Investment in the Middle East becoming more attractive to Western banks, but economic reform must remain a priority, Economist Intelligence Unit report finds

Just over half of the respondents questioned for the survey indicated that they either have an office in the region already or intend to establish one in the next three years. But while local markets for investment banking, wealth management, securities brokerage and other services are developing, concerns about government policy, the regulatory regime and physical security continue to deter would-be investors.

The survey forms the basis of Investment in the Middle East: Opportunities and Challenges for Financial Institutions, a newly released Economist Intelligence Unit report sponsored by the Qatar Financial Centre. The report looks at the impact of record oil prices and recent strong economic performance in the Middle East on the market for financial services in the region, and highlights the key challenges and opportunities that face western banks and other financial institutions.

"A combination of growth and gradual economic reform in the Middle East has stimulated interest in the region among many western financial services firms," says Rob Mitchell, editor of the report. "But foreign banks and other companies will continue to need reassurance from governments in the Middle East that they can operate in a stable political environment and that there will be a sustained trend towards economic and legislative reform in the years ahead."

The conclusions of the report are based on a survey of 168 senior executives from financial services firms conducted by the Economist Intelligence Unit and a series of in-depth interviews with representatives from companies that are already investing in the region.

Key findings of the report include:
The market for financial services in the Middle East is broadening. In addition to financing hydrocarbon projects and large public infrastructure projects, banks are entering the region to capitalise on demand for a wide range of services. Wealth management and private banking are seen as important by 57% of respondents who are active in the region,. With a growing number of companies in the region operating globally and making cross-border acquisitions, investment banking services are also seen as a priority by Western financial institutions.

Concerns about government policy remain a deterrent. Although programmes of economic and legislative reform are under way in many Middle East countries, 70% of the respondents to this survey cite lack of transparency or poor regulatory standards as deterrents to investing in the region. Physical security is another widely voiced concern, as are the volatility and lack of sophistication in capital markets.

Banks need an office on the ground. The growing importance of the Middle East as a region is leading many financial institutions to consider establishing a permanent office or network of offices there. The "suitcase strategy" - managing operations from overseas and flying in for short visits - is increasingly seen as untenable and is fast becoming a thing of the past.

Government policy towards foreign investment is gradually becoming more open. Foreign companies that wish to do business in the Middle East are often required by law to operate in a joint venture with a local partner. However, the rules in some countries are starting to be relaxed. Although the joint venture remains the most common mode of entry for foreign banks that are investing in the Middle East, 28% of all survey respondents say that they would establish their own offices in the region.