Banking in the Arab World

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  • 8/3/2019 Banking in the Arab World

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    FINANCIAL TIMES SPECIAL REPORT | Thursday September 22 2011

    www.ft.com/xxxxxxx | twitter.com/ftreports

    ShariacomplianceIslamic banks,beset by squalls inthe past few years,have defied thecritics. RobinWigglesworthPage 3

    ARAB WORLDBanking & FinanceFINANCIAL TIMES SPECIAL REPORT | Thursday September 22 2011

    www.ft.com/arab-finance-2011 | twitter.com/ftreports

    The biggest worry for the finan-cial community in the MiddleEast at the start of 2011 wasthe lingering losses on bad

    loans from the global financial crisisand the downsizing of staff.

    Very soon, however, the region wasswept by a wave of popular unrest asthe awakening of Arab youth her-alded a new era.

    In March, after Tunisian and Egyp-tian leaders had been ousted, bankersin the financial centre of Bahrainfound themselves in the midst ofstreet battles, with stones flyingthrough the acrid fug of tear gas inManamas financial district.

    Libya descended into civil warbefore Muammer Gaddafis regimewas pushed out of Tripoli, and inYemen and Syria popular protestsdemanding the departure of presi-

    dents continue.The unrest has served as a sharp

    wake-up call about the need for newfoundations of economic equality andpolitical enfranchisement to underpinstability. As the oil-rich Middle East

    and north Africa undergo a historicaltransformation, analysts say that nocountry is immune to popular actionand even those that appear most pro-

    tected, including wealthy Qatar andthe United Arab Emirates, will haveto pay greater attention to the needsand aspirations of their people.

    Bankers were hoping that 2011would herald a recovery from thefinancial crisis, but in reality, eco-nomic growth and market activityhave stagnated.

    The International Monetary Fundforecasts that the growth rate Egyptsgross domestic product will fall from 5p er cent to 1 p er cent, while theunrest will halve Tunisias growth.

    Arab equity markets are down amidpaltry volumes, while initial publicofferings in the second quarter fell 52per cent on the previous year.

    Promising signs of corporate debtissuance have been crimped by globalheadwinds. As the dust begins to set-tle on regional revolts, bankers aretweaking business plans as theysearch for opportunities.

    Where the response has not beenviolent repression, governments haveinitiated huge infrastructure spendingand more state jobs to blunt anger

    among their young populations,where an average of one in four isunemployed.

    If the past oil-fuelled decade was alost opportunity during which cheap,in many cases also borrowed, money

    was squandered on luxury apart-ments, bankers are preparing for asurge in p ub lic investment andreforms that would distribute wealthmore widely.

    V Shankar, chief executive forStandard Chartered in Europe, MiddleEast, Africa and the Americas, says:The youth unemployment problemwill need to be solved: there will

    either be a demographic dividend, asyouth participate in economic revival,or a demographic deficit.

    He adds: Progress will come fromdiversification from oil and frominvestment in infrastructure, schools,

    hospitals and in boosting services.The remedy is hardly new, but Mr

    Shankar believes the seriousness ofthe challenge has been met by closerco-operation among the Gulf states top romote action, b oth within theregion and in countries that are goingthrough political transitions.

    The Gulf Co-operation Council haspledged $10bn for social programmes

    in Oman and in Bahrain, where pro-tests continue, amid calls to broadenmembership of the six-nation bloc tothe regions other monarchies, Jordanand Morocco.

    Europe has also promised $38bn for

    Arab states in transition, includingEgypt, Tunisia, Morocco and Jordan.Two of the regions largest markets,Egy pt and Saud i Arab ia, haveemerged as polar opposites on thespectrum of revolutionary change.

    HSBC, which sees Egypt as its mainregional market, is confident politicalchange in north Africa will fore-shadow economic renaissance, despite

    lingering fears that the revolutioncould be hijacked by groups display-ing a less investor-friendly approach.

    Whoever comes to power will rec-ognise Egypt as a big player in theMiddle East as a conduit to the west,

    says Simon Cooper, chief executive ofHSBC Middle East. We hope to see aTurkish model emerge, he says,referring to Ankaras thriving econ-omy under an Islamist-oriented gov-ernment.

    Saudi Arabia, the worlds largest oilexporter, has escaped unrest and haslaunched a big social spending pro-gramme, a fiscal stimulus equivalent

    to about 30 per cent of GDP. Riyadh isalso flexing regional muscle, leadingGulf efforts to put down pro-democ-racy protests Bahrain.

    Prospects fornew business

    pinned on anold remedySimeon Kerr says thatthe wave of popularunrest is promptinggovernments to spendmore on infrastructureand social programmes

    Inside this issueMerchantfamiliesJames Drummond

    reports on calls forstronger internalcontrols Page 2

    Private equityAcquisitions andasset disposals through IPOs havevirtually dried up Page 2

    Sovereign wealth fundsGulf governments will be spendingmore money on the home front this

    year as they try to placate theirpopulations, writes Camilla HallPage 3

    EgyptBanking is notexpected toreplicate last

    years 39 per centearnings growthbut it has held upwell in spite ofpolitical turmoil,

    finds Heba Saleh Page 3

    Private banking Local banks arerekindling their interest in the sector,leaving big operators to wonderwhether they will be friend or foePage 4

    Project finance Why someinfrastructure projects are morepopular than others Page 4

    Insurance Andrea Felsted reportson the increasing popularity ofTakaful Page 4

    Step change: unrest has served as a sharp wake-up call about the need for new foundations of economic equality Alamy

    Continued on Page 2

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    2 FINANCIAL TIMES THURSDAY SEPTEMBER 22 2011

    Arab World: Banking & Finance

    Farouk Soussa, Citischief regional economist,sees much promise in SaudiArabias liquid banking sys-tem and project pipeline,despite concerns over aforecast softening of oilprices as global demandweakens.

    Qatar, the gas-rich backerof Libyan rebels, has thisyear slowed its breakneckpace of international acqui-sitions, but recent signs arethat its investment appetiteis returning.

    L ibya may becomeanother promising frontier,if a new government canconsolidate control.

    The emergence of newmarkets is a potential life-saver for investment bank-ers, many of whom havebeen disappointed by the

    meagre pickings on offer inthe low-fee environment ofthe regional powerhouse,Saudi Arabia.

    Niche restructuring advi-sory work has not been ableto offset the collapse in feesfrom the dearth of IPOs andmergers. The large invest-ment banking teams at theDubai International Finan-cial Centre (DIFC) were cutafter the financial crisis andinstitutions are again qui-etly trimming costs in linewith the realities of limitedprofitability.

    Bankers are optimisticabout a revival in projectfinance, as governmentsshower their populationswith infrastructure spend-ing to blunt unrest.

    But this is a case of backto the future, a return tothe 1990s, when Arab gov-ernments also launched around of infrastructure

    spending. Thats what ahandful of us were doing adecade ago, says one Gulfbanker. The corollary tothe rise of project finance isthat equities, debt andmergers are dead.

    Private banking, at least,is on the rise, as the ranksof the regions super-wealthy continue to grow.Wealth management armsof banks such as UBS aretrying to foster l inksbetween their private andinvestment banking teamsto generate deal flow fromtheir private clients.

    JPMorgan, for example,has moved relationshipmanagers from Bahrain toDubai. The decision to shifta small team to Dubai camebefore the Shia-led upris-ings in Bahrain; the banksays it remains committedto the island.

    As the Sunni governmentin a majority Shia countryvacillates between repres-sion and reconciliation, theislands banking industrycontinues to suffer.

    Crdit Agricole andRabobanks asset manage-ment arms are relocatingto the DIFC, while otherinstitutions, keen to showcommitment to BahrainsSaudi-oriented financialcentre, are retaining head-quarters in Manama whilequietly moving out staff.

    More affordable, wellpositioned Dubai has beenthe great beneficiary ofunrest, as investors flock toits established infrastruc-ture and easy lifestyle.

    Hopespinnedon oldremedy

    Contributors

    Simeon KerrGulf Business

    Correspondent

    Robin WigglesworthCapital MarketsCorrespondent

    Heba SalehCairo Correspondent

    James DrummondGulf News Editor

    Camilla HallGulf Correspondent

    Andrea FelstedSenior RetailCorrespondent

    Stephanie GrayCommissioning Editor

    Steven BirdDesigner

    Andy MearsPicture Editor

    For advertising details,contact:Mark Carwardine on:+44 (0) 207 873 4880;e-mail:mark.carwardine@ft.com

    All FT Reports areavailable on FT.com at:

    www.ft.com/reports

    During the Gulfs oil-soakedyears of expansion, privateequity was one of its hottestnew industries, as localmerchant families soughtways to channel theirwealth back into their ownregion, and overseas inves-tors wanted to capitalise onthe Arab worlds growth.

    This sparked a fundrais-ing bonanza. More than 130funds were established inthe Middle East and northAfrica between 2003 and2008, which raised $24bnaccording to Preqin, a dataprovider.

    Even in 2008, when thewest was gripped in a deep-ening credit crunch, 30funds raised $5.5bn.

    As a result, dealmakingsoared, as firms snapped upsta