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Bahrain may be on track to consolidating its position as the banking hub of the region. But there are a number of elements that could hamper the kingdom's growth as the key financial centre.
One of them is the prospect of an economic downturn in the region. Banking sector growth has high correlation with regional economic growth and currently high crude oil prices are largely driving the GCC economies. Nevertheless, a very significant drop in crude oil prices may considerably retard regional economic growth and this could spill over to Bahrain's banking sector. As a result, any significant slowdown in the GCC's growth would hurt Bahrain's banking sector growth.
The next major issue could be the large-scale exposure of banks to the real estate sector. The real estate sector is witnessing huge investments in the region and is one of the major growth drivers for the banking sector with Bahrain banks having a significant exposure to the real estate sector. Any significant drop in real estate prices in either Bahrain or the GCC region could hurt Bahrain's banking sector.
Thus a major correction in real estate prices will deteriorate the asset quality of the Bahrain banking sector. Additionally and more current as an issue, the projected loan portfolio growth rates will be affected negatively if the Central Bank of Bahrain decides to implement restriction on real estate lending.
Another matter of concern is the lack of availability of quality manpower. The Bahraini banking sector requires qualified manpower to sustain its prominence in the regional banking space. Scarcity of local skilled manpower is a key concern for the sector.
So far, the manpower gap has been bridged by attracting expatriates with higher compensation and a cosmopolitan lifestyle. However, sustained efforts by UAE and Qatar have intensified competition for talent in the region. Bahrain could face serious shortage of qualified banking and financial services professionals, going forward. This may hurt the banking and financial institutions operating in Bahrain.
Last, but not the least, the US sub-prime crisis could have a ripple effect on Bahrain's banking sector. The sub-prime crisis has impacted the global banking industry due to banks' exposures to structured subprime assets. Thus, the crisis has severely squeezed liquidity from the global banking system, increasing the cost of funds for banks.
Further undisclosed exposure to sub-prime originated structured finance products will hurt the asset quality of Bahraini banks with sub-prime exposures, which in turn will force those affected banks to write-off these assets. This will have a negative impact on the sector.
On the positive side the kingdom's banking sector is already strong - there were 149 local and international institutions operating out of Bahrain, with combined assets of $245.8 billion as of the end of last year.
Bahrain's banking sector can look forward to at least three years of sustained growth, with the kingdom's wholesale banks expected to increase their asset holdings by between 15 per cent and 20 per cent, while the assets of retail banks will increase by 20 per cent to 25 per cent, a study by local financial advisory and management firm Securities and Investment Company (Sico) says.
This growth will be driven by the strong economies across the region, Bahrain's favourable regulatory regime and the increasing popularity of sharia-compliant financing.
Substantial capital expenditure plans of GCC and Mena governments and the private sector will benefit the regional banking sector. More than $1.5 trillion of infrastructure investments are planned (although not all are likely to see the light of day) for the next 10 years, these will likely be funded through budgetary surpluses, bank financing and private equity investments.
Additionally, energy related investments of $490 billion are expected in the Mena region from 2008 to 2012.
GCC governmental budgetary surpluses may not be enough to meet the financing needs, with governments increasingly pushing for more public-private partnerships in major projects. Commercial and investment banks, private equity and infrastructure funds are likely to bridge the funding gap in the region.
As a result, private equity fund raising has grown from less than $1 billion in 2003 to more than $10 billion in 2007 and is expected to grow to $25 billion over the next few years. This indicates enormous growth opportunities for Bahrain-based wholesale and investment banks in particular.
