Apportioning the financial pie

In the race to become ‘the’ financial centre of the region, Bahrain has scored over its rivals with the opening of the first phase of the $1.5 billion Bahrain Financial Harbour (BFH).

As the country’s Prime Minister said, the creation of the BFH is the most prominent event in the economic history of Bahrain. It crowned Bahrain’s success in the finance industry and is expected to attract more investment to the country.
Bahrain, competing with the UAE to host a central bank for the GCC, hopes to house within the BFH a regional central bank that will issue a single currency for the Gulf.
Globally Bahrain faces competition from the UK, which is trying to attract petro-dollars from the GCC to its economy through Islamic banks. The region has an active wealth of $1.300 billion, a figure that could grow to $1.800 billion by 2010.
Standard and Poor’s assesses that London has a three-fold strategy with respect to Islamic finance. The first part is the trading of sukuk (bond), the second is retail onshore Sharia-compliant banking to serve something like 300,000 customers on the retail side and the third aspect of the strategy is wholesale Sharia-complaint banking as well as takaful (insurance).
Despite competition from the UAE, Qatar and possibly Saudi Arabia and Kuwait, why are financial institutions attracted to Bahrain?
Core integrity – that is the reason why some 390 financial institutions have dropped anchor in Bahrain.
Bahrain has over the years built a strong reputation as a sound and well-regulated financial centre.
But the kingdom modestly says it is only complementing GCC rivals.
However, there is no denying the fact that there is intense competition among the GCC countries to make their financial centres successful. In the first half of 2006, several global banks – including Goldman Sachs, Lehman Brothers, Citigroup, Morgan Stanley, Deutsche Bank, EFG International’s subsidiary EFG Bank and American Life Insurance Company – decided to expand their Middle East presence through offices in the Dubai International Financial Centre (DIFC) and QFC.
Nevertheless, banks in Bahrain saw their total assets rising by 33.5 per cent in 2006 to $187.4 billion. In the past, Bahrain’s offshore banks played the dominant role in the country’s banking system, accounting for 82 per cent of total assets in 2005, but the offshore distinction is now no longer there.
Unlike other Gulf states with abundant oil and gas resources, Bahrain has relatively little by way of natural resources and has banked on the financial services industry to back its economy.
Bahrain also had to adapt to major upheavals such as the 1990-91 Gulf war and refine its financial focus to meet regional demands. It has been able to think laterally over the decades and target new areas such as Islamic finance and insurance.
Above all, Bahrain holds aloft its regulatory good name. Officials point out that Bahrain was not as badly burnt by the recent stock market crashes as other Gulf states, with the Bahrain Stock Exchange (BSE) index falling by only 4 per cent while the market capitalisation of the Saudi and the UAE bourses halved.
Central Bank of Bahrain (CBB) governor Rasheed Al Maraj says wholesale banking will remain in Bahrain but will not be a major growth area for it. Bahrain is seeing itself more in terms of Islamic banking, asset management, insurance and the mutual fund business, which will be the major growth areas.
The CBB is reviewing the capital markets structure and collective investment schemes. But what really matters is the quality of corporate governance: it is not how much regulation you have that is important, it is conducting business to the highest standards of corporate governance. Bahrain’s regulatory strength and strong Islamic credentials can also be seen in the growth of the insurance sector. German insurance giant Allianz won a licence from the CBB to operate in Bahrain. Allianz Takaful (Bahrain) will serve as the Allianz Group’s global hub for Islamic insurance and is the third international insurance group to be granted such a licence in recent months. Overall, there are now more than 159 firms in the insurance sector, including takaful, and products such as life insurance, investment-linked insurance and health insurance are now seen as a huge untapped opportunity.
Even as banks are doing well, the new Bahrain Financial Harbour will provide an important new financial edifice for Manama.
Developments such as the BFH are expected to play a large role in addressing the issue of meeting the complex and constantly evolving infrastructure needs of the financial sector. But selling real estate within the BFH shouldn’t be the only priority for the country. A world-class financial centre needs much more than that, especially when the competition is global.

Talking business with
K S Sreekumar
sreekumar@tradearabia.net