Interview: Mazin Manna, Patrik Gallagher
How could the Central Bank of Bahrain (CBB) enhance the regulatory framework to make Bahrain more attractive to foreign banks?
MAZIN MANNA: The CBB is undoubtedly one of the best regulators in the region, and as part of its drive to position Bahrain as a global financial centre, it implements the best practices of the global financial industry.
The CBB’s framework has served stakeholders well in times of local, regional and international turbulence. It continues to work closely with banks and financial institutions in the Kingdom, and its consultative approach helps to create an open communication process, facilitating dialogue while also helping to implement best practices.
It has taken more than 40 years in order to build the current trust in the banking and financial sector. It now both attracts and retains high-quality talent, firms, capital and investment.
The CBB will need to continue its ongoing efforts to provide the right working environment for banks and financial institutions in the region, while protecting the rights of the various stakeholders. It would also be helpful to proceed with plans to create a secondary debt market in Bahrain.
PATRIK GALLAGHER: The CBB over the last four decades has gained a very strong reputation for strong and thorough regulation in the Gulf and has adopted an open-door policy towards foreign banks.
At the moment, the CBB is reviewing a number of initiatives to look at some ways in which it could improve regulation levels in Bahrain. Given the political events of the past year, clearly the CBB has had a very testing period which it has had to navigate.
In 2012, the focus should turn to a more rigorous and better communicated marketing for the industry. Bahrain has been the largest financial services centre in the region since 1975. The Kingdom has the strongest regulatory framework and the greatest number of licensees, but it needs to look outward again and to communicate the state’s successes.
The coming months will be about re-energising the marketing effort, demonstrating to the world that Bahrain has a strong history of financial services and also that it has a bright future.
To what extent have foreign banks been more susceptible to the effects of political uncertainty in the market than their local counterparts?
GALLAGHER: Foreign banks operating in Bahrain typically are branch structures of a much wider regional structure, which in turn must report to a head office in Europe, the US or somewhere else.
Therefore the community of stakeholders outside of the country, in some cases many thousands of miles away, who require convincing and coordination for making their decisions in times of political uncertainty can end up being very large.
However as a balance, global banks with operations spread across the world have typically been present in many other countries which have had similar periods of political stress. They can, therefore, bring this experience to bear on events such as political uncertainty in order to help make plans both strategically and tactically.
In comparison to this, local banks – whose staff, management and board of directors are present locally, living amongst the uncertainty – can at times be more nimble in making judgements and directing changes in strategy than is the case within more complicated global and international banks.
MANNA:The effects of any uncertainty will have an impact on the financial services community, although branches of foreign banks can usually depend on support from their parent organisations in times of need.
Specifically within financial services, the increased uncertainty led to most local and foreign banks shoring up their liquidity levels to provide for a suitable buffer to weather further uncertainties. Furthermore, the unrest resulted in downward pressure on the tourism, retail and financial services sectors, among others.
What changes will the implementation of the US Foreign Account Tax Compliance Act (FATCA) have on the banking industry?
MANNA: Under FATCA, all global financial companies will be forced to report details of any clients linked to the US with more than $50,000 in an account to the Internal Revenue Service (IRS). These rules would partly shift the responsibility to make this filing from the individual to the bank or asset manager. Additionally, the IRS is threatening substantial fines for noncompliance, as well as imposing a withholding tax of up to 30% on sales of US assets by groups deemed to be non-compliant. These assets include, but are not limited to, US equities, treasury bills and bonds.
In addition to the fact that the cost of compliance with FATCA would be excessive, as some banks have said, financial institutions are also concerned that compliance would also put them in a position of violating local privacy laws in certain jurisdictions. The information-sharing deal signed in February 2012 between the US and five European countries ( Germany, France, the UK, Italy and Spain) attempts to address the issue of local privacy laws. Under the agreement, banks in those countries will share data on American assets not with the IRS, but with their own national governments, which, in turn, will share the information with authorities in the US. Going forward, such a deal might set a precedent for other countries, including Bahrain.
Furthermore, leading up to the January 2013 implementation deadline, many financial institutions will have to overhaul their know-your-customer (KYC) and anti-money-laundering procedures and adjust their underlying information technology infrastructure to accommodate those changes.
GALLAGHER: The goal of FATCA is to prevent tax abuse by US citizens that hold offshore accounts. Foreign financial institutions must report – and withhold tax on – payments to non-compliant US and non-US entities. Foreign institutions will face challenges in revising their KYC procedures and systems to be compliant. To avoid incurring the withholding tax through non-compliance, foreign financial institutions may cease holding US securities and terminate US account holders. This could result in a flow of capital from offshore centres to institutions not subject to FATCA.
A number of offshore funds are registered in Bahrain. What do you identify as the most significant trends within this sector?
GALLAGHER: While equity flows in the region are reduced, we continue to see funds setting up in Bahrain. There have notably been very few funds leaving Bahrain and from our intelligence these funds would likely have left Bahrain irrespective of the recent unrest, and the decision to leave was in fact based on regional or global issues. Bahrain is still seen as the fund centre of the Middle East, much more so than neighbouring regional centres. The rationale for this again comes back to having effective regulation and a history of financial infrastructure that is required for fund management, whether it be custodianship, accounting or legal capability. Therefore there is no reason to believe Bahrain should lose its competitive edge in offshore funds in the coming years.
MANNA: On a macro level, the favourable tax and regulatory environment in Bahrain has helped attract and maintain a number of offshore funds and investment companies in the country. Driven by such favourable laws and regulations, numerous companies have established their offices here, despite having little or no exposure to the local economy, with most assets based abroad. Maintaining such laws is crucial to long-term growth and sustainability.
Following the difficult period in the industry after the financial crises in 2008-09, offshore funds have recently seen growth, with management using a number of different strategies, such as a focus on emerging markets. There has also been greater attention paid to corporate governance and fund management.
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