On a recent sunny day, Eric Swats, a fund manager at Rasmala Investments, sat under a parasol at a restaurant on the terrace of the Dubai International Finance Center, talking up his new $25 million Rasmala Global Sukuk Fund.
Mr. Swats hopes it will tap into fast-growing demand from Middle Eastern and Asian investors for sukuk, securities that comply with Islamic law. “The market for conservative and well-managed” Islamic finance products is “underserved and underdeveloped,” he said over a lunch of salad and fruit juice.
The Middle East has proved a far tougher environment for financiers than the El Dorado it was imagined to be a few years ago. Bankers learned the hard way during the credit crisis that they could win business only by tailoring their offerings to the region’s specific needs.
“We saw in the Golden Age of the mid-2000s a lot of firms coming to the region pushing high-margin investment banking,” said Mathieu Vasseux, a partner in Dubai for the financial consultants Oliver Wyman. “Then it died out in 2007, 2008. A lot of firms had to reinvent themselves. For some it was rough. ”
In the aftermath of the global credit market freeze, Dubai’s financial center, which aspires to be the hub of the region, went deathly quiet. Now business is creeping back: Restaurants like Café Bateel, where Mr. Swats was eating, are filled with bankers in expensive suits.
But affiliations are shifting and the business is different. Mr. Swats, an American and a former Citigroup veteran, now works for a regional firm.
“U.S. and European banks are being forced to retrench” because of problems at home, said Nasser H. Saidi, chief economist of the Dubai International Financial Center. “Taking their place are banks from China, India and Turkey “that don’t face these types of issues.” Times have been tough for local banks, too, with Arcapita in Bahrain filing for bankruptcy in March and Shuaa Capital in Dubai going through a reorganization.
Mr. Vasseux estimates that employment in the region’s investment banking industry is down about 20 percent from the precrisis peak. The overall drop would have been greater if banks had not been hiring asset managers and other specialists to focus on new business areas. “The landscape is slowly changing,” said Mustafa Abdel-Wadood, a partner at the private equity firm Abraaj Capital, in Dubai.
Many bankers say that despite its vast wealth, the region has not developed as they expected. A few years ago Western banks were piling into Dubai, expecting it to become a hive of merger, acquisition and stock issue activity, like Hong Kong.
Although there was a modest boom, investment banking in the style of New York or London never really took off in the Middle East. Fees from activities like mergers and acquisitions and equity offerings fell to about $450 million in 2011 from a peak of about $1.4 billion in 2007, according to Thomson Reuters. One reason: Much regional business remains in government or family hands. Such owners tend to engage in fewer corporate transactions.
With juicy merger and acquisition gambits relatively rare, plain bond issuance has become a mainstay of Gulf investment banking. Other strong businesses include financing the hundreds of billions of dollars’ worth of construction projects under way, from new industrial cities in Saudi Arabia and to a rail network in Qatar.
Helping to manage the region’s wealth can be another profitable line, providing special access to deals in the West or, increasingly, Asia, for the region’s huge government funds like those of Abu Dhabi, which has at least $600 billion set aside. In recent years, for instance, the sovereign wealth funds of Kuwait and Qatar have committed about $9 billion as anchor investors in the initial public offerings of Chinese banks while Mubadala, an Abu Dhabi fund, has an $8 billion joint venture with a Malaysian state company.
A look at the region’s gross domestic product suggests “the M.&A. market doesn’t do it justice,” said Klaus Froehlich, co-head of Middle East investment banking in Dubai for Morgan Stanley. The sovereign wealth funds, he said, “have looked to generally invest in blue-chip companies and businesses outside of the region.”
Instead, the lower-profit-margin business of underwriting bonds has become a more reliable area. So far this year, HSBC and Deutsche Bank, long active in the Gulf, are the region’s top arrangers of debt.
They are also leaders in sukuks, securities intended to attract Middle Eastern and Asian investors who might refuse ordinary bond offerings because the interest they pay violates Islamic law. About $6 billion in sukuks — where the revenue is produced by real assets like property — were issued in the six countries of the Gulf Cooperation Council in the first quarter of this year, according to Emirates NBD bank in Dubai.
In another offering aimed at Asian investors, HSBC recently issued a $158 million bond denominated in Chinese renminbi for Emirates NBD. Such bonds “help establish the U.A.E. as a financing center for Asian investors,” the bank says.
While debt underwriting has become a steady business for banks, Gulf stock markets remain volatile, even scary. In December the MSCI index gave a discouraging signal when it decided not to promote the U.A.E. and Qatar to the status of emerging markets, leaving them in the riskier frontier category. The reasons: Concerns about investor protection in the U.A.E. and about foreign ownership restrictions in Qatar.
After a dismal 2011 the Gulf markets are up this year, with most of the gains going to Saudi Arabia, which at more than $400 billion counts for about half of the region’s market value. Majdi Gharzeddine, head of research at Kamco in Kuwait, credits much of the Saudi rise to new laws designed to open up the long-closed market for outside investors.
But the Gulf has no main financial hub that could concentrate the region’s capital and provide one set of uniform regulations for investors. Instead, Saudi Arabia, Qatar, and the United Arab Emirates all continue to fight to attract funds and high-end jobs. The U.A.E. has no fewer than three stock exchanges.
“The Gulf’s problem is that it is not a financial center; it is five or six financial clusters,” said Rachel Ziemba, a senior Middle East analyst at Roubini Global Economics in London.
Dubai has the greatest ambitions to be the regional hub, and it is the only really congenial base for international financial professionals, but it has fallen short in its ambitions to be host to a global financial exchange. Ms. Ziemba said not having one big financial center left the Gulf vulnerable at times of financial crisis. It also may contribute to the light trading and volatility that scare away investors.
Exchanges are “one of the areas that need much more consolidation, starting with the U.A.E.,” said Mr. Saidi, the economist. “We need much more consolidation across the region.”