STAY AHEAD
STAY AHEAD


A financial parachute

Despite the social unrest and the knock-down effects of the global economic crash Bahrain’s financial sector has remained relatively untouched and continues to operate normally showing signs for further growth. According to figures from the Central Bank of Bahrain the small island is home to over 400 financial institutions that operate on shore and off shore and is one of the world´s capitals of Islamic finance.  Banking assets of Bahrain totalled $195.3 billion in March 2013. Although the sovereign credit rating was downgraded at the core of the events, 2013 was inaugurated with hope and a rating improving from BBB negative” to stable”. A boost in business confidence, higher public expenditure and funds coming from the region, particularly from Saudi Arabia, suggest that 2013 will be a good year.

Even during the toughest moments of the uprisings in Bahrain back in February and March 2011, the banking sector worked without a single day of interruption and proved that it could continue,” Abdulkarim Bucheery CEO of BBK told GGC.

Out of approximately 29 banks in Bahrain BBK is considered to be the largest of locally incorporated banks. They have been pioneers in many things but critically they were the first to introduce electronic banking services to the market. BBK owns the largest credit card company of Bahrain, CrediMax and offers different services such as banking, credit card services, Islamic banking, and has started to operate a specialised call centre.

“Though Bahrain’s 2011 political crisis weakened growth potential and damaged the country’s reputation as a business services hub, we believe a post-crisis status quo has been established,” stated the credit rating agency, Standard & Poors, in its report of January 2013. "The stable outlook reflects our opinion that political risks and the potential for sharp oil price declines are unlikely to be severe enough to lead to a downgrade in the near term. Large-scale public investment and greater hydrocarbon production should support growth prospects".  Other agencies such Fittch or Moody’s published similar outlooks on Bahrain’s economy helping also to boost confidence across the island.

“If the country had been downgraded it would have been a very tricky exercise to raise the money the State needs to borrow during 2013 in both dollars and local currency. Nevertheless, in worse conditions last year we raised 1.5 billion dollars overseas and it was four times oversubscribed”, Patrick Gallagher, CEO of HSBC told GGC.

The financial sector of Bahrain has traditionally been a major contributor to the country´s economy since it replaced Lebanon as the banking hub of the Arab world back in the 70s-80s. Driven by the need of economic diversification, Bahrain financial centre has invented and reinvented itself several times. Fierce competition from the region added to a global financial downturn and internal political problems have undoubtedly deteriorated the sector which in turn has proven its resilience to adversities once more.

“I don´t think we should be concerned about the region. It is actually good to have a global financial centre in the area complementing each other rather than competing against each other. But Bahrain has gone a long way before the rest. We started much earlier and we have created the most important element to sustain the financial sector: a skilful local workforce. The availability of skilful human resources is one of the most important elements to establish and grow a financial centre. Indeed we export our human resources to places like Saudi, Kuwait, Qatar, and the UAE.. We have very good legislation and the Central Bank of Bahrain, our market regulator, is very well known for its prudency and credibility. It will still take some time to any other player in the region to have such a credible regulator. Besides, we have in place all related supporting systems such as a good telecommunications network. Therefore, Bahrain is in an advanced stage of development where it can basically keep its position as a financial centre for some time to come,” said Bucheery.

Bahrain's financial sector is well developed and diversified, covering a wide range of conventional and Islamic products. The sector is regulated and supervised by the Central Bank of Bahrain (CBB), a well internationally recognised institution formerly known as the Bahrain Monetary Agency. It is the single regulator since 2002. The sector contributes to around 25 percent of the GDP and employs 14,342 people -most of them Bahrainis- which makes it the largest single employer of the country. Indeed, the banking sector played a pivotal role in the development of a well-educated, trained and skilled local workforce over the years. A traditionally conservative fiscal policy, a prudent macroeconomic management and a strict regulator with a clear legislation have contributed to the good health of the sector and its stability in times of crisis.


Islamic Banking Boom

Bahrain is well known internationally as an Islamic finance hub.  It can claim its generous contribution to the market with some of the most successful Islamic finance products spinning off the tiny island. “Islamic Banking is a very relevant side of banking especially for Muslim countries where they are confined to a certain extent by certain roots and regulations (shariah). The industry has created products that became international and are now very well recognized as Sukuks for example. More and more banks, be them Islamic or conventional, are starting to have Sukuks portfolios on their books and I hope the industry will continue to create new successful products.” said Bucheery to GGC.

Al Baraka Banking Group is one of the first Islamic banks established in Bahrain 1979 and one of the first of the Arab World. “At that time we had a mission and a message about Islamic banking that we needed to spread around the world. In fact, Al Baraka was the pioneer of Islamic banking in the whole world. We are today located in 14 countries with a total of 500 branches. Therefore, we consider a duty to expand Islamic banking. We created many subsidiaries in countries like Algeria, Tunis, Egypt, Sudan, South Africa, Jordan, Lebanon, Syria, Turkey, Bahrain and Pakistan.  Mainly in African, Arab, and Asian countries such as Pakistan and Turkey if you consider them as part of Asia. We can say we established the mere concept of Islamic Banking and now it is everywhere worldwide with other Islamic institutions following Al Baraka´s lead. We created two Islamic banks in the UK and there are four now. Seven years ago we created the European Islamic Investment Bank (EIIB) as a wholesale bank with a paid-up capital of 400 million pounds that I was chairing for 5 years.  The other is a retail bank called IBB. In America there is one Islamic bank called Al Reba Bank. In France we discussed with Christine Lagarde, when she was the Minister of Economy in France, the possibility of having an Islamic institution there and she did change some laws that would allow Islamic banking to operate in a normal way.

However Asia has become an Islamic finance hub. Islamic banking is booming especially in Thailand, Philippines, Indonesia and Malaysia. There are other still small hubs in Bangladesh, Sri Lanka and India and now some of the countries that used to be part of the USSR such as Kazakhstan are looking into Islamic banking.  Last but not least, China is in favour of Islamic banking too. Contrary to common believe, Islamic Banking is not for Muslims; Islamic Banking is for all three religions: Muslims, Christians and Jews. As a matter of fact Christians operate with us almost everywhere.  Furthermore, our shareholders in Lebanon are Christians,” Adnan Yousif, CEO Al Baraka Banking Group told GGC. “Islamic banking is very simple. We do not inflate our business and we always provide financing only for the requirements of the economy. The financial crisis started because the conventional banks dealt out of the scope of what we call strictly banking went into derivatives and bought and sold options and swaps. Their balance sheets, profits and portfolios were inflated and finally they found themselves in deep trouble.

Silvan Varghese Chief Operating Officer and Acting Chief Executive Officer of Khaleeji Commercial Bank also agree to the fortunes of Islamic Banking. “Islamic banking is growing at between 15 to 30 percent annually and it will continue growing in the foreseeable future simply because is only 30 to 40 years old compare to the more than 400 years of conventional banking. But the most important point in my opinion is that Islamic banking in not here to compete with conventional banks and to the contrary. There is still a huge potential for growth in the region because the share of Islamic banks in the GGC is still not significant. And in fact we are witnessing a trend of conventional banks converting themselves into Islamic Banks, and that will possibly continue. But more importantly I think there is an increasing expansion into other regions including Europe. There is a major potential in South East Asia and Africa.  It will be natural to expand into the untapped territory of North Africa and the Sub Sahara where culture and religion are a plus”.


Tales of Exodus

During the worst of the crisis some wholesale banks did find some economic difficulties in Bahrain but an exodus didn´t happen, as it has been reported.  Local commercial banks did not only open new outlets but also showed positive balance sheets.  They remained almost untouched. “In late 2011 there were a few banks that pulled out of Bahrain but the crisis wasn’t necessary the reason for them to leave. Credit Agricole for example shut down operations in 20 countries and the size and economy of Bahrain made it the perfect candidate for that list. “Bahrain was not affected like Dubai due to the real estate bubble. The majority of banks were not affected and I don’t think that Islamic banking was affected at all,” Abdulkarim Bucheery CEO of BBK told GGC. However, the crisis underlined the acute importance for business in Bahrain to diversify its investments. “We were basically sucking wealth out of Bahrain because they felt they were overexposed and that was intensified over the crisis but not because of it.  Some of that money is now coming back to the country,” argued Gallagher.

“Bahrain is a different market from Dubai, Kuwait or Qatar. Bahrain is an international hub and anything that happens internationally reflects in it. Every five to six years there is an economic crisis in every country. There is growth, then stability and finally decline. After that it goes back up”, said Adnan Youssif, CEO of Al Baraka told GGC.

There are 406 financial institutions in Bahrain licensed by the Central Bank from which 114 are banks and the rest Funds and Finance companies. 29 institutions are commercial banks that deal with local customers and end-consumers and are both Islamic and conventional banks and the rest are either investment or offshore bank units, what is called wholesale banks that close deals all over the Middle East domiciling them in Bahrain attracted by a zero tax policy.

The larger conventional banks and foreign banks remained in good health in general with strong balance sheets and highly capitalise. The foreign banks like HSBC are in relatively good shape with no bad debts. “We are actually a bigger bank that what we were before the crisis” Gallagher pointed out. “But there are too many small Islamic banks that are not really successful. Their balance sheets are 80 percent real estate and it is very difficult to get out of that”. HSBC opened its first office in Bahrain in the 70s and has now three offices from which they domicile deals over the Middle East and fund them from offshore.


Towards consolidation

According to figures released by the Central Bank of Bahrain, sector assets totalled almost $200 bn in 2013 against a GDP of 28 bn. It competes with countries like Saudi Arabia, with 27 million people or the UAE, and ranks in the top positions of the region. Assets in the region grew by 12 percent in 2012 to $1,47 trillion driven by higher public expenditure, which was in turn supported by high-energy prices.

The aftermath of the crisis has reopened the debate about the need of consolidation of the market formed by 405 institutions to keep up with its competitiveness and create stronger financial institutions that can bid in bigger infrastructure projects spreading across the region.

“There is a small bunch of institutions that should be merged and there are certain products that should be added to the market, both Islamic and traditional. We should place new products to avoid just lending for the sake of lending. We should identify adding value products that encourage the economy to grow healthy”, Adnan Youssif told GCC. Recent consolidation of the sector includes Ithmaar Bank merger with First Leasing Bank and three-way merger between Elaf Bank, Capital Management House, and Capivest to create an international group with assets in excess of USD400mn.  

“Since the crisis there has obviously been a lack of commercial confidence across the island.  We have all tightened our belts because banking is no longer as successful as it was in the 2000s. It is more difficult to make revenue but not only down to the fact that we had a crisis here two years ago,” emphasized Gallagher. “Bahrain is a very small and saturated market. In 2011, the worst year of the crisis, we opened three branches and in 2012 we opened two more. In general I think there is a trend towards consolidation. But will this really happen in practice? Nobody really knows. We have too many small banks that won´t be sustainable in the long-term. There has to be more pressure from regulators because Bahraini banks need to be more competitive. They are really competing with huge banks such as banks in the UAE, Qatar and Saudi Arabia” Varghese explained GCC. “There has been some consolidation already but unfortunately in a very small scale and definitely not to the extent that we would have wanted. I think there are too many banks. . Consolidation is a very important aspect to operate in a very solid ground and have the ability to be engaged in mega-projects.  However, I think it will take time in Bahrain for different reasons but basically because the shareholders are quite content with the performance of their own banks and because there is always the owner dominating factor that psychologically is difficult to loose.” says Bucheery


Financing the state

As a country with a heavy social coverage that includes subsidies and public sector salaries; a country that doesn´t levy any corporate or personal taxes and a country with limited oil reserves that runs a burdened Sovereign Wealth Fund, state finance and project finance is a key element of politics. Higher public expenditure is expected to boost the economy over the near future but there is a risk of incurring in higher deficits and increasing the GDP to debt ratio.  The difficult exercise of stimulating the economy with limited resources will probably urge the government to find collateral solutions and introduce some sort of private funds in the form of public private partnerships (PPP) in the short term.

“What we call the Sunni merchant class that run Bahrain and owns Bahrain in reality is unwilling to invest at this time. During 2012 it got slightly better after we went through the anniversary phase of February 2011, which was a difficult phase. Up until the beginning of Ramadan last year things were fairly buoyant and there was the feeling that the solution was coming. But that never happened because there was no dialogue at all last year. Ramadan itself was quite a noisy period in the street.  Confidence dropped down and it never truly improved through the end of last year.  Now it looks like there is some sort of new dialogue after 14 months. That is positive but we wouldn’t be holding our breath for any silver bullet solution too quickly. There is significant polarisation at both sides, which is negative.”


Upcoming big deals

There are some big deals coming up soon to the market that will be condiment by the much-awaited $10 million GCC Fund locally known as the GCC Marshal Plan which after two years of negotiations seems that will start pouring down at the pace of one million per year and only allocated to projects. “That has changed heavily over the time. When the rating was downgraded the push of the government was to use Saudi money to repay foreign debt. But that wasn’t going to help the economy in any concrete way.  So they agreed to do it on a project-by-project basis and more lately Saudis hinted at the option to reimburse the money only when the project had been accomplished. That is very different.  So at this point we are sure that it will happen but they need to find a mechanism for it to happen,” explained Gallagher to GCC.

In the meantime some local projects will start.  BAPCO will have to raise $5 bn in 2014 and ALBA $2,2 bn.  Earlier projects include the GIPC $1,5 billion or the $800 of the airport expansion. “Bahrain is very competitive market with too many banks fighting for a small portion and for it to grow the government needs to step in and provide stimulus to the economy whether it is in real estate or others, they have to expedite their projects, so investment will flow. The change will depend on how fast we can put this in circulation,“ Fuad Taqi, AGM Commercial Banking in Khaleeji Commercial Bank told GCC. “I think in the short term growth will be supported mostly through public spending and government support. Bahrain last year approved the largest budget of the history of the country. They allocated substantial amounts for infrastructure projects. We were all hopeful that the spending would start from last year but unfortunately for a reason or another they have not started yet. And there is also the $10 bn GCC fund known as “Gulf Marshall Plan” that will be invested mainly on infrastructure. Once you start spending on Infrastructure everything else will start to move”. HSBC has been appointed advisor on BAPCO´S project-financing process, which is the largest onshore project ever, attempted in the history of Bahrain. “We will go to the market in early 2014 to raise around 4.5 billion for the development of the project during 14-16. They need to get it right but the country’s rating has been downgraded three notches since the beginning of the crisis and we have almost no European banks that want to come to play in the Middle East as they did four years ago. We will look for different pulls that will most probably come from countries like Saudi, regional Gulf banks and more likely Asia. It is difficult but certainly doable. And the fact that Bahrain has now reached a level of civility and S&P has reaffirmed the rating looks like, unless things get much worse politically which is highly improbable, future is promising. We have probably reached the bottom and we are only about 150 points to where we were two years ago. It is not so bad.  Those metrics are very decent. But how much more is Bahrain going to borrow? How high the ratio debt to GDP will get? It will most likely cruise the 40 percent but this is how far it will get unless oil goes back at less than 100 bugs.  However, terms of deals to help the economy, there is a critical need of low-cost housing with 60,000 families on a waiting list that is increasing all the time. Bahrain needs to build 7,000 to 10,000 low cost houses per year for the next 7-8 years to meet the demand,” Patrick Gallagher, CEO of HSBC told GCC.

There are some big deals coming up soon to the market that will be condiment by the much-awaited $10 million GCC Fund locally known as the GCC Marshal Plan which after two years of negotiations seems that will start pouring down at the pace of one million per year and only allocated to projects. “That has changed heavily over the time. When the rating was downgraded the push of the government was to use Saudi money to repay foreign debt. But that wasn’t going to help the economy in any concrete way.  So they agreed to do it on a project-by-project basis and more lately Saudis hinted at the option to reimburse the money only when the project had been accomplished. That is very different.  So at this point we are sure that it will happen but they need to find a mechanism for it to happen,” explained Gallagher to GCC.

In the meantime some local projects will start.  BAPCO will have to raise $5 bn in 2014 and ALBA $2,2 bn.  Earlier projects include the GIPC $1,5 billion or the $800 of the airport expansion. “Bahrain is very competitive market with too many banks fighting for a small portion and for it to grow the government needs to step in and provide stimulus to the economy whether it is in real estate or others, they have to expedite their projects, so investment will flow. The change will depend on how fast we can put this in circulation,“ Fuad Taqi, AGM Commercial Banking in Khaleeji Commercial Bank told GCC. “I think in the short term growth will be supported mostly through public spending and government support. Bahrain last year approved the largest budget of the history of the country. They allocated substantial amounts for infrastructure projects. We were all hopeful that the spending would start from last year but unfortunately for a reason or another they have not started yet. And there is also the $10 bn GCC fund known as “Gulf Marshall Plan” that will be invested mainly on infrastructure. Once you start spending on Infrastructure everything else will start to move”. HSBC has been appointed advisor on BAPCO´S project-financing process, which is the largest onshore project ever, attempted in the history of Bahrain. “We will go to the market in early 2014 to raise around 4.5 billion for the development of the project during 14-16. They need to get it right but the country’s rating has been downgraded three notches since the beginning of the crisis and we have almost no European banks that want to come to play in the Middle East as they did four years ago. We will look for different pulls that will most probably come from countries like Saudi, regional Gulf banks and more likely Asia. It is difficult but certainly doable. And the fact that Bahrain has now reached a level of civility and S&P has reaffirmed the rating looks like, unless things get much worse politically which is highly improbable, future is promising. We have probably reached the bottom and we are only about 150 points to where we were two years ago. It is not so bad.  Those metrics are very decent. But how much more is Bahrain going to borrow? How high the ratio debt to GDP will get? It will most likely cruise the 40 percent but this is how far it will get unless oil goes back at less than 100 bugs.  However, terms of deals to help the economy, there is a critical need of low-cost housing with 60,000 families on a waiting list that is increasing all the time. Bahrain needs to build 7,000 to 10,000 low cost houses per year for the next 7-8 years to meet the demand,” Patrick Gallagher, CEO of HSBC told GCC.


A miscommunication failure

Bahrain reputation as a stable financial hub was seriously damaged during the dark days of the crisis and it remains one of the most acute problems of the local authorities that haven´t managed to restore the country´s business friendly image. “The country still finds very difficult to get the message across overseas but actually very little is changed in how Bahrain operates,” explained Gallagher. “We are still very much the home of fund management; we are very much the home of Islamic banking and Islamic Insurance. The regulation is superb, the central bank is very pragmatic and a great regulator. The infrastructure around finance including the human resources is there and there is a great ease of liveability in Bahrain. I would not want to live in Doha and clearly no expats want to live in Riyadh for obvious reasons but for mid careers bankers Bahrain is a really good place to live. HSBC writes an expat index of liveability per country and Bahrain scored number two to Canada in 2010 and number 5 in 2011.  It won’t fall off the cliff purely because of the local issues. It is also cheaper to have operations here than in Dubai.  There is a 25 percent difference that is unlikely to change and in fact this disparity is more likely to grow to 30 to 35 percent. With financial services being not as remunerative as they used to be, cost lines are taken very seriously.  In our case, as HSBC, we are not going to change our model with the three banks we have here. The fact that Bahrain continued to operate completely successful during its crisis is a testament of good regulation”.


Insurance growth

The traditional and Islamic insurance sector in Bahrain has a huge potential for growth in the Arab world. Insurance expenses per capita in Europe and in Bahrain stand at a ration of 100 to 5. The sector has been growing at 7 to 8 percent yearly and will continue to do so especially as awareness of the importance of insurance in the growth” Insurance is an integral part of life and it is actually the way of sharing risks”, Mahmood Al Soufi, Chief Executive of BNH told GGC Greater coordination between of the sector in the market and in the region to share the business and risks will benefit the sector. “Also, it will help redirect the two thirds of the 7bn premium insurance written in the MENA region that currently go to the US or Europe”, Al Soufi said. BNH is a holding company which core investment is the insurance business activity. The company has been operating for around 40 years although it was established as BNH in 1998.

 

Kuwait in Spain

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Our latest investment report on Kuwait was recently published in one of the leading Spanish dailies, ABC.  FindMe in Kuwait explores the economic perspectives of Kuwait and the country´s future plans to compete with its fast developing neighbours. Once the leading country of the Gulf, Kuwait has remained silent for the past decade. And although many would like to see faster changes, Kuwait is moving, at its pace, to them. Inexorably. Learn about who is who in Kuwait and read what the leaders say about their own future in our upcoming release: FindMe in Kuwait Mobile app.

 

Stay tuned - Stay Ahead

GGC launches FMS and FMB mobile apps

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GGC concludes FindMe in Bahrain

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Global Gulf Consulting has concluded its latest production on Bahrain, FindMe in Bahrain giving the country a fresh approach after a couple of difficult years of local demonstrations that matched the global recession.  Bahrain is a small island in the Arabian Gulf with an incredible potential for logistics, industries and tourism. FindMe in Bahrain was supported by both the public and private sector of Bahrain.  Banagas, Nass Corporation, BBK and DHL were GGC strategic partners in the development of the series among others.  

FindMe in Bahrain is available at the local bookstores Jashamal and online as well as in the Apple Store. It is a full business leisure and business guide for any investor or visitor interested in traveling to Bahrain or for those that already live there.

 

New release: FindMe in Saudi 2013 Edition

FindMe in Saudi offers a multi-faceted overview combining business and leisure, economy and heritage. The book aims to capture the current development of Saudi Arabia in the words of the people who live and work there. It is an authoritative source of information for investors, businessmen and travellers produced to firmly position KSA as an attractive investment destination.

In contains general information about the country´ economic performance and who is who as a sectorial overview and a leisure guide.    

FindMe in Saudi 2013
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