It has become fashionable to ask bankers whether the Gulf Co-operation Council (GCC) region can support three or more financial centres – the traditionally dominant Bahrain, and newer players Doha and Dubai, as well as Riyadh and Kuwait. The politeness that typifies the GCC region usually means the answer is “yes”. The Gulf’s financial centres do not want to be seen to be competing – let alone in conflict – and there are arguments to say that they are often complementary services.
“Each centre has been set up for different reasons: Bahrain as an offshore centre, Qatar as an onshore – it is not a free zone,” Qatar Financial Centre (QFC) Authority chief executive Stuart Pearce told the City of London and the Gulf Co-operation Council conference in London in June. “Why shouldn’t you have more than one financial centre.” Asia, after all, supports Singapore, Shanghai and Tokyo, to name but three.
Plenty to go round
According to Dubai Financial Services Authority chairman Dr Habib al-Mulla: “Competition is not an unhealthy thing… it is good for the clients.” And QFC Regulatory Authority chairman Philip Thorpe told the conference, convened by the Middle East Association: “The pie is getting bigger… there is room for all.”
The very presence of these speakers says much for how the Gulf’s financial services industry is changing, and how quickly. The traditional regional base of choice for many banks, Bahrain, is facing increased competition from other GCC members. In the first half of 2006 alone, several global banks – including Goldman Sachs, Lehman Brothers, Citigroup, Morgan Stanley, Deutsche Bank, EFG International’s subsidiary EFG Bank and American Life Insurance Company – announced plans to expand their Middle East presence through offices in the Dubai International Financial Centre (DIFC) and QFC.
Bahrain has resisted countering Dubai’s pzazz with a massive PR campaign of its own – although there have been statements of intent, such as the Banking on Bahrain conference, held in London in March. Above all, Bahraini officials quietly and confidently continue to promote the island’s regulatory good name. They have taken comfort in the fact that Bahrain was not as badly burnt by recent stock market crashes as other Gulf states, with the Bahrain Stock Exchange (BSE) index falling by only 4% while the market capitalisation of the Saudi and United Arab Emirates bourses halved.
Track record
In public, Manama maintains that it welcomes the rivalry, with officials arguing that the island state’s long experience of regulation and ability to weather crises will stand it in good stead.
“Competition? I am a great believer in the free market and competition is healthy,” says Bahrain Monetary Agency (BMA) governor Rasheed Al-Maraj. “When it comes to financial services, we look back at our track record over the decades. It’s been tried and tested and is respected; all this puts Bahrain in an advantageous position.”
In an interview, Mr Al-Maraj emphasises that Manama, with 360-plus banks in place, “is not new to this business”. The Bahraini city has shown an impressive ability to weather crises over the past three decades. The 1980-88 Iran-Iraq war, tanker bombings and the 1990-91 Gulf War are among episodes cited by Economic Development Board (EDB) head Sheikh Mohammed bin Isa al-Khalifa.
According to Investcorp chief operating officer Gary Long, part of Bahrain’s competitive advantage comes from its regulatory environment. “According to four international ratings agencies, the BMA is the most respected regulator in the Gulf,” he says.
Investcorp, which has been operational in Manama for the past 24 years, “is very happy to have regional headquarters in Bahrain”, says Mr Long. However, he also says that Investcorp is considering opening “satellite offices” in other GCC states.
The arguments of Bahrain’s most enthusiastic advocates often come back to regulation. Ernst & Young transaction advisory services director Yasser Alsharifi told a conference in London that “my colleagues across the region are finding some resistance from regulatory authorities because everything is so new… they are still finding their feet”.
Checks and balances
Mr Al-Maraj says there is still considerable interest from institutions seeking new licences from the BMA, which since 2002 has been regulator for all financial sectors. Not everyone will get in. “There is a very strict regime when licensing new banks; we reject applications, too,” he says. “We look at checks and balances, and require them to present this to us.”
This cautious approach may have allowed Bahrain to avoid the recent collapse of several Gulf equities markets. One banker at the GCC conference said the violent corrections were due to “excess levels of liquidity… undisciplined governance… chronic insider habits… investors being herd-like in the way they operate… market manipulation allegedly occurring without deterrent…. an unhealthy interplay of property speculation, bank lending and stock market investment… people giving up their jobs to become traders”.Such problems were manifestly less apparent in Bahrain than elsewhere.
Equities paradox
According to Khalid Hamad, the BMA’s executive director of banking supervision, the regional correction was due to “young developing bourses; excess liquidity chasing few available stocks; few large speculators versus a large body of naive small investors, with people leaving jobs to trade when they don’t understand the fundamentals; large IPOs [initial public offerings] without track records, and fear due to the naivety and immaturity of investors [which] led to the dumping of shares.”
Mr Hamad stresses that Bahrain is less affected by corrections because “the economy is well diversified. Bahrain is seen as the home of strategic investors – diversified long-term share owners, not speculators – and has established and proper regulation and a well-regulated financial market, which includes strict consumer finance regulations, the prohibition of insider dealing and well designed disclosure standards”.
Ironically, Bahrain has reinforced its reputation by avoiding the worst of the correction precisely because it was not seen by many as a sexy market offering get-rich-quick products.
Equities markets are one area of business in which Bahrain has failed to maintain its regional financial sector leadership – recently underlined by Saudi global investor Prince Alwaleed Bin Talal’s decision to give a regional listing to his Kingdom Holding Company on the new Dubai International Financial Exchange (DIFX).
Reviews of the BSE started last year in an attempt to understand what needed to be done to make it more attractive.
Manama is leading the way in attracting new Islamic banks, however. The European Islamic Investment Bank announced in April that it would open a Bahrain office. And Mohammad Toufic Kanafani, chief executive of Manama-based UBS Noriba, said recently: “When asked to set up an Islamic bank for UBS, our first choice was Bahrain.”
Manama wants to see bigger Islamic institutions dominating the market. According to BMA deputy governor Anwar al-Sadah, smaller Islamic banks should merge to form a single institution. “If Islamic banking is to grow successfully, we do not need more small Islamic banks. We need bigger Islamic banks that can compete successfully and handle large projects,” he says.
Islamic business
This spring, much fanfare surrounded the announcement of the Bahrain-based United International Bank (UIB), to be chaired by Prince Alwaleed’s son, Prince Khaled. Dr Ahmad al-Dosari, executive president of the Bahrain-based Global House, UIB’s founding company, said the bank’s primary objective was wholesale Islamic investment banking activities.
Global House has a 10% holding in UIB, whose main investor is thought to be the Riyadh-based Athar al-Majd Holding Company, chaired by Prince Khaled. Athar al-Majd has a 50% stake in Global House. Other UIB founders include a Qatari ruling family member, and the Bahrain-based Palm Capital.
Another Islamic mega-bank was unveiled in early May at the World Islamic Markets Conference. The new bank, Tadawul, is backed by two Kuwaiti companies: Sokouk Holding Company and Munshaat Real Estates project company. Munshaat chairman and chair of Tadawul’s founding committee, Fouad al-Homoud, said he had applied to the BMA for a licence and hoped to have the bank up and running by the summer. He noted that investors had chosen Bahrain for this venture because it was seen as the regional centre for banking and Islamic financial institutions.
In late June, the BMA gave an initial licence to start up what is said to be the first Islamic women’s investment bank in Bahrain. To be called Masrafy, it has authorised capital of $1bn and paid-up capital of $500m. “Many banks provide commercial banking services for the region’s women, but we do not have a bank dedicated to them for investment services and products,” Abu Dhabi Investment House chief executive Rashad Yousef Janahi said.
“We consider Masrafy as the first bank in this field, which will be run by women banking experts with high qualifications, offering women an opportunity to take part in regional investments.”
Shareholders in Masrafy are thought to include Qatar Islamic Bank and Kuwait Investment Company.
Bank expansion
Regional expansion is on the cards for several Bahrain-based banks. Ahli United Bank (AUB), at the head of a group of Gulf-based banks, has been working on the purchase of an 81% stake in Delta International Bank (DIB), following Central Bank of Egypt approval of the move in May. As part of the agreement, the Kuwait-based Bank of Kuwait and the Middle East (BKME) – 67.3%-owned by the AUB group – has said it intends to acquire a 17.5% stake in DIB. The Doha-based Ahli Bank of Qatar (in which AUB holds a 40% stake) also said it wanted a minority stake.
The Egyptian market is being eyed with keen interest by GCC banks. On June 28, Abu Dhabi’s Union National Bank (UNB) said it would soon submit its bid for the Alexandria Commercial and Maritime Bank – its first acquisition overseas.
The announcement of Bahrain’s Gulf Finance House and Qatar Islamic Bank (QIB) plans to create a new Islamic investment bank in Doha, with authorised capital of $1bn and paid-up capital of $500m, and with QIB and GFH each owning 15% of the institution, also came in late June. It was said to be the first Islamic bank in Qatar dedicated to investment banking. PricewaterhouseCoopers has been appointed to advise on risk, regulatory and compliance matters.
Taking a stake
Also in June, Bahrain-based Unicorn Investment Bank, founded only in 2004, announced it had bought a 20% equity stake in First Dawood Islamic Bank (FDIB), a new commercial Islamic bank in Pakistan. Unicorn chief executive Majid Al Sayed Bader Al-Refai called it “a time of promise and opportunity for Islamic institutions in Pakistan”.
Unicorn was previously unsuccessful in its bid for a stake in Bank Islam Malaysia – a 40% stake instead went to Dubai Investment Group. Unicorn is also understood to be a bidder for an unlisted, commercial bank in the UAE.
“We want to build a network of banks globally and then to grow organically within the banks,” Mr Al-Refai says. Unicorn is seeking to raise $248m in new capital to fund mergers and acquisitions.
Also, Bahrain-based Ithmaar Bank, which already has a large share in Faysal Bank (Pakistan), is to take a 25% stake in Pakistan’s Meezan Bank, through a share swap deal. It is also involved in corporate manoeuvres closer to home: on June 23, Ithmaar said it planned to buy a 60% stake in sister company, Shamil Bank, from the Dar al-Maal al-Islami (DMI) Trust. DMI will take a 100% stake in Ithmaar subsidiary, Islamic Investment Company of the Gulf Bahamas. Ithmaar will also increase its share in Faysal Finance from 49% to 100%.
Under increasing pressure from an ever more dynamic Gulf banking sector, Bahrain’s banks are waking up to the regional challenge; they are on the move.
