The face of banking and financial markets is changing rapidly. Twenty years ago, Bahrain shrewdly established itself as the regional financial centre for the Gulf. As its neighbours have become more sophisticated, however, it must adapt its role in order to survive. David Cowan examines Bahrain's search for a new market niche.
ONCE A PREMIER site for offshore banking in the Middle East, a situation inherited from Beirut, Bahrain is fighting hard to maintain its role as a valuable banking and investment centre in the region. Arab investors are turning to their own indigenous banks or foreign institutions to invest, leaving Bahrain without its traditional client base. With severe declines in the asset base of banks, many banks are seeking new ways to reposition their services.
Bahrain's bankers ascended to dizzy heights in the boom days of the 1970s, rapidly becoming a recycling plant for all those petrodollars, allowing some 75 offshore banks to feather their nests on the island. Today, life is very different and half of those banks have evaporated, with the Kuwait war and declining oil prices forcing over 40 banks to withdraw from the fray.
The country survived the war without serious damage to the structure of banking and financial services. But the warning signs were all too apparent, illustrated by a 16% fall in deposits between the end of July and the end of September 1990, as depositors sought safer havens for their funds after Iraq's invasion of Kuwait.
However, the war was only part of the problem. Improved technology and the emergence of 24-hour trading systems have meant that the attraction of Bahrain as a strategic time-zone location has diminished. Travellers flying from Europe to the Far East no longer need to stop off in the Middle East, which previously brought a lot of transient business to Bahrain and Dubai as stopover centres.
The greatest pressure is coming from competitive forces within the region, with other offshore financial centres becoming more attractive and aggressively marketing themselves, and Saudi banks recapitalising themselves and taking a greater share of the kingdom's financial requirements. One Bahraini banker comments: "The Saudi market just is not there for us anymore, and what business there is does not exist in the same way as before."
The Saudi investor was always a good customer for the offshore banker in Bahrain, but the Saudi banks have since come a long way in meeting their needs, underpinned by a...