The transformation of small banks, existing in the backwaters of the global financial landscape, to institutions with a multi-continent footprint is remarkable. The story of most of the older financial houses in the Gulf region, whether sharia-compliant or conventional, is pretty much the same. Housed in shiny skyscrapers, their books today are laden with petrodollars and their assets top hundreds of billions of dollars. Some of them now rightfully rub shoulders with more established global peers.

Banks have felt the pinch, but fundamentals remain intact

Despite a weaker economic backdrop in the wake of lower oil prices, economies in the GCC are holding firm, better than most in the Middle East and North African (Mena) region. For the banking and financial services sector, this is not their first ride through choppy waters. They have felt the pinch, but fundamentals remain intact and some are already on the road to growth in profitability.

A distinct geographical edge has allowed Middle East banks to carve their niche and thrive in an era where the finance world is divided into hubs in the East and West.

In the 1960s and early 1970s, before the rise of the GCC as the hive of financial services, Beirut was the region’’s banking centre. Business back then was flourishing in Lebanon and about a dozen US banks, including Citibank and Chase as it was and Bank of America, arrived to cash in on growth opportunities. Lebanon’’s home-grown lenders such as Byblos Bank, which was established in the 1950s, and Bank Audi, which traces its roots back to the late 1800s, contributed to solidify Beirut’’s position as a financial hub. The city had all the ingredients to stay on top, but the decade-and-a-half-long civil war that broke out in 1975 dealt a devastating blow.

Bahrain emergence

For financial institutions, the Gulf region, which was booming on the back of hydrocarbons wealth, was the obvious location to migrate to. British banking interests had existed in Bahrain since the 1920s and National Bank of Bahrain had been operating since 1957. Manama used incentives to encourage other banks to establish bases in Bahrain, and it gradually seized the title of the leading financial hub from Beirut.

Creating and nurturing a well-regulated banking industry served the country well during the 1970s and 1980s. Bahrain established its central bank in 1973, shortly after gaining independence from the UK, and built on its financial services sector, which still accounts for a big portion of total employment in the country and contributes more than 17 per cent to its GDP.

Meanwhile, other Gulf states also cashed in on oil discoveries and banking pioneers emerged to capitalise on the opportunities. The rise of Saudi Arabia’’s domestic banking sector came through entrepreneurs such as the Al-Rajhi family, one of the wealthiest in the kingdom. The bank was launched by four brothers, Sulaiman, Saleh, Abdullah and Mohamed, in 1957. It initially operated as a group of banking and commercial ventures, joining together in 1978 under one umbrella. In 1987, it became a joint-stock company, and was rebranded as Al-Rajhi Banking & Investment Corporation two years later.

The roots of Saudi Arabia’’s banking sector can be traced back to 1926, however, when Saudi Hollandi Bank, which was later rebranded as Alawwal Bank, opened a single branch in the country to serve pilgrims. As the kingdom’’s only operational financial institution, it acted as central bank, holding the government’’s gold reserves and oil revenues after commercial quantities of crude were discovered in 1938.

Al-Rajhi and Alawwal Bank have both played their part in the development of banking and finance in Saudi Arabia, making it the top banking market in the wider Middle East and North Africa (Mena) region. Al-Rajhi is currently the second-biggest listed lender in terms of market capitalisation and boasts a presence in markets as far away as Malaysia. The Olayan family, a major local merchant group with holdings in international lenders, owns a 21.8 per cent stake in Alawwal Bank.

The story of banking sector evolution in the rest of the GCC states is no less remarkable. Doha launched Qatar National Bank (QNB) in June 1964 as the country’’s first domestically owned commercial bank. It began life with 35 employees housed in a government-owned building. Today, it is the biggest financial institution in the Mena region with assets topping more than $200bn. QNB Group recently completed the acquisition of a 99.81 per cent stake in Turkey’s Finansbank, the fifth-largest privately owned lender in Turkey by total assets. It also controls a 20 per cent holding of pan-African Ecobank.

Regional assets

Acquisitions over past years have expanded QNB’’s interests in the region. In 2013, the group completed the acquisition of a controlling stake of Egypt’s second-largest private bank, now known as QNB Alahli. It controls a 35 per cent stake in Jordan’s Housing Bank for Trade & Finance and a 40 per cent share in the UAE’’s Commercial Bank International. The list goes on to include assets in Tunisia, Iraq, Libya and Syria.

National Bank of Kuwait (NBK) stands out as being the biggest financial institution in Kuwait and one of the most profitable in the region. Its existence can be traced back to the early 1950s, when a prominent Kuwaiti merchant’s request to the British Bank of the Middle East to open a letter of guarantee was rejected. A petition to the emir to establish a local bank was subsequently granted approval, and NBK launched operations in 1952 with notable Kuwaiti merchants at its helm.

NBK was among the first GCC banks to expand beyond the local market and today its branches, subsidiaries and representative offices span territories from Geneva to London and Singapore to China, with a presence in nearly every regional market.

Dubai from the beginning took the route of developing its trade and financial sectors, and allowed the establishment of privately owned banks

The evolution of the financial services sector in the UAE, particularly Dubai, is perhaps more intriguing than others. Successful private entrepreneurial ventures, the creation of an onshore financial centre and a consolidation drive have turned Dubai into the latest financial hub of Middle East.

The presence of banks in the UAE predates the creation of the country as a federation. Standard Chartered has existed in Sharjah since 1958; HSBC acquired the British Bank of the Middle East in 1959, and used that name in the UAE until 1999. National Bank of Dubai was launched in 1963 as the first local bank in the emirate, while National Bank of Abu Dhabi (Nbad) has been around since 1968.

Lacking the hydrocarbons abundance of neighbouring Abu Dhabi, Dubai from the beginning took the route of developing its trade and financial sectors, and allowed the establishment of privately owned banks. Bank of Oman, the first such institution, was founded in Dubai in 1967 through a decree by the ruler at the time, Sheikh Rashid bin Saeed al-Maktoum. It was pioneered by the Al-Ghurair Group and later rebranded as Mashreq. Today, it boasts many firsts, including the first UAE bank to introduce ATMs, debit and credit cards, and consumer loans. With long-serving chief executive Abdulaziz al-Ghurair at the helm, the bank is expected to further improve its asset quality and fare relatively better than some of its UAE peers in the weaker economic environment.

Dubai was the first to realise that scale was important to compete with the larger regional and international players. In 2007, the government merged National Bank of Dubai with Emirates Bank to create Emirates NBD, which later became the largest lender in the country by assets. Abu Dhabi followed suit in 2016 and combined two of its largest lenders – Nbad and First Gulf Bank. The merger became effective on 1 April and the combined entity is the second-biggest banking institution in the wider Mena region.

Onshore hub

The stroke of genius in terms of cementing Dubai’’s position as unparalleled leader of the region’s financial services sector was the establishment of Dubai International Financial Centre (DIFC) in 2004, achieved just four years after the emirate launched the Dubai Financial Market, the only listed bourse in the region. The 110-hectare onshore hub has its own independent regulator and judicial system, common law framework and tax-friendly regime. It is also home to the UAE’’s third stock exchange, Nasdaq Dubai, and caters to the Middle East, African and Asian markets.

Although, 2016 was a slower year for DIFC, it still recorded 14 per cent growth in the number of new companies registered and intends to triple its core client base in the next eight years.

Others in the GCC, including Saudi Arabia, Qatar and Abu Dhabi, want to replicate DIFC’’s success with their own hubs and financial districts, but it will be some time before any of them are able to outshine Dubai’’s triumph.

Historical milestones

  • 1957: National Bank of Bahrain and Al-Rajhi Bank (Saudi Arabia) established
  • 1964: Qatar National Bank launched
  • 1967: Mashreq bank founded as Bank of Oman
  • 1973: Bahrain Central Bank formed
  • 2000: Dubai Financial Market launched
  • 2004: Dubai International Financial Centre set up