Bahrain Monetary Agency’s (BMA) creation of a single rule book, intended to reinforce what is generally regarded to be the Gulf Cooperation Council (GCC) region’s clearest and most open regulatory framework for banking, is another sign of the island state’s determination to retain its position as the Gulf’s leading financial centre.
The traditional Gulf base of choice for many international banks, Bahrain is facing increased competition from other GCC members, especially the United Arab Emirates and Qatar, and, in particular, from the new Dubai International Finance Centre (DIFC). However, a mixture of tradition and forward-thinking along with steady growth in the domestic economy looks set to ensure that Bahrain’s banking sector continues to expand.
“The Bahraini regulatory environment is constructive and modern,” says Rory Keelan, credit analyst at regional specialist ratings agency Capital Intelligence. “Bahrain has always seen itself as a financial centre and has traditionally had more sophisticated regulation.”
The BMA has built on this reputation by developing the rule book, the first three volumes of which have been published and recently revised, covering licensing requirements for conventional banks, Islamic banks and insurers. The remaining two volumes, dealing with ‘investment business’ and ‘specialised activities’, are due for release this year.
Flexible friend
Besides its solid reputation, Bahrain’s flexible capital requirements make it an attractive centre for investors from some other parts of the GCC region – who, buoyed by the oil price boom and less enamoured of investing in the West in the more hostile post-9/11 environment, are flush with liquidity and looking for familiar places in which to invest.
A number of Kuwaiti investors prefer to run financial institutions in a less onerous environment than their home jurisdiction, where a lending cap based on a maximum 80/20 loan-to-deposit ratio recently came into effect. Regional observers note that many international operations of Kuwaiti-based Burgan Bank are now being run by the Manama-registered, Kuwaiti-owned United Gulf Bank, rather than being operated directly out of Kuwait.
Bankers, who given local sensitivities declined to be quoted, told The Banker that while some large international banks are setting up units elsewhere in the Gulf – notably in the DIFC and Qatar’s new Doha International Financial Centre – their main presence in the region generally remains in Bahrain. They added that this was not just because of the regulatory environment.
The lower-key, more relaxed living environment offered by the capital Manama, compared with the likes of more hectic Dubai, is cited by Arul Kandasamy, head of the Manama-based Islamic finance operation of Calyon, as another advantage. “I do not think Bahrain will lose its lead in the region any time soon,” he told The Banker.
Forward planning evident in prestige schemes such as the Bahrain Financial Harbour (BFH) is another important factor. With phase one of the $250m financial centre due to be completed by the end of the year, the project, capped by two 53-storey towers, is already transforming the Manama seafront.
A specialised insurance centre, to be completed later, is intended to boost Bahrain’s role in that sector. The entire $1.3bn scheme, incorporating further office space, hotels, residential space and leisure facilities, is scheduled to be finished by 2009.
The Bahraini authorities hope the project will show they can match anything their regional rivals may be able to produce to woo financial institutions. It may also provide a boost to the prospects of homegrown Bahraini banks, which have traditionally belonged to one of two camps.
While well-known, Manama-based names such as Gulf International Bank and Arab Banking Corporation have concerned themselves predominantly with regional activities beyond Bahrain’s shores, a plethora of smaller institutions have focused mainly on serving the domestic market.
This latter group have had their ups and downs in recent years, especially those involved in investment banking, but after a few unsettled years around the time of the 9/11 attacks, the domestic market has been recovering.
The steady expansion of the Bahraini economy, a string of big-ticket project financings and real estate developments, such as the BFH, have provided good opportunities for local banks. This has been reflected in a steady improvement in the financial health of the country’s banks. By the end of the third quarter 2005, the Bahraini banking system had consolidated assets of about $133bn, up from $119bn at the end of 2004.
Looking further afield
Nevertheless, the small population and the absence of a hydrocarbons industry to rival other economies in the region inevitably limit the number of domestic openings for banks. “The conventional banks in Bahrain are doing nicely, but growth in revenues and retained capital is not at the same magnitude as those elsewhere in the GCC,” notes Capital Intelligence’s Mr Keelan. Given the relatively small scope of the home lending market, there is little need for local entities to embark on big capital raising exercises.
Given these inherent limitations, it is little surprise that some previously domestically oriented banks are eyeing the prospects for regional expansion as well.
Showing what can be achieved in this respect is Ahli United Bank (AUB), which has surprised some regional observers with the success and swiftness of its move onto the regional stage. In 2004, the bank took a 40% stake in Qatari institution Ahli Bank QSC, as well as taking a one-third interest in Future Bank BSC in Bahrain, which combined the Bahrain operations of Bank Melli Iran and Bank Saderat Iran.
Then, in September 2005, AUB increased its stake in the Bank of Kuwait & the Middle East (BKME) – the seventh-largest bank in Kuwait with assets of about $5.3bn – to take a 75% majority shareholding. This was followed with the purchase of a 49% stake in the Commercial Bank of Iraq, one of the largest private banks in Iraq, a move that increased the capital base of the Iraqi institution to $43.7m from $9.6m, according to AUB.
Analysts say the acuity with which AUB has raised finance for and carried out this ambitious expansion strategy has been impressive, but they point out that further large-scale regional growth may be more complex and much more costly.
“AUB has got BKME and it has gone into Qatar. Now the big move would be to enter the Emirates market, which is not going to be easy given the bank valuations there,” says Mr Keelan. “However, AUB has surprised me before, and it could well do so again.”
