* Gulf aid supports investor confidence in Bahrain
* Decline in banking assets has been modest
* Number of licensed financial firms stable
* But unrest still overhangs any future growth
* Questions over ability to fight off competition
By David French
MANAMA, Feb 20 When Ahli United Bank, Bahrain's
largest lender by market value, announced this week a rise in
profits for 2012, it was more than good news for the bank alone.
It was a sign that the island kingdom is surviving as a regional
Two years after pro-democracy protesters inspired by the
Arab Spring uprisings blockaded Bahrain's financial district,
political tensions still weigh on its banking industry. This is
deterring some investment and inflows of money, and making it
harder for Bahrain to compete with other centres such as Dubai.
But contrary to fears at the time, a mass exodus of
financial firms from Bahrain has not happened and local banks
are proving resilient, allowing the island to remain a hub for
financial services in the Gulf.
Bahraini authorities have mounted an active campaign to
persuade financial institutions to stay in the country. Economic
support to Bahrain from Saudi Arabia and other Gulf states,
which are politically allied to the Bahraini government, has
helped that campaign.
"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," Standard & Poor's said in late January as it
upgraded the outlook for Bahrain's credit rating, a
low-investment grade BBB, to stable from negative.
The survival of Bahrain's financial industry is important to
the country of about 1.3 million people; its oil resources are
not as lavish as those of some of its Gulf neighbours.
Bahrain's financial sector makes up 17.1 percent of its
economy, which had an output of $29 billion in 2011, according
to the latest central bank figures. The industry is a major
employer of local citizens, with Bahrainis accounting for 66
percent of the sector's workforce.
When protests closed down Bahrain Financial Harbour in the
days following the outbreak of unrest on Valentine's Day 2011,
forcing bankers to work from other locations, the fear was that
many might never come back.
The protests were put down by force but sectarian tensions
between majority Shias and minority Sunnis have persisted, with
skirmishes between angry youths and security forces in villages
outside the capital still reported almost daily.
Political talks began on Feb. 10 in an effort to end the
deadlock, but there have been few signs of progress so far. Two
people were killed on the second anniversary of the uprising.
Some banks did choose to leave the island in the aftermath
of the uprising. The biggest blow was the departure of France's
Credit Agricole, which said in late 2011 that it was
moving its regional headquarters and about 60 staff to Dubai.
Japan's Bank of Tokyo-Mitsubishi moved most of its
people to Dubai in mid-2012, leaving a small presence behind.
However, worries about a disastrous hollowing-out of
Bahrain's banking industry were misplaced.
Assets in Bahrain's banking system have fallen to $194.9
billion last November from $222.2 billion at the end of 2010,
just before the uprising. This contrasts with growth in other
Gulf countries such as Saudi Arabia and Qatar, but does not
suggest a mass pull-out of money from the country.
The number of banks and financial institutions licensed in
Bahrain has remained roughly steady; it was 407 at the end of
the third quarter of last year, against 406 at end-2010, central
bank data shows.
A trickle of departures has also been offset by the granting
of new licences, some to foreign institutions; 14 licences were
awarded in 2012. Global asset manager PineBridge Investments
opened its Middle East headquarters in Manama last month.
"They've done a good job preventing a mass exodus of
financial firms," said Jeffrey Singer, chief executive of the
body managing the rival Dubai International Financial Centre.
Many factors are behind Bahrain's survival. Abdulkarim
Bucheery, chairman of the Bahrain Association of Banks, an
industry body, cited an established infrastructure and
regulatory framework and a qualified local workforce.
Bahrain benefits from hosting the headquarters of the
influential Accounting and Auditing Organisation for Islamic
Financial Institutions, whose standards are used in whole or in
part by regulators of Islamic finance around the world.
Boyd Winton, director of financial services at Bahrain's
Economic Development Board, said the island could co-exist with
rapidly expanding centres elsewhere in the region. He noted that
London, Paris and Frankfurt all worked as banking hubs despite
"Just because one place is a financial centre doesn't mean
another place can't have a financial industry," he said.
Pledges of financial support from Bahrain's wealthy Arab
neighbours have helped; those countries undertook in March 2011
to provide a combined $10 billion in aid over 10 years. This
appears to have reassured Saudi and other foreign depositors in
Bahrain that it is safe to keep money there.
Ahli United Bank, which saw its 2012 net profit climb 8.1
percent to $335.7 million, is among several Bahraini banks that
have so far announced higher 2012 earnings. In a report last
week, the government said bank lending began to pick up last
year, setting the stage for strong economic growth in 2013.
"I think 2012 will start to see the beginning of the growth
cycle...and I think 2013 will be building on that growth," said
Bucheery, also chief executive of local lender BBK.
However, there is a split between the health of local,
retail-focused banks and Bahrain's investment houses, which
mostly operate under Islamic principles.
These firms relied on fees from arranging local real estate
deals and are struggling to reinvent themselves after the
uprising compounded the collapse of the property market. One of
the most prominent examples is Gulf Finance House,
which has required multiple debt restructurings since 2010.
The central bank of Bahrain has been active in recent months
in trying to strengthen these institutions, asking them to
increase capital, encouraging revenue diversification and, in
some cases, merge, Winton said.
Nevertheless, the future health of Bahrain as a banking
market will not be assured as long as the political unrest
continues. Ahli United's chairman Fahad al-Rajaan said the
bank's 2012 profit growth came despite a "continuing uncertain
and challenging business and operating environment", which would
persist into 2013.
Although the current, relatively low level of unrest rarely
has a direct impact on the lives of expatriate bankers in
Bahrain, it is not an incentive to relocate families to the
island. Tight, time-consuming screening of travellers arriving
at Bahrain's airport because of heightened security concerns
could interfere with business travel.
And the unrest may make it harder for authorities,
preoccupied with the political crisis, to respond to financial
competition. S&P said in its January report that there had been
a "relegation of economic policymaking" in Bahrain since 2011.
Dubai, which has over twice as many registered financial
firms as Bahrain, hopes to take advantage. Last month, it
launched a drive to become the global centre for Islamic finance
regulation - a direct challenge to Bahrain's dominance.