Experts tell OBG how Bahrain's banking sector tackles global economic challenges

The 'wait-and-see' sentiment is likely to dominate the banking world until global economic indicators stabilise, but with some investors bringing their liquidity back into the GCC, the overall picture for Bahrain is positive.

This was one of the viewpoints expressed by leading figures within the banking sector who were interviewed by Oxford Business Group (OBG), the global publishing, research and consultancy firm. The roundtable included Abdulkarim Bucheery, CE, Bank of Bahrain and Kuwait (BBK); Abdul Razak Abdulla Hassan Al Qassim, CEO, National Bank of Bahrain; Michael Lee, CEO, Ithmaar Bank, and Sabah Almoayyed, GM, Eskan Bank.

The experts were discussing how Bahrain is rising to the economic challenges that the world is facing. Their views feature in The Report: Bahrain 2009, the most comprehensive and accurate review of the country's economy available, which is soon to be published by OBG. Rated as the premier source of information for foreign direct investment, The Report covers the most important economic and financial developments in the country. It offers a detailed sector-by-sector guide for foreign investors, alongside a wide range of interviews with the most prominent political, economic and business figures.

With consolidation a hot topic, Almoayyed said she supported the idea of bigger banks, although this decision, she added, would be down to shareholders and boards of directors. Lee believes that consolidation is likely to happen if the authorities decide it is the way forward.

He stressed, however, that even with regional consolidation, banks in the GCC would still be relatively small on the global stage and would therefore need to focus on their comparative advantages. "An important part of that is their close understanding of clients in the region," he said.

Bucheery believes that increasing costs could prove to be a catalyst for consolidation. "Some banks will need to strengthen their capital base to cope with these higher costs," he said. Al Qassim would prefer to see banks differentiate between equity risks and lending risks rather than focusing on consolidation.

"Banks need to correctly price the risk instead of pursuing big volume business at very fine margins, which to an extent led to the current economic situation in the first place," he said.

Small and medium-sized enterprises (SMEs) have undoubtedly borne the brunt of the downturn, even though it is also widely recognised that they can provide a lifeline for economic recovery. Lee admitted this had produced a dilemma.

"In the current environment, it is very difficult for private sector banks to take on the risks that SME financing entails," he said. "At the same time, governments around the world realise that the onus of revitalising their economies rests largely upon SMEs in order to support and enhance employment."

Al Qassim agreed that SMEs were an important segment for sustained growth but also advocated a prudent approach. "The right balance must be struck to create and support viable business ventures that have the potential to be competitive, at least in the region," he said.

Bucheery pointed out that there had been marked improvements in the way SMEs were being managed locally. He said that Tamkeen (the Bahraini Labour Fund) was providing SMEs with support to develop their human resources systems and accounting structures, while also taking on part of the guarantee on the capital. "This will help these companies to grow and will increase their ability to access financing," he said.

Almoayyed added that microfinancing was now playing an increasingly important role in assisting SMEs. "Vehicles such as microfinancing open the door for more SMEs to come into the market," she said. "Similar cases in other countries show that despite the limited profit margins, the business model is sustainable."

Experts believe that the current economic climate could prove to be ideal for Islamic banking to gain a competitive edge in financial services, although it was felt that the business model would benefit from a rethink.

Almoayyed pointed out that the equity-focused approach and the profit sharing principle of Islamic banking are often praised for securing a sustainable business model at a time when traditional practices are showing their flaws.

"As a result of this growing international awareness, I am certain that Islamic products will compete increasingly with traditional services," she said. Al Qassim is confident that the scope is there for Islamic products to increase their market share, but believes that the business model needs to shift its focus away from real estate and other luxury investment ventures to productive and developmental projects and processes.

"There is a growing tendency within the region towards Islamic financing and banks should enhance their capabilities in order to enable them to be active players in this sector," he said.

With the market correction of February 2006 still fresh in financiers' minds, the question of whether Gulf retail investors have learned from past mistakes brings a mixed response. Lee believes that all investors need to avoid the speculation characterised by paper trading and look carefully at the underlying risks and returns available to them.

"Risk is inherent in all investments but prudential risk-taking and outright financial speculation - or gambling - must be sharply distinguished," he said. "Investors must have patience and take a long-term view, being able to withstand industrial and capital market cyclicality as necessary."

Bucheery agreed, saying that today, thorough market analysis had become essential. "Institutional and individual investors are understanding more and more that risk needs to be looked at more carefully and that they should not only be led by market sentiments," he said. "We have all learned to go back to the principles of risk assessment and are revisiting the ABCs of banking."

Available in print form and online, The Report: Bahrain 2009 will form part of the range of OBG's publications renowned as leading sources of information on developing and emerging economies around the world.