Leading US ratings agency Moody's Investors Service says Bahrain's banks are in good shape, but the outlook for the country as a major banking centre is less than favourable.

'After 20 years of initial boom followed by regional recession and the Gulf crisis, coupled with the current economic downturn and political unrest, the outlook for the banking industry in Bahrain is less than promising,' says a report released on 30 September, by the agency, which began reporting on the Gulf at the start of this year.

It says that improvements in global communications have eroded Bahrain's advantage of being located between US and Asian time zones and Dubai is becoming a competitor.

On the positive side, Moody's says, the Bahrain Monetary Agency (BMA) is a compe tent supervisor of the industry and that Islamic banking offers growing business.

The main elements of the report are:

The 19 domestic banks and the 47 offshore banking units (OBUs) are mostly in good shape. Both recovered well from the Gulf War and bad debt problems from the 1980s: though levels of non-performing loans remain high by world standards, returns on assets are improving steadily.

The banking sector is well-supervised. 'To date, the Bahrain Monetary Agency's (BMA) record is a good one, and it has the capacity to remain among the most forward-looking central banks in the Gulf,' Moody's says.

Domestic banks have limited opportunities to expand in the small local market. The BMA is ambivalent about extensive retail lending and overseas networks, preferring banks to play a greater role in the international markets by increasing their capital.

The offshore banks' assets have fallen from a peak in the late 1980s. The BMA says the OBUs' total assets in June 1996 stood at $61,500 million compared with $67,980 million the year before. Assets reached a peak in 1989 of $72,600 million. Moody's says locally-incorporated OBUs are dependent on the volatile interbank market for nearly 70 per cent of their liabilities. The OBU market as a whole remains vulnerable to any political or economic disruption.

Islamic banking is an expanding sector of the market. 'The potential for new business is considerable,' Moody's says.

It rated two Bahraini domestic banks:

Bank of Bahrain and Kuwait and National Bank of Bahrain and gave Bahrain a sovereign rating below investment grade (Banking, MEED Special Report, 28:6:96).