Philippe Jouard is head of private banking at Dexia
The Middle East is a burgeoning market and there are many wealthy families needing specialist financial services. Philippe Jouard describes the challenges facing the private banking sector in meeting the cultural and financial demands of this clientele
When one thinks about the Middle East, the picture that comes to mind is of nomads living in the desert, camels, oil extraction plants and refineries. Today, the region has moved away from this naïve image; During the past decade, the local authorities, thanks to the benefits and growth that came out of oil production, have been able to develop the region by investing in infrastructure and education. They modernised the legal environment and their economies in order to first attract foreign investment, and then to develop their own growth areas such as finance, fundamental research, production facilities, chemicals, tourism and leisure to name a few, in order to diversify from dependence on oil income.
In the domestic banking sector, the picture has evolved dramatically too. With this development, the Middle East has become one of the world's key regions to conduct private banking activities, beside Asia.
The number of high net worth individuals in the region grew by around 4.7% in the region in 2002, and the current growth rate now sits at a healthy 6-7% per annum. Four percent (US) of the world's total $1.1 trillion wealth for individuals with more than $1 million is domiciled in the Middle East, and most of this wealth is "invested" in non-interest bearing accounts in accordance with Islamic law banning the payment or receipt of usury – therefore this "dead" money represents huge potential for investment and for private banks looking for a nascent market.
Saudi Arabia remains the mammoth power of the Middle East and has the highest concentration of ultra high net worth individuals and families in the region. Assets there total some $160 billion; the United Arab Emirates is considered the second largest wealth market after Saudi Arabia with assets of $100 billion. Having opened the doors to its new financial centre, Dubai has great potential and is a fast-growing, international city.
Bahrain is still considered the financial centre of the Middle East by most international standards. Investors are attracted to Bahrain by the absence of income tax, a sophisticated telecommunications infrastructure compared to its neighbours, and a liberal economic and social environment. A well regulated country for more than 30 years, Bahrain is the base for numerous international banking units, commercial banks, Islamic banks, and investment banks that want to be active in the region. Now is a favourable time for any foreign bank to enter the Middle East through Bahrain, thanks to its permanent access to sophisticated high net worth individuals and families.
Still, many clichés still stick: moneyed sheikhs in chauffeured limousines and suites on the French Riviera, or visiting their private bankers in Geneva. This picture is certainly still a reality for many, though the protagonists are quite different today: more frequently brought up in the UK and educated at the best US universities, the second and third generations of wealthy Middle-Easterners – while still aware of their traditions – are made entrepreneurs. "They want to put their money to work; they seek to organise, lead and finance industrial conglomerates or huge commercial projects and, above all, tend to invest massively into their home countries even if they still crave a pad in Mayfair, London, an office building in Frankfurt or a flat on Paris' Avenue Montaigne."
This relatively new but sustained and impressive client group tends to look to "onshore" destinations like Dubai, Qatar, Saudi Arabia and Lebanon.
For domestic private bankers, this creates a tough challenge. The market was already overcrowded with offshore private banks from Switzerland. However, their saving grace could be the specific needs of high net worth families in the region versus the offerings foreign banks made here: do these banks offer the right set of answers to meet local client needs? Do they know their clients? Or will they apply the European and American approach homogenously to the Middle East?
Families in the $500 million to $2 billion wealth band are often so interested in banking that they want to own part of their private bank in order to manage their own assets and not depend on others. Of course, this would mean partnering with an established, institutional banker, but few banks are ready to entertain such an idea, mindful of the conflict of interest between client and partner that could arise. A better solution would be to establish their own private bank – which would satisfy an interest in developing their home economies and the desire to maintain control over family assets. This could provide Middle Eastern families with the opportunity to develop the family office model for their own use.
As a private bank targeting this region, one must first understand local mentality and culture, and especially, how wealthy families want to invest their money and deal with their entrepreneurial goals. There is certainly a gap between what traditional private banks offer now and what these clients really want.
Moving wealth management onshore is a challenge against the background of political issues in the region. A significant local presence is a must if one wants to achieve any form of market penetration, but foreign private banks must keep in mind that offshore banking services are still key to wealthy Middle Eastern clients, usually provided by Switzerland whose reputation for confidentiality remains an attractive proposition. A full range of private banking expertise needs to be offered to Middle Eastern high net worth individuals within their own jurisdiction.
Domestic banks will also have the challenge of satisfying the demands of an enlightened and sophisticated clientele, as most wealthy families send their children to study abroad, and receive them back as well-informed consumers of financial products.
Being sophisticated individuals with a need for diversification, they are more and more attracted to European institutions with a solid credit rating. They opt for institutions offering wealth advisory and wealth management as well as offshore and onshore banking, but they mostly need tailor-made solutions like credit engineering and real estate advice, structured products, socially responsible investments and Islamic funds to some extent.
Work with cultural nuances
The Middle East market is not an easy one to address for a private bank. There is no strong interest in global financial advice or in personal "patrimonial" advice either. Of course, building on-going relationships and offering in-house experts is welcome, but nothing will ever replace the patient breeding of a steady relationship locally. As they say in the Middle East: "A banker in a plane is here to rob you."
It is important to fill in the gaps to adapt to these market specifics. For example, a private bank cannot enter the market without developing or adding a range of Shariah-compliant structures to its existing product proposition. In the same vein, private equity opportunities must be shown to clients seeking absolute returns above all, so there's no real place for benchmarking strategies there.
As for services already on offer, they need to be leveraged to their highest potential – from a range of exclusive alternative investments, to all kinds of credits, real estate up to project management.
The challenge for a private banker is to recognise and understand these new trends in the market and to be able to adapt his offer of products and services to meet such specific, sophisticated, and local needs. A perfect challenge in a challenging region.