OXFORD NSRTUTE

E N E R G Y STUDIES

= FOR m

Oil and the Internationalization

of Arab Banks

Naiem A. Sherbiny

Oxford Institute for Energy Studies

F6

1985

The c o n t e n t s of t h i s paper are for t h e purposes of study and d i s c u s s i o n and do not represent the views of t h e Oxford Inst i tute for Energy S t u d i e s or any of i t s members.

Copyright 0 1985 Oxford I n s t i t u t e f o r Energy Studies

ISBN 0 948061 11 1

ACKNOW LED GEMEBTS

The a u t h o r i s a s e n i o r e c o n o m i s t i n t h e E n e r g y Department of t he World Bank. He wrote the p re sen t paper w h i l e v i s i t i n g the Oxford I n s t i t u t e f o r Energy Studies i n Summer 1985. The p a p e r is based p a r t l y on t h e author 's r e s e a r c h i n t h e I n s t i t u t e , and p a r t l y OR h i s r e c e n t p a p e r e n t i t l e d "Arab F inanc ia l I n s t i t u t i o n s and Developing Countries" prepared for the 1985 World Development Report , which w i l l s h o r t l y appear i n the Wor I d Sank's S t a f f Working P a p e r s Ser ies . Without imp l i ca t ion , t h e a u t h o r wishes t o acknowledge t h e s u p p o r t and comments of Rober t Mabro, D i r e c t o r of t h e Oxford I n s t i t u t e f o r Energy S t u d i e s ; Dav id J Re id , A d v i s o r , Bank of E n g l a n d ; and Hikmat Nashashibi, Chief Execut ive, A I - M a l Group, London. Erro r s and i n t e r p r e t a t i o n s are t h e author's s o l e r e s p o n s i b i l i t y .

, t

1 . INTRODUCTION

2 . EARLY DEVELOPMENTS OF A R A B BANKS

3. THE 1970s AND EARLY 1980s: OPPORTUNITIES AND CHALLENGES

4 . CENTRES OF ARAB BANKING

5 . ISLAMIC BANKS

6 . FUTURE PROSPECTS

14

28

41

48

TABLE 1 INDEX NUMBERS OF AVERAGE ANNUAL O I L REVENUES OF ARABlOPEC MEMBERS

2 AVERAGE ANNUAL IMPORTS OF ABAB/OPEC COUNTRIES

3 CUMULATIVE NET FOREIGN ASSETS OF THE LOW ABSORBERS

4 INTERNATIONAL A C T I V I T I E S OF ARAB BANKS

5 ASSETS OF SELECTED ISLAMIC BANKS

6 SOME PERFORMANCE INDICATORS OF SELECTED ISLAMIC BANKS

A - l LARGEST ARAB BANKS

A-2 LEADING ARAB BANKS I H EUROCURRENCY SYNDICATED LENDING

16

1 7

19

25

44

46

5 5

56

1. IHTRODUCTIOH

The major i n c r e a s e s i n o i l p r i c e s d u r i n g t h e 1970s caused

many changes i n t h e soc io-economic map of t h e M i d d l e E a s t ,

i nc lud ing s u b s t a n t i a l l y increased f i n a n c i a l f l ows t o and from t h e

o i l economies. In a s h o r t t i m e , t h e o i l e x p o r t e r s became a l s o

c a p i t a l exporters . Some of t he f i n a n c i a l i n s t i t u t i o n s managing

t h e s e f l o w s had t o e s t a b l i s h a p r e s e n c e i n i n t e r n a t i o n a l

f i n a n c i a l c e n t r e s i n a r a t h e r s h o r t p e r i o d . t h e

1970s w i l l be seen i n banking and f inance c i r c l e s as t he decade

of i n t e r n a t i o n a l i z a t i o n of Arab banks, j u s t as t h e 1960s was the

decade of i n t e r n a t i o n a l i z a t i o n of American banks.

I n many w a y s ,

The i n t e r n a t i o n a l i z a t i o n of Arab banks, however , was a

p r o c e s s which s t a r t e d u n e v e n l y w e l l b e f o r e t h e 19708, and n o t

a l w a y s b e c a u s e of i n c r e a s e d o i l r e v e n u e s a t home o r c a p i t a l

expor t s abroad. During the 1940s t he Jerusalem-based Arab Bank

was a l r eady opera t ing ou t s ide P a l e s t i n e and i n t o the Arab reg ion

(Amman, Cairo, Damascus). The Lebanese banks began t o e s t a b l i s h

branches o u t s i d e Lebanon e a r l y i n t h e 1950s. The Kuwaiti banks

s t a r t e d t h e i n t e r n a t i o n a l i z a t i o n p r o c e s s i n t h e e a r l y 1960s.

H o w e v e r , i t was d u r i n g t h e 1 9 7 0 s t h a t many A r a b b a n k s -

e s p e c i a l l y from o i l coun t r i e s - became q u i t e ac t ive ly engaged i n

e s t a b l i s h i n g branches, j o i n t ventures , or c o n s o r t i a ove r seas thus

1

increas ing t h e i r v i s i b i l i t y i n i n t e r n a t i o n a l markets.

The f o c u s i n t h i s p a p e r w i l l be m o s t l y on banks from t h e

Arab o i l producing coun t r i e s i n the Gulf , because some of those

banks h a v e been a t t h e f o r e f r o n t of f i n a n c i a l i n n o v a t i o n i n

r e c e n t y e a r s , and a l l h a v e had r eady a c c e s s t o p e t r o d o l l a r

sources from t h e i r s t a r t .

The second s e c t i o n thus out 1 ines the ear l ier developments of

Arab banking which had an e x p l i c i t i n t e r n a t i o n a l o r i e n t a t i o n : t he

e s t a b l i s h m e n t o f modern b a n k s i n t h e Arab o i l - e x p o r t i n g

coun t r i e s ; t h e r ise of Bei ru t a s a r eg iona l f i n a n c i a l cen t r e ; and

the i n t e r n a t i o n a l i z a t i o n of Kuwaiti banks. The s t a g e w i l l then

be s e t for t h e t h i r d s e c t i o n t o examine t h e s p e c i f i c f a c t o r s

d u r i n g t h e 1970s which h a v e prompted Arab banks t o e s t a b l i s h a

p r e s e n c e i n i n t e r n a t i o n a l f i n a n c i a l c e n t r e s on a l a r g e s c a l e .

Here, t h e s p e c i a l r e l a t i o n of o i l e x p o r t s and t h e i n t e r -

n a t i o n a l i z a t i o n of Arab banks i s examined, and t h e a c t i v i t i e s of

those banks exp I ored.

The demise of B e i r u t i n t h e mid-1970s as a r e g i o n a l

f i n a n c i a l c e n t r e n e c e s s i t a t e d the search f o r o t h e r a l t e r n a t i v e s .

Kuwait and Bahrain have emerged as such c e n t r e s i n t h e Gulf, and

they appear t o be having t h e i r share of d i f f i c u l t i e s . Elsewhere

i n t h e Arab r e g i o n , C a i r o c o u l d become an i m p o r t a n t c e n t r e of

Arab banks o n l y i f monetary and exchange r e f o r m s a r e adop ted .

Outside the Arab region, a l though London and P a r i s t r a d i t i o n a l l y

h o s t t h e l a r g e s t numbers of Arab banks , o t h e r l o c a t i o n s a r e

i n c r e a s i n g l y becoming important i n t e r n a t i o n a l f i n a n c i a l cen t r e s

of Arab banking: Mew York, Singapore, Hong Kong, and Switzerland.

These developments are d e t a i l e d i n Sec t ion Four.

2

The r i s e and e x p a n s i o n of Arab banks i n i n t e r n a t i o n a l

f i n a n c i a l markets began t o be assoc ia ted w i t h another phenomenon

- t h a t of I s l amic banks. The increased wea l th and monet izat ion

of the Moslem count r ies i n OPEC' necess i t a t ed the es tab l i shment

of modern f i n a n c i a l i n s t i t u t i o n s . The n o t i o n of c h a r g i n g and

pay ing i n t e r e s t which i s c e n t r a l t o modern bank ing is un-

a c c e p t a b l e on r e l i g i o u s g rounds t o most d e v o u t Moslems. An

a l t e r n a t i v e was t h u s needed t o a t t r a c t t h e l a r g e masses of

p o p u l a t i o n i n t o t h e i n c r e a s i n g l y mone t i zed economies of t h e

Moslem count r ies . What have I s l amic banks done so f a r , and what

is t h e i r l i k e l y r o l e in t h e f u t u r e a r e some of t h e q u e s t i o n s t o

be taken up in Sect ion Five of t h i s paper.

F i n a l l y , S e c t i o n Six a d d r e s s e s t h e f u t u r e imp l i ca t ions of

t h e r e c e n t major d r o p i n o i l r e v e n u e s f o r t h e i n t e r n a t i o n a l

a c t i v i t i e s of Arab banks. A c e n t r a l concern is whether such f a l l

would s i g n a l t h e d e c l i n e of Arab banks. The p a p e r a r g u e s t h a t

t h e r e l a t i o n s h i p be tween t h e volume of oil r e v e n u e s and t h e

i n t e r n a t i o n a l a c t i v i t i e s of Arab banks i s asymmetrical: increased

o i l r e v e n u e s h a v e expanded i n t e r n a t i o n a l a c t i v i t i e s of Arab

banks , b u t t h e f a l l i n t h o s e r e v e n u e s w i l l n o t n e c e s s a r i l y

d iminish t h e i n t e r n a t i o n a l i z a t i o n of Arab banks.

1. The p o p u l a t i o n of Ecuador , Gabon, and V e n e z u e l a t o g e t h e r r ep resen t 7 per cent of t he combined popu la t ion of OPEC. The r e m a i n i n g 93 p e r c e n t a r e m o s t l y Moslem, as c a l c u l a t e d f rom The World Development Report 1985.

3

I

2. EARLY DEVEUIPMEBTS OF ARAB W S

The g e n e s e s of t h e i n t e r n a t i o n a l i z a t i o n of Arab b a n k s go

back t o the es tab l i shment of modern banking i n Arab c o u n t r i e s by

f o r e i g n banks, t he emergence of Beirut a s a r eg iona l f i n a n c e and

b u s i n e s s c e n t r e , and t h e o r i e n t a t i o n of Kuwai t i f i n a n c i a l

i n s t i t u t i o n s towards i n t e r n a t i o n a l b u s i n e s s and i n v e s t m e n t

o p p o r t u n i t i e s d u r i n g t h e 1960s.

Foreign banks e s t a b l i s h e d i n Arab coun t r i e s f e l 1 g e n e r a l l y

i n two ca tegor ies : those s e t up semi-independently by f o r e i g n e r s

t o s e r v e t h e b u s i n e s s and commerc ia l i n t e r e s t s of r e s i d e n t

c o l o n i z i n g communi t i e s ; and t h o s e e s t a b l i s h e d a s b r a n c h e s of

f o r e i g n banks t o p a r t i c i p a t e in t h e l o c a l boom a s s o c i a t e d w i t h

success fu l o i l f i nds . Although those banks were e s t a b l i s h e d too

early t o have a d i r e c t r e l a t i o n s h i p wi th t h e i n t e r n a t i o n a l i z a t i o n

of Arab banks i n t h e 1970s, t h e i r presence none the le s s c r e a t e d a

new awareness of and a n o r i e n t a t i o n towards o v e r s e a s bank ing .

More impor tan t ly , they served in varying degrees as sources of

and t r a i n i n g grounds f o r domestic banking s k i l l s which were l a t e r

t o l e a d the processes of modernization then i n t e r n a t i o n a l i z a t i o n

of Arab f i n a n c i a l i n s t i t u t i o n s .

The f i r s t t y p e of f o r e i g n banks i n Arab c o u n t r i e s w a s

e s t a b l i s h e d l o n g b e f o r e o i l was d i s c o v e r e d i n commerc ia l

4

q u a n t i t i e s . Thus, i n 1851 t h e F rench e s t a b l i s h e d Banque

d'Algerie; i n 1898 t he B r i t i s h e s t a b l i s h e d the Nat ional Bank of

Egypt; i n 1910 t h e I t a l i a n s e s t a b l i s h e d Banco d i Roma i n Libya;

i n 1926 t h e Dutch e s t a b l i s h e d Nederlandsche Handel Maatschappij

i n Saudi Arabia; and i n 1920 t h e B r i t i s h e s t a b l i s h e d t h e Eas te rn

Bank i n Bahra in . Most of t h e s e banks were a c t i v e l y engaged i n

e x t e r n a l t rading. To t he few domestic educated e l i t e s , t h e pro-

s p e r i t y and s o p h i s t i c a t i o n of bank ing employees a p p e a r e d t o be

c l o s e l y r e l a t e d t o t h e i n t e r n a t i o n a l c h a r a c t e r of t h e banks.

However, t h e g r e a t m a j o r i t y of t h e i n d i g e n o u s communi t ies had

t h e i r own long t r a d i t i o n s and p r a c t i c e s i n t rad ing , bus iness , and

money exchange which had l i t t l e or no need f o r modern commercial

banking. F i n a n c i a l d u a l i s m was embedded in t h e soc io-economic

s t r u c t u r e s of Arab c o u n t r i e s , where a n c i e n t i n s t i t u t i o n s co-

e x i s t e d w i t h modern i n s t i t u t i o n s , e a c h s e r v i n g t h e d i s t i n c t

f i n a n c i a l and commercial i n t e r e s t s and needs of v a s t l y d i f f e r e n t

communities.

The o t h e r t y p e of f o r e i g n banks i n Arab c o u n t r i e s was

e s t a b l i s h e d fundamental ly in response t o d i s c o v e r i e s of o i l i n

c o m m e r c i a l l y v i a b l e q u a n t i t i e s i n o r d e r t o p a r t i c i p a t e i n t h e

ensuing boom. A c t i v i t i e s of t he B r i t i s h Bank of t h e Middle East

(BBME) i n t he Gulf c h a r a c t e r i s e t h i s t y p e of banking. Thus, t h e

BBME e s t a b l i s h e d b r a n c h e s i n Kuwait in 1942, B a h r a i n i n 1944,

Dubai i n 1946, Oman i n 1948, S h a r j a h i n 1953, Qatar i n 1954, and

Abu Dhabi i n 1959. I n t h e s e c a s e s t o o , f i n a n c i a l d u a l i s m came

into e x i s t e n c e w i t h modern banks , and deepened o v e r t i m e w i t h

t h e i r growth and expansion.

I n most cases , t h e o i l r e v e n u e s which t h e gove rnmen t s

5

r e c e i v e d , though i n i t i a l l y modest , began t o f i n a n c e t h e most

e s s e n t i a l p a r t s of i n f r a s t r u c t u r e . These r a t h e r 1 i m i t e d , b u t

cont inuing, f lows of government expendi tures had an unmistakable

m u l t i p l i e r e f f e c t on t he domestic economy: con t r ac t ing wi th l o c a l

merchants f o r goods and s e r v i c e s , employing n a t i o n a l s , buying o r

l e a s i n g land, r e n t i n g off ice space, e tc . Espec ia l ly n o t i c e a b l e

was t h e boom i n l a n d v a l u e s w h i c h c o n t r i b u t e d t o l o c a l

prosper i ty . As incomes of t he p r i v a t e s e c t o r increased, so did

expendi tures , e s p e c i a l l y on imported consumer goods and durables .

The p r o f i t s of fore ign-owned banks began t o i n c r e a s e marked ly .

The G u l f c o u n t r i e s became a major s o u r c e of d e p o s i t s f o r BBME.

For example, i n 1959 d e p o s i t s i n the Kuwait branch p l u s Kuwaiti-

owned d e p o s i t s w i t h BBME i n London r e p r e s e n t e d 47 p e r c e n t of

t o t a l p u b l i c d e p o s i t s i n BBME. F u r t h e r m o r e , some of t h e s e

d e p o s i t s were i n t e r e s t - f r e e : 50 p e r c e n t of d e p o s i t s i n t h e

Kuwait branch of B B M E throughout t he 1950s c a r r i e d no i n t e r e s t . 2

The a b i l i t y of t h e d o m e s t i c Gu l f economies t o a b s o r b

government and p r i v a t e e x p e n d i t u r e s , t hough expand ing q u i t e

r a p i d l y , became i n c r e a s i n g l y l i m i t e d r e l a t i v e t o t h e sub-

s t a n t i a l l y g r e a t e r e x p a n s i o n i n o i l r e v e n u e s . B y t h e e a r l y

1 9 5 O s , most Gul f b r a n c h e s of B E M E l a c k e d s u f f i c i e n t l o c a l

o p p o r t u n i t i e s t o absorb a l l t he l o c a l depos i t s . The bank t r an -

s f e r r e d a major p o r t i o n of t h e d e p o s i t s i n t h e Kuwait b ranch t o

London: 30 p e r c e n t in 1 9 5 5 , and 50 pe r c e n t i n t h e mid-1960s.

The same w a s t rue , even t o a g r e a t e r ex ten t i n Bahrain and Dubai

2. G e o f f r e y J o n e s “3ank ing i n t h e Gul f b e f o r e 1960”, London School of Economics, 1985 (Mimeographed).

6

(60 p e r c e n t of d e p o s i t s i n v e s t e d ab road i n 19591, and i n Oman

(80 p e r c e n t in t h e 1 9 6 0 ~ 1 . ~

Impressed by t h e s u c c e s s , p rof i t s , and i n t e r n a t i o n a l

o r i e n t a t i o n of foreign-owned banks, l o c a l merchants i n a number

of o i l c o u n t r i e s i n i t i a l l y p o o l e d r e s o u r c e s t o g e t h e r and

e s t a b l i s h e d modern banks, b a s i c a l l y t o g e t a sha re i n the growing

p ie . These banks s t a r t e d opera t ions under f a v o u r a b l e condi t ions

because t h e major merchan t s h a r e h o l d e r s t r a n s f e r r e d t h e i r

b u s i n e s s t r a n s a c t i o n s t o t h e n e w l y - e s t a b l i s h e d banks. Even

though s u c h moves i m p l i e d c o m p e t i t i o n w i t h t h e foreign-owned

banks, growth of bus iness f o r both t y p e s reduced p o t e n t i a l s f o r

c o n f l i c t . I n most c a s e s l o c a l ly-owned modern banks r e c r u i t e d

experienced s t a f f , e s p e c i a l l y n a t i o n a l , i n management and o the r

p o s i t i o n s f rom t h e foreign-owned banks. S k i l l s of t h o s e s t a f f

and t h e i r k n o w l e d g e of i n t e r n a t i o n a l s u p p l i e r s , bank ing

procedures abroad, and f o r e i g n languages - i n a d d i t i o n t o t h e i r

l o c a l know l e d g e and c o n n e c t i o n s - were e s s e n t i a l r e q u i s i t e s t o

the success of modern l o c a l banks.

The es tab l i shment of modern banks by l o c a l i n t e r e s t s was an

i n t e g r a l p a r t of t h e m o d e r n i z a t i o n p r o c e s s sweeping t h e o i l

count r ies . Such event occurred in 1938 in Saudi Arabia wi th the

family-owned Nat ional Commercial Bank i n Jeddah; in 1941 in I r a q

w i t h t h e government-owned Raf i d a i n Bank i n Baghdad; i n 1 9 5 2 i n

Kuwait w i t h the privately-owned Nat ional Bank of Kuwait; i n 1955

i n Libya w i t h T r i p o l i ' s N a t i o n a l Bank of L i b y a ; i n 1957 i n

Bahrain w i t h the Nat iona l Bank of Bahrain; i n 1963 i n Dubai w i t h

3. Geoffrey Jones, i b id .

t h e N a t i o n a l Bank of Dubai ; i n 1968 i n Abu Dhabi w i t h t h e

government-owned Nat iona l Bank of Abu Dhabi; and i n 1973 i n Oman

wi th Muscat's Nat ional Bank of Oman.

The a c t i v i t i e s o f b o t h Arab and f o r e i g n banks t y p i c a l l y

concent ra ted on short- term commercial loans, r e l a t e d f o r t h e most

p a r t t o e x t e r n a l and i n t e r n a l t r a d i n g . Both t h e e x p o s u r e and

o r i e n t a t i o n of Arab banks t o i n t e r n a t i o n a l bank ing norms and

p r a c t i c e s e v o l v e d o v e r t i m e t o become o r d i n a r y d a i l y a f f a i r s .

The coexis tence of Arab and fo re ign banks ( f u l l y Owned, o r branch

o f f i c e s ) continued i n some coun t r i e s u n t i l t he present , such as

i n Bahra in , Dubai , Abu Dhabi , Q a t a r , and Oman. I n o t h e r

coun t r i e s , commercial banks were n a t i o n a l i z e d fo l lowing Egypt's

example i n 1961. Thus, n a t i o n a l i z a t i o n of t h e e n t i r e bank ing

s y s t e m was accomplished i n 1964 in I raq , 1965 i n A lge r i a , 1970 i n

Libya , and 1971 i n Kuwait . S a u d i A r a b i a f o l l o w e d a m i d d l e

c o u r s e , where by 1981 a l l non-Saudi banks had t o a c c e p t 6 0 p e r

cen t Saudi ownership.

Another con t r ibu t ing f a c t o r t o t he i n t e r n a t i o n a l i z a t i o n of

Arab banks w a s the development of t he banking s y s t e m i n Lebanon

w h i c h f o l l o w e d a d i s t i n c t l y l i b e r a l o r i e n t a t i o n s i n c e

independence i n 1943. I n add i t ion , s e v e r a l a s p e c t s he lped make

B e i r u t t h e f i n a n c e and b u s i n e s s c e n t r e of t h e Arab r e g i o n : t h e

ne twork of c o n t a c t s t h r o u g h m i g r a n t L e b a n e s e b u s i n e s s m e n

w o r l d w i d e ; a s t r a t e g i c l o c a t i o n a t t h e c r o s s r o a d s of t h r e e

c o n t i n e n t s ; and a good communicat ion s y s t e m . These a s p e c t s ,

among o the r s , helped expand t h e number of banks in Beirut from 11

i n 1945 t o 90 i n 1965. The scope of bank ing s e r v i c e s expanded

e q u a l l y s u b s t a n t i a l l y : from f inanc ing e x t e r n a l commerce t o t h e

8

wide range of f i n a n c i a l , investment, and in te rmedia t ion func t ions

normal l y o b t a i n e d i n major i n t e r n a t i o n a l b u s i n e s s c e n t r e s .

Fu r the rmore , t h e wave of bank n a t i o n a l i z a t i o n s i n neighbouring

Arab coun t r i e s e s p e c i a l l y during t h e 1960s c rea ted an i n f l u x of

f 1 i gh t c a p i t a l i n t o Lebanese banks. The apparent s t a b i l i t y and

p r o s p e r i t y of Lebanon u n t i l i t s t r a g i c c i v i l war h a s g i v e n

f u r t h e r inducement t o t w o - r e l a t e d deve lopmen t s . First, t h e

Lebanese pound g a i n e d s t r e n g t h v i s - a - v i s major i n t e r n a t i o n a l

cu r renc ie s ; dur ing 1955-75 t h e Lebanese pound improved by 29 pe r

cent a g a i n s t t h e d o l l a r , and by 44 per cent aga ins t t he S t e r l i n g .

Second, r i c h i n d i v i d u a l s and f i n a n c i a l i n s t i t u t i o n s i n the Gulf

t r a n s f e r r e d t o Bei ru t s u b s t a n t i a l f lows of investment funds.

The wide-ranging scope of Lebanese banking a c t i v i t i e s , and

t h e e n t e r p r i s i n g a p p r o a c h e s o f Lebanese managers , made i n t e r -

n a t i o n a l i z a t i o n a n a t u r a l c o r o l l a r y i n t h e development of Arab

banking. For example , t h e Banque L i b a n a i s e pour l e Commerce

which w a s e s t a b l i s h e d i n 1950 by a p rominen t Lebanese f a m i l y

opened s u b s i d i a r i e s i n Damascus i n 1953 and i n P a r i s i n 1956.

The I n t r a Bank, e s t a b l i s h e d i n 1951 by a P a l e s t i n i a n businessman,

p a r t i c i p a t e d i n t h e f i n a n c i n g of i n d u s t r i a l , t o u r i s m , and r e a l

e s t a t e p r o j e c t s i n t h e M i d d l e E a s t , Europe , and Nor th America.

Cap i t a l inves tments from the Gulf were ins t rumenta l i n s e t t i n g up

a number of B e i r u t - b a s e d banks of r e g i o n a l l i n t e r n a t i o n a l

c h a r a c t e r , s u c h as t h e Ee i ru t -R iyad Bank (19591, t h e C r e d i t

L i b a n a i s (19611, t h e Audi Bank (1962) , and t h e Byb los Bank

(1962).4

4. T r a u t e Wohle r s -Scha r f , Arab and I s l a m i c Banks, OECD, Pa r i s 1983, p.17 and its footnotes , pp 62-63.

9

Through t h e mid-1960s Lebanese banks were exempted f rom

se r ious government c o n t r o l s and were a l lowed t o main ta in a system

of c o n f i d e n t i a l numbered a c c o u n t s which t u r n e d Lebanon i n t o a

haven for anonymous c a p i t a l . The c rash of t h e I n t r a Bank i n 1966

s e n t shock waves i n t o the r e l a t i v e l y smal l but h igh ly v i s i b l e

f i n a n c i a l community which l e d t o government c o n t r o l s , s t r e a m -

l i n i n g t h e bank ing system, and a c o m p l e t e ban on s e t t i n g up new

banks. I n t h e p r o c e s s , t h e number of banks d e c l i n e d t o 74 by

1968 and remained unchanged t h r o u g h 1976. The s e v e r i t y of t h e

c i v i l war had by then forced more Lebanese banks t o move the base

of t h e i r ope ra t ions from Beirut and set up branches or a f f i l i a t e s

i n Cyprus as w e l l as i n major f i n a n c i a l c e n t r e s such as London,

Pa r i s , and Switzer land.

P a r a l l e l t o t he development of t h e Lebanese banking system,

and a t t h e o t h e r ex t r eme , was the d e v e l o p m e n t of t h e K u w a i t i

Banking System. A t f i r s t , t he Kuwaiti s y s t e m was l i m i t e d by t h e

monopoly a d v a n t a g e s t h e B r i t i s h Bank o f t h e M i d d l e E a s t had

enjoyed s i n c e i t s es tabl ishment . The Nat ional Bank of Kuwait was

e s t a b l i s h e d i n 1 9 5 2 f o r t h e most p a r t as a r e s u l t of p r e s s u r e s

f rom K u w a i t i m e r c h a n t s when t h e c o u n t r y was s t i l l a B r i t i s h

p ro tec to ra t e . U n t i l 1960 o n l y t h e s e two commerc ia l banks were

a 1 lowed t o ope ra t e in Kuwait and through them investments were

placed ove r seas , most ly i n London, on behal f of t he country and

i t s r i c h f ami l i e s .

I n 1960 two a d d i t i o n a l commerc ia l banks were e s t a b l i s h e d :

t h e Commercial Bank of Kuwait and t h e Gulf Bank. I n 1967 another

commercial bank was added (A1 A h l i Bank). The a c t i v i t i e s of t h e

10

new banks fo l lowed i n t h e f o o t s t e p s of t h e i r predecessors: mos t ly

s h o r t - t e r m f i n a n c i n g of impor t t r a d e and , t o a l e s se r e x t e n t ,

g u a r a n t e e s of c o n s t r u c t i o n c o n t r a c t s . The d e p o s i t s which were

n o t p o s s i b l e t o d e p l o y p r o d u c t i v e l y i n Kuwait were g e n e r a l l y

p l aced by t h e banks overseas , most ly i n London.

It i s t h e l imi t ed a b s o r p t i v e capac i ty of t he Kuwait economy

which exp 1 a i n s why t he go v ernment encouraged t h e es t a b 1 ishment of

s p e c i a l i z e d i n s t i t u t i o n s t o h e l p p l a c e investments abroad i n a

s y s t e m a t i c f a s h i o n . Thus, t h e government p a r t i c i p a t e d i n t h e

e s t ab l i shmen t of t he Kuwait Investment C o m p a n y ( K I C ) i n 1961 with

50 p e r cent of t he shares , and a l s o i n t h e Kuwait Foreign Trade,

Contract ing, and Investment Company ( K F T C I C ) i n 1964 w i t h 80 per

cent of the shares. The expressed po l i cy of K I C was t o d i v e r s i f y

inves tments t o a s su re a r easonab le degree of s a fe ty , but a t the

same t i m e maximize income. I t s a c t i v i t i e s d u r i n g 1965-70 were

concentrated i n i n t e r n a t i o n a l f i n a n c i a l instruments (92 per cent )

wi th v a r i a n t term s t r u c t u r e , a l l of which were in OECD count r ies .

The r e m a i n i n g 8 p e r c e n t were i n d i r e c t i n v e s t m e n t s , m o s t l y i n

r e a l e s t a t e and bank ing , w i t h a wide g e o g r a p h i c s p r e a d of

developed and developing ~ o u n t r i e s . ~ By c o n t r a s t , t h e a c t i v i t i e s

of K F T C I C were r e l a t i v e l y more c o n c e n t r a t e d i n d i r e c t i n v e s t -

ments, wi th 85 pe r cent of i t s resources i n OECD ventures dur ing

t h e 1 9 6 0 ~ ~ These two investment houses, t oge the r with Kuwaiti

commerc ia l banks , formed in 1966 t h e U n i t e d Bank of Kuwait i n

London t o s t r e n g t h e n t h e p o s i t i o n of K u w a i t i b a n k s in

5. KIC Annual Reports.

6 . K F T C I C Annual Reports.

11

i n t e r n a t i o n a l operat ions. This w a s t h e f i r s t time a Gulf bank was

e s t a b l i s h e d in a major i n t e r n a t i o n a l f i n a n c i a l c e n t r e . I t s

e x p r e s s e d o b j e c t i v e was t o a s s i s t i n t h e management of c a p i t a l

e x p o r t s . Three y e a r s l a t e r t h e same g r o u p of banks , t o g e t h e r

wi th Socigte' G&&ale, formed in P a r i s t h e Banque Franco-Arabe

d ' I n v e s t i s s e m e n t s I n t e r n a t i o n a u x , known a s FRAB Bank, as t h e

f i r s t Arab-Occidental Consortium bank. By 1970 t h i s c l u s t e r of

i n s t i t u t i o n s h e l p e d p l a c e s u b s t a n t i a l K u w a i t i f u n d s i n ma jo r

i n t e r n a t i o n a l m a r k e t s , e s t i m a t e d f o r t h e government a t $4.0

b i l l i o n and f o r t h e p r i v a t e s e c t o r a t $1.2 b i l l i o n . 7

A p a r t f rom t h o s e i n s t i t u t i o n s , t h e K u w a i t i M i n i s t r y of

F i n a n c e i n 1964 t o o k t h e i n i t i a t i v e w i t h t h e C e n t r a l Bank of

Egypt t o e s t a b l i s h i n Cairo one of t h e fo re rune r s of inter-Arab

banks , t h e Arab A f r i c a n Bank, where e a c h h e l d 42.4 p e r c e n t of

t h e s h a r e s ; t h e r e m a i n i n g 15 p e r c e n t were s u b s c r i b e d b y t h e

gove rnmen t s of A l g e r i a , I r a q , J o r d a n , and Qa ta r . A 1 though t h e

bank was e s t a b l i s h e d as a j o in t - s tock company under Egyptian law,

i t had a s p e c i a l s t a t u s s imilar t o off-shore f a c i l i t i e s i n t h a t

i t was exempt from exchange-control r e g u l a t i o n s and from banking

and c r e d i t l e g i s l a t i o n cover ing jo in t - s tock companies. By 1970,

t h e Bank had a p o r t f o l i o of 14 d i r e c t investment p r o j e c t s , s i x of

which were i n Af r i ca , seven i n Arab coun t r i e s , and one i n Par i s .

During t h e 1970s t h e Bank s i g n i f i c a n t 1 y expanded i t s a c t i v it ies

in A f r i c a n and Arab c o u n t r i e s and s u b s t a n t i a l l y i n c r e a s e d i t s

c a p i t a l , t o become one of t h e l e a d i n g d e v e l o p m e n t f i n a n c e

7. N.A. Sherb iny "Arab F i n a n c i a l I n s t i t u t i o n s and D e v e l o p i n g Countr ies" World Bank, S t a f f Working Paper (Forthcoming).

1 2

i n s t i t u t i o n s i n the Middle East. 8

On t h e o f f i c i a l a i d f r o n t , t h e government e s t a b l i s h e d i n

1961 - the year of Kuwait's i ndependence - t h e Kuwait Fund f o r

Arab Economic Development (KFAED), as t h e main i n s t i t u t i o n f o r

t h e p r o v i s i o n of p r o j e c t a s s i s t a n c e . U n t i l 1974, t h e Fund's

mandate was l i m i t e d t o t h e p r o v i s i o n of l o a n s to Arab League

members; t h e r e a f t e r i t extended t o a l l deve loping count r ies . The

Kuwait Fund a s s i s t e d the governments of s e v e r a l o i l coun t r i e s to

s e t up t h e i r n a t i o n a l f u n d s : Abu Dhabi i n 1971, and I r a q and

S a u d i A r a b i a i n 1974. Dur ing a 12-year p e r i o d (1962-731, t h e

Kuwait Fund p r o c e s s e d 45 p r o j e c t s t o 1 2 Arab c o u n t r i e s , €or a

t o t a l commitment of $370 m i l l i o n , and gross disbursements of $230

million. ' Symptomatic of t h e Fund's dynamism, even i n those e a r l y

years, was t h e r a p i d e x p a n s i o n i n i t s c a p i t a l . From a n i n i t i a l

c a p i t a l of KD 50 m i l l i o n ($140 m i l l i o n ) , t he government doubled

t h e Fund's c a p i t a l once i n 1963 , and once more i n 1966 t o KD 200

m i l l i o n ($560 m i l l i o n ) . 1 0 L a t e r on d u r i n g t h e 1970s , t h e Fund

expanded i t s c a p i t a l s t i l I f u r t h e r : t o K D l O O O m i l lion ($3400

m i l l i o n ) i n 1974, and t o KD2000 m i l l i o n ($6900 m i l l i o n ) i n 1979.

8. Arab Af r i can Bank, Annual Reports.

9. Kuwait Fund Annual R e p o r t s ; and OECD, Aid f rom OPEC Countr ies , P a r i s , 1983, p.46.

10. OECD, i b i d , p.45.

1 3

3. TEJl 1970s dBD EAEtLY 1980s: OPPCHLTUHITIBS Bw) CHdLLEBlGES

The t h r u s t of t h e f o r e g o i n g d i s c u s s i o n was t o show t h a t

p r i o r t o t h e major i n c r e a s e s i n o i l p r i c e s , modern bank ing was

a l r e a d y e s t a b l i s h e d t h r o u g h o u t Arab c o u n t r i e s ; b o t h Arab and

f o r e i g n banks p a r t i c i p a t e d in t he monet izat ion of Arab economies;

some coun t r i e s n a t i o n a l i z e d t h e i r banking s y s t e m ; and Lebanon and

Kuwait stood a t the f o r e f r o n t of t h e i n t e r n a t i o n a l i z a t i o n of Arab

banks, though i n varying degrees and f o r d i f f e r e n t reasons. While

t h e push towards i n t e r n a t i o n a l markets took p l a c e i n Lebanon as a

r e s u l t of banking s k i l l s and f i n a n c i a l connect ions t o s e r v e l o c a l

and r e g i o n a l c l i e n t s , it occurred i n Kuwait as a result of o i l -

r e l a t e d c a p i t a l exports .

I f t h e i n t e r n a t i o n a l i z a t i o n of Kuwaiti f i n a n c i a l i n s t i t u -

t i o n s occurred during t h e 1960s when t h e country's o i l revenues

were r e l a t i v e l y small, t h e r e was a l l t h e more reason f o r banks

from t h e s m a l l economies of t h e Gulf and Libya - t he s o - c a l l e d

low absorbers' ' - t o seek i n t e r n a t i o n a l investment o p p o r t u n i t i e s

dur ing t h e 1970s when o i l revenues m u l t i p l i e d . There were a l s o

e q u a l l y good r e a s o n s for K u w a i t i b a n k s t o e x p a n d t h e i r

11. D e f i n e d i n t h e ArablOPEC c o n t e x t t o i n c l u d e Kuwait , L ibya , Q a t a r , S a u d i A r a b i a , and U n i t e d Arab E m i r a t e s (UAE) . Those economies c o u l d t r a n s f o r m o n l y a minor p o r t i o n of t h e i r annuaL sav ings i n t o product ive inves tments e s p e c i a l l y dur ing t h e 1970s.

14

i n t e r n a t i o n a 1 a c t i v i t i e s d u r i n g t h e 1970s. Banks f rom h i g h

absorbers l i k e A l g e r i a o r I r a q were engaged i n t h e i n t e r n a t i o n a l

markets f o r t he most p a r t t o f inance import t rade .

Index numbers of average annual o i l revenues i n t o t h e low-

a b s o r b i n g c o u n t r i e s (1963-69 = 100) were computed a c c o r d i n g t o

the fol lowing f i v e t i m e i n t e r v a l s ; Table 1.

1963-69 - o i l p r i c e s t a b i l i t y

1970-73 - minor inc reases in o i l p r i c e s

1974-78 - fol lowing t h e f i r s t major o i l p r ice increase

1979-81 - fo l lowing t h e second major o i l p r i c e inc rease

1982-83 - f a l l i n g oil p r i c e s .

The table shows s u b s t a n t i a l l y changed o r d e r s of magnitude between

t h e 1960s and 1970s. The m u l t i p l e s began t o show e v e n i n t h e

e a r l y 19709, but t he d i s c o n t i n u i t i e s occurred i n the mid-1970s.

The d e c l i n e i n 1982-83 of both o i l expor t volume and o i l prices

severely a f f e c t e d t h e index numbers for o i l revenues, but they

s t i l l continued above t h e i r 1974-78 averages.

T h i s enormous e x p a n s i o n i n o i l r e v e n u e s e n a b l e d t h e

Arab/OPEC coun t r i e s t o expand t h e i r i m p o r t s s i g n i f i c a n t l y ; see

T a b l e 2. The i n d e x numbers i n T a b l e 2 f a c i l i t a t e d i r e c t

compar i sons w i t h t h e i n d e x numbers o f T a b l e 1. The compar i son

shows g e n e r a l l y similar s h i f t s between time per iods i n the l e v e l s

of o i l revenues and imports f o r each country l i s t e d , except f o r

t h e e a r l y 1980s. Dur ing 1982-83 t h e s i g n i f i c a n t d e c l i n e i n

a n n u a l a v e r a g e o i l r e v e n u e s from t h e peak a v e r a g e s of 1979-81

a p p e a r e d t o be accompanied by impor t expans ion , which was

s u b s t a n t i a l i n some c o u n t r i e s . This a p p a r e n t i n c o n s i s t e n c y i s

15

r e s o l v e d by not ing t h a t import demand peaked two years a k t e r t h e

peak i n o i l revenues in 1980; i t dec l ined in 1983.

Table 1

Index Numbers of Average Annual O i l Revenues

of Arab/OPEC Members

Country 1963-69 1970-73 1974-78

Alger i a

I r aq

Kuwait

Libya

Qatar

Saudi Arabia

UAE

100

100

100

100

100

100

100(a)

366

242

192

298

289

345

379

2547

2130

1094

1258

2178

3993

51 07

1979-81

6825

493 9

2530

3105

4800

12295

12157

1982-83

3230

2315

1266

2175

3467

8351

9714

( a > f o r 1966-69

Source ; C a l c u l a t e d from I n t e r n a t i o n a l F i n a n c i a l S t a t i s t i c s , on t h e b a s i s t h a t average annual o i l revenues dur ing 1963- 69 was a s f o l l o w s : $150 m i l l i o n f o r A l g e r i a , $390 m i l l i o n f o r I r aq , $640 m i l l i o n f o r Kuwait, $570 m i l l i o n f o r Libya, $90 m i l l i o n for Qatar , $740 m i l l i o n f o r Saudi Arabia, and $140 m i l l i o n f o r UAE

T a b l e 2 a l s o shows t h e a v e r a g e a n n u a l magn i tude of i m p o r t

t r a d e : by c o u n t r y , f o r t h e Arab g r o u p i n OPEC, and f o r t h e low

a b s o r b e r s a s a group. W h i l e Arab banks a r e u n l i k e l y to h a v e

f i n a n c e d a 1 1 i m p o r t s of Arab c o u n t r i e s , t h e y may h a v e f i n a n c e d

t h e ma jo r p o r t i o n . The volume of i m p o r t t r a d e i t s e l f h a s

expanded g e o m e t r i c a l l y : f rom an a n n u a l a v e r a g e of a b o u t $3

b i l l i o n dur ing the 1960s, t o about $6 b i l l i o n i n t h e e a r l y 1970s,

to $31 b i l l i o n in t h e mid-19708, t o $77 b i l l i o n i n t h e l a t e

16

Table 2

Average Annual Imports of Arab/OPEC Countries

Algeria

Iraq

Kuwait

Libya

Qatar

Saudi Arabia

UAE

1963-69

7 40

420

480

440

60

53 0

180(*)

Total Arab

Low Absorbers

Algeria

Iraq

Kuwait

Libya

Qatar

Saudi Arabia

UAE

2850

1690

(Millions of US dol lars)

1970-73 1974-78 1979-81

1550 6240 10170

700 3630 14070

7 80 3340 6230

1030 3580 6700

130 7 80 1460

1160 10150 29900

470 3620 8450

5820 31340 76980

3570 21470 52740

19 82-83

10550

16880

8640

7 840

1700

40070

9180

94860

6743 0

( Index Numbers )

100 210 843 1374 1426

100 167 864 3350 4019

100 163 696 1298 1800

100 234 814 1523 1782

100 217 1300 2433 2833

100 21 9 1915 5642 7 560

100 260 201 1 4694 5100

Source: Calculated from International Financial S t a t i s t i c s , 1984 Yearbook.

( * ) d e n o t e s author’s e s t i m a t e s , based o n p a r t i a l information.

17

1970s. Arab imports reached t h e i r peak i n 1982 a t $104 b i l l i o n ,

a f t e r which they r e t r e a t e d t o $90 b i l l i o n i n 1983 - a d e c l i n e of

some 13 per cent. The sha re of t he low absorbers i n those f lows

has grown over t i m e : from about 60 per c e n t i n the l a t e 1960s t o

a b o u t 70 p e r c e n t i n t h e e a r l y 1980s. T h i s p a r t l y e x p l a i n s why

Gulf banks were a t t he f o r e f r o n t of t he i n t e r n a t i o n a l i z a t i o n of

Arab banks d u r i n g t h e 1 9 7 0 s , and a l s o why they h a v e had more

d i f f i c u l t i e s than o the r banks s i n c e 1983.

I m p o r t s of i n d i v i d u a l c o u n t r i e s show s u b s t a n t i a l g rowth

d i f f e r e n c e s : h i g h e s t i n S a u d i A r a b i a , UAE, and Iraq, and l o w e s t

i n A l g e r i a . As a r e s u l t , t h e volume of i m p o r t s f o r t h e

i n d i v i d u a l coun t r i e s changed d r a m a t i c a l l y dur ing the 1970s, and

w i t h it t h e amount of t r a d e f i n a n c i n g p r o v i d e d by banks f rom

those count r ies . During t h e 1960s A l g e r i a was by f a r t h e l a r g e s t

i m p o r t e r i n t h e Arab/OPEC c o u n t r i e s , fol lowed a t c o n s i d e r a b l e

d i s t a n c e by the roughly equal imports of I raq , Kuwait, Libya, and

S a u d i Arabia . B y t h e mid-1970s t h i s p i c t u r e has changed

s i g n i f i c a n t l y , and by t h e e a l r y 1980s i t changed s t i l l f u r t h e r .

S a u d i i m p o r t s h a v e become a b o u t t h r e e times Iraq's, t h e second

l a r g e s t i m p o r t e r , and a b o u t e q u a l t o t h e i m p o r t s of A l g e r i a ,

I r a q , Kuwait , and Libya combined. The i m p 1 i c a t i o n s of t h e s e

developments f o r t r a d e f inanc ing by Arab banks - e s p e c i a l l y Saudi

banks - are s e l f evident . The impl i ca t ions f o r t he s i z e of Arab

banks by n a t i o n a l i t y show i n t he volume of a s s e t s of those banks

i n t h e early 1980s; s e e Annex Table A-1.

Notwithstanding t h e major expansion i n Arab imports, p a r t of

t h e increased o i l revenues i n the low absorbers was t r ansmi t t ed

abroad f o r investments. The volume of t h e inves t ed s u r p l u s by

18

country is no t p r e c i s e l y known, but e s t ima tes of t h e cumula t ive

c u r r e n t a c c o u n t s u r p l u s m a y s e r v e as a proxy. Such e s t i m a t e s

were i n f a c t made by an independent researcher and a r e repor ted

in T a b l e 3 below. A s would be e x p e c t e d , t h e f i g u r e s show sub-

s t a n t i a l i n c r e a s e s i n t h e c a p i t a l s u r p l u s i n v e s t e d ab road

fo l lowing the two major o i l p r i c e increases . Combined, t he low

a b s o r b e r s h a v e accumula t ed a t o t a l s u r p l u s t h r o u g h t h e end of

1982 i n e x c e s s of $320 b i l l i o n , d i s t r i b u t e d a s f o l l o w s : 26 p e r

c e n t f o r Kuwait , 8 p e r c e n t f o r Libya , 4 p e r c e n t f o r Q a t a r , 5 1

p e r c e n t f o r S a u d i A r a b i a , and 11 p e r c e n t for UAE. I t a p p e a r s

Table 3

Cumulative Net Foreign Assets of t h e Low Absorbers

( b i l l i o n s of US d o l l a r s )

Country A t End 1973 1974-78 1979-82 A t End 1982

Kuwait 3.7 31.8 48.8 84.3

Libya 3.2 10.2 12.0 25.4

Qatar 0.9 4.6 8.1 13.6

Saudi Arabia 4.2 61.6 98.6 164.4

UAE

Tota l

Sources :

0.5 11.7 23.9 36.1

12.5 119.9 191.4 323.8

For f i g u r e s a t end 1973 f rom R i c h a r d P. M a t t i o n e "OPEC's I n v e s t m e n t s and t h e I n t e r n a t i o n a l F i n a n c i a l System", Srookings Discussion Papers i n I n t e r n a t iona 1 Economics, No. 6, J u l y 1983, T a b l e 1.3. For 1974-78 and 1979-82, from R.P. Mattione, OPEC's Investments and t h e I n t e r n a t i o n a l F i n a n c i a l System, t h e Brookings I n s t i t u t i o n , 1985, Tab le 2-4, p.11.

19

t h a t t h e 1982 f i g u r e s repor ted i n the t a b l e represented a peak,

because s t a r t i n g in 1983 p r a c t i c a l l y a l l t h e low absorbers have

r e s o r t e d t o t h e i r a c c u m u l a t e d s u r p l u s t o f i n a n c e b u d g e t a r y

d e f i c i t s , a 1 b e i t i n varying degrees. Saudi Arabia i n p a r t i c u l a r

appears t o have withdrawn s u b s t a n t i a l sums, es t imated a t $35-45

b i l l i o n d u r i n g 1983-85, a c c o r d i n g t o t h e country 's a n n u a l

budgets . The deployment of r a p i d l y i n c r e a s i n g i n v e s t m e n t f u n d s

o u t s i d e t h e Arab r e g i o n t h r o u g h o u t t h e 1970s was c a r r i e d o u t

t h r o u g h a 1 t e r n a t i v e c h a n n e l s , most n o t a b l y bank d e p o s i t s and

o t h e r l i q u i d p l a c e m e n t s i n t h e US and UK. I n a d d i t i o n , a new

banking formula e s p e c i a l l y s u i t e d f o r t he 1970s began t o emerge - t h a t of c o n s o r t i u m banks. Because of t h e i r r o l e i n t h e p r o c e s s

of i n t e r n a t i o n a l i z a t i o n of Arab banks d u r i n g t h e 1970s, t h e y

dese rve some d e t a i l e d a n a l y s i s . The f i r s t c o n s o r t i u m bank was

t h e FRAB Bank, e s t a b l i s h e d i n 1 9 6 9 by a g r o u p of Kuwai t i banks

wi th Socigte' G&&ale. The formula must have proven s u f f i c i e n t -

l y a t t r a c t i v e because FRAB was s h o r t l y fo l lowed by o ther Arab-

Occidenta l consortium banks such a s t h e Union des Banques Arabes

e t F r a n c a i s e s (UBAF) i n 1 9 7 0 , t h e European Arab Bank (EAE) i n

1972, and Banque Arabe e t I n t e r n a t i o n a l e d 'hves t i ssements (BAII)

i n 1973. T h i s form of i n t e r n a t i o n a l c o o p e r a t i o n i n v o l ved n e t

ga ins t o the p r i n c i p a l p a r t i c i p a n t s : access of European banks t o

p e t r o c a p i t a l i n r e t u r n f o r access of Arab banks t o modern banking

t e c h n i q u e s , i n t e r n a t i o n a l e x p e r i e n c e and c o n n e c t i o n s , and

d e v e l o p i n g t h e c a p a c i t y t o b u i l d new f i n a n c i a l mechanisms and

s e r v i c e p roduc t s . I n a d d i t i o n , t h i s new bank ing f o r m which

20

e n a b l e d b o t h s i d e s t o r e a p t h e b e n e f i t s of t h e r a p i d l y growing

commerce between Europe and Arab c o u n t r i e s a l s o f a c i l i t a t e d the

i n s t i t u t i o n a l s h a r i n g i n t h e c o s t s and r i s k s of t h e new

opera t ions .

What i s s i g n i f i c a n t abou t t h e s e major Arab-Occ iden ta l

consortium banks i s t h a t they were a l l formed before 1974; they

a1 1 invo lved Kuwaiti p a r t i c i p a t i o n , sometimes s u b s t a n t i a l ; and

t h e y a l l had European banks as ma jo r p a r t n e r s . On a l l t h r e e

c o u n t s , t h e q u e s t i o n i s : why? F o r m a t i o n of t h e s e c o n s o r t i u m

banks before 1974 was f o r t h e most p a r t i n a n t i c i p a t i o n of f u t u r e

e x p a n s i o n i n b u s i n e s s , e v e n b e f o r e t h e f i r s t major o i l p r i c e

i n c r e a s e . T a b l e 2 shows t h a t Arab i m p o r t s i n t h e e a r l y 1 9 7 0 s

were a l r e a d y twice t h e l e v e l of t h e l a t e 1960s. The K u w a i t i

p a r t i c i p a t i o n i n a 1 1 was due to p i o n e e r i n g y e a r s of e x p e r i e n c e

wi th i n t e r n a t i o n a l f i n a n c i a l ventures , be it on t h e government

s i d e (KIC, KFTCIC, and t h e Arab Afr ican Bank), o r on the p r i v a t e

bus iness s i d e (UBK and BAII) .12 That t h e major overseas p a r t n e r s

were European banks was m a i n l y d u e t o t h e i r l o n g - s t a n d i n g

i n t e r e s t i n and f a m i l i a r i t y w i t h commerce and f i n a n c e of Arab

economies i n gene ra l and of t he then r a p i d l y growing economies of

t h e Gulf i n p a r t i c u l a r .

S i n c e 1974, however , some Arab banks j o i n e d t h e h i t h e r t o

Kuwait dominated consortium banks, thereby changing the s t r u c t u r e

of t h e i r ownership and management. Other Arab banks p re fe r r ed t o

e s t a b l i s h new consortium banks, e v i d e n t l y because the formula's

12. The r o l e of Abdel La t i f A 1 Hamad was s i g n i f i c a n t . He was t h e D i r e c t o r - G e n e r a l of Kuwait Fund, t h e Managing D i r e c t o r of KIC, and t h e Chairman of UBK and R A I I .

appeal was s t i l l too s t rong t o ignore. Development of consortium

banks dur ing the 1970s went beyond the i n i t i a l u n i v e r s a l mandate

of t h i s pioneer group i n t o two a d d i t i o n a l d i r e c t i o n s as w i l l be

d e t a i l e d below, namely t o semi - indus t r i a l coun t r i e s of Southern

Europe, A s i a and L a t i n America, and w i t h i n t h e Arab r e g i o n

i t s e l f .

A s t he s i z e and country composition of Arab f i n a n c i a l f lows

changed, t he func t ions and s t r u c t u r e s of consortium banks e v o l ved

beyond t h e i r i n i t i a l ob jec t ives . For example, FRAB Bank e v o l ved

q u i c k l y t o i n c l u d e o t h e r Arab banks from S a u d i A r a b i a , UAE,

Libya, Tunis ia , A lge r i a and Morocco and OECD banks from Belgium,

HoZ land, Switzer land, Spain, Greece and Japan. E v e n t u a l l y , t he

Western p a r t n e r s were bought o u t by Arab banks, and FRAB became

i n e f f e c t a n i n t e r - A r a b bank. UBAF became a c o n s o r t i u m of many

Arab and OECD i n s t i t u t i o n s . On UBAF's Arab s i d e a l o n e , t h e r e

were e l e v e n commercial banks, f i v e c e n t r a l banks, nine government

banks, and a minis t ry of finance. The p a t t e r n was about t h e same

wi th B A 1 1 and EAB.

A l t h o u g h most c o n s o r t i u m banks were i n i t i a l l y s e t up t o

promote Arab-European business r e l a t i o n s , t h e i r mandate expanded

q u i c k l y t o c o v e r a r a n g e of a c t i v i t i e s i n c l u d i n g commerc ia l

banking , t r a d e f i n a n c i n g , f o r e i g n exchange , money m a r k e t , and

loan syndicat ion. Some, however, s t i l l added special f e a t u r e s t o

t h e i r services. B A I I , f o r example, i n order t o a t t r a c t t h e r i c h

i n d i v i d u a l Arab i n v e s t o r s , i n i t i a t e d r e a l e s t a t e management,

i n s u r a n c e , and s t o c k marke t programs. As such , B A 1 1 was a c t i n g

as a f i n a n c i a l adv i so r t o Arab inves to r s . I n add i t ion , t h e bank

became q u i t e a c t i v e i n Eurobond market, managing l a r g e i s s u e s i n

22

b o t h OECD and Arab c u r r e n c i e s ( i n c l u d i n g UAE di rham, K u w a i t i

d i n a r , and Bahraini d i n a r ) .

The p a r t i c i p a t i o n of an i n c r eas i n g number of non-Kuwa i t i

Arab banks i n e x i s t i n g c o n s o r t i u m banks pushed f u r t h e r t h e i r

g rowth momentum and e n a b l e d them t o e n t e r i n t o j o i n t v e n t u r e s

wi th l ead ing banks i n the major f i n a n c i a l c e n t r e s of London, New

York, Rome, Luxembourg, F r a n k f u r t and Hong Kong. I n a d d i t i o n ,

consortium banks e s t a b l i s h e d Asian branches and/or j o i n t ventures

i n Seoul , Tokyo, India , Pakis tan , S r i Lanka, t h e Ph i l ipp ines , and

Singapore t o f a c i l i t a t e t r a d e and i n v e s t m e n t t r a n s a c t i o n s w i t h

t h a t v i t a l p a r t of t h e ~ 0 r l d . l ~ The waves of b u s i n e s s and

f i n a n c i a l oppor tun i t i e s i n v o l ving the newly crea ted o i l - r e l a t e d

wea 1 t h induced t h e e s t a b 1 ishment of s p e c i a l i z e d i n t e r n a t i o n a l

banks t o promote b i l a t e r a l c o o p e r a t i o n be tween i n d i v i d u a l OECD

c o u n t r i e s and Arab c o u n t r i e s . Thus, t h e Banco Arab-Espanol

(Aresbank) was e s t a b l i s h e d i n Madrid i n 1975 w i t h a c a p i t a l of

$19 m i l l i o n ; t h e Banco Saudi-Espanol (Saudesbank) w a s e s t a b l i s h e d

a l s o i n Madrid i n 1979 with a c a p i t a l of $53 m i l l i o n ; t h e Arab-

H e l l e n i c Bank was e s t a b l i s h e d i n Athens i n 1979 with a c a p i t a l of

$15 m i l l i o n ; and t h e Arab-Turk i sh Bank w a s e s t a b l i s h e d i n

I s t a n b u l i n 1977 w i t h a c a p i t a l of $20 m i l l i o n . Some of t h e

a c t i v i t i e s of these b i l a t e r a l banks were t y p i c a l l y s h o r t - t e r m

o r i en ted , o t h e r s were investment or ien ted , f i nanc ing p r o j e c t s i n

hos t countr ies . T y p i c a l of short- term a c t i v i t i e s , f o r example,

13. Barun Roy, "Arab-Asian Banking T i e s Grow", Arab Banking. and Finance Handbook, Fa1 con Pub1 ishing, Manama, Bahrain, 1983, pp. 29-35.

23

t h e Arab-Turkish Bank is a c t i v e l y i n v o l ved i n f i n a n c i n g t h e

r a p i d l y growing Arab-Turkish t r a d e , r e p a t r i a t i n g t h e expand ing

f l o w s of T u r k i s h worke r s r e m i t t a n c e s e s p e c i a l l y f rom S a u d i

A r a b i a , and issuing i n t e r n a t i o n a l g u a r a n t e e s f o r T u r k i s h

c o n t r a c t o r s working i n Arab c o u n t r i e s , n o t a b l y Libya and S a u d i

Arabia.

The p r e s e n c e of Arab banks e x t e n d e d beyond i n t e r n a t i o n a l

f i n a n c i a l c e n t r e s and Med i t e r r anean c a p i t a l s t o L a t i n America.

The Arab-La t in American Bank ( A r l a b a n k ) was s e t u p i n L i m a i n

1977 a s a c o n s o r t i u m bank t o promote f i n a n c i a l c o o p e r a t i o n and

i n d u s t r i a l and commerc ia l r e l a t i o n s be tween Arab and L a t i n

American count r ies . The a c t i v i t i e s of t h e Arlabank i n c l u d e t r a d e

f i n a n c i n g be tween t h e two r e g i o n s ; merchan t and commerc ia l

bank ing ; and j o i n t v e n t u r e s i n m i n i n g , a g r i c u l t u r e , a n d

pe tr ochem i c a l s . By the l a t e 1970s Arab f i n a n c i a l i n s t i t u t i o n s appear t o have

r e sponded t o the new i n t e r n a t i o n a l b u s i n e s s cha 1 I e n g e s by

e s t a b l i s h i n g a g l o b a l network engaged i n a va r i e ty of a c t i v i t i e s .

In a d d i t i o n t o the a l r eady discussed t r a d e f inanc ing , Arab banks

have undertaken a number of commercial and investment a c t i v i t i e s ,

a s shown i n T a b l e 4. The t a b l e shows t h a t s y n d i c a t e d Euro-

c u r r e n c y l e n d i n g i s t h e l a r g e s t a c t i v i t y of Arab banks ( a s i d e

from t r a d e f inanc ing ) cumula t ive ly adding t o about $41 b i l l i o n i n

1984, e v e n though i t s t a r t e d much l a t e r than t h e o t h e r s . The

second l a r g e s t a c t i v i t y i s d i r e c t investment , cumula t ive ly adding

t o a b o u t $24 b i 11 i o n i n 1984 - which i s most 1 i k e l y a n under -

e s t i m a t e . Eurobonds i s t h e s m a l l e s t o f Arab bank a c t i v i t i e s ,

c u m u l a t i v e l y a d d i n g t o some $10 b i l l i o n . S i g n i f i c a n t l y ,

24

Table 4

International Activities of Arab Banks

(Millions of US dollars)

Year Syndicated Bonds Direct Eurocurrency Investments Credits

Before 1974 1974 1975 1976 1977 1978 1979 1980 1981 1982

1984 1983

- 9 51 2321 2491 3 583 9102 9798 69 85 5716

450 68 164 316 53 1 770 7 41 857 1676 1619 n.a. n.a.

1290 1560 1200 1400 1740 2480 2360 27 60 48 90 1760 1100 1200

Sources :

1 . Syndicated Eurocurrency Credits: from Middle East Economic Survey, several issues, especially 28:14, 14th January, 1985, pp. 81-86.

2. Bonds: from N.A. Sherbiny "Arab Financial Institutions and Developing Countries" World Bank, Staff Working Paper (Forth- coming).

3. Direct Investments: from N.A. Sherbiny, ibid, f o r direct investments in developing countries; and Bank of England, Quarterly Bul letin, March 1985, f o r direct investments in developed countries. Mote, however, that differentiating direct investments from investments in securities in developed countries is rather difficult, given the nature of data reporting. It is suspected that reporting direct investments in developed countries is somewhat downward biased, and that t h e figures presented in the table are therefore conservative estimates.

activities of Arab banks during 1980-84 constituted 86 per cent

of cumulative syndicated Eurocurrency loans, 70 per cent of

25

Eurobonds, and 49 p e r cent of d i r e c t investments.

A s p e c i a l f o c u s on E u r o c u r r e n c y l o a n s s y n d i c a t e d by Arab

banks shows t h a t 20 l ead ing banks accounted f o r about 88 p e r cen t

of t he t o t a l dur ing 1979-83, w h i l e t h e remaining 12 p e r cent were

h a n d l e d by some 30 o t h e r s m a l l e r banks ; s e e Annex T a b l e A-2.

Some banks which appeared on the l ead ing 20 loan synd ica to r s i n

1983 were n o t i n c l u d e d i n some e a r l i e r years. For example ,

n e i t h e r t h e Arab ,Banking Corporation nor the Saudi I n t e r n a t i o n a l

Bank appeared on t he l i s t i n 1979 because they s t a r t e d ope ra t ion

o n l y i n 1980. However, o the r banks e s t a b l i s h e d long before d id

n o t a p p e a r on t h e l i s t e i t h e r i n 1979 o r 1980 b e c a u s e of t h e i r

p rev ious ly l i m i t e d i n v o l vement i n Eurocurrency loans. Included

i n t h i s g roup a r e A l a h l i Bank of Kuwai t , Commercial Bank of

Kuwait, Nat iona l Bank of Bahrain, Riyad Bank, and Bank of Bahrain

and Kuwait.

W i t h i n t h e Arab c o u n t r i e s t h e m s e l v e s , new d i r e c t i o n s f o r

c o n s o r t i u m banks began t o shape i n S a u d i A r a b i a and Egypt ,

p r a c t i c a l l y f o r d i a m e t r i c a l i y opposed reasons. The Saudiza t ion

p o l i c y of 1977-81 , aimed a t e s t a b l i s h i n g n a t i o n a l c o n t r o l of t he

bank ing sys t em, t u r n e d a number of f o r e i g n banks i n t o Saud i -

European c o n s o r t i u m banks. Thus, t h e Banque d e 1 ' Indochine

became Al-Bank Al-Saudi Al-Faransi ; t h e Algemene Bank Nederland

became Al-Bank A l - S a u d i A l - H o l l a n d i ; t h e B r i t i s h Bank of t h e

Middle East became Al-Bank Al-Saudi Al-Bri tanni ; and Ci t ibank was

t u r n e d i n t o Al-Bank Al -Saud i Al-Ameriki . l4 I n Egypt , € o r

~~ ~~~

14. T. Wohlers-Scharf, Op.cit . , p.27.

26

oppos i te reasons, consortium banks were e s t a b l i s h e d as a r e s u l t

of t h e go v ernment's "open door" po 1 icy, which aimed t o a t t r a c t

fo re ign investments i n joint ventures wi th Egyptian i n s t i t u t i o n .

Dur ing t h e second h a l f of t h e 1970s s e v e r a l Egypt ian-Western

Consortium banks were e s t a b l i s h e d , t h e l a r g e s t of which w a s Chase

N a t i o n a l Bank (Chase Manha t t an and N a t i o n a l Bank of Egypt ) and

Societe Arabe I n t e r n a t i o n a l e d e Banque (Banque d e Paris e t d e s

Pays-Bas, t h e Arab I n t e r n a t i o n a l Bank, and t h e Nat iona l Bank of

EgY Pt

27

4. CHaTBES OF ARAB MUKIBG

With markedly increased o i l revenues in t he ear ly 1970s t h e

f o c a l p o i n t of Arab bank ing began t o s h i f t f rom Lebanon t o t h e

Gu l f . However, i t was t h e s t a r t o f Lebanese c i v i l war i n 1 9 7 5

which s p e l l e d out t h e demise of B e i r u t a s a r e g i o n a l f i n a n c i a l

c e n t r e . W i t h i n t h e Gulf, t h e new c e n t r e s were Kuwait and

Bahra in . I n t h e wide r Arab c o n t e x t , C a i r o was s t r u g g l i n g t o

become a r e g i o n a l Arab bank ing c e n t r e . I n t e r n a t i o n a l l y , Arab

banks no l o n g e r c o n f i n e d t h e i r g rowing p r e s e n c e t o London and

P a r i s , b u t went t o e s t a b l i s h a n c h o r s i n New York, Geneva,

Frankfur t , Singapore and Hong Kong. For a whi le , t h e network of

Arab banks appeared t o e n c i r c l e t he globe. By t h e ear ly 1980s,

w i t h s u c h i n t e r n a t i o n a l n e t w o r k o f b a n k s and f i n a n c i a l

i n s t i t u t i o n s i n p l a c e and o i l r e v e n u e f l o w s i n t o t h e Arab

coun t r i e s a t a h i s t o r i c a l peak, Arab f i n a n c i a l power appeared a s

a r i s i n g f o r c e i n i n t e r n a t i o n a l f i n a n c i a l c i r c l e s . T h i s new

s t a t e of a f f a i r s , however , t u r n e d o u t t o be a t r a n s i t o r y

phenomenon. Fur the rmore , p r a c t i c a l l y every c e n t r e of Arab

banking has drawbacks of i t s own.

The i n t e r n a t i o n a l i z a t i o n of Kuwaiti banks dur ing t h e 1960s

became more consol ida ted dur ing t h e 1970s. Kuwaiti i n s t i t u t i o n s

e s t a b l i s h e d a g r e a t e r p r e s e n c e a b r o a d and p a r t i c i p a t e d i n a n

28

i n c r e a s i n g r a n g e of i n t e r n a t i o n a l f i n a n c i a l and i n v e s t m e n t

ac t iv i t i e s : i s s u i n g bonds i n both Kuwaiti d i n a r s and U S d o l l a r s

on b e h a l f of c u s t o m e r s i n d e v e l o p e d and d e v e l o p i n g c o u n t r i e s ;

j o i n i n g Eurodo l l a r s y n d i c a t e d l o a n s a s l e a d managers , co-

managers , o r managers ; e s t a b l i s h i n g d i r e c t i n v e s t m e n t j o i n t

v e n t u r e s i n s e v e r a l d e v e l o p e d and d e v e l o p i n g h o s t c o u n t r i e s ,

e s p e c i a l l y i n t h e Arab region; assuming a l e a d r o l e i n o f f i c i a l

concessional f lows t o deve loping coun t r i e s ; promoting complemen-

t a r y a c t i v i t i e s t o o f f i c i a l a i d f l o w s s u c h as c o f i n a n c i n g

d e v e l o p m e n t p r o j e c t s w i t h o t h e r Arab o r i n t e r n a t i o n a l a i d

i n s t i t u t i o n s ; and c o n t r i b u t i n g t o s c h e m e s of i n v e s t m e n t

g u a r a n t e e s t o improve t h e i n v e s t m e n t and b u s i n e s s c l i m a t e i n

r e c i p i e n t deve loping count r ies ,

A l o n g s i d e t h e s e i m p r e s s i v e d e v e l o p m e n t s , t h e s e e d s of

f i n a n c i a l c r i s i s were sown i n t h e l a t e 1 9 7 0 s w i t h t h e

e s t a b l i s h m e n t of an i n f o r m a l s t o c k exchange (Sus a1 Manakh) i n

wh ich t h e s h a r e s of o f f s h o r e Gul f companies were t r a d e d . The

n a r r o w n e s s of t h e o f f i c i a l s t o c k m a r k e t r e l a t i v e t o expand ing

d o m e s t i c 1 i q u i d i t y prompted t h e s e a r c h for new i n v e s t m e n t

oppor tun i t i e s , which Suq a1 Manakh helped t o s a t i s f y . Feve r i sh

s p e c u l a t i o n i n this unorganized market, and a1 lowing t h e c la ims

t o b e s e t t l e d by p o s t - d a t e d checks , pushed s h a r e p r i c e s t o

u n r e a l i s t i c a l l y h igh l e v e l s , which came tumbling i n August 1982,

1 5 s e n d i n g shock waves t h r o u g h t h e smal 1 i n v e s t m e n t community.

T h r e e y e a r s a f t e r t h e Manakh c o l l a p s e , d u r i n g wb ich t h e

15. Hazern Beblawi, The Arab Gulf Economy i n a Turbulent ARe, S t . Martin's Press , New York 1984, pp.230-234.

29

government has spent more than $8 b i l l ion i n var ious support and

compensation programs, t he debt t a n g l e remains wi th no immediate

s o l u t i o n i n s igh t . 16

The Hanakh c o l l a p s e was f o l lowed by a bank ing c r i s i s i n

1984, d u r i n g wh ich t h e p r o f i t s of commerc ia l banks as a g r o u p

f e l l € o r the first t i m e in a decade , by a b o u t 1 5 p e r c e n t . Many

borrowers were no t performing n o t b e c a u s e t h e y were d e l i n q u e n t

but because of poor condi t ions. In v i e w of t h i s banking c r i s i s ,

t h e c e n t r a l bank has been seeking t o e s t a b l i s h g r e a t e r degree of

commercial and monetary d i s c i p l i n e , and a s a r e s u l t some

r e p u t a b l e f i n a n c i a l i n s t i t u t i o n s h a v e t a k e n s t e p s which may

u l t i m a t e l y lead t o t h e i r merger: Burgan Bank and Bank of Kuwait

and t h e M i d d l e E a s t ; and KIC and KFTC1C.l-I These s u c c e s s i v e

c r i s e s m a y h a v e r a i s e d q u e s t i o n s abou t Kuwait's i n t e r n a t i o n a l

f i n a n c i a l r e p u t a t i o n , However, t h e r e s p o n s e t o s u c h c r i s i s ,

uneven as it may have been, demonstrates government se r iousness

about c o r r e c t i v e ac t ions . Never the less , more d e c i s i v e measures

are s t i l l needed t o induce i n s t i t u t i o n s t o respond c rea t ive ly t o

a d v e r s e s i t u a t i o n s and t h u s become more t u n e d t o f i c k l e m a r k e t

c o n d i t i o n s . A f t e r a l 1, f i n a n c i a l downtu rns i n t h e p a s t d i d n o t

n e c e s s a r i l y end Kuwait's s t a n d i n g a s a f i n a n c i a l c e n t r e .

Kuwait's modern f i n a n c i a l and banking system has a t r a c k record

of t h r e e d e c a d e s of e x p e r i e n c e and g rowth - more t h a n c a n be

claimed by any o t h e r Gulf country.

16. R a m i Khouri "A Bitter P i l l t o Swallow" Euromoney, Aug. 1985, pp.119-128.

17. C h a r l e s Bab ing ton " S t i l l P a y i n g f o r t h e Manakh" Euromoney, March 1985, pp.133-136.

30

Bahrain's emergence as an Arab c e n t r e of f i n a n c e i s t h e

r e s u l t of s e v e r a l f a c t o r s i n c l u d i n g t h e government 's need t o

d i v e r s i f y t h e domestic economic base, t he adopt ion of f l e x i b l e

p o l i c i e s t o a c h i e v e t h e d i v e r s i f i c a t i o n s t r a t e g y and t h e

count ry ' s s p e c i a l l o c a t i o n a l a d v a n t a g e s . I n t h e e a r l y 1970s ,

Bahrain's o i l expor t s begain t o d e c l i n e because of dwindl ing o i l

r e s o u r c e s . I n r e s p o n s e , t h e government o p t e d f o r g i v i n g

f i n a n c i a l s e r v i c e s a prominent r o l e t o prepare Bahrain f o r t h e

pos t -o i l era. The i n t e r e s t i n f i n a n c i a l s e r v i c e s d e r i v e s from

Bahrain's s p e c i a l l o c a t i o n a l advantage which l i e s c l o s e t o the

s h o r e of Saud i A r a b i a i n t h e m i d d l e of t h e G u l f . T h a t v e r y

l o c a t i o n enab le s Bahrain to complete a g l o b a l c i r c l e of f i n a n c i a l

c e n t r e s r u n n i n g from London t o New York, San F r a n c i s c o , Tokyo,

and S ingapore . Bahrain's t i m e zone g i v e s i t t h e d i s t i n c t

ad vantage of opera t ing i n currency d e a l ings and f o r e i g n exchange

business a f t e r Singapore c l o s e s , but before the European c e n t r e s

open.

F o r e i g n banks u n a b l e t o e s t a b l i s h o p e r a t i o n s i n Kuwait o r

S a u d i A r a b i a due t o l e g a l b a r r i e r s found B a h r a i n a most

c o n v e n i e n t a l t e r n a t i v e . Wi th t h e 1 9 7 5 l e g i s l a t i o n of OBUs

(o f f shore banking u n i t s ) model l e d a l o n g t h e l i n e s o f S i n g a p o r e

and Cayman I s l a n d s , Bahrain became a h ighly a t t r a c t i v e banking

centre . Most major banks ove r a s h o r t per iod e s t a b l i s h e d branch

o f f i c e s , so t h a t by 1983 t h e r e were 21 commerc ia l banks , 63

r e p r e s e n t a t i v e o f f i c e s ( f r o m 35 in 19801 , 1 6 i n v e s t m e n t

companies, 6 fo re ign exchange brokers , 77 OBUs (from 51 i n 19801,

31

and another 2 05Us l i censed t o start.18 I n i n s t i t u t i o n a l range,

B a h r a i n began t o r i v a l s u c h i n t e r n a t i o n a l bank ing c e n t r e s as

S i n g a p o r e , Hong Kong, Luxembourg, and Nassau and i t s bank ing

community was g e t t i n g t o be widely d ive r se .

C a p i t a l f l o w s i n t o B a h r a i n o r i g i n a t e for t h e most p a r t i n

t h e Arab c o u n t r i e s and Western Europe. The s h a r e of Arab

c o u n t r i e s as sources of funds s t e a d i l y expanded from 50 p e r c e n t

i n 1978 t o 66 per c e n t i n 1983; t h a t o f W e s t e r n Europe s t e a d i l y

d e c l i n e d f rom 30 p e r c e n t i n 1978 t o 21 p e r c e n t i n 1983; and

t h a t of combined o t h e r s o u r c e s such a s t h e US o r A s i a a l s o

d e c l i n e d f rom 20 p e r c e n t i n 1 9 7 8 t o 14 p e r c e n t i n 1983.

C a p i t a l from Bahrain f lows t o borrowers p r a c t i c a l l y everywhere.

However, Bahrain is a n e t expor te r of funds t o t h e Far East (How

Kong, Singapore, Tokyo), A s i a , La t in America, and l a t e l y Western

E ~ r 0 p e . l ~ S i g n i f i c a n t l y , a b o u t 50 p e r c e n t of t h e a s s e t s a r e

l e n t t o Arab c l i e n t s , t hus p a r t l y counterba lanc ing the argument

t h a t Bahrain i s merely a c e n t r e f o r r e c y c l i n g o i l revenues t o t h e

o u t s i d e world.

Assets of OBUs i n c r e a s e d r a p i d l y o v e r a s h o r t t i m e span :

f rom $23.4 b i l l i o n i n 1978 t o $62.7 b i 11 i o n a t t h e end of 1983.

The p a c e of growth , however , was r a t h e r uneven , b e c a u s e a f t e r

i n i t i a l a c c e l e r a t i o n through 1981, i t d e c e l e r a t e d s i g n i f i c a n t l y

d u r i n g 1982 and 1983. A l t h o u g h t h e p i c t u r e for 1984 i s s t i l l

incomplete , t h e r e a r e i n d i c a t i o n s of a d e c l i n e €or t he f i r s t t i m e

18. Bahrain Monetary Agency, Annual Report , 1983-

19. A l a n E. Moore, "Bahrain's O f f s h o r e Banking U n i t s , " Arab Bankinn and F i n a n c e Handbook, F a l c o n Pub1 i s h i n g , Manama, Bahrain, 1983, pp. 89-94.

32

20 i n t h e volume of OBU assets.

This r e v e r s a l of growth momentum was the r e s u l t of several

f a c t o r s : t h e s e r i o u s d e c l i n e o f o i l r e v e n u e f l o w s i n t o t h e o i l

e x p o r t i n g s t a t e s , t h e c o n t i n u i n g war between neighbouring I r aq

and I ran , t he accumulat ion of bad deb t s , and the r e l a t e d r e g i o n a l

banking crisis i n r ecen t years. O v e r t s i g n s of t r o u b l e for OBUs,

began t o a p p e a r d u r i n g 1984 w i t h t h e d e p a r t u r e of some banks ,

such as Secur i ty P a c i f i c , or e a r l y i n 1985 wi th t h e d i s t r e s s s a l e

of t h e Arab A s i a n Bank to a m i n o r i t y s h a r e h o l d e r and t h e ma jo r

r e o r g a n i z a t i o n of t h e Un i t ed Gul f Rank. Unhapp i ly , b e f o r e t h e

cr is is i s over , more OBUs will have depar ted reducing t h e demand

for qua l i f ied Bahrainis , o f f i ce space, and fami ly accomodations.

The small economic base of t he Bahrain economy toge ther w i t h t h e

h i g h dependence of OBUs on b u s i n e s s c o n d i t i o n s and o i l r e v e n u e

f l o w s i n t o n e i g h b o u r i n g Gulf c o u n t r i e s r e n d e r t h e i s l a n d

v u l n e r a b l e t o e x t e r n a l shocks. It i s these f a c t o r s which e x p l a i n

t h e heightened s t a t e of uncer ta in ty du r ing 1984-85.

A s i g n i f i c a n t p a r t of Bahrain's s t r e n g t h d e r i v e s from

banking 1 i m i t a t i o n s i n neighbouring coun t r i e s , p a r t i c u l a r l y where

banks a r e n a t i o n a l i z e d : 60 p e r c e n t i n Saud i A r a b i a and 100 p e r

cent i n Kuwait. I n t e r n a t i o n a l banking ope ra t ions no t p o s s i b l e t o

e s t a b l i s h i n e i t h e r c o u n t r y found i n Bahra in a p e r f e c t l y

s a t i s f a c t o r y a l t e r n a t i v e t h r o u g h t h e OBUs. Changes i n e i t h e r

c o u n t r y t o modify bank ing p o l i c i e s o r r e g u l a t i o n s may t h u s

d i m i n i s h Bahrain's p o s i t i o n . For example , e x c e s s s h o r t - t e r m

l i q u i d i t y i n S a u d i banks was p r e v i o u s l y abso rbed e a s i l y i n

20. The F inanc ia l T h e , July 22, 1985.

33

Bahrain's OBUs, which i n t u r n was transformed r e a d i l y i n t o s h o r t

term d o l l a r l i a b i l i t i e s . I n e f f e c t , t he process amounted to a de

f a c t o i n t e r n a t i o n a l i z a t i o n of t h e Saud i r i y a l , n o t a welcome

outcome t o S a u d i a u t h o r i t i e s . A s SAMA began t o d e v e l o p s h o r t

term i n s t r u m e n t s , Saud i banks w i t h excess l i q u i d i t y could t u r n

ins tead t o t h e s e instruments r a t h e r than d i r e c t t h a t l i q u i d i t y t o

Bahrain. The impact of t h i s development on Bahrain's OBUs could

be det r imenta l .

Despi te t h e s e r ecen t a d v e r s i t i e s , Bahrain cont inues t o be an

important r e g i o n a l cen t r e f o r Arab banks and a s i g n i f i c a n t l i n k

i n t h e network of t h e i r g l o b a l operat ions. Bahrain's l o c a t i o n a l

advantage, conducive s o c i a l environment, and t h e a b i l i t y of i t s

p e o p l e t o i n t e r a c t e a s i l y w i t h i n t e r n a t i o n a l b a n k e r s a r e a 1 1

b a s i c f e a t u r e s u n l i k e l y t o change wi th business downturns. The

tough-minded commercial d i s c i p l i n e app l i ed by Bahrain Monetary

Agency on member banks and O B I I S , in a d d i t i o n , c o n t i n u e s t o be

c o n f i d e n c e i n s p i r i n g . What is e s p e c i a l l y u n s e t t l i n g , none-

t h e l e s s , i s the depth and du ra t ion of t he present downturn.

E l s e w h e r e i n t h e Arab r e g i o n , C a i r o i s making a q u e s t t o

become a c e n t r e of Arab bank ing , though n o t w i t h o u t s e r i o u s

l imi t a t ions . Egypt has always had s p e c i a l r e l a t i o n s wi th Arab

count r ies : c u l t u r a l l y , i n t e l l e c t u a l l y , p o l i t i c a l l y , s o c i a l l y , o r

economical l y . With the post-#asser s h i f t i n i t s socio-pol i t i c a l

o r i e n t a t i o n , and t h e a d o p t i o n of Sadat ' s i n f i t a h (open-door)

po l i cy , Egypt began t o undergo some changes of major imp l i ca t ions

f o r Arab banking and finance. On the one hand, Egypt opened the

g a t e s f o r hundreds of thousands of i t s abundant labour to migra te

t o t h e labour-short Gulf c o u n t r i e s and Libya. On t h e o t h e r , Egypt

34

i n s t i t u t e d economic po l i cy reforms t o a t t r a c t f o r e i g n i n v e s t o r s ,

i nc lud ing f o r e i g n banks.

As t h e l a r g e s t demographic base i n t h e Arab r eg ion ( c l o s e t o

50 m i l 1 ion), Egypt has become the major source of Arabic-speaking

e x p a t r i a t e workers i n the Arab o i l -expor t ing coun t r i e s , i nc lud ing

I r a q , i t s e l f a l a b o u r e x p o r t e r u n t i l t h e l a t e 1 9 7 0 s . Over a

s h o r t p e r i o d , Egyp t i an w o r k e r s r e m i t t a n c e s t o Egypt became a

s i g n i f i c a n t s o u r c e of t h e country 's f o r e i g n exchange. From a

modest $85 m i l l i o n i n 1973 , E g y p t i a n w o r k e r s r e m i t t a n c e s

increased t o about $1.8 b i l l ion i n 1978 and about $2.7 b i l l ion i n

1980.21 Dur ing 1983 and 1984, i t i s e s t i m a t e d t h a t t h o s e

r e m i t t a n c e s h a v e been a t a minimum of a b o u t $3.0 b i l l i o n

annually . Such major f i n a n c i a l i n f l o w s were to a l a r g e e x t e n t

encouraged by t h e r e f o r m of E g y p t i a n banking . They a l s o

con t r ibu ted t o r a i s i n g t h e n a t i o n a l s av ings r a t e t o about 15 per

cent of GDP, and thus t o t h e c r e a t i o n of an environment conducive

t o the growth of i n t e r n a t i o n a 1 banking, i n c l u d i n g par exce 1 1 ence

Gul f banks. Fu r the rmore , t h e l a r g e and growing a b s o r p t i v e

capac i ty of t he Egyptian economy, t h e advantages and f a c i l i t i e s

e x t e n d e d t o f o r e i g n i n v e s t o r s i n t h e bank ing s e c t o r , and t h e

i n c r e a s e d marke t o r i e n t a t i o n of economic policymaking have a 1 1

g i v e n s i g n a l s t o Arab banks t o e s t a b l i s h some presence i n Cairo.

B y 1983, C a i r o was t h e host t o a b o u t 3 0 Arab banks , of which 1 4

21. N.A. Sherbiny, C a p i t a l and Labour Flows i n t h e Arab World - A C r i t i c a l V i e w , I n d u s t r i a l flank of Kuwait , IBK P a p e r No. 16, Feb. 1985, p.55.

35

were commercial banks, 9 investment banks, and 7 r e p r e s e n t a t i v e

off ices.

Egypt’s d r i v e t o improve i t s banking system and t o c r e a t e a

p r o p e r l y f u n c t i o n i n g c a p i t a l m a r k e t t o r e spond t o i n c r e a s i n g

development demands f o r medium-term and long-term f inanc ing has

by no means been progress ing we1 1. P o l i t i c a l d i f f i c u l t i e s have

o c c a s i o n a l l y a d v e r s e l y a f f e c t e d t h e c a p i t a l marke t , as w a s

e v i d e n t w i t h t h e 1978 Arab b o y c o t t o f Egypt because of t h e Camp

Dav id a c c o r d s w i t h I s r a e l , o r i ndeed w i t h t h e a s s a s s i n a t i o n of

P r e s i d e n t Sada t i n 1981. However t h e e f f e c t s of t h e s e e v e n t s

h a v e been m o s t l y t r a n s i t o r y . By c o n t r a s t , Egypt’s c r i p p l i n g

bureaucracy and i t s b r a i n c h i l d of mu1 t i p l e exchange s y s t e m seem

t o have i n f l i c t e d more l a s t i n g damage t o the development of t h e

c a p i t a l market. L i t t l e wonder t h a t t he m u l t i p l e exchange system

appears t o have eluded even t h e governor of t he Cent ra l Bank. 22

The r eady c o n v e r t i b i l i t y of c u r r e n c i e s of t h e o t h e r Arab

f i n a n c e c e n t r e s - Lebanon, Kuwait , and B a h r a i n - c o n t r a s t s

s h a r p l y w i t h t h e b a f f l i n g E g y p t i a n pound. Whi l e t h e f o r m a l

exchange ra te of t h e pound has moved ever so s lowly , i f a t a l l ,

t h e i n f o r m a l r a t e h a s t ended g e n e r a l l y t o r e f l e c t m a r k e t

c o n d i t i o n s . I t i s a sad commentary t h a t t h e b a r o m e t e r of t h e

E g y p t i a n pound d u r i n g t h e l a s t t h r e e d e c a d e s was n o t t h e

count ry‘s bank ing s y s t e m , b u t Cairo‘s b a z a r s and back a 1 l e y s .

Other drawbacks t o Cairo’s ques t a r e t h e r e s t r i c t i o n s on currency

t r a n s f e r s , t he i n c o n s i s t e n t macro management of t h e economy, and

t h e mixed s i g n a l s f rom t o p government o f f i c i a l s r e g a r d i n g t h e

22. Euromoney, February 1985, p.111.

36

o r i e n t a t i o n of t h e economy.

U l t i m a t e l y , however , Cairo's q u e s t t o become a c e n t r e of

Arab banking i s n o t a l t o g e t h e r hopeless . By comparison w i t h the

t u r b u l e n t M i d d l e E a s t , E g y p t h a s e n j o y e d b o t h r e l a t i v e

s t a b i l i t y a n d G D P g r o w t h o f 5 - 6 p e r c e n t s i n c e S a d a t ' s

a s s a s s i n a t i o n . Arab a i d a g e n c i e s wh ich b o y c o t t e d Egypt s i n c e

1 9 7 8 resumed t h e i r l e n d i n g programs i n 1984. Egypt w a s r e -

admit ted t o the Islamic Conference, a l s o i n 1984. P r iva t e Arab

i n v e s t o r s h a v e g e n e r a l l y been a c t i v e t h r o u g h o u t t h e o f f i c i a l

boycot t , c o n t r i b u t i n g i n 1983 some $2 b i l l i o n , about one f o u r t h

of Egypt's t o t a l i n ~ e s t m e n t . ~ ~ F i v e of t he l a r g e s t 30 Arab banks

a r e Egyptian; see Annex Table A-1. Combined, t he assets of those

f i v e banks a r e s i g n i f i c a n t l y l a r g e r t h a n the a s s e t s of t h e

Baf i d a i n Bank, one of I raq 's two commerc ia l banks , and t h e o n l y

one au thor ized to hand le government depos i t s . The Egyptian s tock

exchange i s one of t h e few which a1 lows l i s t e d companies t o be

c a p i t a l i s e d i n dollars and d iv idends t o be made a l s o i n d o l l a r s .

A new j o i n t venture has been e s t a b l i s h e d a s a s e c u r i t i e s d e a l e r

and s t o c k exchange p romote r , w i t h e q u i t y p a r t i c i p a t i o n f rom

se v e r a 1 E g y p t i a n banks , t h e I n t e r n a t i o n a l Finance Corporation,

and M a n u f a c t u r e r s Hanover. Even t h e country 's communica t ion

s y s t e m i s i m p r o v i n g e s p e c i a l l y w i t h t h e o u t s i d e wor ld . G iven

t h e s e h o p e f u l s i g n s , Cairo's p o s i t i o n a s a r e g i o n a l c e n t r e o f

f i n a n c e w i l l u l t i m a t e l y depend o n government p o l i c y : i n

minimiz i n g res t 1: i c t i o n s on c u r r e n c y t r a n s f e r 6 , e s t ab 1 i s h i n g

c o n s i s t e n t macro management w i t h c l e a r o r i e n t a t i o n , k e e p i n g

23. Ibid, p.112.

37

b u r e a u c r a c y a t bay, and f r e e i n g t h e E g y p t i a n pound f rom t h e

confused m u l t i p l e exchange s y s t e m .

The con t r a s t of Arab cen t r e s of f i nance wi th i n t e r n a t i o n a l

c e n t r e s s u c h as London, P a r i s , o r New York must a p p e a r s t r i k i n g

indeed. London's r e l a t i o n s with t h e Arab world a r e q u i t e complex

' a s t h e y encompass h i s t o r y , p o l i t i c s and c u l t u r e in a d d i t i o n t o

t r ade , f inance, and investment. For t h e s e reasons London enjoyed

t h e l ion ' s s h a r e of OPEC's s u r p l u s p l a c e m e n t s t h r o u g h 1974.

Fur the rmore , London h a s been t h e w o r l d c a p i t a l of E u r o d o l l a r

t r a n s a c t i o n s s i n c e t h e 1960s and i t w a s o n l y n a t u r a l t h a t i t

became the l a r g e s t c e n t r e f o r Arab banks. I n l e s s than t e n years

s i n c e the f i r s t major o i l p r i c e inc rease , London has become the

h o s t of a t l e a s t 60 Arab banks. Only 3 were e s t a b l i s h e d b e f o r e

1970, 1 2 d u r i n g 1970-75, 22 d u r i n g 1976-80, 16 a f t e r 1980, and

t h e remaining 7 d i d n o t have a known d a t e of es tabl ishment . 24

C l o s e h i s t o r i c a l and c u l t u r a l c o n n e c t i o n s made Pa r i s a n

o b v i o u s and i m p o r t a n t c e n t r e f o r t h e e s t a b l i s h m e n t of Arab

f i n a n c i a l i n s t i t u t i o n s . Dur ing t h e 1950s and 1960s, P a r i s was

t h e i n t e r n a t i o n a l f i n a n c i a l c e n t r e f o r Lebanese banks, themselves

t h e most i n t e r n a t i o n a l l y o r i en ted Arab banks dur ing t h a t period.

Subsequently, P a r i s became t h e hos t t o t h e f i r s t group of Arab-

Western consortium banks. To make s u r e t h a t French banking r u l e s

and r e g u l a t i o n s were c a r e f u l l y f o l l o w e d by t h e new Arab banks

d u r i n g t h e l a t e 1960s and e a r l y 1970s, t h e Banque d e F r a n c e

24. The F i n a n c i a l T imes , October 3, 1983, Curiously, a 1984 l i s t compiled by t h e Banker (November 1984) showed Arab banks i n London t o h a v e been o n l y 32. S e e m i n g l y , t h e d i s c r e p e n c y between t h e two sources was due t o var iance i n d e f i n i t i o n of what s e p a r a t e s a bank from o the r f i n a n c i a l i n s t i t u t i o n s .

38

i n s i s t e d on a l o c a l connection of sound f i n a n c i a l reputa t ion . So

most Arab banks h a v e ( o r had) a F r e n c h p a r t n e r i n t h e i r P a r i s

opera t ions (FBAB, UBAF, o r UII).

Much as p o l i t i c s was t h e impe tus f o r t h e e s t a b l i s h m e n t of

Arab-French c o n s o r t i u m banks d u r i n g t h e 1970s, s o i t i s beh ind

t h e d e c l i n e i n t h e i n t e r e s t of Arab banks t o expand t h e i r P a r i s

presence and a c t i v i t i e s during t h e 1980s. The French Government

during the l a t e r days of de G a u l l e and under Georges Pompidou was

t h e most pro-Arab Western power. The H i t t e r a n d Government h a s

i n s t i t u t e d a program of bank n a t i o n a l i z a t i o n s , i nc lud ing share-

h o l d i n g s i n Arab c o n s o r t i a . The Arab banks were s h a k e n by t h e

way i n which Banque de Par is e t d e s Pays-Bas ( P a r i b a s ) was

n a t i o n a l i z e d . The s o c i a l i s t r eg ime h a s i n s t i t u t e d t i g h t e r

e x c h a n g e c o n t r o l s a n d l e s s 1 i b e r a l a t t i t u d e towards t h e

e s t a b l i s h m e n t of f o r e i g n banks i n t h e country.25 Among o t h e r

f a c t o r s , t h e s e measu res must h a v e weakened t h e F rench f r a n c i n

r e c e n t y e a r s . N e v e r t h e l e s s , a t t h e end of 1983 P a r i s w a s t h e

c e n t r e f o r 39 Arab f i n a n c i a l i n s t i t u t i o n s , 3 of which were

e s t a b l i s h e d be fo re 1970, 7 dur ing 1970-75, 26 dur ing 1976-80, and

3 a f t e r 1980. S i g n i f i c a n t l y , 1 6 of t h o s e banks were Lebanese - forming a d i s t i n c t group e s t a b l i s h e d most ly a f t e r t h e c i v i l w a r

has broken out.

B e s i d e s London and P a r i s , t h e r e a r e s e v e r a l o t h e r c e n t r e s

which emerged i n the e a r l y 1980s a s i n t e r n a t i o n a l bases of Arab

f i n a n c i a l i n s t i t u t i o n s fundamental ly because of t h e i r p o s i t i o n i n

25. Euromoney, M a y 1 9 8 3 , pp. 126-130; and The F i n a n c i a l T i m e s , October 3, 1983.

39

t he expanding t rade, f inance, and investment r e l a t i o n s wi th t h e

o i l e x p o r t i n g c o u n t r i e s . N e w York i s t h e c e n t r e of d o l l a r

t r a n s a c t i o n s worldwide and the base of most US g i a n t banks wi th

which Arab governments and i n d i v i d u a l s have depos i ted t h e l a r g e s t

sums; i t h o s t s 1 9 Arab banks , o n l y 3 of which were e s t a b l i s h e d

be fo re 1980, Severa l f a c t o r s e x p l a i n the increased presence of

Arab banks i n New York and t h e i r p o s s i b l e growth in t h e f u t u r e .

The OS i s t h e l a r g e s t t r a d i n g p a r t n e r f o r a number of o i l

e x p o r t e r s i n t h e Arab r e g i o n , and t h e need f o r t r a d e f i n a n c i n g

w i l l undoubtedly continue. The US i s the l a r g e s t hos t of s u r p l u s

p l a c e m e n t s by governmen t s of t h e low a b s o r b e r s . A l t h o u g h t h e

comula t ive s u r p l u s has r e c e n t l y dec l ined , t he placements of m o s t

low absorbers w i l l most l i k e l y s t a y f a i r l y s t a b l e f o r t h e fore-

s e e a b l e f u t u r e . F i n a l l y , t h e U S p r o v i d e s n o t o n l y s a f e t y for

p r i v a t e Arab i n v e s t o r s , b u t t h e most numerous and d i v e r s i f i e d

investment o p p o r t u n i t i e s world-wide.

S i n g a p o r e and Hong Kong a r e key c e n t r e s of commerce,

f i nance , and investments i n t h e Far East; Singapore hos t s 19 Arab

banks, w h i l e Hong Kong h o s t s 15. The l a t t e r , however, appears t o

h a v e l o s t i t s a t t r a c t i o n w i t h t h e r e c e n t announcement of i t s

u l t i m a t e r e t u r n to China. S w i t z e r l a n d is a c e n t r e o u t s i d e t h e

Gulf of t r a d i t i o n a l banking and f i n a n c i a l conserva t i sm w i t h which

t h e Arabs h a v e had r e l a t i o n s f o r a l o n g t i m e ; i t hosts 1 5 Arab

banks. Other cen t r e s are most ly Mediterranean bases wi th which

t h e Arab c o u n t r i e s t r a d i t i o n a l l y s h a r e c u l t u r e , h i s t o r y and

commerce, such a s Cyprus, Rome, Athens, and Madrid.

40

Discussion of t he i n t e r n a t i o n a l i z a t i o n of Arab banks w i l l be

l a c k i n g i f i t f a i l s t o i n c l u d e I s l a m i c banks. The u n d e r l y i n g

r a t i o n a l e is t h a t major c a p i t a l in f lows t o OPEC coun t r i e s , many

of whom a r e Moslem, c r e a t e d c h a l l e n g e s t o e s t a b l i s h I s l a m i c

f i n a n c i a l i n s t i t u t i o n s , f i r s t w i t h i n t h e i r own b o r d e r s t h e n

i n t e r n a t i o n a l l y . T h i s is t o be s e e n as p a r t of a b r o a d e r

phenomenon, t h a t of t h e r e v i v a l of I s l am and i t s values. To t he

world's Moslems, an I s l amic economic order r ep resen t s an a l t e r -

n a t i v e t o c a p i t a l i s t and s o c i a l i s t s y s t e m s : w h i l e p r o t e c t i n g t h e

r i g h t s of property i t opposes "excessive" accumulat ion of weal th ,

and provides teachings and guide 1 i n e s whereby the depr ived have

an "acknowledged r i g h t " t o the wea l th of t h e r ich. P r i n c i p l e s of

Islamic economics d e r i v e from Shari'a, t h e l e g a l s y s t e m fundamen-

t a l l y based on Q u r a n ( t h e Holy Book of I s l a m ) and Sunna ( t h e

t r a d i t i o n s of t h e P r o p h e t Muhammad). I n s t e a d of a l e n d e r -

borrower r e l a t i o n s h i p , I s l amic f inance r e l i e s on t h e n o t i o n of

d i s t r i b u t i v e j u s t i c e , t h a t of e q u i t a b l e risk shar ing between the

s o u r c e s o f c a p i t a l ( b a n k s ) a n d t h e u s e r s o f c a p i t a l

( en t r ep reneur s ) .

Although the f i r s t I s l amic bank was p r i v a t e l y e s t a b l i s h e d in

Egypt in 1962, t h e c o n c e p t of I s l a m i c f i n a n c i a l i n s t i t u t i o n s

43

r e c e i v e d a major b o o s t from t h e e s t a b l i s h m e n t in 1975 of t h e

Jeddah-based I s l amic Development Bank ( I D B ) . C a p i t a l i z e d a t 2

b i l l i o n SDRs, and compr ised of more t h a n 40 Moslem c o u n t r y

governments, about two-thirds of the c a p i t a l came from f o u r Arab

o i l c o u n t r i e s : Saud i A r a b i a (25 p e r c e n t ) , L ibya ( 1 6 p e r c e n t ) ,

t h e U.A.E. (14 p e r c e n t ) and Kuwait (13 p e r c e n t ) . The mandate

of t he I D B i s t o f o s t e r economic development and s o c i a l progress

i n t h e member coun t r i e s according t o I s l amic law.

Most I s l a m i c banks were e s t a b l i s h e d i n t h e l a t e 1 9 7 0 s and

ear ly 1980s. A t p resent , some 30 f i n a n c i a l i n s t i t u t i o n s ope ra t e

i n Arab, Moslem, and o t h e r c o u n t r i e s . I n t h e Arab c o u n t r i e s ,

I s l amic banks opera te i n Egypt, Sudan, Jordan, and t h e Gulf. I n

o the r Moslem count r ies , they a r e i n Pakis tan, I ran , Bangladesh,

and Ma 1 ay s ia. Other non-Mos 1 em coun t r i e s i n which Is 1 amic banks

o p e r a t e i n c l u d e t h e P h i l i p p i n e s , S o u t h A f r i c a , N a s s a u ,

Luxembourg, Cyprus and A u s t r a l i a ; and some f i n a n c i a l c e n t r e s such

as London and Gene va. Is1 amic banks , for t h e most p a r t , depend

on p r i v a t e , n o t g o v e r n m e n t a l , i n i t i a t i v e . The o u t s t a n d i n g

e x c e p t i o n i s Kuwait F inance House, e s t a b l i s h e d i n 1978 w i t h 49

p e r cen t government share ho ld ing which was r e c e n t l y increased t o

60 p e r cen t .

The d i s t i n c t i o n between commercial and investment banks i s

not e a s i l y a p p l i c a b l e t o Islamic banks, because they a r e uniquely

c h a r a c t e r i z e d by o p e r a t i o n s of t h e i r own, t h e most common of

which a re : Morabaha, Mosharaka, and Modaraba. Morabaha is t h e

r e s a l e of goods with t h e a d d i t i o n of a f i x e d s u r c h a r g e on t h e

o r i g i n a l c o s t , on a defer red payment basis . Under t h e Mosharaka

p r i n c i p l e , an I s l amic bank and a c l i e n t e s t a b l i s h a par tne r sh ip ,

42

sha r ing p r o f i t s and l o s s e s u n t i l t he time, normally f ixed , when

t h e c l i e n t w i l l buy o u t t h e bank’s h o l d i n g . The Modaraba

c o n t r a c t is f o r m a l l y a s i l e n t pa r tne r sh ip which c l e a r l y d i s t i n -

gu ishes the c a p i t a l source (bank) and the en t repreneur (Modareb)

who manages t h e p r o j e c t . Remunera t ion i s based on a p r e d e t e r -

mined p e r c e n t a g e of p r o f i t s , w h i l e l o s s e s a r e t o be bo rne b y

c a p i t a l p rov ide r s a lone ; t he Modareb foregoes remuneration f o r

his work. 25

T a b l e 5 summarizes t h e a s s e t p o s i t i o n of some l e a d i n g

Islamic banks. The t a b l e i s not exhaus t ive , but i l l u s t r a t i v e .

Growth of a s s e t s i n t h i s group has been f a s t , averaging about 38

p e r c e n t p e r y e a r i n 1982 and 1983. However, t h e s i z e of t h e s e

banks measured i n a b s o l u t e and r e l a t i v e terms i s s t i l l q u i t e

small . The c o l l e c t i v e a s s e t s of t he s a m p l e of banks shown in t h e

t a b l e was $2.8 b i l l i o n i n 1981, $3.9 b i l l i o n i n 1982, and $5.3

b i l l ion i n 1983. S i g n i f i c a n t l y , t he Kuwait Finance House a l o n e

a c c o u n t e d f o r abou t 50 p e r c e n t of t h e a s s e t s of t h i s group.

Those banks a r e dwarfed by compar ison w i t h some of t h e l e a d i n g

Arab banks. For example, t h e c o l l e c t i v e a s s e t s of t h e i d e n t i f i e d

s a m p l e were l e s s t h a n 114 of t h e a s s e t s of t h e Raf i d a i n Bank of

Baghdad which , a s t h e l a r g e s t Arab bank i n 1983, r a n k e d 8 3 r d on

t h e Banker‘s 500 l i s t . Assets of t he same group combined were a t

a b o u t t h e same l e v e l as a s s e t s of C r e d i t P o p u l a i r e d’Algerie ,

whose rank was 291 on the Banker‘s 500 l i s t . 27

26. “The F i r s t Licensed Islamic Bank in Saudi Arabia” Euromoney, November 1984, pp. 113-121; and T r a u t e Wohle r s -Scha r f , o p . c i t . pp. 74-95.

27. The Banker, June 1984.

43

Table 5

Assets of Se lec ted I s lamic Banks

(Mi l l i ons of Ind ica t ed Currencies)

Bank Location Year Asset 1982 1983 E s t . Donomination

F a i s a l I s lamic Bank Cairo 1977 US d o l l a r 997 1504

I s lamic I n t e r n a t i o n a l Bank Cairo 1980 US d o l l a r 89 412

Dar Alma1 A 1 Islami Geneva 1981 US d o l l a r 310 286

Kuwait Finance House Kuwait 1978 Kuwaiti d i n a r 569 800

F a i s a l Islamic Bank Khartoum 1977 Sudanese 278 n.a. pound

Dubai Islamic Bank Duba i 1975 UAE dirham 509 805

Jordan Is lamic Bank Amman 1978 Jordanian 45 72 d ina r

Bahrain Islamic Bank Manama 1978 Arab d ina r* 29 n.a. --

Tota l i n US d o l l a r equiva len t 3872 5320

Sources: Annual Reports by Banks shown, and Middle East Economic Survey, s e v e r a l 1984 issues.

Notes: 1.The I s l a m i c Development Bank was excluded from the t a b l e b e c a u s e i t s f u n c t i o n s a n d o b j e c t i v e s d i f f e r s i g n i f i c a n t l y f r o m t h e r e s t of t h e b a n k s shown. P r o p e r l y c l a s s i f i e d , t h e I D B b e l o n g s t o d e v e l o p m e n t o r g a n i z a t i o n s , f o r t h e most p a r t o u t s i d e t h e s c o p e of t he p re sen t pape r .

2.n.a. denotes no t a v a i l a b l e ;

* one Arab d i n a r equals one SDB.

44

C o n s i d e r i n g t h e r e l a t i v e s i z e of I s l a m i c banks , and

though r e c o g n i z i n g t h a t T a b l e 5 i s by no means e x h a u s t i v e , i t

c a n n o t be s a i d t h a t t h e y h a v e so f a r o f f e r e d a n a l t e r n a t i v e

bank ing f o r m u l a , However, such compar ison i s n o t fair b e c a u s e

I s l a m i c banks h a v e been i n e x i s t e n c e f o r no more t h a n a d e c a d e

w h i l e convent iona l banks a s w e know them have e v o l v e d over more

t h a n two c e n t u r i e s . What i s c l e a r , h o w e v e r , i s t h a t t h e

i n s t i t u t i o n a l framework of I s l amic banks is a l r e a d y i n p l a c e , and

t h e i r connections wi th c e n t r e s of i n t e r n a t i o n a l f i nance and Moslem

coun t r i e s a r e a l r eady f i r m l y e s t ab l i shed . Furthermore, it appears

t h a t t h e r e i s a s p e c i a l i z e d r o l e which I s l amic banks can c a r v e out

f o r t h e m s e l v e s t o s e r v i c e Moslem communi t ies wor ldwide . I n

p a r t i c u l a r , Islamic banks are i d e a l l y s u i t e d t o mob i l i ze resources

from the masses of Muslim communities which i n p r i n c i p l e r e f u s e

t h e n o t i o n of "Riba" ( i n t e r e s t c h a r g i n g and r e c e i v i n g ) , i n t h e i r

v i e w t he p r i n c i p a l t e n e t of modern banking. I n Saudi Arabia a l o n e

Islamic banks have a major p o t e n t i a l with households which do not

h a v e bank a c c o u n t s , e s t i m a t e d t o be 35-60 p e r c e n t of t o t a l

h o u s e h o l d s . How w i l l I s l a m i c banks pe r fo rm t h i s s p e c i f i c task

remains t o be seen.

The r i s i n g popu la r i ty of I s l amic banks could no t have been

due t o e s p e c i a l l y f a v o u r a b l e r e t u r n s on d e p o s i t s and equi ty o r to

unusual l y h igh d iv idends on paid-up c a p i t a l , by comparison w i t h

commerc ia l banks. Using s u c h pe r fo rmance i n d i c a t o r s f o r t h e

p e r i o d 1980-82 shows t h a t r e t u r n s on d e p o s i t s and e q u i t y i n

I s l amic banks h a v e r a n g e d f rom a h i g h of 16 p e r c e n t f o r F a i s a l

I s l a m i c Bank of Khartoum t o a low of 2 p e r c e n t for J o r d a n

Islamic Bank; s ee Table 6. By comparison, t he same i n d i c a t o r f o r

45

t h e 9 convent iona l commercial banks i n Saudi Arabia dur ing the

same period showed much b e t t e r performance, ranging from 47 p e r

c e n t f o r t h e Arab N a t i o n a l Bank t o 27 p e r c e n t f o r t h e N a t i o n a l

Commercial Bank.28 T a b l e 6 a l s o shows t h a t a l t h o u g h t h e r e was

some c o r r e s p o n d e n c e be tween r e t u r n s on equi ty and d iv idends on

paid-up c a p i t a l , t h e r e was no c o r r e l a t i o n between t h e s e measures

and growth of a s s e t s ; i.e. t he bes t performing Islamic banks d id

not n e c e s s a r i l y grow f a s t e s t . For example, Jordan Islamic Bank

which w a s t he poorest performer i n t h e group experienced f a s t e r

growth i n a s s e t s than d id F a i s a l I s l amic Bank of Khartoum, one of

t he b e t t e r performers. The only l o g i c a l exp lana t ion of t he speed

Table 6

Some Performance I n d i c a t o r s of Se lec ted Is lamic Banks (Average 1980-82)

Bank Return on Dividends on Annual Growth Deposi ts & Paid-up of Asse ts

Equity Cap i t a l

F a i s a l I s lamic Bk - 7% 14%

Kuwait Finance House 9% 25% F a i s a l I s lamic Bk - 16% 23%

Dubai I s lamic Bk 6% 8% Jordan Islamic Bk 2% 4% Bahrain I s lamic Bk 6X 8%

Cairo

Khartoum

125%

77% 51%

35% 5 8% 5 9%

Source: C a l c u l a t e d from A.M. Abdeen and D.N. Shook, The Saudi Financ ia l System, W i l e y 1984, pp.209-237.

28. As c a l c u l a t e d from A.M. Abdeen and D.N. Shook, The S a u d i F inanc ia l System,

46

of g rowth i s t h e s p e c i a l a p p e a l of I s l a m i c banks t o d e v o u t

Moslems i n a p a r t i c u l a r c o u n t r y . Using t h i s y a r d s t i c k , and

judging by the meteoric growth of a s s e t s i n F a i s a l Islamic Bank

of C a i r o , i t a p p e a r s t h a t Egypt must h a v e a l a r g e r e s e r v o i r o f

Moslem c l i e n t s who a r e especial ly i n t e r e s t e d in I s l a m i c banks.

The adve r se Middle East economic and o t h e r developments of

1983-85 d i d n o t s p a r e I s l a m i c banks , e s p e c i a l l y in t h e Gu l f

region. The d e c l i n e i n o i l revenues , t h e f a l l i n precious m e t a l s

p r i c e s , t h e end of t h e r e a l e s t a t e boom i n t h e G u l f , t h e p o s t -

Manakh r e v e r b e r a t i o n s i n Kuwait and t h e rest of t h e Gul f , and t h e

I ran- I raq war have all combined t o c r e a t e an environment which

r eve r sed t h e f o r t u n e s of many banks, i nc lud ing Islamic banks, and

c a u g h t them i n a d i f f i c u l t l i q u i d i t y squeeze .29 R e l a t i v e l y

l i t t l e informat ion i s ye t a v a i l a b l e on t h e performance of Islamic

banks o u t s i d e t h e Gulf r eg ion dur ing 1983-85.

29. Euromoney, August 1984, pp. 170-172; and March 1985, pp. 133- 136.

47

6. FUTURE PBOSPECTS

C o n t r a r y t o p o p u l a r m i s c o n c e p t i o n s , t h e p r e s e n t p a p e r h a s

shown t h a t t h e i n t e r n a t i o n a l i z a t i o n of Arab banks d id no t occur

o v e r n i g h t . E a r l i e r e f f o r t s d u r i n g t h e 1 9 4 0 s , 1950s, and 1960s

h a v e paved t h e way f o r t h e major t r a n s f o r m a t i o n of Arab banks

du r ing t h e 1970s. Although the e a r l i e r e f f o r t s were no t a l l t i e d

t o c a p i t a l exports , t h e i n t e r n a t i o n a l i z a t i o n of Arab banks dur ing

t h e 1970s was s o l e l y caused by the sudden and l a r g e expansion i n

c a p i t a l e x p o r t s made p o s s i b l e by t h e major i n c r e a s e s i n o i l

revenues.

This p a t t e r n c o n t r a s t s sharp ly wi th t h a t of European banks

(Engl i sh , French, Dutch and German) dur ing t h e l a t e 19th century

and e a r l y 20th c e n t u r y , and w i t h t h e p a t t e r n of American banks

d u r i n g t h e 2 0 t h c e n t u r y . European banks e s t a b l i s h e d o v e r s e a s

b r a n c h e s and a f f i l i a t e s " t o se rve t h e i r d o m e s t i c c u s t o m e r s i n

t h e i r c o l o n i a l and f o r e i g n v e n t u r e s , t o p r o v i d e them w i t h t h e

s e r v i c e s they requi red , t o f inance t h e i r imports and exports , and

t o h e l p f i n a n c e t h e i r o v e r s e a s i n ~ e s t r n e n t s " . ~ ~ I t is s t r i k i n g

t h a t t h e same s o r t of m o t i v a t i o n r e s u l t e d i n t h e e x p a n s i o n of

30. J.P. Koszul "American Banks i n Europe", in C.P. K i n d l e b e r g e r ( ed ) The I n t e r n a t i o n a l C o r p o r a t i o n , MIT P r e s s , Cambridge 1970, pp. 273-289.

48

American banks abroad, e s p e c i a l l y during t h e 1920s i n a s s o c i a t i o n

wi th expansion of i n t e r n a t i o n a l t r a d e and i n v e s t m e n t f o l l o w i n g

WWI, and d u r i n g t h e 1960s f o l l o w i n g t h e r e c o v e r y of Western

Europe and J a p a n f rom t h e d e v a s t a t i o n of W W I I . I t is e q u a l l y

i n d i c a t i v e t h a t American banks abroad d e c l i n e d during t h e 1930s

with the Great Depression and ceased ope ra t ion dur ing the 1940s

with t h e breakout of W W I I . ~ ~

With t h e s u b s t a n t i a l d e c l i n e i n o i l revenues a f t e r peaking

i n 1980, t h e main q u e s t i o n c o n c e r n s t h e f u t u r e of Arab banks

o u t s i d e t h e i r home base. Here i t i s i n s t r u c t i v e t o n o t e t h a t

j u s t as t h e d e c l i n e i n o i l revenues has focussed p u b l i c i n t e r e s t

on t h e weaknesses developed i n the economies of t h e low absorbers

o v e r t h e l a s t 10-15 years3’, s o i t h a s u n c o v e r e d s e v e r a l

weaknesses in t h e ope ra t ion of Arab banks both a t t h e i r home base

and abroad. To be sure , t h e weaknesses of Arab banks a r e no t a l l

t h e i r own making; some h a v e r e s u l t e d f rom t h e e n v i r o n m e n t s i n

which they o p e r a t e , p a r t i c u l a r l y i n r e g a r d t o i n a p p r o p r i a t e

government p o l i c i e s . This is e q u a l l y t r u e i n Arab coun t r i e s a s

w e l l as i n some hos t f o r e i g n count r ies .

A t t h e i r home base, Arab banks tended t o t a k e t h e prolonged

p r o s p e r i t y o f t h e o i l c o u n t r i e s f o r g r a n t e d . The volume of

d o m e s t i c b u s i n e s s n o t o n l y was expand ing , b u t t h e r a t e of

expansion was i t s e l f i nc reas ing ove r time. Investments in real

e s t a t e were being recovered i n extremely s h o r t per iods - 2 t o 3

31. Ib id , p. 276 .

32. Robert Mabro “The Economic Consequences of t h e F a l l i n Future Energy Demand i n t h e Arab World” Middle East Economic Survey 28:31, 13 May 1985, pp. D l - D l 4 .

49

yea r s . Many banks r e a l i z e d enormous p r o f i t s b y t u r n i n g s h o r t -

term d e p o s i t s i n t o long- t e rm a s s e t s . So l o n g as t h e r a t e of

growth of d e p o s i t s was a c c e l e r a t i n g o v e r t i m e , banks were

c o m f o r t a b l y awash i n l i q u i d i t y . When o i l r e v e n u e s d ropped ,

bus iness condi t ions cont rac ted , and the real e s t a t e boom came t o

an end , growth i n d e p o s i t s began t o d e c e l e r a t e s e r i o u s l y and

even tua l l y f e l l . Many commercial banks were caught i n a mismatch

between t h e i r long-term i l l i q u i d a s s e t s and short- term d e p o s i t s

and 1 i a b i 1 it ies.

Other discouraging f a c t o r s occurred a t t he same t i m e . The

Manakh c r i s i s i n Kuwait, i n which banks were h e a v i l y invo lved ,

h a s had s e r i o u s r e p u r c u s s i o n s beyond Kuwait. P r e c i o u s metal

p r i c e s crashed, reducing t h e hold ings va lue of several f i n a n c i a l

i n s t i t u t i o n s . The r e - e x p o r t t r a d e from Kuwait and B a h r a i n was

p r a c t i c a l l y wiped o u t as a r e s u l t of t h e I r a q - I r a n war. Bank

c o l l a t e r a l u n t i l r e c e n t l y w a s not a s important a s t h e borrower’s

p e r s o n a l r e p u t a t i o n or h i s c o n n e c t i o n s w i t h i n t h e power

s t r u c t u r e .

What t he c r i s i s d id w a s t o uncover many of the weaknesses a t

once. Some banks i n Kuwait, Bahrain, and UAE have s u f f e r e d more

t h a n o t h e r s , and i t a p p e a r s t h a t t h e f u t u r e may b r i n g more

r e v e l a t i o n s . T h e r e i s no d o u b t t h a t more s h a k e o u t s w i l l o c c u r

be fo re the c r i s i s is f i n a l l y over . Bankruptcies, t akeovers , and

m e r g e r s w i l l b e p a r t of t h e bank ing s c e n e in t h e Gu l f f o r some

t i m e t o come. The p r o c e s s , p a i n f u l a s i t w i l l b e , i s

u n f o r t u n a t e l y n e c e s s a r y t o improve t h e l a x bank ing p r a c t i c e s

which have developed ove r t h e l a s t decade.

The c r i s i s has a l s o a t t r a c t e d a t t e n t i o n of policymakers t o

50

t he l a c k of s u f f i c i e n t a u t h o r i t y €or c e n t r a l banks, e s p e c i a l l y i n

Kuwai t , Q a t a r and UAE. More m e t h o d i c a l p r o c e d u r e s a r e b e i n g

developed t o a s s u r e g r e a t e r commercial d i s c i p l i n e than h i the r to .

The more r i g o r o u s d i s c i p l i n e of S a u d i A r a b i a and B a h r a i n i s

l i k e l y t o become the s tandard f o r c e n t r a l banks i n t h e Gulf.

A 1 though weaknesses of t he i n t e r n a t i o n a l ized Arab banks are

of a d i f f e r e n t t y p e , t h e y seem a l s o to h a v e been r e l a t e d t o t h e

r a p i d pace of c a p i t a l exports. With t h e d e c l i n e in o i l revenues,

t h e weaknesses h a v e been exposed , and i n some c a s e s magn i f i ed .

Dur ing a p e r i o d of r a p i d g rowth , mos t i n t e r n a t i o n a l i z e d Arab

banks were preoccupied wi th showing r e s u l t s . They concentrated

on t h e i r c o m p a r a t i v e a d v a n t a g e i n t h e i n t e r n a t i o n a l f i n a n c i a l

markets, namely t h e i r connections wi th sources of p e t r o c a p i t a l .

Most of t h o s e banks thus became h e a v i l y engaged i n E u r o d o l l a r

l o a n s y n d i c a t i o n w i t h o t h e r more e s t a b l i s h e d banks , which

provided t h e necessary e x p e r t i s e and s k i l l s . The sha re of Arab

banks in syndicated Eurodo l l a r loan market increased r a p i d l y from

2.5 p e r c e n t i n 1 9 7 7 t o a b o u t 10 p e r c e n t i n t h e e a r l y 1980s.

The i n t e r n a t i o n a l debt c r i s i s s e r i o u s l y a f f e c t e d t h e volume of

ope ra t ions i n t h i s market, and wi th i t t h e d o l l a r volume of Arab

banks p a r t i c i p a t i o n , b u t t h e s h a r e of t h o s e banks remained

g e n e r a l l y u n a f f e c t e d . I n t h e f u t u r e , a 1 though f u r o d o l l a r

synd ica t ion w i l l be u n l i k e l y t o grow a s before , Arab banks w i l l

c o n t i n u e t o p a r t i c i p a t e a c t i v e l y , b u t t h e i r s h a r e w i l l most

l i k e l y be l e s s .

The debt c r i s i s prompted Arab

a c t i v i t i e s , no tab ly t r a d e f inance

banks t o exp 1 or e o the r banking

and investment banking. Other

51

p o s s i b i l i t i e s i n c l u d e f l o a t i n g r a t e n o t e s , and f l o a t i n g r a t e

c e r t i f i c a t e s of deposi ts . The nagging ques t ion is how can Arab

banks p a r t i c i p a t e i n a l l such a c t i v i t i e s a f t e r o i l revenues have

d e c l i n e d s o s e r i o u s l y . The answer r e s i d e s i n t h e i r h i g h

c a p i t a l i z a t i o n by i n t e r n a t i o n a l standards. The r a t io of equi ty

p l u s r e s e r v e s to a s s e t s i n m o s t Arab banks e x c e e d s 1 5 p e r c e n t ,

whereas i t i s only 3-7 per cent f o r most i n t e r n a t i o n a l banks. 33

It i s t h i s f a c t o r which w i l l g i v e Arab banks room f o r f u r t h e r

growth of t h e i r i n t e r n a t i o n a l ope ra t ions d e s p i t e t h e d e c l i n e in

o i l revenues. I n t h i s sense, i t appears t h a t t h e i n t e r n a t i o n a l i -

z a t i o n of Arab banks was asymmetr ical ly r e l a t e d t o o i l revenues.

Arab banks overseas appear t o be going through a t r a n s i t i o n

phase be fo re they become i n t e r n a t i o n a l banks i n the f u l l y conven-

t i o n a l sense. They have accomplished t h e most d i f f i c u l t s tep i n

t h e i n t e r n a t i o n a l i z a t i o n p r o c e s s , i.e. e s t a b l i s h e d presence i n

i n t e r n a t i o n a l f i n a n c i a l markets, and what t h a t e n t a i l s i n terms

of c l i e n t e l e , scope of a c t i v i t i e s , p r o f i l e , and momentum. Now i s

t h e t i m e f o r t hem t o a t t e n d t o t h e w e a k n e s s e s i n t h e i r

o p e r a t i o n s . The mos t u r g e n t n e e d i s t o d i v e r s i f y t h e i r

a c t i v i t i e s , b a s i c a l l y t o d e r i v e an inc reas ing po r t ion of t h e i r

income f r o m f e e s , i.e., i n v e s t m e n t banking . T h i s r e o r i e n t a t i o n

r e q u i r e s a change i n t h e i r p r e s e n t s k i l l mix. S k i l l s and

experiences of s t a f f a r e the most v a l u a b l e a s s e t s of f i n a n c i a l

i n s t i t u t i o n s . I n the rush to e s t a b l i s h themselves i n t e r n a t i o n a l -

l y , Arab banks have not s u f f i c i e n t l y a t tended t o t h e development

33. Address by Sheikh A l i R h a l i f a AL Sabah i n September 1984 t o t h e Arab Bankers Assoc ia t ion i n London, a s r epor t ed in Middle East Economic Survey, 24 September 1984.

5 2

of t h e i r own s t a f f . The e x i s t i n g s t a f f , e s p e c i a l l y Arab s t a f f ,

tend t o be more narrowly t r a i n e d i n few a c t i v i t i e s . The p resen t

condi t ions o f f e r some brea th ing space f o r Arab banks t o d e v e l o p

m a n a g e r i a l and s t a f f c a p a b i l i t i e s t o c a r r y o u t t h e p r o j e c t e d

r e o r i e n t a t i o n .

Such r e o r i e n t a t i o n towards investment banking i s necessary

i f Arab banks a r e t o s u r v i v e i n t h e changed c o n d i t i o n s of t h e

1980s. U n t i l 1982, gove rnmen t s were t h e s o u r c e of most Arab

i n v e s t m e n t s o v e r s e a s . T h e r e a f t e r , as governmen t s s t a r t e d t o

drawdown on t h e i r accumulated a s se t s , i t was t h e p r i v a t e sources

wh ich became dominant i n Arab i n v e s t m e n t f l o w s . T h i s p r i v a t e

c a p i t a l comes from the cumula t ive p r o f i t s of t he 1970s, l e a v i n g

t h e Gulf r eg ion f o r t h e reasons o u t l i n e d ear l ie r . Such p r i v a t e

c a p i t a l movements o f f e r good o p p o r t u n i t i e s and c h a l l e n g e s f o r

Arab banks t o d i v e r s i f y t h e i r a c t i v i t i e s . Most of t h e s e

movements h a v e been l i m i t e d t o w e a l t h y i n d i v i d u a l s who e i t h e r

have empires of t h e i r own (Khashoggi, A 1 Sabah, Pharaon, Oloyan,

etc.) o r who have se t up e l i t e investment c l u b s comprising a few

f a m i l i e s each.34 Large untapped p o t e n t i a l s t i l l e x i s t s wi th l e s s

weal thy but more numerous i n d i v i d u a l s throughout t he Gulf and the

r e s t of t h e Arab region.

The p o t e n t i a l volume of business from government agencies i n

Arab o i l and n o n - o i l c o u n t r i e s i s q u i t e l a r g e , d e s p i t e t h e

d e c l i n e i n o i l r e v e n u e s . I n t h e n o n - o i l Arab c o u n t r i e s most

government agencies go t o the i n t e r n a t i o n a l market to borrow f o r

t h e i r development p r o j e c t s i n the tune of $15 b i l l i o n per year.

34. F i n a n c i a l T i m e s , October 3 , 1983.

53

S e v e r a l government a g e n c i e s i n oil c o u n t r i e s such as I r a q ,

A l g e r i a , and Oman h a v e a l r e a d y been bo r rowing in t h e i n t e r -

n a t i o n a l marke t , T o g e t h e r w i t h o t h e r government agencies from

o i l coun t r i e s , t h e p o t e n t i a l demand of development p r o j e c t s f o r

new r e s o u r c e s w i l l be in t h e t u n e of $150 b i l l i o n p e r year , a t

l e a s t one-third of which w i l l be secured through borrowing. By

s tepping i n t o in te rmedia te between sources and uses of funds i n .

t h i s s i z e a b l e marke t , Arab banks n o t only would c r e a t e a h i t c h

f o r t h e m s e l v e s based on c o m p a r a t i v e a d v a n t a g e , b u t a l s o c o u l d

become the c a t a l y s t for f i n a n c i a l l y i n t e g r a t e d m a r k e t s i n t h e

Arab region. 35

The demand for t r a d e f inanc ing i n Arab coun t r i e s i s e q u a l l y

enormous: imports by t h e Arab c o u n t r i e s are about $90 b i l l i o n

p e r y e a r ; and by t h e n o n - o i l c o u n t r i e s a b o u t $35 b i l l i o n p e r

year. A s growth of both o i l and non-oi l Arab economies cont inues,

though i n varying degrees, t h e a s soc ia t ed inves tments and imports

w i l l expand a s w e l l . The p r o c e s s w i l l c a l l f o r c o n t i n u o u s l y

expanding demand f o r c r e d i t , short-term f o r import f i nanc ing and

l o n g e r t e r m f o r i n v e s t m e n t f i n a n c i n g . Noth ing can b e more

a s su r ing f o r Arab banks.

3 5 . A long-time advoca te of t h i s v i e w i s Hikmat Nashashibi, who e l a b o r a t e d t h e theme i n n u m e r o u s o c c a s i o n s ; s e e h i s monograph, S tud ie s in t he Development and I n t e g r a t i o n of Arab F inanc ia l Markets (Arabic) , Dolphine Pub l i she r s , Milano 1982.

54

Annex

Table A-1 - Largest Arab B a n k s

Bank Head- q u a r t e r s

1. Raf ida in Bank Baghdad 2. Nat ional Com'l Bk Jeddah 3. Bank of Credi t & Luxembourg

4. B. Nat ionale A l g i e r s

5. Union de Banques Par i s

6 . Arab Bank Amman 7. Nat'l Bk of Kuwait Kuwait 8. Arab Banking Corp. Bahrain 9. Commercial Bank of Damascus

l0.Riyad Bank Jeddah 11.Nat'l Bk of Egypt Cairo 12.Gulf I n t ' l Bank Bahrain 13. Banque Ext e r i e u r e A l g i e r s

14.Gulf Bank Kuwait 15.Com'l Bk of Kuwait Kuwait 16.National Bank of Abu Dhabi

1 7 . Banque Misr Cairo 18.Alahl i Bk of Kuwait Kuwait 19.Credit Popula i re A l g i e r s

20.Banque du Cai re Cairo 21.Arab Af r i can I n t ' l Cairo

22.Saudi In t ' l Bank London 23.Bank of Kuwait & Kuwait

24.Saudi American Bk Riyadh 25.Nat'l Commercial Bk T r i p o l i 26 .Compagnie Arabe e t Luxembourg

27.A1 Bank A 1 Saudi Jeddah

28. Bank of Alexandria Cairo 29 .Wahda Bank Benghaz i 30. Jamahyria Bank T r i p o l i 31 .Libyan Arab F. Bank T r i p o l i 32.8urgan Bank Kuwait

Commerce I n t ' l

d'Algerie

Arabes e t Franca ises

S y r i a

d'Algerie

Abu Dhabi

d'Algerie

Bank

Middle Eas t

Int'l d'Investissement

A 1 F a r a n s i

Year E s t .

Assets ( $ b ill ion) 1980 1983

1983 Bank

1941 1983 1972

1966

1970

1930 1952 1980 1967

1957 1898 1975 1967

1960 1961 1968

1920 1967 1966

1952 1964

1975 1971

1980 1970 1973

1977

1957 1970 1969 1972 1975

8.8 14.9 5.3

6.3

4.8

7.1 5 .O 1.9 3.3

4.2 4.4 2.9 5.9

4.2 5.1 4.7

3.7 4.7 3.0

2.4 2.7

2.7 2.0

2.1 2.1 2.4

3.2

1.8 2.5 1.3 3.7 1.5

22.4 14.7 12.3

11.4

11.2

10.4 9.0 8.8 8.6

7.8 7.5 7.4 7.4

7.1 6.6 6.1

6.1 5.8 5.2

4.6 4.4

4.0 3.6

3.5 3.4 3.3

3.2

3.2 3.0 2.5 2.5 2.3

83 119 136

146

148

157 1 7 1 175 178

199 208 21 1 214

2 22 23 8 252

2 54 26 9 291

329 333

358 398

399 41 8 427

43 7

443 45 9 489 491 500

Sources: The Banker, June 1984; and Alexander E. Fleming, "Survey of O r i g i n and Deve lopmen t of Arab Banks" IMF S u r v e y , February 8 , 1982.

55

a d f l c d d 6 G o u O E l

H a -4 0 a u n r u

56

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