Faced with stiff competition from Dubai and its infant Dubai International Financial Centre (DIFC), Bahrain is pushing ahead with its own variant, the Bahrain Financial Harbour (BFH). The BFH’s vision is to “create a revolutionary international financial business park that will empower the global financial community and inspire the economic development of Bahrain”, and construction has already begun.
Gateway to the Gulf
For decades Bahrain has prided itself on being the financial gateway to the Gulf and today the Bahrain Monetary Agency (BMA, the central bank) licenses 362 institutions, of which 186 are banks and banking-related institutions, 163 are insurance and insurance-related firms and 13 are capital market brokers. Ahmed bin Mohamed Al-Khalifa, governor of the BMA, the sole financial regulator, is keen to exploit his new single-regulator model and spread his involvement into the fields of insurance, asset management, capital markets and, of course, banking and Islamic banking.
Bahrain is viewed as being well ahead of its rivals in monetary expertise and in terms of regulation, particularly with its efforts to unify the disparate and interpretative regulations of Islamic banking. With 25 Islamic banks, Bahrain is the largest and possibly the best-regulated Islamic financial centre in the world and, although total Islamic bank assets are relatively small at $4.4bn, BMA deputy governor Khalid Al-Bassam, believes there is huge growth potential. For example, the Bahrain government is keen to issue more Islamic Sukuk leasing bonds and he wants to encourage more private sector Sukuk issues and build an Islamic capital market.
Islamic finance is not the only growth area and Bahrain’s two biggest institutions, Arab Banking Corporation (ABC) and Gulf International Bank (GIB), are bullish about the prospects for project finance and retail in the Gulf in particular. Notes GIB executive vice-president Abbas Ameeri: “Business is booming in the Gulf, governments are expanding spending, new projects abound and corporates are doing well.” Clearly there is a correlation with the oil price (now around $40 per barrel) but Mr Ameeri believes the boom will continue because oil supplies are experiencing a downturn, and the six Gulf Cooperation Council (GCC) states and Iran remain key producers.
“The GCC states are opening up politically and economically. They cannot afford not to open up, they have to spend money for jobs so this boom will continue,” he says.
GIB leads field
GIB was recently declared the primary provider of project and structured finance services in the Middle East and North Africa (MENA) in 2003 by Dealogic Projectware, surpassing all other local, regional and international banks active in the region. Dealogic noted that the volume of project finance in the MENA region almost doubled in 2003 to $14bn, from $7.6bn in 2002, and bankers suggest that project finance expansion will continue this year.
Mr Ameeri says that liquidity is flooding back into the region and the GCC is literally awash with funds. It is estimated that $1400bn of funds of GCC governments, institutions and individuals are invested abroad and so if just 1% of funds ($14bn) returns it creates a huge amount of liquidity in the local market.
Mr Ameeri explains that GIB has just established a new investment fund, called the GCC Energy Fund, which will be capped at $130m and will invest in GCC projects. The fund is due to be registered in the DIFC, which is seen as the right place for such funds. Real estate prices have doubled in a number of GCC states and returning funds are bolstering all markets, says Mr Ameeri. Surprisingly, some bankers suggest that “the flow of money is too big [to absorb]”.
GIB is expanding its operations in Saudi Arabia and now has 13 people there in investment banking, and 42 people in the Riyadh branch focused on corporates. As the leading merchant bank in the Gulf, it expects to thrive on the huge number of power, petrochemical, aluminium and other projects under way.
ABC’s chief executive Ghazi Abdul-Jawad also sees “unprecedented levels of liquidity” and wants to be more active in the privatisation and project finance deals emerging. “The pipeline of deals for the next five years is enormous,” he says.
After selling banking assets in Hong Kong and Spain, ABC has surveyed the GCC market and may possibly acquire a retail commercial bank sometime this year. Mr Abdul-Jawad says: “We are looking (for a retail bank) and we will see how things develop.” He adds that ABC is putting more emphasis on its retail franchise in Egypt and north Africa, and is looking to develop its “product kitchen” in retail across the Arab world.
Eye on Iraq
ABC is also keen to move in Iraq. Last year six licences were bid for but only three (HSBC, Standard Chartered and National Bank of Kuwait) were awarded; the other three were not activated. Mr Abdul-Jawad says ABC is “ready to roll in Iraq”, to help rebuild the infrastructure and a modern banking system. He acknowledges that Iraq’s arrears at both the London Club and Paris Club need to be sorted out but says that the process must be transparent.
Bahrain’s fourth largest banking group, Ahli United Bank, is also expanding fast cross-border and chief executive Adel El-Labban recently acquired a 40% stake in Al Ahli Bank of Qatar (see Qatar supplement) as part of his strategy to build a pan-GCC financial operation.
Ahli United’s move is likely to be followed by other regional acquisitions and NBK is also looking for similar opportunities.
With its reputation for sound regulatory practices and the strong performances of its institutions, Bahrain is well placed for the future. In 2003 profits at its banks more than doubled. The 29 Bahrain-incorporated commercial, investment and offshore banks, both conventional and Islamic, posted net profits of $714.8m, an increase of 134% over 2002 profits of $305.6m. This surge was partly due to the return to profitability of ABC ($120m) and strong increases from GIB and Ahli United; conventional offshore banking units rose by 218% to $331.4m from $104m in 2002. In addition, profits at conventional investment banks soared, mainly due to improved performances by Investcorp and TAIB Bank, with aggregate profits rising to $116m from $4.9m in 2002.
Benefit not threat
So does the DIFC threaten Bahrain’s financial role in the region? Some argue that they are trying to do different things, with the DIFC concentrating on global listings and Bahrain on regional development. BMA’s governor, Mr Al-Khalifa, takes a magnanimous approach: “Every time there is a major development in the region we can all benefit – so with the DIFC, we all stand to benefit and learn.”
The BMA, however, is keen to put its weight behind the Bahrain Financial Harbour development and will rent seven floors of the first of the new towers in the project, which is due to be completed in early 2006. While there will be plenty of competition between the financial centres in the Gulf, given the abundance of liquidity, successful marketing and booming growth there will also be plenty of opportunities for financial institutions. No one centre appears likely to dominate, there seems to be plenty for all and Bahrain looks set to get its share.
