[PDF] Oil and the Internationalization of Arab Banks

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OXFORD

NSRTUTE

ENERGY

STUDIES

= FOR m

Oil and the Internationalization

of Arab Banks

Naiem A. Sherbiny

Oxford Institute for Energy Studies

F6 1985

The contents of this paper are for the

purposes of study and discussion and do not represent the views of the Oxford Institute for Energy Studies or any of its members.

Copyright 0 1985

Oxford Institute for Energy Studies

ISBN 0 948061 11 1

ACKNOW LED GEMEBTS

The author is a senior economist in the Energy

Department

of the World Bank. He wrote the present paper while visiting the Oxford Institute for Energy Studies in

Summer 1985.

The paper

is based partly on the author's research in the

Institute, and partly

OR his recent paper entitled "Arab

Financial Institutions

and Developing Countries" prepared for the

1985 World Development Report, which will shortly appear in the

Wor Id Sank's Staff Working Papers Series. Without implication, the author wishes to acknowledge the support and comments of Robert Mabro, Director of the Oxford Institute for Energy

Studies; David

J Reid, Advisor, Bank of England; and Hikmat

Nashashibi, Chief Executive,

AI-Mal Group, London. Errors and

interpretations are the author's sole responsibility. , t

1. INTRODUCTION

2. EARLY DEVELOPMENTS OF ARAB BANKS

3. THE 1970s AND EARLY 1980s:

OPPORTUNITIES AND CHALLENGES

4. CENTRES OF ARAB BANKING

5. ISLAMIC BANKS

6. FUTURE PROSPECTS

14 28
41
48

TABLE 1 INDEX NUMBERS OF AVERAGE ANNUAL OIL

REVENUES OF ARABlOPEC MEMBERS

2 AVERAGE ANNUAL IMPORTS OF ABAB/OPEC

COUNTRIES

3 CUMULATIVE NET FOREIGN ASSETS OF

THE LOW ABSORBERS

4 INTERNATIONAL ACTIVITIES OF ARAB BANKS

5 ASSETS OF SELECTED ISLAMIC BANKS

6 SOME PERFORMANCE INDICATORS OF

SELECTED ISLAMIC BANKS

A-l LARGEST ARAB BANKS

A-2 LEADING ARAB BANKS IH EUROCURRENCY

SYNDICATED LENDING

16 17 19 25
44
46
55
56

1. IHTRODUCTIOH

The major increases in oil prices during the 1970s caused many changes in the socio-economic map of the Middle East, including substantial ly increased financial flows to and from the oil economies.

In a short time, the oil exporters became also

capital exporters. Some of the financial institutions managing these flows had to establish a presence in international financial centres in a rather short period. the

1970s

will be seen in banking and finance circles as the decade of internationalization of Arab banks, just as the 1960s was the decade of international ization of American banks.

In many ways,

The internationalization of Arab banks, however, was a process which started unevenly well before the 19708, and not always because of increased oil revenues at home or capital exports abroad. During the

1940s the Jerusalem-based Arab Bank

was already operating outside Palestine and into the Arab region (Amman, Cairo, Damascus). The Lebanese banks began to establish branches outside Lebanon early in the

1950s. The Kuwaiti banks

started the internationalization process in the early

1960s.

However, it was during the 1970s that many Arab banks - especially from oil countries - became quite actively engaged in establishing branches, joint ventures, or consortia overseas thus 1 increasing their visibility in international markets. The focus in this paper will be mostly on banks from the Arab oil producing countries in the Gulf, because some of those banks have been at the forefront of financial innovation in recent years, and all have had ready access to petrodollar sources from their start.

The second section thus out

1 ines the earl ier developments of

Arab banking which had an explicit international orientation: the establishment of modern banks in the Arab oil-exporting countries; the rise of Beirut as a regional financial centre; and the internationalization of Kuwaiti banks. The stage will then be set for the third section to examine the specific factors during the 1970s which have prompted Arab banks to establish a presence in international financial centres on a large scale.

Here, the special relation of

oil exports and the inter- nationalization of Arab banks is examined, and the activities of those banks exp I ored.

The demise of Beirut in the mid-1970s

as a regional financial centre necessitated the search for other alternatives.

Kuwait

and Bahrain have emerged as such centres in the Gulf, and they appear to be having their share of difficulties. Elsewhere in the Arab region, Cairo could become an important centre of Arab banks only if monetary and exchange reforms are adopted. Outside the Arab region, although London and Paris traditional ly host the largest numbers of Arab banks, other locations are increasingly becoming important international financial centres of Arab banking: Mew York, Singapore, Hong Kong, and Switzerland.

These developments

are detailed in Section Four. 2 The rise and expansion of Arab banks in international financial markets began to be associated with another phenomenon - that of Islamic banks. The increased wealth and monetization of the Moslem countries in OPEC' necessitated the establishment of modern financial institutions. The notion of charging and paying interest which is central to modern banking is un- acceptable on religious grounds to most devout Moslems. An alternative was thus needed to attract the large masses of population into the increasingly monetized economies of the

Moslem countries. What have Islamic banks done

so far, and what is their likely role in the future are some of the questions to be taken up in Section Five of this paper.

Finally, Section

Six addresses the future implications of

the recent major drop in oil revenues for the international activities of Arab banks. A central concern is whether such fall would signal the decline of Arab banks. The paper argues that the relationship between the volume of oil revenues and the international activities of Arab banks is asymmetrical: increased oil revenues have expanded international activities of Arab banks, but the fall in those revenues will not necessarily diminish the internationalization of Arab banks.

1. The population of Ecuador, Gabon, and Venezuela together

represent

7 per cent of the combined population of OPEC. The

remaining 93 per cent are mostly Moslem, as calculated from

The World Development Report

1985.

3 I

2. EARLY DEVEUIPMEBTS OF ARAB WS

The geneses of the internationalization of Arab banks go back to the establishment of modern banking in Arab countries by foreign banks, the emergence of Beirut as a regional finance and business centre, and the orientation of Kuwaiti financial institutions towards international business and investment opportunities during the

1960s.

Foreign banks established in Arab countries f el 1 general ly in two categories: those set up semi-independently by foreigners to serve the business and commercial interests of resident colonizing communities; and those established as branches of foreign banks to participate in the local boom associated with successful oil finds. Although those banks were established too early to have a direct relationship with the internationalization of Arab banks in the 1970s, their presence nonetheless created a new awareness of and an orientation towards overseas banking.

More importantly, they served

in varying degrees as sources of and training grounds for domestic banking skills which were later to lead the processes of modernization then international ization of Arab financial institutions.

The first

type of foreign banks in Arab countries was established long before oil was discovered in commercial 4 quantities. Thus, in 1851 the French established Banque d'Algerie; in

1898 the British established the National Bank of

Egypt; in 1910 the Italians established Banco di Roma in Libya; in

1926 the Dutch established Nederlandsche Handel Maatschappij

in Saudi Arabia; and in

1920 the British established the Eastern

Bank in Bahrain.

Most of these banks were actively engaged in

external trading.

To the few domestic educated elites, the pro-

sperity and sophistication of banking employees appeared to be closely related to the international character of the banks.

However, the great majority

of the indigenous communities had their own long traditions and practices in trading, business, and money exchange which had little or no need for modern commercial banking. Financial dual ism was embedded in the socio-economic structures of Arab countries, where ancient institutions co- existed with modern institutions, each serving the distinct financial and commercial interests and needs of vastly different communities.

The other type

of foreign banks in Arab countries was established fundamentally in response to discoveries of oil in commercially viable quantities in order to participate in the ensuing boom. Activities of the British Bank of the Middle East (BBME) in the Gulf characterise this type of banking. Thus, the BBME established branches in Kuwait in 1942, Bahrain in 1944, Dubai in 1946, Oman in 1948, Sharjah in 1953, Qatar in 1954, and

Abu Dhabi in

1959. In these cases too, financial dualism came

into existence with modern banks, and deepened over time with their growth and expansion.

In most

cases, the oil revenues which the governments 5 received, though initial ly modest, began to finance the most essential parts of infrastructure. These rather 1 imited, but continuing, flows of government expenditures had an unmistakable multiplier effect on the domestic economy: contracting with local merchants for goods and services, employing nationals, buying or leasing land, renting off ice space, etc. Especial ly noticeable was the boom in land values which contributed to local prosperity. As incomes of the private sector increased, so did expenditures, especial ly on imported consumer goods and durables.

The profits

of foreign-owned banks began to increase markedly.

The Gulf countries became a major source

of deposits for BBME. For example, in 1959 deposits in the Kuwait branch plus Kuwaiti- owned deposits with BBME in London represented 47 per cent of total public deposits in BBME. Furthermore, some of these deposits were interest-free:

50 per cent of deposits in the

Kuwait branch of

BBME throughout the 1950s carried no interest. 2

The ability of the domestic Gulf economies to absorb government and private expenditures, though expanding quite rapidly, became increasingly limited relative to the sub- stantially greater expansion in oil revenues. By the early

195Os, most Gulf branches of BEME lacked sufficient local

opportunities to absorb all the local deposits. The bank tran- sf erred a major portion of the deposits in the Kuwait branch to

London:

30 per cent in 1955, and 50 per cent in the mid-1960s.

The same was true, even to a greater extent in Bahrain and Dubai

2. Geoffrey Jones "3anking in the Gulf before 1960", London

School of Economics,

1985 (Mimeographed).

6 (60 per cent of deposits invested abroad in 19591, and in Oman (80 per cent in the 1960~1.~ Impressed by the success, prof its, and international orientation of foreign-owned banks, local merchants in a number of oil countries initial ly pooled resources together and established modern banks, basically to get a share in the growing pie. These banks started operations under favourable conditions because the major merchant shareholders transferred their business transactions to the newly-established banks. Even though such moves implied competition with the foreign-owned banks, growth of business for both types reduced potentials for conflict. In most cases local ly-owned modern banks recruited experienced staff, especial ly national, in management and other positions from the foreign-owned banks. Skills of those staff and their knowledge of international suppliers, banking procedures abroad, and foreign languages - in addition to their local know ledge and connections - were essential requisites to the success of modern local banks. The establishment of modern banks by local interests was an integral part of the modernization process sweeping the oil countries. Such event occurred in 1938 in Saudi Arabia with the family-owned National Commercial Bank in Jeddah; in 1941 in Iraq with the government-owned Raf idain Bank in Baghdad; in 1952 in Kuwait with the privately-owned National Bank of Kuwait; in 1955
in Libya with Tripoli's National Bank of Libya; in 1957 in Bahrain with the National Bank of Bahrain; in 1963 in Dubai with

3. Geoffrey Jones, ibid.

the National Bank of Dubai; in 1968 in Abu Dhabi with the government-owned National Bank of Abu Dhabi; and in 1973 in Oman with Muscat's National Bank of Oman.

The activities

of both Arab and foreign banks typically concentrated on short-term commercial loans, related for the most part to external and internal trading. Both the exposure and orientation of Arab banks to international banking norms and practices evolved over time to become ordinary daily affairs.

The coexistence

of Arab and foreign banks (full y Owned, or branch offices) continued in some countries until the present, such as in Bahrain, Dubai, Abu Dhabi, Qatar, and Oman. In other countries, commercial banks were nationalized following Egypt's example in

1961. Thus, nationalization of the entire banking

system was accomplished in 1964 in Iraq, 1965 in Algeria, 1970 in

Libya, and

1971 in Kuwait. Saudi Arabia followed a middle

course, where by

1981 all non-Saudi banks had to accept 60 per

cent Saudi ownership.

Another contributing factor

to the internationalization of Arab banks was the development of the banking system in Lebanon which followed a distinctly liberal orientation since independence in

1943. In addition, several aspects helped make

Beirut the finance and business centre of the Arab region: the network of contacts through migrant Lebanese businessmen worldwide; a strategic location at the cross roads of three continents; and a good communication system. These aspects, among others, helped expand the number of banks in Beirut from 11 in 1945 to 90 in 1965. The scope of banking services expanded equally substantially: from financing external commerce to the 8 wide range of financial, investment, and intermediation functions normal ly obtained in major international business centres. Furthermore, the wave of bank nationalizations in neighbouring Arab countries especially during the 1960s created an influx of f 1 ight capital into Lebanese banks. The apparent stabil ity and prosperity of Lebanon until its tragic civil war has given further inducement to two-related developments.

First, the

Lebanese pound gained strength vis-a-vis major international currencies; during 1955-75 the Lebanese pound improved by 29 per cent against the dollar, and by 44 per cent against the Sterling. Second, rich individuals and financial institutions in the Gulf transferred to Beirut substantial flows of investment funds. The wide-ranging scope of Lebanese banking activities, and the enterprising approaches of Lebanese managers, made inter- nationalization a natural corollary in the development of Arab banking. For example, the Banque Libanaise pour le Commerce which was established in 1950 by a prominent Lebanese family opened subsidiaries in Damascus in 1953 and in Paris in 1956.

The Intra Bank, established in 1951 by

a Palestinian businessman, participated in the financing of industrial, tourism, and real estate projects in the Middle East, Europe, and North America. Capital investments from the Gulf were instrumental in setting up a number of Beirut-based banks of regionallinternational character, such as the Eeirut-Riyad Bank (19591, the Credit Libanais (19611, the Audi Bank (1962), and the Byblos Bank (1962).4

4. Traute Wohlers-Scharf, Arab and Islamic Banks, OECD, Paris

1983, p.17 and its footnotes, pp 62-63.

9 Through the mid-1960s Lebanese banks were exempted from serious government controls and were allowed to maintain a system of confidential numbered accounts which turned Lebanon into a haven for anonymous capital. The crash of the Intra Bank in 1966 sent shock waves into the relatively small but highly visible financial community which led to government controls, stream- lining the banking system, and a complete ban on setting up new banks. In the process, the number of banks declined to 74 by

1968 and remained unchanged through 1976. The

severity of the civil war had by then forced more Lebanese banks to move the base of their operations from Beirut and set up branches or affiliates in Cyprus as well as in major financial centres such as London,

Paris, and Switzerland.

Parallel to the development of the Lebanese banking system, and at the other extreme, was the development of the Kuwaiti

Banking

System. At first, the Kuwaiti system was limited by the monopoly advantages the British Bank of the Middle East had enjoyed since its establishment. The National Bank of Kuwait was established in 1952 for the most part as a result of pressures from Kuwaiti merchants when the country was still a British protectorate. Until

1960 only these two commercial banks were

a1 lowed to operate in Kuwait and through them investments were placed overseas, mostly in London, on behalf of the country and its rich families. In

1960 two additional commercial banks were established:

the Commercial Bank of Kuwait and the Gulf Bank. In 1967 another commercial bank was added (A1 Ahli Bank). The activities of the 10 new banks followed in the footsteps of their predecessors: mostly short-term financing of import trade and, to a lesser extent, guarantees of construction contracts. The deposits which were not possible to deploy productively in Kuwait were generally placed by the banks overseas, mostly in London. It is the limited absorptive capacity of the Kuwait economy which exp

1 ains why the go v ernment encouraged the es tab1 ishment of

specialized institutions to help place investments abroad in a systematic fashion. Thus, the government participated in the establishment of the Kuwait Investment Company (KIC) in 1961 with

50 per cent of the shares, and also in the Kuwait Foreign Trade,

Contracting, and Investment Company

(KFTCIC) in 1964 with 80 per cent of the shares. The expressed policy of KIC was to diversify investments to assure a reasonable degree of safety, but at the same time maximize income. Its activities during 1965-70 were concentrated in international financial instruments (92 per cent) with variant term structure, all of which were in OECD countries.

The remaining

8 per cent were in direct investments, mostly in

real estate and banking, with a wide geographic spread of developed and developing ~ountries.~

By contrast, the activities

of KFTCIC were relatively more concentrated in direct invest- ments, with

85 per cent of its resources in OECD ventures during

the

1960~~ These two investment houses, together with Kuwaiti

commercial banks, formed in 1966 the United Bank of Kuwait in London to strengthen the position of Kuwaiti banks in

5. KIC Annual Reports.

6. KFTCIC Annual Reports.

11 international operations. This was the first time a Gulf bank was established in a major international financial centre. Its expressed objective was to assist in the management of capital exports. Three years later the same group of banks, together with Socigte' G&&ale, formed in Paris the Banque Franco-Arabe d'Investissements Internationaux, known as

FRAB Bank, as the

first Arab-Occidental Consortium bank.

By 1970 this cluster of

institutions helped place substantial Kuwaiti funds in major international markets, estimated for the government at $4.0 billion and for the private sector at $1.2 billion. 7 Apart from those institutions, the Kuwaiti Ministry of Finance in 1964 took the initiative with the Central Bank of

Egypt

to establish in Cairo one of the foreruners of inter-Arab banks, the Arab African Bank, where each held

42.4 per cent of

the shares; the remaining

15 per cent were subscribed by the

governments of Algeria, Iraq, Jordan, and Qatar.

A1 though the

bank was established as a joint-stock company under Egyptian law, it had a special status similar to off-shore facilities in that it was exempt from exchange-control regulations and from banking and credit legis lation covering joint-stock companies.

By 1970,

the Bank had a portfolio of 14 direct investment projects, six of which were in Africa, seven in Arab countries, and one in Paris.

During the

1970s the Bank significant 1 y expanded its acti v it ies

in African and Arab countries and substantially increased its capital, to become one of the leading development finance

7. N.A. Sherbiny "Arab Financial Institutions and Developing

Countries" World Bank, Staff Working Paper (Forthcoming). 12 institutions in the Middle East. 8 On the official aid front, the government established in 1961
- the year of Kuwait's independence - the Kuwait Fund for

Arab Economic Development (KFAED),

as the main institution for the provision of project assistance. Until 1974, the Fund's mandate was limited to the provision of loans to Arab League members; thereafter it extended to all developing countries. The

Kuwait Fund assisted the governments

of several oil countries to set up their national funds: Abu Dhabi in 1971, and Iraq and

Saudi Arabia in 1974. During

a 12-year period (1962-731, the

Kuwait Fund processed

45 projects to 12 Arab countries,

€or a total commitment of $370 million, and gross disbursements of $230 million.' Symptomatic of the Fund's dynamism, even in those early years, was the rapid expansion in its capital. From an initial capital of KD 50 million ($140 million), the government doubled the Fund's capital once in 1963, and once more in 1966 to KD 200 million ($560 million).10 Later on during the 1970s, the Fund expanded its capital stil I further: to KDlOOO mil lion ($3400 million) in 1974, and to KD2000 million ($6900 million) in 1979.

8. Arab African Bank, Annual Reports.

9. Kuwait Fund Annual Reports; and OECD, Aid from OPEC

Countries, Paris, 1983, p.46.

10.

OECD, ibid, p.45.

13

3. TEJl 1970s dBD EAEtLY 1980s: OPPCHLTUHITIBS Bw) CHdLLEBlGES

The thrust of the foregoing discussion was to show that prior to the major increases in oil prices, modern banking was already established throughout Arab countries; both Arab and foreign banks participated in the monetization of Arab economies; some countries nationalized their banking system; and Lebanon and

Kuwait stood

at the forefront of the internationalization of Arab banks, though in varying degrees and for different reasons. While the push towards international markets took place in Lebanon as a result of banking skills and financial connections to serve local and regional clients, it occurred in Kuwait as a result of oil- related capital exports. If the internationalization of Kuwaiti financial institu- tions occurred during the 1960s when the country's oil revenues were relatively small, there was all the more reason for banks from the small economies of the Gulf and Libya - the so-called low absorbers'' - to seek international investment opportunities during the 1970s when oil revenues multiplied. There were also equally good reasons for Kuwaiti banks to expand their

11. Defined in the ArablOPEC context to include Kuwait, Libya,

Qatar, Saudi Arabia, and United Arab Emirates

(UAE). Those economies could transform only a minor portion of their annuaL savings into productive investments especially during the 1970s. 14 internat iona 1 act i v it ies during the 1970s. Banks from high absorbers like Algeria or Iraq were engaged in the international markets for the most part to finance import trade.

Index numbers

of average annual oil revenues into the low- absorbing countries (1963-69 = 100) were computed according to the following five time intervals; Table 1.

1963-69 - oil price stability

1970-73 - minor increases in oil prices

1974-78 - following the first major oil price increase

1979-81 - following the second major oil price increase

1982-83 - falling oil prices.

The table shows substantially changed orders of magnitude between the

1960s and 1970s. The multiples began to show even in the

early

19709, but the discontinuities occurred in the mid-1970s.

The decline in 1982-83 of both oil export volume and oil prices severely affected the index numbers for oil revenues, but they still continued above their 1974-78 averages. This enormous expansion in oil revenues enabled the Arab/OPEC countries to expand their imports significantly; see Table 2. The index numbers in Table 2 facilitate direct comparisons with the index numbers of Table 1. The comparison shows generally similar shifts between time periods in the levels of oil revenues and imports for each country listed, except for the early 1980s. During 1982-83 the significant decline in annual average oil revenues from the peak averages of 1979-81 appeared to be accompanied by import expansion, which was substantial in some countries.

This apparent inconsistency is

15 resolved by noting that import demand peaked two years akter the peak in oil revenues in 1980; it declined in 1983.

Table 1

Index Numbers of Average Annual Oil Revenues

of Arab/OPEC Members

Country 1963-69 1970-73 1974-78

Algeria

Iraq

Kuwait

Libya

Qatar

Saudi Arabia

UAE 100
100
100
100
100
100

100(a)

366
242
192
298
289
345

379 2547

2130
1094
1258
2178
3993

51 07 1979-81

6825

493 9

2530
3105
4800

12295

12157 1982-83

3230
2315
1266
2175
3467
8351
9714
(a> for 1966-69 Source ; Calculated from International Financial Statistics, on the basis that average annual oil revenues during

1963-

69
was as follows: $150 million for Algeria, $390 million for Iraq, $640 million for Kuwait, $570 million for Libya, $90 million for Qatar, $740 million for Saudi

Arabia, and $140 million for

UAE Table 2 also shows the average annual magnitude of import trade: by country, for the Arab group in OPEC, and for the low absorbers as a group. While Arab banks are unlikely to have financed a1

1 imports of Arab countries, they may have financed

the major portion. The volume of import trade itself has expanded geometrically: from an annual average of about $3 billion during the 1960s, to about $6 billion in the early 1970s, to $31 billion in the mid-19708, to $77 billion in the late 16

Table 2

Average Annual Imports of Arab/OPEC Countries

Algeria

Iraq

Kuwait

Libya

Qatar

Saudi Arabia

UAE

1963-69

7 40 420
480
440
60
53 0

180(*)

Total Arab

Low Absorbers

Algeria

Iraq

Kuwait

Libya

Qatar

Saudi Arabia

UAE 2850
1690
(Millions of US dollars)

1970-73 1974-78 1979-81

1550

6240 10170

700 3630 14070

7

80 3340 6230

1030 3580 6700

130 7 80 1460

1160

10150 29900

470 3620 8450

5820

31340 76980

3570

21470 52740

19 82-83

10550

16880

8640

7 840

1700

40070

9180

94860

6743
0 ( Index Numbers )

100 210 843 1374 1426

100 167 864 3350 4019

100 163 696 1298 1800

100 234 814 1523 1782

100 217 1300 2433 2833

100 21 9 1915 5642 7 560

100
260

201 1 4694 5100

Source: Calculated from International Financial Statistics, 1984

Yearbook.

(*)denotes author's estimates, based on partial information. 17

1970s. Arab imports reached their peak in 1982 at $104 billion,

after which they retreated to $90 billion in 1983 - a decline of some

13 per cent. The share of the low absorbers in those flows

has grown over time: from about 60 per cent in the late 1960s to about 70 per cent in the early 1980s. This partly explains why

Gulf banks

were at the forefront of the internationalization of Arab banks during the 1970s, and also why they have had more difficulties than other banks since

1983.

Imports of individual countries show substantial growth differences: highest in Saudi Arabia,

UAE, and Iraq, and lowest

in Algeria.

As a result, the volume of imports for the

individual countries changed dramatically during the

1970s, and

with it the amount of trade financing provided by banks from those countries. During the

1960s Algeria was by far the largest

importer in the Arab/OPEC countries, fol lowed at considerable distance by the roughly equal imports of Iraq, Kuwait, Libya, and

Saudi Arabia.

By the mid-1970s this picture has changed

significantly, and by the ealry

1980s it changed still further.

Saudi imports have become about three

times Iraq's, the second largest importer, and about equal to the imports of Algeria,

Iraq, Kuwait, and Libya combined.

The imp1 ications of these

developments for trade financing by Arab banks - especially Saudi banks - are self evident. The implications for the size of Arab banks by nationality show in the volume of assets of those banks in the early 1980s; see Annex Table A-1. Notwithstanding the major expansion in Arab imports, part of the increased oil revenues in the low absorbers was transmitted abroad for investments. The volume of the invested surplus by 18 country is not precisely known, but estimates of the cumulative current account surplus may serve as a proxy. Such estimates were in fact made by an independent researcher and are reported in Table 3 below. As would be expected, the figures show sub- stantial increases in the capital surplus invested abroad following the two major oil price increases. Combined, the low absorbers have accumulated a total surplus through the end of

1982 in excess of $320 billion, distributed as follows: 26 per

cent for Kuwait, 8 per cent for Libya, 4 per cent for Qatar, 51 per cent for Saudi Arabia, and 11 per cent for UAE. It appears

Table

3 Cumulative Net Foreign Assets of the Low Absorbers (billions of US dollars)

Country

At End 1973 1974-78 1979-82 At End 1982

Kuwait 3.7 31.8 48.8 84.3

Libya 3.2 10.2 12.0 25.4

Qatar 0.9 4.6 8.1 13.6

Saudi Arabia 4.2 61.6 98.6 164.4

UAE

Total

Sources

:

0.5 11.7 23.9 36.1

12.5 119.9 191.4 323.8

For figures at end 1973 from Richard P. Mattione

"OPEC's Investments and the International Financial

System", Srookings Discussion Papers in Internat

iona 1 Economics, No. 6, July 1983, Table 1.3. For 1974-78 and 1979-82, from R.P. Mattione, OPEC's Investments and the International Financial System, the Brookings

Institution,

1985, Table 2-4, p.11.

19 that the 1982 figures reported in the table represented a peak, because starting in 1983 practically all the low absorbers have resorted to their accumulated surplus to finance budgetary deficits, a1 beit in varying degrees. Saudi Arabia in particular appears to have withdrawn substantial sums, estimated at $35-45 bill ion during 1983-85, according to the country's annual budgets . The deployment of rapidly increasing investment funds outside the Arab region throughout the

1970s was carried out

through a1 ternative channel s, most notably bank deposits and other liquid placements in the

US and UK. In addition, a new

banking formula especially suited for the

1970s began to emerge -

that of consortium banks. Because of their role in the process of internationalization of Arab banks during the

1970s, they

deserve some detailed analysis. The first consortium bank was the FRAB Bank, established in 1969 by a group of Kuwaiti banks with Socigte' G&&ale. The formula must have proven sufficient- ly attractive because FRAB was shortly followed by other Arab- Occidental consortium banks such as the Union des Banques Arabes et Francaises (UBAF) in 1970, the European Arab Bank (EAE) in

1972, and Banque Arabe et Internationale d'hvestissements (BAII)

in

1973. This form of international cooperation invol ved net

gains to the principal participants: access of European banks to petrocapital in return for access of Arab banks to modern banking techniques, international experience and connections, and developing the capacity to build new financial mechanisms and service products. In addition, this new banking form which 20 enabled both sides to reap the benefits of the rapidly growing commerce between Europe and Arab countries also facilitated the institutional sharing in the costs and risks of the new operations. What is significant about these major Arab-Occidental consortium banks is that they were all formed before 1974; they a1 1 involved Kuwaiti participation, sometimes substantial; and they all had European banks as major partners. On all three counts, the question is: why? Formation of these consortium banks before 1974 was for the most part in anticipation of future expansion in business, even before the first major oil price increase. Table

2 shows that Arab imports in the early 1970s

were already twice the level of the late 1960s. The Kuwaiti participation in a1

1 was due to pioneering years of experience

with international financial ventures, be it on the government side (KIC, KFTCIC, and the Arab African Bank), or on the private business side (UBK and BAII).12 That the major overseas partners were European banks was mainly due to their long-standing interest in and familiarity with commerce and finance of Arab economies in general and of the then rapidly growing economies of the

Gulf in particular.

Since 1974, however, some Arab banks joined the hitherto

Kuwait dominated consortium

banks, thereby changing the structure of their ownership and management. Other Arab banks preferred to establish new consortium banks, evidently because the formula's

12. The role of Abdel Latif A1 Hamad was significant. He was the

Director-General of Kuwait Fund, the Managing Director of

KIC, and the Chairman of UBK and RAII.

appeal was still too strong to ignore. Development of consortium banks during the

1970s went beyond the initial universal mandate

of this pioneer group into two additional directions as will be detailed below, namely to semi-industrial countries of Southern

Europe,

Asia and Latin America, and within the Arab region itself. As the size and country composition of Arab financial flows changed, the functions and structures of consortium banks evol ved beyond their initial objectives. For example,

FRAB Bank evol ved

quickly to include other Arab banks from Saudi Arabia, UAE, Libya, Tunisia, Algeria and Morocco and OECD banks from Belgium, HoZ land, Switzerland, Spain, Greece and Japan. Eventually, the

Western partners

were bought out by Arab banks, and FRAB became in effect an inter-Arab bank. UBAF became a consortium of many

Arab and

OECD institutions. On UBAF's Arab side alone, there were eleven commercial banks, five central banks, nine government banks, and a ministry of finance. The pattern was about the same with

BA11 and EAB.

Although most consortium banks were initially set up to promote Arab-European business relations, their mandate expanded quickly to cover a range of activities including commercial banking, trade financing, foreign exchange, money market, and loan syndication.

Some, however, still added special features to

their services. BAII, for example, in order to attract the rich individual Arab investors, initiated real estate management, insurance, and stock market programs.

As such, BA11 was acting

as a financial advisor to Arab investors. In addition, the bank became quite active in Eurobond market, managing large issues in 22
both OECD and Arab currencies (including UAE dirham, Kuwaiti dinar, and Bahraini dinar).

The participation

of an incr eas ing number of non-Kuwa i t i Arab banks in existing consortium banks pushed further their growth momentum and enabled them to enter into joint ventures with leading banks in the major financial centres of London, New York, Rome, Luxembourg, Frankfurt and Hong Kong. In addition, consortium banks established Asian branches and/or joint ventures in Seoul, Tokyo, India, Pakistan,

Sri Lanka, the Philippines, and

Singapore to facilitate trade and investment transactions with that vital part of the ~0rld.l~ The waves of business and financial opportunities invol ving the newly created oil-related wea

1 th induced the est ab 1 ishment of specialized international

banks to promote bilateral cooperation between individual OECD countries and Arab countries. Thus, the Banco Arab-Espanol (Aresbank) was established in Madrid in

1975 with a capital of

$19 mil lion; the Banco Saudi-Espanol (Saudesbank) was established also in Madrid in

1979 with a capital of $53 million; the Arab-

Hellenic Bank was established in Athens in

1979 with a capital of

$15 million; and the Arab-Turkish Bank was established in

Istanbul in

1977 with a capital of $20 million. Some of the

activities of these bilateral banks were typically short-term oriented, others were investment oriented, financing projects in host countries.

Typical of short-term activities, for example,

13. Barun Roy, "Arab-Asian Banking Ties Grow", Arab Banking. and

Finance Handbook, Fa1 con Pub1 ishing, Manama, Bahrain, 1983, pp. 29-35. 23
the Arab-Turkish Bank is actively invol ved in financing the rapidly growing Arab-Turkish trade, repatriating the expanding flows of Turkish workers remittances especially from Saudi

Arabia, and

issuing international guarantees for Turkish contractors working in Arab countries, notably Libya and Saudi

Arabia.

The presence

of Arab banks extended beyond international financial centres and Mediterranean capitals to Latin America.

The Arab-Latin American Bank (Arlabank) was

set up in Lima in

1977 as a consortium bank to promote financial cooperation and

industrial and commercial relations between Arab and Latin

American countries. The activities

of the Arlabank include trade financing between the two regions; merchant and commercial banking; and joint ventures in mining, agriculture, and pe tr ochem ical s . By the late 1970s Arab financial institutions appear to have responded to the new international business cha 1 I enges by establishing a global network engaged in a variety of activities. In addition to the already discussed trade financing, Arab banks have undertaken a number of commercial and investment activities, as shown in Table 4. The table shows that syndicated Euro- currency lending is the largest activity of Arab banks (aside from trade financing) cumulatively adding to about $41 billion in

1984, even though it started much later than the others. The

second largest activity is direct investment, cumulatively adding to about $24 bi 11 ion in 1984 - which is most 1 ikely an under- estimate. Eurobonds is the smallest of Arab bank activities, cumulatively adding to some $10 billion. Significantly, 24

Table 4

International Activities of Arab Banks

(Millions of US dollars) Year

Syndicated Bonds Direct

Eurocurrency Investments

Credits

Before

1974
1974
1975
1976
1977
1978
1979
1980
1981
1982
1984
1983
- 9 51 2321
2491

3 583

9102
9798

69 85

5716
450
68
164
316
53
1 770
7 41
857
1676
1619
n.a. n.a. 1290
1560
1200
1400
1740
2480
2360

27 60

48
90
1760
1100
1200

Sources :

1. Syndicated Eurocurrency Credits: from Middle East Economic

Survey, several issues, especially

28:14, 14th January, 1985,

pp. 81-86.

2. Bonds: from N.A. Sherbiny "Arab Financial Institutions and

Developing Countries" World Bank,

Staff Working Paper (Forth-

coming).

3. Direct Investments: from N.A. Sherbiny, ibid, for direct

investments in developing countries; and Bank of England,

Quarterly Bul letin, March

1985, for direct investments in

developed countries. Mote, however, that differentiating direct investments from investments in securities in developed countries is rather difficult, given the nature of data reporting. It is suspected that reporting direct investments in developed countries is somewhat downward biased, and that the figures presented in the table are therefore conservative estimates. activities of Arab banks during 1980-84 constituted 86 per cent of cumulative syndicated Eurocurrency loans, 70 per cent of 25
Eurobonds, and 49 per cent of direct investments. A special focus on Eurocurrency loans syndicated by Arab banks shows that

20 leading banks accounted for about 88 per cent

of the total during 1979-83, while the remaining 12 per cent were handled by some 30 other smaller banks; see Annex Table A-2. Some banks which appeared on the leading 20 loan syndicators in 1983
were not included in some earlier years. For example, neither the Arab ,Banking Corporation nor the Saudi International

Bank appeared

on the list in 1979 because they started operation only in

1980. However, other banks established long before did

not appear on the list either in 1979 or 1980 because of their previously limited invol vement in Eurocurrency loans. Included in this group are Alahli Bank of Kuwait, Commercial Bank of

Kuwait, National Bank

of Bahrain, Riyad Bank, and Bank of Bahrain and Kuwait.

Within

the Arab countries themselves, new directions for consortium banks began to shape in Saudi Arabia and Egypt, practically for diametrical iy opposed reasons. The Saudization policy of 1977-81 , aimed at establishing national control of the banking system, turned a number of foreign banks into Saudi- European consortium banks. Thus, the Banque de 1'Indochine became Al-Bank Al-Saudi Al-Faransi; the Algemene Bank Nederland became Al-Bank Al-Saudi Al-Hollandi; the British Bank of the

Middle

East became Al-Bank Al-Saudi Al-Britanni; and Citibank was turned into Al-Bank Al-Saudi Al-Ameriki. l4 In Egypt, €or ~~ ~~~

14. T. Wohlers-Scharf, Op.cit., p.27.

26
opposite reasons, consortium banks were established as a result of the go v ernment's "open door" po 1 icy, which aimed to attract foreign investments in joint ventures with Egyptian institution.

During the second half

of the 1970s several Egyptian-Western

Consortium banks

were established, the largest of which was Chase

National Bank (Chase Manhattan and National

Bank of Egypt) and

Societe Arabe Internationale de Banque (Banque de Paris et des

Pays-Bas, the Arab International

Bank, and the National Bank of

EgY Pt

27

4. CHaTBES OF ARAB MUKIBG

With markedly increased oil revenues in the early 1970s the focal point of Arab banking began to shift from Lebanon to the

Gulf. However,

it was the start of Lebanese civil war in 1975 which spel led out the demise of Beirut as a regional financial centre. Within the

Gulf, the new centres were Kuwait and

Bahrain. In the wider Arab context, Cairo was struggling to become a regional Arab banking centre. International ly, Arab banks no longer confined their growing presence to London and

Paris, but went

to establish anchors in New York, Geneva,

Frankfurt, Singapore and

Hong Kong. For a while, the network of

Arab banks appeared to encircle the globe. By the early 1980s, with such international network of banks and financial institutions in place and oil revenue flows into the Arab countries at a historical peak, Arab financial power appeared as a rising force in international financial circles. This new state of affairs, however, turned out to be a transitory phenomenon. Furthermore, practically every centre of Arab banking has drawbacks of its own. The internationalization of Kuwaiti banks during the

1960s

became more consolidated during the 1970s. Kuwaiti institutions established a greater presence abroad and participated in an 28
increasing range of international financial and investment activities: issuing bonds in both Kuwaiti dinars and US dollars on behalf of customers in developed and developing countries; joining Eurodol lar syndicated loans as lead managers, co- managers, or managers; establishing direct investment joint ventures in several developed and developing host countries, especially in the Arab region; assuming a lead role in official concessional flows to developing countries; promoting complemen- tary activities to official aid flows such as cofinancing development projects with other Arab or international aid institutions; and contributing to schemes of investment guarantees to improve the investment and business climate in recipient developing countries, Alongside these impressive developments, the seeds of financial crisis were sown in the late 1970s with the establishment of an informal stock exchange (Sus a1 Manakh) in which the shares of offshore Gulf companies were traded. The narrowness of the official stock market relative to expanding domestic

1 iquidity prompted the search for new investment

opportunities, which Suq a1 Manakh helped to satisfy. Feverish speculation in this unorganized market, and a1 lowing the claims to be settled by post-dated checks, pushed share prices to unrealistically high levels, which came tumbling in August 1982, 15 sending shock waves through the smal 1 investment community. Three years after the Manakh collapse, during wbich the

15. Hazern Beblawi, The Arab Gulf Economy in a Turbulent ARe, St.

Martin's Press, New York 1984, pp.230-234.

29
government has spent more than $8 bill ion in various support and compensation programs, the debt tangle remains with no immediate solution in sight. 16

The Hanakh col lapse was fol lowed

by a banking crisis in

1984, during which the profits of commercial banks as a group

fell €or the first time in a decade, by about 15 per cent. Many borrowers were not performing not because they were delinquent but because of poor conditions. In view of this banking crisis, the central bank has been seeking to establish greater degree of commercial and monetary discipline, and as a result some reputable financial institutions have taken steps which may ultimately lead to their merger: Burgan Bank and Bank of Kuwait and the Middle East; and

KIC and KFTC1C.l-I These successive

crises may have raised questions about Kuwait's international financial reputation, However, the response to such crisis, uneven as it may have been, demonstrates government seriousness about corrective actions. Nevertheless, more decisive measures are still needed to induce institutions to respond creatively to adverse situations and thus become more tuned to fickle market conditions. Af teral 1, financial downturns in the past did not necessarily end Kuwait's standing as a financial centre.

Kuwait's modern financial and banking

system has a track record of three decades of experience and growth - more than can be claimed by any other Gulf country. 16. Rami Khouri "A Bitter Pill to Swallow" Euromoney, Aug. 1985, pp.119-128.

17. Charles Babington "Still Paying for the Manakh" Euromoney,

March 1985, pp.133-136.

30
Bahrain's emergence as an Arab centre of finance is the result of several factors including the government's need to diversify the domestic economic base, the adoption of flexible policies to achieve the diversification strategy and the country's special locational advantages. In the early 1970s,

Bahrain's oil exports begain to decline because

of dwindling oil resources. In response, the government opted for giving financial services a prominent role to prepare Bahrain for the post-oil era. The interest in financial services derives from

Bahrain's special locational advantage which

lies close to the shore of Saudi Arabia in the middle of the Gulf. That very location enables Bahrain to complete a global circle of financial centres running from London to New York, San Francisco, Tokyo, and Singapore. Bahrain's time zone gives it the distinct ad vantage of operating in currency deal ings and foreign exchange business after Singapore closes, but before the European centres open.

Foreign banks unable

to establish operations in Kuwait or Saudi Arabia due to legal barriers found Bahrain a most convenient alternative. With the

1975 legislation of OBUs

(offshore banking units) model led along the lines of Singapore and Cayman Islands, Bahrain became a highly attractive banking centre. Most major banks over a short period established branch offices, so that by 1983 there were 21 commercial banks, 63 representative offices (from 35 in 19801, 16 investment companies,

6 foreign exchange brokers, 77 OBUs (from 51 in 19801,

31
and another 2 05Us licensed to start.18 In institutional range,

Bahrain began to

rival such international banking centres as Singapore, Hong Kong, Luxembourg, and Nassau and its banking community was getting to be widely diverse.

Capital flows into Bahrain originate

for the most part in the Arab countries and Western Europe. The share of Arab countries as sources of funds steadily expanded from 50 per cent in

1978 to 66 per cent in 1983; that of Western Europe steadily

declined from

30 per cent in 1978 to 21 per cent in 1983; and

that of combined other sources such as the US or Asia also declined from

20 per cent in 1978 to 14 per cent in 1983.

Capital from Bahrain flows to borrowers practically everywhere.

However,

Bahrain

is a net exporter of funds to the Far East (How Kong, Singapore, Tokyo), Asia, Latin America, and lately Western

E~r0pe.l~

Significantly, about

50 per cent of the assets are

lent to Arab clients, thus partly counterbalancing the argument that Bahrain is merely a centre for recycling oil revenues to the outside world. Assets of OBUs increased rapidly over a short time span: from $23.4 bill ion in 1978 to $62.7 bi 11 ion at the end of 1983. The pace of growth, however, was rather uneven, because after initial acceleration through

1981, it decelerated significantly

during

1982 and 1983. Although the picture for 1984 is still

incomplete, there are indications of a decline €or the first time

18. Bahrain Monetary Agency, Annual Report, 1983-

19. Alan E. Moore, "Bahrain's Offshore Banking Units," Arab

Bankinn and Finance Handbook, Falcon Pub1 ishing, Manama,

Bahrain,

1983, pp. 89-94.

32
20 in the volume of OBU assets. This reversal of growth momentum was the result of several factors: the serious decline of oil revenue flows into the oil exporting states, the continuing war between neighbouring Iraq and Iran, the accumulation of bad debts, and the related regional banking crisis in recent years. Overt signs of trouble for OBUs, began to appear during 1984 with the departure of some banks, such as Security Pacific, or early in 1985 with the distress sale of the Arab Asian Bank to a minority shareholder and the major reorganization of the United Gulf Rank. Unhappily, before the crisis is over, more OBUs will have departed reducing the demand for qual if ied Bahrainis, off ice space, and family accomodations. The small economic base of the Bahrain economy together with the high dependence of

OBUs on business conditions and oil revenue

flows into neighbouring

Gulf countries render the island

vulnerable to external shocks. It is these factors which explain the heightened state of uncertainty during 1984-85. A significant part of Bahrain's strength derives from banking 1 imitations in neighbouring countries, particularly where banks are nationalized: 60 per cent in Saudi Arabia and 100 per cent in Kuwait. International banking operations not possible to establish in either country found in Bahrain a perfectly satisfactory alternative through the

OBUs. Changes in either

country to modify banking policies or regulations may thus diminish Bahrain's position. For example, excess short-term liquidity in Saudi banks was previously absorbed easily in

20. The Financial The, July 22, 1985.

33
Bahrain's OBUs, which in turn was transformed readily into short term dollar liabilities. In effect, the process amounted to a de facto internationalization of the Saudi riyal, not a welcome outcome to Saudi authorities.

As SAMA began to develop short

term instruments, Saudi banks with excess liquidity could turn instead to these instruments rather than direct that liquidity to

Bahrain. The impact of this development

on Bahrain's OBUs could be detrimental. Despite these recent adversities, Bahrain continues to be an important regional centre for Arab banks and a significant link in the network of their global operations. Bahrain's locational advantage, conducive social environment, and the ability of its people to interact easily with international bankers are a1 1 basic features unlikely to change with business downturns. The tough-minded commercial discipline applied by Bahrain Monetary

Agency on member banks and

OBIIS, in addition, continues to be

confidence inspiring. What is especially unsettling, none- theless, is the depth and duration of the present downturn.

Elsewhere in the Arab region, Cairo

is making a quest to become a centre of Arab banking, though not without serious limitations. Egypt has always had special relations with Arab countries: culturally, intellectually, politically, socially, or economical ly. With the post-#asser shift in its socio-pol itical orientation, and the adoption of Sadat's inf itah (open-door) policy, Egypt began to undergo some changes of major implications for Arab banking and finance.

On the one hand, Egypt opened the

gates for hundreds of thousands of its abundant labour to migrate to the labour-short Gulf countries and Libya.

On the other, Egypt

34
instituted economic policy reforms to attract foreign investors, including foreign banks. As the largest demographic base in the Arab region (close to

50 mil 1 ion), Egypt has become the major source of Arabic-speaking

expatriate workers in the Arab oil-exporting countries, including

Iraq, itself a labour exporter until the late

1970s. Over a

short period, Egyptian workers remittances to Egypt became a significant source of the country's foreign exchange. From a modest $85 mil lion in 1973, Egyptian workers remittances increased to about $1.8 bill ion in 1978 and about $2.7 bill ion in

1980.21 During

1983 and 1984, it is estimated that those

remittances have been at a minimum of about $3.0 billion annually . Such major financial inflows were to a large extent encouraged by the reform of Egyptian banking. They also contributed to raising the national savings rate to about

15 per

cent of GDP, and thus to the creation of an environment conducive to the growth of internationa 1 banking, including par exce 1 1 ence Gulf banks. Furthermore, the large and growing absorptive capacity of the Egyptian economy, the advantages and facilities extended to foreign investors in the banking sector, and the increased market orientation of economic policymaking have a1 1 given signals to Arab banks to establish some presence in Cairo. By 1983, Cairo was the host to about 30 Arab banks, of which 14

21. N.A. Sherbiny, Capital and Labour Flows in the Arab World - A

Critical View, Industrial flank of Kuwait, IBK Paper No. 16,

Feb. 1985, p.55.

35
were commercial banks, 9 investment banks, and 7 representative off ices. Egypt's drive to improve its banking system and to create a properly functioning capital market to respond to increasing development demands for medium-term and long-term financing has by no means been progressing we1 1. Political difficulties have occasionally adversely affected the capital market, as was evident with the 1978 Arab boycott of Egypt because of the Camp David accords with Israel, or indeed with the assassination of

President Sadat in

1981. However the effects of these events

have been mostly transitory.

By contrast, Egypt's crippling

bureaucracy and its brainchild of mu1 tiple exchange system seem to have inflicted more lasting damage to the development of the capital market.

Little wonder that the multiple exchange system

appears to have eluded even the governor of the Central Bank. 22 The ready convertibility of currencies of the other Arab finance centres - Lebanon, Kuwait, and Bahrain - contrasts sharply with the baffling Egyptian pound. While the formal exchange rate of the pound has moved ever so slowly, if at all, the informal rate has tended generally to reflect market conditions.

It is a sad commentary that the barometer of the

Egyptian pound during the last three decades was not the country's banking system, but Cairo's bazars and back a1 leys. Other drawbacks to Cairo's quest are the restrictions on currency transfers, the inconsistent macro management of the economy, and the mixed signals from top government officials regarding the

22. Euromoney, February 1985, p.111.

36
orientation of the economy. Ultimately, however, Cairo's quest to become a centre of Arab banking is not altogether hopeless. By comparison with the turbulent Middle East, Egypt has enjoyed both relative stability and

GDP growth of 5-6 per cent since Sadat's

assassination. Arab aid agencies which boycotted Egypt since

1978 resumed their lending programs in 1984. Egypt was re-

admitted to the

Islamic Conference, also in 1984. Private Arab

investors have generally been active throughout the official boycott, contributing in

1983 some $2 billion, about one fourth

of Egypt's total in~estment.~~ Five of the largest 30 Arab banks are Egyptian; see Annex Table A-1. Combined, the assets of those five banks are significantly larger than the assets of the Baf idain Bank, one of Iraq's two commercial banks, and the only one authorized to handle government deposits. The Egyptian stock exchange is one of the few which a1 lows listed companies to be capitalised in dollars and dividends to be made also in dollars. A new joint venture has been established as a securities dealer and stock exchange promoter, with equity participation from se vera1 Egyptian banks, the International Finance Corporation, and Manufacturers Hanover. Even the country's communication system is improving especially with the outside world. Given these hopeful signs, Cairo's position as a regional centre of finance will ultimately depend on government policy: in minimiz ing rest 1: ic t ions on currency transfer 6, est ab 1 is hing consistent macro management with clear orientation, keeping

23. Ibid, p.112.

37
bureaucracy at bay, and freeing the Egyptian pound from the confused multiple exchange system. The contrast of Arab centres of finance with international centres such as London, Paris, or New York must appear striking indeed. London's relations with the Arab world are quite complex 'as they encompass history, politics and culture in addition to trade, finance, and investment. For these reasons London enjoyed the lion's share of OPEC's surplus placements through 1974. Furthermore, London has been the world capital of Eurodollar transactions since the

1960s and it was only natural that it

became the largest centre for Arab banks. In less than ten years since the first major oil price increase, London has become the host of at least

60 Arab banks. Only 3 were established before

1970, 12 during 1970-75, 22 during 1976-80, 16 after 1980, and

the remaining

7 did not have a known date of establishment.

24
Close historical and cultural connections made Paris an obvious and important centre for the establishment of Arab financial institutions. During the

1950s and 1960s, Paris was

the international financial centre for Lebanese banks, themselves the most international ly oriented Arab banks during that period. Subsequently, Paris became the host to the first group of Arab-

Western consortium banks.

To make sure that French banking rules

and regulations were carefully followed by the new Arab banks during the late 1960s and early 1970s, the Banque de France

24. The Financial Times, October 3, 1983, Curiously, a 1984 list

compiled by the Banker (November 1984) showed Arab banks in

London to have been only

32. Seemingly, the discrepency

between the two sources was due to variance in definition of what separates a bank from other financial institutions. 38
insisted on a local connection of sound financial reputation. So most Arab banks have (or had) a French partner in their Paris operations (FBAB, UBAF, or UII). Much as politics was the impetus for the establishment of Arab-French consortium banks during the 1970s, so it is behind the decline in the interest of Arab banks to expand their Paris presence and activities during the 1980s. The French Government during the later days of de Gaulle and under Georges Pompidou was the most pro-Arab Western power. The Hitterand Government has instituted a program of bank nationalizations, including share- holdings in Arab consortia. The Arab banks were sh