is far more challenging than it used to be, many industry insiders believe that the six Gulf Co-operation Council (GCC) states should work together to agree on a common set of rules that would lift the whole region in terms of its standing in the world.

Just as Europe has London, Frankfurt and Paris all serving as international financial centres, so the GCC states could use their growing rivalry to their advantage. Largely speaking, they have different economic drivers and are carving out different roles for themselves, and should be looking at how best to complement each other, rather than compete.