The impossibility of an island
Dubai crash, financial crisis, corruption, Arab Spring – how Bahrain, a thriving financial centre, got caught in a maelstrom.
In the 1970s and 80s, when civil war was raging in Lebanon, rich Arabs moved their money out of Beirut, hitherto the financial centre of the Arab world. The new home was in Bahrain, a small island in the Persian Gulf whose comparatively liberal way of life rapidly attracted money and nightlife-lovers from the surrounding oil-rich countries.
Now Bahrain has got itself caught in a bit of a maelstrom. It was still coming to terms with the fallout of the 2008 property crash in the Gulf and several subsequent banking scandals when last year’s Arab Spring triggered unrest in Bahrain itself. The Shi’ite majority was demanding a greater say in economic and political affairs. The uprising was suppressed with help from Saudi Arabia but the unrest and subsequent crackdown on the Shi’ites by the authorities shattered any hopes of a fresh start for the financial industry. In March 2011 alone, 10 percent of the funds being managed in Bahrain left the country.
In the first decade of this century, the tiny kingdom made a name for itself as a place to invest the proceeds from oil in the Gulf region. Small investment houses sprang up from nowhere, like mushrooms, and investors from Saudi Arabia, Kuwait and Qatar chose to base their companies in Bahrain’s capital, Manama, rather than in the underdeveloped financial sectors in their home countries. But they directed their money into only two areas – equity capital and real estate – making a lot of money between 2002 and 2008, thanks to the property bubble in the Gulf.
There was no corporate governance or monitoring by investors or the central bank in this sector during the »gold rush«. Some principals went ahead with investments that their supervisory boards had expressly rejected.
Gulf Finance House (GFH) was one extreme example. Gathering investors’ funds for real estate projects throughout the Middle East, it behaved like an investment bank but actually only dealt in land. In return for the investments he promised to governments, Executive Chairman Esam Janahi received cheap plots of land, which he then sold to investors at a hefty mark-up. GFH charged the investors fees of more than 20 percent – before the projects had even begun. The company’s books were nothing but smoke and mirrors.
The Lehman Brothers collapse in autumn 2008 went international and burst the bubble in the Gulf as well. GFH and the Bahraini investment sector were razed to the ground. Critics accuse the investment bank of having concealed the losses for a long time to avoid further tarnishing the country’s reputation as a financial centre. In early 2009, when the Bahraini banks of two Saudi family conglomerates collapsed overnight and their international creditors searched the books in vain for assets, doubts were voiced about the competence of the supervisory authority. The GFH case, too, shows up the Central Bank’s lack of independence on an island where the ruling family dominates business life. For example, Sheikh Khalifa bin Khalifa, who has held the office of Prime Minister since the country became independent in 1971, was a long-time business partner of GFH’s Janahi, who therefore had de facto immunity from criticism about his ethics and conduct.
The Arab Spring delivered the final blow to Bahrain as a financial centre. After the suppression of the peaceful protests last March, the anti-Shi’ite hardliners within the royal family believed their time had come and tried to set up an apartheid-style regime that would separate Sunnis and Shi’ites. Shi’ite bank employees who had taken part in peaceful demonstrations were arrested on the trading floors of international banks and taken away to police torture chambers. With that, Bahrain had lost its grip on one of its last remaining standard benefits, one which foreigners had valued greatly – the liberal, tolerant way of life on the tranquil island.
As a result, French investment bank Credit Agricole went ahead with its plans to move its regional headquarters from Manama to Dubai. The sole remaining major bank is BNP Paribas, which has several hundred employees in Bahrain. Officially, it will continue operating from there but those in the know say that BNP will move jobs to Dubai little by little so as to avoid negative headlines that might jeopardise its business in Bahrain. »Quite a few asset management companies have either reduced the amount of business they are doing here or removed themselves entirely,« says one banker with decades of experience in Bahrain and the whole region, who prefers to remain anonymous. »Essentially, the exodus to Dubai began several years ago.«
Bankers and analysts have been calling for consolidation and tidy-up in the Bahraini financial sector for a long time, but mergers and acquisitions are not the Gulf way. For the leading families in the business world of the region, owning one’s own financial company is a question of honour. They would not dream of selling unless bankruptcy became inevitable. Nevertheless, last year, Bahrain’s Central Bank managed to get the Bahrain Islamic Bank and the Al-Salam Bank to merge. Neither bank was able singlehandedly to stem the necessary write-offs of non-performing loans and allowances for losses on property investments. At the end of the year, three further investment institutions announced a merger. »These mergers are intended to ensure the survival and growth of the banks,« says Dr Jasim Husain, economics spokesperson for the Shi’ite opposition party »Wefaq«. But investment in areas like social housing is still the exclusive domain of the government.
During the boom, Bahraini investment institutions failed to diversify their products. The capital markets in the Gulf are still in their infancy and have very few revenue-earning opportunities to offer local investment banks. The loans and bonds business is dominated by the international banks which, with their greater total assets, have such an advantage when it comes to the cost of finance that local banks will never be able to catch up. The local market for stock market flotations has been stagnant for years and is not showing any signs of recovery.
And the political tension in Bahrain continues. Unnoticed by the wider world, there are clashes between Shi’ite young people and the government’s Sunni security forces almost every day.
With this in mind, the experienced banker says the mergers are »only temporary solutions that won’t help in the long term. The business model for these new banks won’t be any different.«