In 2011, a popular and unfinished uprising damaged the reputation of the Gulfâs oldest financial centre. Yet some asset managers say there are many benefits to operating in Bahrain. George Mitton reports.
What was the cost of the Arab spring? About $800 billion, according to HSBC. That’s how much greater the GDP of seven crisis-hit Arab states, from Egypt to Syria, would have been by the end of 2014 had the revolutions never happened.
The bank’s estimate is speculative, but in Bahrain, the forecast seems to confirm a common perception about the cost to the financial services sector of the uprising that began in 2011. The perception is that after protests began, international financial services firms got spooked and either scaled back their Bahrain operations or moved their offices elsewhere in the Gulf.
Or did they?
Many people in the Bahrain industry insist those companies that withdrew did so because they were cutting costs in the wake of the financial crisis, not as a direct result of the unrest.
What most people probably can agree is that Bahrain’s experience of the Arab spring created doubts about the country’s stability. Are these doubts reasonable, or is Bahrain still a good place to do business?
TROUBLE
The unrest in Bahrain, which began as a series of protests by the predominantly Shia Muslim majority, has yet to come to a satisfactory conclusion. The country recently passed stricter “antiterrorism” measures and al-Wefaq, the main Shia opposition group, says the government is pursuing a crackdown on dissent.
The economy, however, seems to have improved even if the political situation remains vexed. Jarmo Kotilaine, chief economist at the Bahrain Economic Development Board, says of the unrest that “these things are disruptive, but in truth the performance of the economy has been characterised by resilience”.
GDP growth in Bahrain was about 5% in 2012, an increase over the previous year. Profits in the banking sector doubled in 2012, according to figures from the Central Bank of Bahrain.
Two areas of the economy which have remained particularly strong, says Kotilaine, are insurance and wealth management.
Proximity to Saudi Arabia is one reason for the success of wealth managers. For decades, wealthy Saudis have been coming to Bahrain to do their private banking.
These wealth managers benefit from lower operating costs than in other financial zones in the Gulf. A report published by consultancy KPMG in November 2012 found that the cost of operating an office – including employment costs – in the Dubai International Financial Centre (DIFC) was 25% higher than in Bahrain, and in the Qatar Financial Centre (QFC) it was 40% higher.
“In Bahrain, you don’t have a separate jurisdiction and therefore a limited amount of real estate that is available for certain developments,” says Kotilaine. “In the DIFC, there is a link between the location and real estate and certain operating licences, and that has cost implications.”
In addition, Bahrain has a large local workforce that is typically bilingual or multilingual, whereas, “if you look at the DIFC or the QFC, these are virtually entirely expatriate labour forces”, says Kotilaine.
PRIVATE EQUITY
However, the rise of financial centres in Dubai and Qatar has provided more competition to Bahrain. The announcement of a new financial free zone in Abu Dhabi and the development of a financial services hub in Riyadh threaten to take more business away from Bahrain, and have raised questions about how many financial centres the comparatively small capital markets of the Gulf region can support.
Is there a risk that Bahrain will be left behind by these newer, shinier developments?
If Bahrain succeeds in carving out its own niche in the Gulf financial sector, it is likely that its regulator, the Central Bank of Bahrain (CBB), will have played a key role. Bahrain is already popular as a fund domicile (see box). Companies based in Kuwait, the UAE and elsewhere choose to domicile funds there because they appreciate the clarity and relative stability of the CBB’s regime.
The most popular type of fund by asset class in Bahrain is private equity, which accounts for a third of the funds domiciled in the country.
Some of these private equity firms are based in Bahrain, such as Investcorp, which was established in 1982. Mohammed Al-Shroogi, president, Gulf business, says the company increased its profits by more than half in the last 12 months by capitalising on a growing demand for alternative investments in the Gulf region.
“Bahrain has been our home for the last 30 years,” he says. “Over the years, Bahrain has provided us with a solid operating base, with easy access to the region.”
Investcorp is expanding in the region, however. The company was recently granted a licence by the Capital Market Authority in Saudi Arabia to establish an office in Riyadh. The company has also applied for a licence with the QFC and applied to establish a branch in Abu Dhabi.
Pinebridge Investments Middle East is another asset manager operating in Bahrain with a particular focus on private equity. An offshoot of US-based Pinebridge Investments, the company attained a licence to operate in Bahrain in 2012 and employs 32 people. It has also sought to expand in the region. In addition to its Bahrain headquarters, it has a representative office in Abu Dhabi.
“We are seeing increased levels of interest from our clients in the GCC real estate sector,” says Talal Al Zain, chief executive.
“We are also looking at other private equity opportunities in the region in social infrastructure, oil and gas services, and demand-driven sectors.”
WHAT WE LIKE
Pinebridge Investments Middle East is the kind of company Bahrain wants to attract, says Boyd Winton, director of financial services, Bahrain Economic Development Board. Another is Takaud Savings and Pensions, a long-term saving and insurance venture established by the Kuwait Projects Company (KIPCO) in Bahrain.
“They want to open up a significant business,” he says, of Takaud. “They want to generate the product here, distribute the product here, manage it here and have the back office here. That’s the sort of business that is setting up. We’re currently talking to two other entities that are looking to set up significant 30 to 40-person businesses.”
Winton argues that Pinebridge and Takaud are unlike most of the asset management firms based in the DIFC, which are typically sales offices for international firms. These regional offices aim to sell investment products that are managed elsewhere, not employ large numbers of people on the ground in the UAE, he says.
“In contrast, what we want to be is the access point for people who want a deep, long engagement into this region.”
If Bahrain can market itself as the best place in the Gulf to establish larger financial companies, it may be able to distinguish itself against rival financial centres, and ensure a successful future. However it will not be easy, and potential investors will continue to monitor the political situation with care – more instability could derail Bahrain’s plans.
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