Banks hold key to better corporate disclosure

DUBAI (Reuters) - The Gulf has a long way to go in corporate disclosure and unlike developed economies in the West, the key driver here may well be banks rather than the regulators.

The message from speakers at this week's Reuters Middle East Investment Summit was clear. There has been improvement, there is a long way to go, more transparency is essential and the banks will demand it before they risk any more cash on the region's businesses.

Banks across the region, as well as their international counterparts, have been badly burned by the wave of corporate defaults that came in the wake of the economic downturn, and future lending is likely to depend on greater transparency from lenders.

Credit given solely on the good reputation of the borrower -- known locally as name lending -- has all but evaporated and banks are looking a lot more closely at corporate customers before extending loans.

Corporate disclosure and transparency is "nowhere near where it needs to be but it's moving in the right direction," Abraaj Capital Managing Director Mustafa Abdel Wadood told the summit this week.

"If you are a public company you have to meet with analysts, they are the conduit," Wadood said, warning that companies will pay the price for bad behavior on the disclosure front in the form of a discount in their shares.

Joe Kawkabani, managing director of asset management at Dubai-based Algebra Capital puts it in a nutshell. "When investors aren't fully clear, they price in the worst."

Like other parts of the Middle East, family-owned businesses play a significant role in the Gulf economy and they are traditionally not very forthcoming. And although bankers expect this to change, it will not be quick.

Some argue the vast sovereign wealth of the region, based primarily on oil and trade, means there is little pressure for more corporate candor, but economic diversification is higher on the agenda following a financial crisis that ravaged key industries like property development and banking.

The Gulf still has many of the hallmarks of an emerging market. There is no broad-based pool of investible wealth -- as there is in the West -- from insurance companies and pension funds.

Michael von Uffelen, an Australian-born director at Arqaam Capital in Dubai says that despite its wealth, the Gulf is "not quite a place with ample liquidity. "More international capital is needed and this will force transparency," he argues.

Von Uffelen notes that companies with debt ratings from the international credit rating agencies see more demand for the their paper from international investors than those who don't - for obvious reasons.

"Transparency is certainly an ongoing challenge for the region."

The investment case for the region is compelling. Large, young populations and demand for products and services from industries that are underdeveloped -- from healthcare to white goods. But globally this story has been edged out by the BRIC economies (Brazil, Russia, India and China) .

"This region has a growth profile second only to China," says Abraaj's Wadood. But bankers argue that slow progress toward greater transparency could be a drag on growth.

"The economy is shifting in the direction where longer-term financing is necessary -- and with that we will see greater accountability and transparency," says Howard Handy, chief economist at Samba Financial Group in Riyadh. "It is an issue of transparency, of how lenders do business. I think it will certainly affect credit policies."

Looking ahead, bankers see room for improvement across the board in corporate governance but Suresh Kumar, chief executive of Emirates NBD Capital, sees room for financial regulators to act.

"Regulation doesn't go very far and accounting rules -- there's a lot of catch-up there. Unlisted companies especially those who wish to access the capital markets -- there is a lot of work to be done.

Emirates NBD Capital is the investment banking arm of the UAE's largest bank by assets.

Kumar says incentives and encouragement are key and a home-grown system of independent ratings for corporate governance and disclosure run by the central bank and taking account of the amount of exposure banks have to a company offers the best way forward.