Much of the focus in Bahrain this year has been on the fall out from the ‘Arab Spring’ uprising and the subsequent damage to the kingdom’s financial services industry. However, I have noticed a disturbing (yet low key) trend; failed investment banks are transmogrifying into retail banks.
This does not exactly bode well for the health of the industry.
In the wake of the 9/11 attacks a number of investors returned to the Middle East and helped set up a new breed of bank, hitherto not seen in the region – investment banks, Islamic investment banks, anything related to wholesale banking as long as it had either ‘investment’ or ‘capital’ in its name.
Despite the grand titles, in reality these institutions were nothing more than a mish-mash of a banking styles threw money at real estate and defended their existence by claiming they were Islamic banks. They continued to raise money from ‘investors’, which provided the liquidity.
Investment banks, despite the recent crises, were always considered the ‘crème de la crème’; the industry having growing spectacularly in size after the ‘big bang’ deregulation in the City of London in the 1980s.
In the Middle East there seems to have been very little thought process into the raison d’être for many investment banks, or indeed what they were ‘investing’ in. Having been disillusioned by the lack of activity in local capital markets, stock markets, the dearth of any real private equity opportunities and hardly any mergers and acquisitions, local investment banks turned to real estate as an easy option.
Real estate by definition is always based on debt, or the ability to borrow. Once this dries up – there is NO real estate market.
Local investment banks have seen revenues tumble as well as many very disgruntled local businessmen and investors’ money depart, meaning liquidity has dried up.
What’s the solution? Re-invent yourself as a retail bank!
There are, quite obviously, some very big differences between these two types of banks. Investment banks can generate big income without relatively small labour force and no branch network. This can all happen very quickly if you get it right. In order to make money, a retail bank needs ‘critical mass’; lots of customer accounts and a functional network of branches. This cannot and never happens as quickly, or as profitably, as an investment bank.
But there are a number of reasons for concern; not least of which the track record of the people who managed the failed investment banks.
Then there’s the employment issue – there’s no way investment bankers could transfer their skills across to retail, nor, I suspect, would they want to and there are few other opportunities available to them. I’d also question whether there’s a big enough local workforce to staff a number of new retail banks.
Thirdly these new retail banks will need a certain amount of retail clients with active accounts using all financial services, from current accounts, credit cards, personal loans and, dare I say it, investment products?
To set up such an infrastructure requires a lot of capital, a lot of advertising as well as instilling market awareness to any new clients coming to the bank. In short, the road to success is long and very work intensive.
Banks are currently offering a lot of promotions to lure new customers; things like special saving accounts, ‘free’ credit cards, low interest loans on consumerables like cars and houses: everything is at a discount just to get you to bank with them.
These will all be reversed when the bank realizes it now needs to become profitable.
There are simply are not enough people locally to sustain all these retail banks, all falling over each other to get your business. It will all end in tears.
Robert Moxon is currently CEO of Nonoo Exchange Company in Bahrain, a position he has held since 2009. He is a foreign exchange veteran, have worked for Citibank, Midland Montague Treasury and British Petroleum over the last 30 years. He moved to the Middle East in 1994 to start up the investments for BMB Investment Bank in Bahrain.