Bankers in Burnooses

Cautious but well heeled, Arab moneymen enter world finance

Bankers still do not mention it in the same breath with Tokyo, Zurich, London or New York. But some day they may. Bahrain, a small Arabian Gulf island sheikdom off the oil-rich coast of Saudi Arabia, is rapidly becoming an important financial center. Since the 1973 quadrupling of petroleum prices, 120 banks, including such international giants as Bank of America, Citibank, Chase Manhattan and Bank of Tokyo, have opened offices in Bahrain to handle the gusher of oil money flowing into the Arab world.

What makes Bahrain so potentially significant is that Western banks no longer have a virtual monopoly on handling the huge surpluses that the members of OPEC regularly amass--as much as $117 billion this year alone. Instead, a new breed of Arab-owned banks is picking up an expanding percentage of the action. Though new to the game, some of these institutions are starting off with formidable monetary bases. Begun in 1977, Gulf International Bank has assembled assets of nearly $3 billion and is competing with the big U.S. financial institutions in loan underwriting. The newly founded Arab Banking Corp., a tripartite venture of Libya, Kuwait and the United Arab Emirates, has a $1 billion capital base, equal to that of Manhattan's Bankers Trust, the tenth largest in the U.S.

Until the 1975-76 Lebanese civil war, Beirut was the Middle East's undisputed financial center. The fighting sent many Arab bankers fleeing to Bahrain or Europe, but now the shattered city is making a comeback. At least 85 domestic and foreign banks are operating there, twelve more than before the war.

Arab banks have also set up bases in Western money centers like Paris and London. On the elegant Champs Elysees, the National Bank of Abu Dhabi has taken over the former offices of Merrill Lynch. Near the Ritz Hotel on Place Vendome, discreet brass plates in Arabic script announce the presence of Banque Arabe et Internationale d'Investissement. All told, 32 Arab-controlled banks now operate in Paris. Some of London's toniest locations are occupied by eleven Arab banks, including the Bank of Credit and Commerce International. With 45 branches scattered throughout the country, it is one of Britain's fastest-growing financial institutions.

While they have generally been welcomed in Europe, the Arabs managed to arouse considerable hostility by taking over fewer than a dozen relatively minor U.S. banks. The largest: Detroit's Bank of the Commonwealth, with assets of $1.1 billion. The main reason is that the Arabs have been unusually insensitive to community feelings and inept in selecting friends.

The most glaring case was Saudi Industrialist Ghaith Pharaon's ploy to hook up with the Georgia good-ole-boy network. The Saudi financier bought from President Carter's former Budget Director and confidant Bert Lance most of his shares in the National Bank of Georgia for $2.4 million, a price far above the market value; other Arab moneymen reportedly arranged a loan for Lance of about $3.5 million. In another case, a group of Arabs, led by a shadowy sheik named Kamal Adham, the former chief of Saudi internal intelligence, touched off a confusing imbroglio in Washington by trying to take over 55-year-old Financial General Bankshares Inc. With assets of $2.3 billion, the holding company owns a chain of twelve banks stretching from Tennessee to New York. After a proxy fight that ended in a narrow defeat for the Arabs, Bankshares' management felt compelled to negotiate an honorable surrender at a higher price. Later this month the Arabs are expected finally to gain control by paying about 14% more than their initial bid of $140 million.

Though their oil sales have given the Arabs the greatest transfer of wealth in world history, they have moved relatively slowly into banking. Considering the complexity and high risks involved in modern international finance, they acted with commendable prudence. As the first petrodollars began to flood in, almost no Arab monetary agencies knew how to protect their new-found riches from the ravages of inflation. Many of the top moneymen had scant training for their high posts. Hence the Arab officials wisely turned to sure things: U.S. Treasury bills and mammoth deposits in the big international American and British banks.

The Arabs quickly realized, however, that they could learn about banking and also earn a better return on their investments if they linked up with established financial institutions. Starting about 1976, a number of partnerships were created, including the Saudi International Bank. Union des Banques Arabes et Franchises and the European Arab Bank. At the same time, Morgan Guaranty, Citibank and Chase Manhattan launched joint ventures with Middle East moneymen and began teaching scores of young Arabs complex arts like organizing loan syndicates on the Eurodollar market.

A decisive push toward an independent role for Arab banking came as a result of one jarring development: the U.S. freezing of Iranian assets last November, following the seizure of the American hostages at the U.S. embassy in Tehran. The action forced Arabs to recognize the unsettling fact that their deposits in American banks might also one day be frozen. Says Serat Al-Baker, an executive with the Kuwait International Investment Co.: "The investment world can no longer ever be the same as it was before the freeze. No depositor will ever again be quite as confident about putting his money in banks vulnerable to similar action by the U.S. or any other government."

Despite such fears, an estimated 90% of the 115 billion petrodollars now on deposit throughout the world remain in Western or Japanese banks. Only about $12 billion has been transferred to Arab-controlled financial institutions. Concedes Bashir Zuheri, Syrian general manager of the London-based European Arab Bank: "The oil-exporting countries still have more confidence in American and European banks than they do in Arab ones."

A main barrier facing Arab bankers remains the lack of well-trained people. The investment of Arabian Gulf money has largely been in the hands of able expatriates, like Khaled Abu Saoud in Kuwait or Abdul Kadir al-Kadi in Qatar, both Palestinians. In many other countries experienced Western bankers still hold top managerial posts, although they are being gradually replaced by Arabs. In the fiercely competitive business of recycling petrodollars into high-yield loans in Eurodollar markets, Arab banks remain novices. "The Arabs lack self-confidence and are still afraid of burning their fingers," declares Munir Haddad, a Lebanese who is an adviser to West Germany's Dresdner Bank.

Certainly the Arabs are extremely cautious. The governmental monetary authorities, which act as central banks and receive the oil income, are archconservative investors. They place their huge caches, up to $300 million a week for Saudi Arabia, in only the bluest of blue chips and the soundest of banks. By contrast, private Arab investors, notably the sons of the ruling families and super-rich entrepreneurs, are the main backers of the new commercial banks. If these new banks succeed, and the chances are good that they will, many international financiers expect a change in official Arab financial policy. Arab banks would then receive a growing percentage of the ever increasing OPEC surplus, and thus would immediately gain greater influence in world banking.

Understandably, this scenario causes some concern. The world's main experience of unified Arab economic operations is OPEC, whose rapid price increases have created the chaos and inflation that its members profess they are seeking to avoid.

Arab banking is unlikely to be as disruptive. In contrast to OPEC, some of whose members are antagonistic toward the West, Arab bankers are, for the most part, dedicated to doing business within the existing financial framework, where most of them learned their trade and have long worked. Khaled Abu Saoud, chief financial adviser to the Emir of Kuwait, told TIME'S Beirut bureau chief, William Stewart, "No banking system in the Arab world could operate without the cooperation of the present international system." If he is right, those are heartening words for the West. With their vast holdings, these new Arab bankers could be agents of greater international cooperation--or further dangerous division.

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