BAHRAIN’S FINANCIAL ‘HARBOUR’ & DUBAI’S ‘GATEWAY’

Whenever I visit Bahrain, I am struck by the contrasting styles between Dubai’s pursuit as an emerging financial hub and Bahrain’s consolidation of its established financial centre status. In the 1960s and 70s, Beirut was the thriving cosmopolitan financial capital of the Middle East. It had all the ingredients to be successful and these included talented finance professionals, an indulgent lifestyle and a salubrious climate; all of which enchanted the expatriate community, who lapped up the liberal mix of chic, haute couture and Beirut’s French speaking élan. Lebanon’s prolonged and tragic civil war caused the city’s rapid decline and demise as a financial centre. This was the time when GCC countries saw the quadrupling of the oil prices and their wealth exploding. Soon, the GCC region was embarking on a huge investment spree and an infrastructure programme that required recycling of billions of Dollars, stepped-up project finance and cross-border banking activity on an unprecedented scale.

Saudi Arabia emerged clearly as the largest and the most lucrative market for the global financial community that wanted to attract petro-Dollars to their businesses and / or lend money to finance the air construction sector. 

This is the background in which the small Bahraini Island, on the periphery  of Saudi Arabia, became the financial nucleus and a natural successor to Beirut. In those years, Dubai was focused managing its huge trading flows. Other cities including Kuwait, did not exhibit or entertain any ambitions to play the role of a regional financial centre. Besides, Bahrain was less well endowed in terms of its oil surpluses and had to rely on the aluminium smelter and other light industrial base on the one hand, and the public sector and offshore baking on the other, to create the much needed jobs for its young population. It had and continues to have good literacy and education among its growing population and therefore, has had to nurture a strong work-force. Sensibly, Bahrain’s financial regulatory regime was put on a sound footing, and it began to gain a reputation as an efficient frontier.

Dubai’s recent initiative to establish a financial hub of its own has coincided with Bahrain’s offshore banking taking a toll in recent decades. The principal factors have been that Saudi Arabia has begun to build up and diversify its financial system. The Saudi banks have grown large and versatile enough to be able to finance the ongoing needs domestically, needing no longer to place reliance on the Bahraini-based offshore banks and international institutions. In Saudi Arabia, many large global banks, including those from the U.S., France, U.K. and Dutch institutions went into joint ventures with local banking partners.  Much of this history is of course well known to the longer-term GCC residents, but need to be borne in mind while considering the new initiatives.

The Dubai International Financial Centre (DIFC) is based on a carefully crafted ‘blue-print’, and is designed with the help of internationally renowned legal and regulatory experts to stand up to scrutiny.  The recent incidents involving the exit of senior regulatory officials have raised many eyebrows; given the wide coverage in the Western media and on the Internet journals. It is unfortunate that on the eve of its launch, DIFC is mired in a controversy.  If not dealt with conclusively and transparently, this could create detractors and take away some gloss.  Reassuring is the speed with which good successors have been announced for both the positions, but this issue will, no doubt, be clarified further. Bahrain has also had its embarrassing moments, especially the controversies arising from the troubles surrounding its two investment banks, and the manner in which the creditors were perceived to have been dealt with.  Credibility, confidence, consistency and implicit trust are cornerstones and the foundation for building world class financial centres.

The international financial community tracks matters carefully, and anything that favours domestic players and is not equitable, will be noticed and frowned upon.  It is therefore, vital that the authorities are alive to the international implications and the fallout from incidents such as these. It may be difficult to prevent them, but  they should be dealt with fairly and swiftly.  “Caesar’s wife” approach is the best and the need to be well above suspicions; both perceived and real. Otherwise, other major financial capitals including the previously mushrooming offshore havens will attempt to undermine upstarts and take away market share. As it is, the GCC region’s conflicts, be it the Iran-Iraq war, the Kuwait invasion, and ethnic and other tensions in the Northern Gulf, constitute a barrage of barriers to the orderly growth of financial centres. 

With the Basle II Capital Accord now threatening to inhibit capital flows to emerging markets, it is essential that a sense of community confidence among the financial community is fostered and reinforced by robust regulatory practices for the good of the GCC and other emerging markets.  Bahrain Monetary Agency (BMA) with the new insurance regulations is moving towards becoming a financial services authority a la FSA and DFSA.

Dubai’s undeniable success has been in building world-class real estate propositions. Some cynics may even regard every city and cluster, be it for Healthcare, Internet or Media, ending up as high quality property ventures. However, these clusters create the right ambience for professional pursuits who revel in a superior working environment. Dubai’s liberal lifestyle also helps to buttress its case in the minds of senior executives of multinational corporations, banks or financial institutions, especially the opinion-makers who decide on locating or transferring their regional headquarters.

Dubai’s encouragement of foreign ownership of properties in certain zones is again an innovative idea to attract capital, talent and skills and provides incentives to the incoming population and Dubai’s real estate sector to profit from the much-needed housing and work places. This growth pattern is now replicated in other parts of the GCC, whether in Doha, Muscat and more recently, in Bahrain.   Bahrain’s recent decision to adopt the novel “strata title” approach to freehold ownership in the financial centre is timely and should be inviting to the international community. Besides, Bahrain’s BMA is a national regulator unlike DIFC being a financial free-zone in one emirate within the country.

Bahrain is poised to benefit from those relocating from Saudi Arabia; given the recent incidents there. The causeway will be the conduit for many of the executives and their families to be close to each other.  This could prove to be a shot in the arm for the Bahraini real estate and for its consumer markets; although Bahrain may have wished to have derived this largesse on its own right, in the natural course, and not because of the sad and tragic incidents in its neighbourhood.

As an institutional financial centre, Bahrain’s position remains unrivalled, and all within a square mile; similar to the City in London. Bahrain can also boast of all major regional and global banks on its roll. All of them, in the aggregate, account for very substantial financial fire-power.

There is some healthy rivalry between Bahrain and every emerging financial centre such as that of Beirut (attempting to regain its past glory) or Dubai building on its trade flows and the vast capital resources and liquidity available in the UAE.

Ultimately, the affluent Arab world warrants and indeed needs not just some three large financial centres, but a few more. The GCC, collectively, represents a huge ‘store-house’ of wealth and potential opportunities for conventional and Islamic banking and for creating vibrant capital markets.  The momentum will come from the quality and the sustainability of good, fair and responsive regulatory framework.

[The author is General Manager of Emirates Bank.  However, the views expressed in this article are not necessarily shared by the Bank].

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