Mergers top the Gulf banking agenda

It should come as no surprise that the banks that often arrange other people's mergers are also now busy arranging their own marriages. The pressures to create larger banks are now increasing on the region's bankers.

One sword hanging over the heads of local bankers is accession to the World Trade Organization. In several key markets this should mean that foreign banks will enter previously closed, or partly-closed, markets with devastating consequences for local banking communities.

There are also intra-GCC forces to consider. With the GCC now in the process of consolidating into a single market with one currency by 2010, the barriers between countries are starting to come down. Reciprocal opening of markets is the buzz-word of the hour.

For example, Emirates Bank Group is to open a branch in Riyadh this summer, although there have been 'teething problems' in this ground-breaking entry by a UAE bank into the Kingdom. Not everyone welcomes competition from the innovative owner of MeBank.

Kuwait has also indicated its willingness to accept foreign banks, at least from GCC states. Logically over time this process should lead on to the creation of genuinely pan-GCC banks to meet the imminent challenge of the global multinationals.

The danger, otherwise, as one speaker told the Channels conference is that the multinationals will carve up the Middle East market between them and push up banking charges, as they have, for instance, in Mexico since the banking crisis there.

Islamic local banks are another response to this external challenge. And news this week that Bahrain has sanctioned the creation of a new $2 billion Islamic bank should be seen in this light, particularly as this may involve the merger of a number of existing Islamic banks.

This strategy should meet with some success, but it must not be forgotten that HSBC offers Islamic accounts already. The multinationals have not forgotten the benefits of being local when they go global, and becoming the world's local bank.

So where will this leave Gulf banks in the near future? Consolidation across national boundaries looks a certainty. And banks will have to use all their local market savvy and low operating costs to maintain their present strength.

The strong will survive and thrive in such an environment, while the weak will be best advised to locate a merger partner early. But the multinationals will probably find it harder to advance their position in the Middle East than they have in other parts of the world.

For even if the law gives them new rights, will that law be implemented, let alone enforced? And would there be any prizes for pointing this out?