Bahrain or Dubai to be financial centre of the Middle East?

The very presence of the IMF and World Bank meetings in Dubai this week must make the Bahrain banking community seethe with envy. After all is not Bahrain the financial centre of the Middle East?

Not for long if Dubai gets its way. The upcoming Dubai International Financial Centre is clearly a challenge to Bahrain and a threat to its existing, and future business. For the DIFC is a project on an epic scale, and intends to house 20,000 white-collar workers by 2010 in a purpose-built, air-conditioned complex, sat on to of the world's largest car park.

But this is more than a real estate project. The DIFC is setting up its own, independent, civil and commercial law from scratch. This will ensure international best practice for activities as diverse as insurance to equity trading.

The DIFC's English language, international legal framework is a key differentiator from Bahrain where Arabic is the language of business and Sharia courts administer the law. So can we expect a polarization of business, Bahrain dealing with regional banking, and Dubai taking over the international role?

In a sense this has already happened. That is one of the reasons why ABN Amro and Credit Suisse have relocated from Bahrain to Dubai in recent years. HSBC and Standard Chartered Bank have had their regional headquarters in Dubai for some time.

Another attraction for international banks of locating in the DIFC is that they will be free to decide whether or not to employ local nationals who meet their standards. This is another factor that counts against Bahrain where local labour is imposed on the banks.

However, the real battle to watch for between Bahrain and Dubai is in the Islamic banking sector. Bahrain is certainly winning at the moment, and has become something of a global centre for this fast growing banking niche.

Dubai will have its work cut-out trying to catch up, but again its international banking edge may come to its aid. The larger international banks are only just getting into Islamic banking, and if this niche continues to mushroom, then this may help Dubai establish itself as part of the Islamic banking world.

Bahrain also has its new Bahrain Financial Harbour, an impressive piece of real estate which will cater to the needs of its financial sector and aims to match the glamour of the DIFC as a working environment.

But perhaps we really need to step back a little from this battleground and look at the bigger picture.

Within a few years Saudi Arabia is likely to join the World Trade Organization and that should open up a massive new market for the international banks, which are currently only allowed to own stakes in Saudi banks. Dubai with its openness to foreign cultures is likely to prove an ideal base for international banks wishing to establish a presence in the Kingdom.

This is why Citigroup announced last week that it would take no further part in the management of the Saudi American Bank in which it holds a stake. For the giant US bank wishes to be considered as a foreign bank post-WTO.

So is Dubai seizing the initiative to become an international banking sector just at the right time, while Bahrain is welded to a glorious but declining past? Some people have begun to think this might prove to be the case.