The global financial crisis has caused a dramatic rethink of how companies finance themselves. In the past, about 85 per cent of the Middle East’s outstanding corporate finance came from the banks, compared with about 33 per cent globally, according to a 2005 study by the International Monetary Fund.

However, the financial crisis has changed all that. This year, for the first time since data has been available, Middle East companies have raised more money through bonds than they have borrowed from banks.

In a bid to make Gulf bonds more attractive, in March this year, Abu Dhabi and Qatar issued sovereign bonds. The two governments were swiftly followed by several state-backed corporates. This has helped investors build a yield curve – a model of the yield on a bond over time – that can be used as a benchmark to price other bonds.

While banks remain nervous about lending, bond issuance is an attractive option for Middle East companies.

When banks eventually rebuild their battered balance sheets, the loan markets are expected to return to prominence. This will be a relief to corporates eager to hide behind the anonymity of bank funding, which does not require them to disclose any financial information. But high-profile defaults by Saudi family businesses have already demonstrated that large-scale and opaque bank lending creates major problems.

An institutional investor base will be vital if the bond markets are to remain a significant funding source. After helping to establish a yield curve, the governments of the region must now foster the development of investors such as pension funds and insurance companies.

New investors will help to ensure efficient pricing in the market, particularly as they will tend to have deeper knowledge of the region and the risks associated with investing in it than US and European funds.