Foreign banks waiting on financial reform

Western financial services firms are increasingly interested in developing an institutional presence in the Middle East, but are waiting for financial sector reforms, according to a survey by the Economist Intelligence Unit (EIU).

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By  Andrew White Published  June 11, 2006

Western financial services firms are increasingly interested in developing an institutional presence in the Middle East, but are waiting for financial sector reforms, according to a survey by the Economist Intelligence Unit (EIU). The survey forms the basis of ‘Investment in the Middle East: Opportunities and Challenges for Financial Institutions’, a new report sponsored by the Qatar Financial Centre. The report indicates that whilst firms are keen to expand their Middle East operations, they are looking for governments in the region to further the trend towards economic reform and a more open business environment. “A lack of transparency and poor regulatory standards are seen as a deterrent by quite a high proportion of those companies that we surveyed,” Rob Mitchell, editor of the report, told Arabian Business. Although programmes of economic and legislative reform are underway in many Middle East countries, 70% of the respondents to the survey cite lack of transparency or poor regulatory standards as deterrents to investing in the region. Physical security is another widely voiced concern, as are the volatility and lack of sophistication of the capital markets. “The volatility of the stock markets is making institutions more cautious,” said Mitchell. “There is an enormous amount of interest in investing in the region and providing, for example, securities brokerage services - but with the recognition that the stock markets in the region are very concentrated, and as a result quite volatile. Institutions are concerned that the markets are constricted to a very small number of stocks, and are therefore very shallow.” Over half of the respondents questioned for the survey indicated that they either have an office in the region already or intend to establish one in the next three years. But whilst local markets for investment banking, wealth management, securities brokerage and other services are developing, concerns about government policy, the regulatory regime and physical security continue to deter would-be investors. “Governments need to convince banks and other institutions that there will be a sustained trend towards economic and legislative reform in the years ahead,” continued Mitchell. “One of the ways that governments could address these concerns is to open up the markets, allowing broader access - to foreign banks, for example. “Ongoing economic reform is key and governments need to reassure banks and other industries that they can operate in a stable political environment,” he added. “There’s certainly a sense that economic reform needs to remain a priority, but the sense we got from the survey is that there’s still a long way to go.” The report is based on a survey of 168 senior executives from financial services firms polled by the EIU, and a series of in-depth interviews with representatives from companies that are already investing in the region. The report finds that the market for financial services in the Middle East is broadening. In addition to financing hydrocarbon projects and large public infrastructure projects, banks are entering the region to capitalise on demand for a wide range of services. Wealth management and private banking are seen as important, and investment banking services are also viewed as a priority by Western financial institutions. The report does accept that government policy towards foreign investment is gradually becoming more open in the region. Foreign companies that wish to do business in the Middle East are often required by law to operate in a joint venture with a local partner - however, the rules in some countries are starting to be relaxed. Although the joint venture remains the most common mode of entry for foreign banks that are investing in the Middle East, 28% of all survey respondents say that they would establish their own offices in the region.

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