BAHRAIN-BASED Gulf International Bank (GIB) is best known as a lender to Gulf Arab governments and corporations. It is also a leading arranger of project finance for large industries in the region, from gas liquefaction to plastics production. Given the scale of its operations, GIB has much to gain from the new developments facing the banking industry in the region.

The bank's new general manager, Abdullah El-Kuwaiz, told MEED in an interview that Gulf banks are in good shape to face the gradual opening of their domestic markets to foreign competition, and to cope with techniques which are now in greater demand, from bond issuance to Islamic finance.

At the same time El-Kuwaiz, a prominent diplomat and economist from Saudi Arabia who took up his post in February, warns that some banks will have to merge. 'You will have consolidation because this is a requirement of the market, and you will have more openness because this is a requirement of the World Trade Organisation. The consequence will be stronger banks, and they have all the conditions to be strong.' El-Kuwaiz also observes that most banks in the Gulf Arab states are well-capitalised and doing business in economies that are expanding. But there may be a price to pay.

'Openness will entail competition from foreign banks that have better technology and cheaper financing,' he says. This should spur the process of consolidation, along the lines of the merger between United Saudi Commercial Bank and Saudi Cairo Bank in September which reduced the number of Saudi banks to 11.

However, there have been relatively few bank mergers or acquisitions in the Gulf states since the near collapse of several UAE banks in the 1980s which resulted in a government-led bailout and restructuring. One reason is that existing corporate law is not favourable to mergers, El- Kuwaiz says. Another is that there is not enough pressure from the regulatory authorities on the banks to consolidate. 'People in the industry say there should be consolidation but it doesn't filter through to where the decision is.'

Although there are a few bond issues outstanding from borrowers in the region, capital markets are emerging only slowly as a source of funding in the Gulf states. GIB itself borrowed $200 million earlier this year via a floating-rate note (FRN) issue. 'If we compare bank borrowing and syndications to FRNs and bonds, you find that direct borrowing is much cheaper. These tools may not be as effective from a price point of view as people initially thought.'

GIB chose to raise money through an FRN, at a slight premium to the cost of a bank loan, so that it could tap new pools of funds and lessen the strain on its existing lines of credit from banks. As for Gulf banks underwriting bond issues themselves, it is still early days. Says El-Kuwaiz: 'We are in the initial stage of our learning. I am sure that [in time] we will come to know it.'

Islamic banking is another sector of the industry which is becoming more significant - a new Islamic bank has been set up in Abu Dhabi this year, and there are plans for similar initiatives elsewhere in the Gulf. 'There is more and more appetite for Islamic products, and banks have to respond to this demand by depositors, investors and risk-takers,' El-Kuwaiz says. Despite the growing demand, GIB has abandoned its own plans to upgrade an existing Islamic banking service into a full-blown subsidiary. 'We do some Islamic financing and we are receptive to new ideas and products, but you can't be all things to all people. We are basically a traditional bank.'

The possible privatisation of state-controlled banks is another area of opportunity. Although relatively few are majority-owned by governments, many banks in the region have some government shareholding and rely to some extent on government-related business. Another significant group of public-sector banks are the pan-Arab institutions which are owned or controlled by more than one government. These include GIB itself and its parent, Gulf Investment Corporation, as well as Arab Banking Corporation, The Arab Investment Company and the Arab Petroleum Investments Corporation.

Last month, another pan-Arab institution, the Bahrain-based Arab Insurance Group, went through a partial flotation which left 51 per cent of its shares in private hands. Is this an example that the regional banks ought to follow? 'They should, because the governments are pushing for privatisation [of state-owned companies in general],' says El-Kuwaiz. Strike the right balance and get the timing right and there should be no reason to hesitate. 'The shareholders are willing and the market is favourable, though it requires a balancing act.'