Lifting the veil from Mideast finance (page 1 of 4)

For decades, corporate Arabia has been cloaked in secrecy. The culture of ownership and control among many major companies has shielded business and accounting practices from the public eye.

Weak government regulation - and little enforcement - has allowed bad habits to flourish. Even publicly listed companies have gotten away with minimal disclosure.

Some regional banks are known for 'name lending' on the basis of personal relationships rather than financial fundamentals - not to mention laundering money. The fact that many governments in the region are defiantly opaque when it comes to money has done little to encourage transparency and openness.

This lack of transparency carries a heavy price. Investors - both foreign and local - have had little faith that what they see is what they get when it comes to Mideast companies. As a result, capital has flooded out of the region and into the US and Europe, robbing the region of the investment it so badly needs to fuel economic growth, job creation and prosperity.

'It would be lame to claim there is not a problem in the Middle East,' says Qais al Maskati, manager of the Strategic Business Consulting Division at BDO Jawad Habib, one of the largest professional services consultancies in Bahrain. 'It is an emerging region, and it is not uncommon to have a transparency problem in an emerging market.'

He is not alone in confirming that transparency - or the lack of it - is a real problem in parts of the Middle East. 'Definitely there is a problem with transparency,' says Naser Nabulsi, chief executive officer of Dubai International Financial Center (DIFC).

The situation begs a number of searching questions. Just how bad is the problem? How much damage is it doing to the regional economy? And what must be done to repair that damage?

The consensus among the Middle East's business community is that the problem is real - but that it does not amount to the crisis some suggest.

'It is not fair to say bluntly that there is a lack of transparency in all countries on all levels,' says Maskati. 'We have to dissect what lack of transparency really means. A lack of transparency takes place on a number of levels: legal, monetary, data.'

Maskati cites the example of Qatar's recent closure of a $700 million Ijara Sukuk Islamic bond issue as an example of a high level of transparency in the region. The bond was rated by international ratings agency Standard & Poor's (S&P), and Qatar itself has a rating from S&P, among others.

'If you look at the major projects, there is a high level of transparency,' says Maskati. 'Take the recent Sukuk issue in Qatar. You are getting people investing from outside the region.'

Nabulsi at DIFC agrees. 'It is not just a Middle East problem,' he insists. Nabulsi spent 11 years working for US investment Bank Merrill Lynch. Based in the Middle East but answerable to regulatory authorities on Wall Street, he had an unparalleled international perspective on corporate Arabia.

'Lack of transparency is a worldwide problem. Even in the US, you see problems within the SEC [Securities and Exchange Commission] itself. It is human nature for us to hide things and not to show things.'

The lack of transparency can be broken down into two main areas - corporate and government. Some companies are better than others at financial disclosure, just as some Middle East governments are more open than others.

On a corporate level, the issue can present major problems - but the situation is improving.