OFFSHORE: Coming home to cater for local needs

22 December 1995

PETRO-DOLLARS were once the main attraction for offshore banks setting up in Bahrain. At the height of the oil boom in the 1970s and 1980s, there seemed an endless flood of funds pouring out of the Gulf and offshore banks were quick to mop them up. But the flow of funds is changing direction, and so too is the role of these institutions.

Increasingly, Bahrain-based investment banks are trying to draw capital into the region. Once a big lender, the region is now a net borrower. The funds are needed for the growing number of privately financed industrial and infrastructure projects. The providers of private banking services are also facing new challenges from wealthy individuals who are making tougher demands. Smaller investors too are looking for more structured and diversified vehicles for their funds.

The changing climate has taken its toll on Bahrain's offshore banking community. In the mid-1970s, the island archipelago boasted about 75 international institutions, but 20 years later that number has fallen below 50 and continues to decline. In 1995, American Express Bank announced plans to move its office from Manama to Cairo, and Dresdner Bank closed down its representative office in favour of a new base in Dubai. Arab institutions based in Bahrain have also been rationalising their activities and developing a more specialised focus.

'The whole world since the mid-1980s has been moving away from spread lending,' says Albert Kittaneh, chief executive of Bahrain Middle East Bank (BMB). 'When the oil price crashed in the mid-1980s, it taught banks in the area to become more resilient, to shrink costs and run their operations in a lean way.' He is the first to admit that BMB's lending operations were hit hard when that downturn came.

Matters were made even worse in 1990 when Iraq invaded Kuwait, the home of BMB's largest shareholder, Burgan Bank. In the aftermath of the invasion BMB sought a new strategy, slashing its loans portfolio by almost three- quarters, and turning to investment banking and corporate finance activities instead.

Among its new initiatives are two funds - the Asia Pacific Performance fund, launched in February in association with two other international institutions and the Proinvest fund launched at the end of 1994, which BMB manages itself.

The transition has put a squeeze on profits as the bank builds up earnings from the new activities, but Kittaneh says the shift has been necessary. 'If you want, we are trying to turn BMB into a boutique investment bank,' says Kittaneh. 'We are investing in the future.'

TAIB Bank is another Bahrain-based institution which has been cutting back its lending activities and redefining its role. 'Most offshore banks do not have a natural deposit base, which means they have to borrow on the interbank market. That's always going to be a constraint on offshore banks,' comments one TAIB Bank official. 'Money is a commodity, but corporate finance is not a commodity, it is really a science.'

TAIB is developing its treasury, merchant banking and investment banking activities. This includes launching its own brokerage service on the Bahrain stock exchange. It is a small beginning, as the local share market offers only limited rewards. In 1994, commissions for all transactions on the exchange reached no more than $800,000. However, TAIB says it is developing the research skills to take advantage of future capital market opportunities throughout the Gulf.

TAIB is also developing its international activities. Leading the way is TAIB's 100 per cent-owned Turkish subsidiary, Yatirim Bank. Like its parent, Yatirim switched at the end of the 1980s from lending to the provision of merchant banking services. Now TAIB is looking further afield. In November, it inaugurated a joint-venture merchant bank in the Indian city of Bangalore. The partners in the project are 10 Indian corporates which the bank hopes will provide a solid base from which to develop new corporate business.

But expansion abroad is an exception to the general trend. Most regional institutions are reducing their overseas activities and looking more closely at opportunities closer to home. Gulf International Bank (GIB), for example, has closed or down-sized most of its overseas offices or branches over the past five years. GIB has identified GCC business, much of it generated by the state sector, as its future target. 'There is a big push coming from GIB in what we see as the market needs of the next five to 10 years,' says Mohannad Farouky, GIB assistant general-manager of banking. 'The governments in the region are, in our view, moving away from running business, and are allowing the private sector to control and run business.'

In Oman, the privately financed Al-Manah power station has broken new ground and could be the first of several private infrastructure initiatives that are planned in the sultanate. Other Gulf countries could soon follow suit. State-owned companies or those with a major government stake are also looking for private financing. The $700 million Saudi Petrochemical Company (Sadaf) loan signed in November was the first syndication raised by the industrial giant, Saudi Basic Industries Corporation (Sabic), and an indication of the new opportunities.

Outside competition

The aim of the large institutions with roots in the region, such as GIB and Arab Banking Corporation, is to capitalise on existing links with major companies in the area. But there is stiff competition from other international banks, and the planned merger of Chemical Bank and Chase Manhattan - already major players in the region in their own right - suggests the competition will get no easier. 'The new Chase will keep doing the same things that we are doing now, but will do it on a bigger scale,' explains George Karam, managing-director of Chemical Bank in Bahrain.

The international banks have already carved out a dominant position in private banking. The Gulf is still a less competitive climate than other financial centres, but this too is changing. 'The role of private banking is becoming much more important, because there is no more easy money. Customers look for the best service they can get,' explains the head of one leading private banking operation in Bahrain.

When it comes to Islamic banking, however, it is the international banks that are trailing the field. Islamic banks are finding a growing appetite for their services, and what was once a niche market is now moving into the mainstream. Mohammed Tariq, senior vice-president at the offshore Faysal Islamic Bank of Bahrain (FIBB), says Islamic banks once concentrated on only short-term financing, with a maximum of five years, but now there is growing demand for medium-term financing.

Business also benefits from the closer relationship that Islamic banking implies from the lender and borrower sharing in risk and profit. Says Tariq, 'We take equity stakes, which is much more focused, rather than just financing.'

FIBB is also responding to requests to assist local banks which want to offer Islamic products, but do not have the skills or resources to structure the product themselves. Encouraged by the growth in opportunities, FIBB launched a local commercial operation two years ago, which has been reporting healthy profits and is planning cautious expansion that includes raising the number of branches to three. 'We are very conscious that Bahrain is saturated with local branches so we don't want to push too hard with this,' says Tariq.

There are already international players that are well-established in this market, including Citibank, and others are following suit. ABN Amro is setting up an Islamic department in its offshore unit that will become the centre for Islamic services provided by the bank world-wide. ABN says this reflects the bank's commitment to the new service and the region.

Bahrain remains an attractive financial centre in spite of the changes of the past 20 years and its reputation is protected by the professionalism of The Bahrain Monetary Agency (central bank). 'The regulations are very strict which we welcome because it keeps quality high,' says the private banker. The King Fahd causeway has linked the island state to Saudi Arabia for the past 10 years, providing easy access to the main market for banks in the area. 'Bahrain is still the place to be in the Gulf,' says Chemical's Karam.

Despite the changes, the offshore banks are learning to live with their new role, and many are learning to thrive on it. 'The offshore banking industry has come of age,' says the head of one Manama-based operation, who has experienced the changes over the past 20 years. 'Those banks which have survived, have found a niche and have been able to maintain their position.'


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