Almost all Gulf Cooperation Council (GCC) states, with the exception of Oman, are aiming to become the region’s financial centre. The most high-profile sources are the Dubai International Centre (DIFC) and the Qatar Financial Centre (QFC). Bahrain, the former recognized financial hub since the 1970s when bankers migrated from war-torn Beirut, is relying more on developing its internationally respected regulatory reputation. “We have a 35-year history of supervision and regulation, and investors are happy with the regimes,” says Ahmed Al Bassam, director, licensing and policy at the Central Bank of Bahrain (CBB).
Leaders in the various financial centres tend to insist – to much scepticism – that they are complementary rather than competitive, since GCC states are not supposed to vie with each other for business, according to the group’s founding principles. “The number of financial centres in the region is not really the issue; it is what they do that is important,” QFC chief executive officer Stuart Pearce tells Emerging Markets. “The QFC is based on a very different model to its counterparts in Bahrain and Dubai. “The DIFC has set itself up as a free zone, while Bahrain is very much an offshore centre. The QFC has a very flexible legal and regulatory framework that allows businesses to operate within Qatar and from Qatar in the region.”
There is also some geographical segmentation of markets within the region. “Yes, we feel the impact of competition, but a lot of banks now put two offices in the region, with Bahrain the hub to serve the markets of Saudi Arabia, Qatar and Kuwait,” says Al Bassam. The new centres – which also include plans for a dedicated financial district in Riyadh – are scrambling to offer more attractive incentives for institutions to set up shop there, while making it plain that they stand a better chance of winning government business by establishing a presence on the ground. When international banks were approached about participating in the Qatargas 3 liquefied natural gas project financing in 2005, for example, the invitation documents asked them to detail their plans, if any, to set up in the QFC.
Making the change
The CBB is continuing to implement regulatory change to maintain its high reputation and strong track record, faced with the challenge that it is denied the luxury of building an international supervisory regime from scratch as in Dubai and Qatar. A series of “rulebooks” are under preparation, covering conventional banks, Islamic banks, insurance business, special services such as credit card companies and money changers, and the capital market. The first four have been issued, with the stock market rules the current priority.
While the Bahrain Stock Exchange escaped the regional crash of 2006, the bursting of the bubble has focused attention on the need for a carefully monitored stock market. Rules governing captive insurance – the first licensed provider of which was Abu Dhabi Central Cooling Company (Tabreed) – trusts and hedge funds have also recently been promulgated. At the same time as aiming to remain an established financial centre across the full range of services, Manama is also concentrating particularly on the burgeoning Islamic financial sector and on insurance.
In sharia-compliant banking, the kingdom remains the undisputed king, symbolized in March by the announcement that the world’s largest Islamic bank, Al-Masref, will be based there. International institutions such as Accounting & Auditing Organization for Islamic Financial Institutions, the International Islamic Financial Market and the International Islamic Rating Agency are located in Manama. And the GCC’s veteran Islamic investment banks – Arcapita and Gulf Finance House (GFH) – are both based in the kingdom. Other recent licences granted include one for the world’s first women’s Islamic investment bank in mid-2006.
Centre point
The kingdom has traditionally been a centre for serving the Saudi insurance market. Initially there were concerns that, as Riyadh reformed its insurance sector, Bahrain would lose out. However, change in Saudi Arabia has moved slowly, and most foreign providers regard Bahrain as a far more attractive place to live. “We feel there is great demand among foreign insurance providers to set up in Bahrain, and many new companies are continuing to be licensed, recently the takaful arms of Western heavyweights Alliance Insurance Group and AIG,” says Al Bassam.
Licensing activity continues to move swiftly across the board, with 392 financial institutions having been granted permission to operate as of mid-April. The urgency of Bahrain’s activity is understandable. Financial services contribute more than a quarter of gross domestic product – the figure in 2005 was 27.6%, and Al Bassam expects that to have risen substantially in 2006 when new data is released. It is also a major employer of nationals, a key concern, given the country’s rapidly rising young population. The continued strength of the industry is not a luxury, but an economic necessity.