Q+A-Bahrain's offshore banks at crossroads

MANAMA Nov 18 (Reuters) - Bahrain's offshore investment houses raked in the money during a five-year long oil boom, but the impact of the global financial crisis on the Gulf Arab region has swept away a business model that relied on fees from raising money for property and private equity projects.

For an analysis on the banks double click on [ID:nLC380496]

WHAT HAPPENED?

Dubai's real estate bubble burst late in 2008, with prices falling sharply in the Emirate and at least capping growth in other markets in the region, including Bahrain.

As oil prices dwindled, investors held on to their money for much of 2009, leading to the collapse of the regional placement market for property and real estate projects.

The lack of corporate transparency in the region, highlighted by debt woes at Saudi groups Saad [SAADG.UL] and Ahmad Hamad Algosaibi & Bros (AHAB) that surfaced in May, has worried investors.

WHO ARE THE INVESTORS?

Bahrain's off-shore investment houses have mostly raised money with family offices and ultra high net worth individuals in the six Gulf countries, in particular Saudi Arabia, to which their placement teams travel across the causeway connecting Bahrain and OPEC's largest oil exporter.

The more prominent names also have raised money with the region's sovereign wealth funds such as the Abu Dhabi Investment Authority (ADIA), considered the world's largest with assets estimated at $500-$700 billion.

Islamic investment house Arcapita is seen backed by its chairman Mohammed Abdulaziz Aljomaih, also chairman of the Aljomaih Holding Co, a large Saudi family conglomerate.

WHICH ARE ALTERNATIVE REVENUES?

The investment houses could turn themselves into retail banks that possess more stable sources of funding from customer deposits. Ithmaar Bank ITHMR.BH is effectively turning itself into a retail bank by integrating its fully-owned Islamic retail bank Shamil Bank.

Gulf Finance House GFHB.BH (GFH) plans to make Khaleeji Commercial Bank KHCB.BH, in which the bank and its chairman Esam Janaji own a combined 47 percent stake, the centrepiece of its new commercial banking division.

However, this route is only open to banks that already control stakes in retail banks as others are unlikely to raise funding needed for acquisitions or start-up costly retail operations in a competitive market.

Some investment houses are also considering or have announced plans to offer investment banking services, but it would take them time to establish the track record needed to attract large ticket sizes to generate sizable revenues.

Liquidity in the region is still ample, but investment houses need to find the right products and distribution channels to tap it.

Experts have said Islamic asset management products hold strong potential, but the industry has so far mostly offered real estate and private equity products, lacking the important fixed-income component crucial in conventional asset management products.

Some investment houses have announced the first funds focusing on sukuk, or Islamic bonds. Saudi Arabia is also seen as the only market with a retail banking base through which products could be distributed. COULD THE GOVERNMENT HELP THE SECTOR?

Bahrain is a small oil producer and is generally seen as not having the resources to plough funds into its off-shore banking sector. Central bank governor Rasheed Al-Maraj was cited in September as saying the Central Bank of Bahrain (CBB) was not prepared to bail out the sector, saying shareholders were responsible for supporting banks. [ID:nLL232609]

(Reporting by Frederik Richter; Editing by Sitaraman Shankar)