The kingdom's central bank has proposed an overhaul of the banking system to deal with the aftershocks of the Al Gosaibi and Saad groups' troubles.
Bahrain's banks learn hard lessons
The aftershocks of the scandal embroiling the Al Gosaibi and Saad groups continue to ripple across the Gulf. With the troubled Saudi conglomerates owing an estimated US$3 billion (Dh11.01bn) in the UAE and another $5bn to banks in Saudi Arabia. But the affair is having particularly strong repercussions in neighbouring Bahrain. The Central Bank of Bahrain (CBB) was forced in July to take control of Awal Bank, owned by the Saad Group, and The International Banking Corporation (TIBC), a unit of Ahmad Hamad Al Gosaibi and Brothers (AHGB), after it became clear that neither bank could meet its loan obligations.
"Taking a bank into administration is not a decision that one can take lightly," says the CBB governor Rasheed al Maraj, who ordered the move after both banks failed to come up with suitable restructuring plans. The legal firms appointed as administrators for Awal and TIBC published their preliminary reports last Wednesday, setting out the rights, assets and liabilities of each institution. Major creditors include Mashreqbank, based in Dubai, which claims Al Gosaibi and TIBC defaulted on two currency swaps valued at US$150 million (Dh550.9m) and $75m.
The CBB is now moving to apply lessons learnt from the affair. Documents published on the regulator's website early this month propose an overhaul of the Bahraini banking system, bringing in new rules on bank liquidity and improving local scrutiny of banks' balance sheets. "We recognise there are lessons to be learnt from these recent episodes," Mr al Rasheed said. "But the GCC is not alone in needing to learn lessons and regulators around the world have found it difficult to allow markets the freedom they need to function efficiently while at the same time curbing speculative excesses."
Bahrain's central bank has gained a reputation as one of the most prudent regulators in the Middle East, helping the small island kingdom to attract a sizeable financial community. Local banking assets were valued at some $236 billion at the end of June, equivalent to more than 18 times its GDP. Comparatively high capital adequacy levels, stringent loan-to-deposit ratio requirements and firm rules on exposure to property, though not always popular at the time, put Bahraini banks in good stead when the first tremors of recession reached the Gulf a year ago. Manama escaped the worst of the blowback from property speculation that affected cities such as Dubai.
Yet the problems of TIBC and Awal appear to have caught the CBB unawares. Mr al Maraj said in June that the regulator was trying to determine "how the reported liquidity position of these banks could have deteriorated so suddenly". Reports submitted by both institutions shortly before the crisis unfolded showed no signs of liquidity problems, he said. Despite its firm rules on disclosure, the central bank did not have specific rules on liquidity management at the time, a situation it now plans to remedy.
Under the new rules, the CBB would introduce a minimum liquidity ratio of 25 per cent. This ensures that banks can cover a certain percentage of their long-term liabilities with assets that can be sold at short notice. The regulator also plans to extend its rules on maturity mismatches to wholesale banks, ensuring their long-term lending obligations do not out pace their access to short-term funding.
These mismatch ratios already apply to local retail banks. However, wholesale institutions such as Awal and TIBC make up a significant chunk of the financial industry in Bahrain, with such "offshore" banks comprising 82 of the 145 banks registered in the kingdom. This division between wholesale and retail banks helps insulate the local banking community from systemic threats, say bank analysts, as does the diverse nature of the Bahraini financial sector. Compared with rival banking centres such as Abu Dhabi and Doha, Manama has a strong suit in niche industries such as Islamic finance, insurance and asset management. Some 412 financial institutions are registered in the kingdom.
Yet Awal and TIBC are not the only Bahrain-based banks to run into trouble. Gulf International Bank (GIB) was one of the Middle East financial institutions worst hit by the subprime crisis, to which most banks in the region had little or no exposure. In March, its GCC government shareholders bailed out the bank by buying some $4.8bn of toxic assets. Unlike oil-rich neighbours such as the UAE and Saudi Arabia, however, the Bahraini government has limited resources with which to help its own banks in the event of a crisis. Maintaining its negative outlook for the Bahraini banking sector last month, Moody's Investor Service noted the "large size of the wholesale and retail banking sectors relative to the size of the economy".
The CBB argues its responsibilities to offshore banks do not extend to throwing cash at them if they run into trouble. "We have been very clear over the years that the primary responsibility for supporting the wholesale banks resides with their shareholders - that was our clear expectation, for example, with TIBC and Awal," said Mr al Maraj. "The CBB would not, for example, expect to act as lender of last resort."
As the central bank moves to apply its new liquidity rules, Bahrain's banking community is drawing its own lessons from the affair. "It came as a shock to most people, but I don't think it has unduly shaken confidence in the system or the regulator," said the head of research for a local Islamic investment bank. "Yes, banks are jittery. There are worries about liquidity in the wholesale sector, but then that's not specific to Bahrain."
Some banks could even benefit from the affair, said Majid al Refai, the chief executive of Unicorn Investment Bank, one of 26 Islamic institutions based in the country. "Just as in the crisis in the West, there are lessons to be learnt," he said. "And the fundamental lesson is the cornerstone of Islamic banking: keep your eye on the underlying asset." firstname.lastname@example.org