Balance of power shifts in Gulf finance sector

19 January 2010

Regional institutions stopped the global credit crunch contaminating GCC finance markets. Their status has been enhanced and change is in the air

Speaking at a meeting in the Dubai International Financial Centre (DIFC) on 9 January, shadow UK Conservative Party International Development Secretary Andrew Mitchell said his party, if it wins Britain’s general election due by this summer, would restore the Bank of England’s control over British banking. There should be a single regulator and that will be the UK central bank, he said.

Mitchell declared as a failure the tripartite system of regulation established in 1997 which made the UK central bank responsible for UK monetary policy, put the treasury in charge of fiscal policy and transferred regulation of the banking industry to the Financial Services Authority (FSA). There were gaps and inconsistencies that had made the financial crisis worse. British banking under the Tories will make a journey back to the future.

Mitchell was talking about the City of London, but his remarks resonate in the Gulf. The events since the credit crunch began have enhanced the significance of the region’s central banking authorities. Throughout the region, they intervened to provide liquidity when required and supported individual banks that were under threat. In October, the Qatar Central Bank announced it would buy the investment portfolio of seven local banks to relieve them from the need of having to make big stock market loss provisions. This was the most striking of a range of support measures taken across the region that helped the GCC banking industry start 2010 in better shape than most of its Western counterparts.

Lower profits

That does not mean there will be no consequences. There is an expectation that full-year 2009 results will show many Gulf banks recorded slower growth and lower profits in the year. Provisions for non-performing loans are bound to be generally higher. Some banks are likely to report a loss. Some losses may be dangerously large.

But for banks that have avoided the pitfalls of the past two years, this may present an opportunity to acquire a banking business at a reasonable price. Equities are down and some bank shareholders may conclude that a decent offer today is a better than waiting for a price rebound. Management change is in the air. It would be extraordinary if at least one major Gulf bank didn’t lose its chief executive officer by the end of 2010.

Gulf central banks are among the region’s biggest credit crunch winners. And this is raising questions about newer GCC bank regulatory bodies. The future of the DIFC, under the management of Emirates NBD chairman Ahmed al-Tayer since the end of November, seems assured despite the decline in the number of international investment bankers it accommodates. The Dubai Financial Services Authority (DFSA), an independent body that regulates businesses operating from the DIFC and Nasdaq Dubai, will continue to have a role as long as the DIFC continues to function. No one seriously doubts that it will.

Change seems more probable in Qatar. The government is expected to act later this year to establish a single regulator that will be based on the Qatar Central Bank rather than the Qatar Financial Centre Authority (QFCRA). The move will be welcomed by most bankers operating in Qatar. It is a sign of the times. The balance of power is shifting in Gulf finance. The central banks are in charge and practically no one doubts that this is as it now should be.

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