BAHRAIN is in no doubt about its position as a thriving financial services centre. It has an active stock market and is home to 160 international and domestic financial institutions whose premises dominate the Manama skyline.

Yet, however much the island promotes the activities of its financial sector, the booming offshore banking industry of the mid-1970s is now a shadow of its former self. The number of offshore banking units (OBUs) operating in Manama has dropped to around 47 today from 75 in its heyday. The advances in communications and electronic settlement as well as political shocks and the erosion of the region's capital surpluses prompted banks to question the need for a permanent local presence. Many have packed their bags for home.

Fortunately for Bahrain, business in the Middle East requires constant personal contact. Enough institutions have chosen to maintain a Manama base that their combined assets are still significant. While they have fluctuated between $53,000 million and $73,000 million during the last decade, at end-June the combined assets of the OBUs stood midway at $63,427 million.

By comparison, the domestic banking sector is flourishing, stimulated by the strong competition among the 21 specialised and commercial banks. This has led to steady growth, and their consolidated assets have increased by 76 per cent over the past decade to $8,753 million in 1993.

The most active growth area has been retail banking. 'Consumer lending was practically non-existent five years ago,' says general manager at National Bank of Bahrain (NBB) Abdul Razak Hassan. Today, it has now grown to more than 30 per cent of total bank credit. 'Consumer lending and deposits are a growing part of our business,' says Bank of Bahrain & Kuwait (BBK) deputy general manager Peter Stevenson. Bankers consider the related risks to be modest. Salaries are paid directly into accounts and banks can deduct fees and interest directly. Risk only arises if a bank client subsequently becomes unemployed.

But job security is high in Bahrain and banks have pursued consumer lending aggressively. So much so that the Bahrain Monetary Agency (BMA - central bank) has been forced to demand restraint. In June, the BMA issued a circular instructing banks to reduce their exposure. Bankers have reacted positively, seeing it as a prudent intervention to limit the value and terms of loans on offer.

Corporate lending has been another growth area and a ready outlet for surplus liquidity. Several banks are active elsewhere in the region in short-term lending and syndications. NBB is generating business in Saudi Arabia and Kuwait; BBK is active in India and Kuwait. In Bahrain, the prime openings have been a series of syndicated loans to some of Bahrain's leading companies.

Recent expansion programmes at Aluminium Bahrain (Alba), Bahrain Aluminium Extrusion Company (Balexco), Gulf Aluminium Rolling Mill Company (Garmco), Arab Shipbuilding & Repair Yard (ASRY) and Gulf Air have stimulated the banks' appetite for long-term lending. The various large industrial projects currently under consideration would require similar financing arrangements, and the banking community is keen to see them approved.

The private sector is also viewed as an exciting prospect. 'The increasing trend towards privatisation will provide a major area for bank activity,' says Hassan. Private investment is being tapped to generate capacity in the utilities sector, and NBB and BBK are part of a group proposing to build a $200 million-250 million desalination plant in Muharraq. The development of Bahrain's small manufacturing base and tourist industry is also being handed over to a willing private sector, supported by a range of financial incentives designed to attract foreign investment to local projects.

Another distinct initiative has been the growing number of investment funds on offer to clients. 'Bahrain has a reputation for leading the region in financial developments,' says Paul Mason, corporate banking account manager at Grindlays Bahrain Bank. The BMA has approved 156 funds operated by 26 institutions, among them NBB, BBK and Al-Ahli Commercial Bank. They have all sought to build up their capabilities in fund management to mobilise cash surpluses from a region where deposits exceed loans. 'There are investment opportunities and liquidity in the region which can be tapped by these investment vehicles,' says Bahrain stock exchange director Fawzi Bahzad.

NBB has seven core funds, both equity and fixed-interest, spread between Europe, North America and the Far East, and its first fund, launched in 1987, matured earlier this year with a return of 8-9 per cent. BBK has an umbrella fund set up in 1989, some open-ended unit trusts and in June, it launched a three-year guaranteed fund. Al-Ahli Commercial Bank launched a guaranteed fund in 1993, and is planning an equity and bond fund to be launched by the end of the year with minimum investments of $10,000.

'Bahrainis have displayed obvious interest in such vehicles, especially until the sharp bond adjustment earlier in the year,' says Mason. This enthusiasm has been noted by Bahrain Islamic Bank, which is now trying to develop similar investment instruments within the criteria of Islamic banking.

Rising rates

However, rising interest rates are a new force to contend with as dinar rates rise in line with those for the dollar, to which it is tied. The attractions of investment funds will decline if investors can get a competitive guaranteed return from leaving money on deposit at home.

The underlying strength of the banking sector has also meant that few adjustments were needed to meet the Basle-based Bank for International Settlements ruling on capital adequacy ratios. BBK, Al-Ahli Commercial Bank and Bahraini Saudi Bank all boast capital to assets ratios of more than 20 per cent.

Local bankers are looking forward to 1995 in the belief that the recent firming of oil and aluminium prices will translate into higher government spending and economic activity. Yet they do not expect business to fall into their laps. 'This is a competitive market place,' says Bahraini Saudi Bank corporate banking manager, AJ Jaganathan. Inevitably, this raises the question of whether there will always be enough business to go around. For the time being there are no signs of self doubt. The next phase of infrastructure projects should present opportunities well into the next century and few bankers are thinking much beyond the new millennium.