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Bahrain: Like Wall Street, but now with guns

Dominic Dudley
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The political unrest in Bahrain has adversely affected banks and their customers. Loss of business to other Gulf states might be hard to reverse, especially as the government crackdown continues, leaving popular resentment smouldering. Dominic Dudley reports.

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IN EARLY 2010, TV ads featuring international corporations such as HSBC and KPMG began airing in Bahrain to promote the country’s position as a regional financial hub. In one of them, an executive from French bank BNP Paribas describes the small Gulf island nation as "like Wall Street with palm trees" and signs off by asking: "Wish you were here?"

A year later, in early 2011, many people were wishing they were almost anywhere else. As troops moved onto the streets of the capital to dispel pro-democracy protestors, Manama’s financial district was more like Wall Street with guns and tanks.

The EDB has confirmed that Crédit Agricole has pulled out of Bahrain, although they insist that no other big player has followed. For all their reassurances though, for that to remain the case in the longer term depends on the maintenance of peace and stability in the kingdom.

But others in the industry were still prepared to tell Euromoney about the mood among bankers in Bahrain and offer views about the short-term and long-term impact of this year’s unrest. Many in the country deny there are any serious problems but the views in other financial centres are important for Middle East trade. Bankers in such as Dubai, Beirut and London are often far more pessimistic.

The political unrest in the country began in mid-February when protestors camped out at the Pearl Roundabout calling for greater freedom and equality. It was a rare outbreak of political activism for the Gulf and was only briefly tolerated by the authorities. A brutal crackdown took place in mid-March with the aid of troops from Saudi Arabia and other Gulf Cooperation Council countries.

The events had some notable short-term effects on the banking sector. Institutions in the country put their contingency plans into action by moving staff and operations to other centres, money was withdrawn from the market and credit lines were frozen by international banks. With normal economic life disrupted, some business owners had difficulties servicing their bank loans.

After March the situation, on the surface at least, appeared to return to normal. But the question now is, how much long-term damage has been done to the country and its key financial sector and how quickly a recovery can take place. As Esam Fakhro, chairman of the Bahrain Chamber of Commerce & Industry and a prominent figure on the local business scene, acknowledges: "It takes you a very long time to build and a short period to destroy things."

If Bahrain does not manage to recover all of the ground it has lost, the effect on its economy might be severe. There are 411 banks and other financial institutions in the country, including 77 wholesale banks, 30 retail banks and 27 representative offices, as well as 27 Islamic banks. According to the Central Bank of Bahrain, the financial sector as a whole contributes some 27% of GDP and is a big source of jobs for locals and foreign nationals.

At the end of December 2010 the financial sector employed a little over 14,000 people in the country, according to the annual survey by the Central Bank of Bahrain, and two-thirds of those were Bahraini staff. The main driver of jobs growth in the past year has been the non-bank sector, including insurance firms and money brokers. In 2010 employment in the banking sector fell, from 8,946 at the start of the year to 8,782 by the end of December. Unless the economy recovers, the number could have dropped even more by the time the central bank comes to do its next annual survey.

Even before the political unrest, Bahrain’s position as a regional financial hub had been coming under steady pressure as a result of the growth of the Dubai International Financial Centre and, to a lesser extent, the Qatar Financial Centre. Both have proved themselves to be adept at luring large international banks and, just as important, both have remained peaceful this year. As a result, they are now viewed as safe havens and it is widely assumed in the Gulf that the money that left Bahrain at the height of the crisis largely went to those centres, even if this cannot be proved directly from the official sources.

"The data did show some outflow from Bahrain during the unrest," says Marios Maratheftis, the Dubai-based regional head of research at Standard Chartered Bank. "This was understandable and anticipated; it is something one would expect to see. That doesn’t mean the cash that left Bahrain went to Dubai and Qatar because we cannot really see that from the data. But there were large inflows into Dubai and Qatar. Dubai and Qatar emerged as relative winners out of the unrest."