Hot Competition Over Financial Services

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Hot Competition Over Financial Services



  As the most established financial centre in the Middle East, Bahrain has a leading position as a fund domicile within the GCC. With a regulator – the Central Bank of Bahrain – that has built up a strong international reputation, a healthy choice of service providers and significant home grown expertise especially in Islamic finance, the island state is home to 107 locally-domiciled funds.
  But as a destination for investment management professionals, Bahrain has found itself seriously challenged
of late. Dubai’s DIFC has attracted a plethora of international firms through its offshore freezone status, while Qatar is able to offer incentives and the backing of public investment that Bahrain cannot match.
  Moreover, political tensions during the 2011 Arab Spring were a setback for the country’s image, and led to the UAE and Qatar being viewed as comparative ‘safe havens’ by multinational firms looking to establish a base in the region.

  So what is Bahrain doing to fight back? One area where believes it has the edge is the quality of the local workforce. Building on the longevity of Bahrain’s financial sector and traditionally high standards of education and literacy, the state has been investing in publicly-funded schemes for young Bahrainis, through training and support organisations such as Tamkeen, to ensure the financial talent pipeline remains strong.

  This element will be a major draw for those international players who are committed to a long-term presence in the region, according to Boyd Winton, director of financial services at the Bahrain Economic Development Board.

  “If you are taking a five, 10 or 15 year view, the real opportunities for asset managers going forward are not just the UHNWIs and the Sovereign Wealth Funds – obviously that’s what has attracted a lot of people to the region in the past, and to be honest that market is saturated – but the new growing class of HNWIs and people on middle incomes,” says Winton. “Now if you want to tap into that sort of sector, then you are going to be looking at doing more than just placing an expatriate with a secretary to sell your product into the region, you’re going to want to have a deep engagement into the region which is going to mean having a bigger operation here.  And Bahrain is really the only place you can hire a locally-orientated, skilled, hardworking workforce to do that.”
 
 Winton predicts that asset managers targeting the HNWI and middle-income bracket will launch more funds both domiciled in the region and investing in the region, as this target audience wants more of a regional emphasis to their investments.

  One example of this in action is PineBridge Middle East, which gained its license from the CBB last year. As well as distribution for its global products, PineBridge is aiming to build up investment capabilities focusing on the region; it has started with private equity and real estate, and will be launching its first fund later in 2013. Talal al Zain, CEO of Pine- Bridge Middle East, says he had certainly made the most of the local financial talent available in building up his team.

   “We are strong believers in diversity and the value that brings to the business,” says al Zain. “When I look at my staff today, around 60% are Bahrainis, and this is at senior and junior levels, in the investment team as well as in sales and distribution, and support staff. When you have an investment category license from the Central Bank, you are exempt from ‘Bahrainization’ rules; so really the fact that I’m employing Bahrainis is purely because of the quality of their work and their productivity.”    
  Nicolas Angio, managing director at Apex Fund Services, echoesthis point, saying that more than half of his staff in the firm’s Bahrain office are Bahrain nationals. As a service provider with a presence in both Bahrain and Dubai, he believes that each destination holds a slightly varying appeal. 
  “On the fund domiciliation side, specifically within the GCC region, I think Bahrain still has one of the leading reputations. The funds team at the CBB is more comfortable with a variety of fund structures than the vast majority of the neighbouring countries, and from that perspective I think they still have an advantage over their GCC competitors,” says Angio. “But on the investment management side, in terms of establishing investment management companies, we’re seeing more people choosing Dubai.”

  Part of the reason the CBB is held in high esteem is its conservatism: even in the boom years for financial services that preceded the financial crisis, it was harder to get an investment license in Bahrain than in many places elsewhere. However, while this inspires confidence for investors, the flip side of this is that it is harder for start-ups and smaller asset managers to establish themselves in the country, and so one could argue that Bahrain misses out on the dynamism that these smaller players can bring. Angio says that he would like to see the regulator do more to make the country amenable to start-ups.

  “In order to get a license for investment management in Bahrain from the central bank, there are two requirements that are quite difficult to meet: the capital requirements, and the requirement that one of the shareholders of the newly established company be an institutional investor or an existing financial institution,” he says. “That makes it quite difficult if for example, a couple of individuals spinning off from an investment bank decide to set up themselves, or a single manager wants to set up a small asset management company. I think that definitely hinders the growth, and it would be very beneficial to Bahrain to change the requirements in that respect.”

  He added that the CBB’s caution on this issue may stem from the fact that it has more interaction with investors than a typical regulator, and therefore feels more direct responsibility to them.

  However, Boyd Winton says that the CBB’s more stringent requirements are justified in the post-financial crisis environment, and will soon become the reality elsewhere as well.

   “If you set up as an asset manager, and you want to manage people’s money, then you need to have a certain amount of functions around that: a compliance officer, an anti-money laundering process, and so on,” says Winton.
  “The days of one or two people setting up an asset management company and more or less ‘winging it’ are over; you need five or six people to set up a genuine start-up fi rm. Across the globe, I think what you’ll find is that really Bahrain’s position on this is a position that others are moving towards.”

  Two interesting dynamics to watch for the future are how the possible opening up of the Saudi Arabian economy, and more formal co-operation within the GCC – such as the proposed customs union – will impact on asset managers based in Bahrain.

  Bahrain is traditionally seen as the ‘gateway’ to Saudi Arabia, and a trend towards Saudi openness might undermine this. Further integration could mean that Bahrain’s model, under which firms can be 100% foreign-owned but are domiciled onshore in the GCC, could gain ground over the offshore DIFC both for investing and distribution purposes. 
  Edmondo Sarteur, chief executive of BSI Bahrain, the Swiss bank which upgraded from a rep office to a full license in Bahrain last year, says that in his view the GCC countries should work together and not be competitors, but admits that this is not the current reality and Bahrain does face regional competition.    
  “It is a real challenge, but I think the answer for Bahrain is to be more focused on the area of Islamic banking and finance,” says Sarteur.

  “Basically, in the region today, you have two core financial hubs: Dubai and Bahrain. Dubai has achieved international recognition more on the conventional banking side, but in Bahrain the professionalism of the local people, especially in Islamic finance, is at a very high level. In the region, Bahrain is perceived as an Islamic finance hub, and as a gateway to Saudi Arabia, where the weight of Islamic Finance compared to conventional is very high. You can’t compete over 360 degrees, you have to differentiate yourself and focus in a certain area to protect your growth, and I think this is where Bahrain can differentiate itself.”