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SWP-794
Arab Financial Institutionsand Developing Countries
Naiem A. Sherbiny
WORLD BANK STAFF WORKING PAPERSNumber 794
SERIES ON INTERNATIONAL CAPITALAND ECONOMIC DEVELOPMENT
Number 6
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WORLD BANK STAFF WORKING PAPERSNumber 794
SERIES ON INTERNATIONAL CAPITALAND ECONOMIC DEVELOPMENT
Number 6
Arab Financial Institutionsand Developing Countries
Naiem A. Sherbiny
The World BankWashington, D.C., U.S.A.
Copyright (© 1986The Intemational Bank for Reconstructionand Development/THE WORLD BANK
18I8 H Street, N.W.Washington, D.C. 20433, U.S.A.
All rights reservedManufactured in the United States of AmericaFirst printing January 1986
This is a working document published informally by the World Bank. To present theresults of research with the least possible delay, the typescripiL has not been preparedin accordance with the procedures appropriate to formal printed texts, and the WorldBank accepts no responsibility for errors. The publication is supplied at a token chargeto defray part of the cost of manufacture and distribution.
The World Bank does not accept responsibility for the vievws expressed herein, whichare those of the authors and should not be attributed to the World Bank or to itsaffiliated organizations. The findings, interpretations, and conclusions are the resultsof research supported by the Bank; they do not necessarily represent official policy ofthe Bank. The designations employed, the presentation of material, and any maps usedin this document are solely for the convenience of the reader imd do not imply theexpression of any opinion whatsoever on the part of the World Bank or its affiliatesconcerning the legal status of any country, territory, city, area, or of its authorities, orconcerning the delimitation of its boundaries, or national affilation.
The most recent World Bank publications are described in the annual spring and falllists; the continuing research program is described in the annual Abstracts of CurrentStudies. The latest edition of each is available free of charge from the Publications SalesUnit, Department T, The World Bank, 1818 H Street, N.W, Vlashington, D.C. 20433,U.S.A., or from the European Office of the Bank, 66 avenue d'`Ina, 75116 Paris, France.
Naiem A. Sherbiny is a senior economist in the Energy Strategy and PreinvestmentDivision I of the World Bank.
Library of Congress Cataloging-in-Publication Data
Sherbiny, Naiem A.Arab financial institutions and developing countries.
(World Bank staff working papers ; no. 794. Series oninternational capital and economic development; no. 6)
Bibliography: p.1. Arab countries--Foreign economic relations--
Developing countries. 2. Developing countries--Foreigneconomic relations--Arab countries. 3. Investments,Arab--Developing countries. 4. Economic assistance,Arab--Developing countries. 5. Peroleum industry andtrade--Finance--Arab countries. I. Title. II. Series:World Bank staff working papers; no. 794. III. Series:World Bank staff working papers. Series on internationalcapital and economic development; no. 6.HF3866.Z7D447 1986 337.1'174927 85-31748ISBN 0-8213-0705-3
FOREWORD
This paper is one in a special series of World Bank StaffWorking Papers on international capital and economic development.Prepared as background papers for World Development Report 1985,the series provides more detailed treatment and documentation ofthe issues dealt with in the Report. The papers cover a range oftopics including a historical perspective on international capitaland economic development; the effects of policies in industrialand developing countries on international capital flows, externaldebt, and economic development; and the role of officialassistance, commercial bank lending, securities markets, andprivate direct investment in developing countries. Severalstudies of individual developing countries are also included inthe series.
The background papers draw on a large number of publishedand unpublished studies of individual researchers, on World Bankpolicy analysis and research, and on reports of other organ-izations working on these issues. The papers are the work ofindividuals and the views and interpretations expressed in them donot necessarily coincide with the views and interpretations of theReport itself.
I hope these detailed studies will supplement WorldDevelopment Report 1985 in furthering understanding of therelationship between international capital and economic develop-ment. A complete list of the papers appears on the overleaf.
Francis X. ColaqoStaff Director
World Development Report 1985
- iii -
Papers in the Series
Aliber, Robert. Financial Intermediation and the External Debt Crisis
Batista, Paulo Noguiera, Jr. International Financial Flows to Brazil Since the Late1960s: An Analysis of Debt Expansion and Current Payments Problems
Blanchard, Olivier, and Lawrence H. Sumrs. Perspectives on High Real Interest RatesThroughout the World
Codippily, Hilarian M.A. Ethiopia: International Financial Flows, 1967-83
Dornbusch, Rudiger. The Effects of OECD Macroeconomic Policies on Non-oil DevelopingCountries: A Review
Fishlow, Albert. Capital Markets During the 19th Century and the Interwar Period:Lessons from the Past
Hooper, Peter. The International Repercussions of the U.S. Budget Deficit
Ibrahim, Tigani E. Kenya: Use of External Resources, 1963-1983
Ishiyama, Yoshihide, and Keiko Atsumi. Capital Outflows from Japan to DevelopingCountries
Iqbal, Farrukh. Korea's Debt Accumulation, Use, and Management Strategies
Johnson, John H. The Role of International Finance in Argentine Development, 1965-84
Lessard, Donald. International Financing for Developing Countries: The UnfulfilledPromise
Llewellyn, David. International Financial Intermediation and the Role of Banks in Balanceof Payments Financing
Martone, Celso L. Macroeconomic Policies, Debt Accumulation, and Adjustment in Brazil,1965-84
Muller, Patrice, and Robert Price. Public Sector Indebtedness and Long-Term InterestRates
O'Brien, Richard, and John Calverley. Private Banks and Developing Countries
Pant, Chandrashekar. Yugoslavia: Economic Development and External Capital, 1970-1984
Rybczynski, T. M. Internationalization of Financial Arrangements and the DevelopingCountries: The Evolving Relationship
Sachs, Jeffrey, and Warwick McKibbin. Macroeconomic Policies in OECD Countries andExternal Adjustment in Developing Countries
Saini, Krishan G. Capital Market Innovations and Financial Flows to Developing Countries
Sherbiny, Naiem A. Arab Financial Institutions and Developing Countries
Swoboda, Alexander, and Hans Genberg. The Stages in the Balance of Payments HypothesisRevisited
Weigel, Dale, and Robert R. Miller. Foreign Direct Investment in Economic Development
Wyplosz, Charles. International Aspects of the Policy Mix in Six OECD Countries
Zietz, Joachim, and Alberto Valdes. The Costs of Protectionism to Developing Countries:An Analysis for Selected Agricultural Products
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Abstract
Drawing together hitherto scattered material, the paperattempts to present an integrated picture of the activities ofArab financial institutions in developing countries. Most ofthese activities--whether official aid, commercial credits, ordirect investments--seem to have been triggered by the capitalsurplus in a number of oil exporting countries during the 1970s.The study thus begins by considering the deployment of the capitalsurplus so as to place the activities of Arab financialinstitutions in developing countries in the proper context. Thediscussion then turns to the development of Arab financialinstitutions in the light of Kuwait's experience as the earliestcapital surplus country. The mechanisms and institutions thatKuwait devised during the 1950s and 1960s to manage its capitalsurplus help to explain the international activities of thefinancial institutions from other capital surplus countries duringthe 1970s and 1980s. The study concludes by assessing futureprospects of Arab financial institutions in developing countriesin regard to Arab/OPEC aid, Islamic banks, and participation insyndicated loans, Eurobonds, and direct investments.
Acknowledgments
The author wishes to thank a number of individuals in the WorldBank, in the Bank of England, and in other institutions for theirsupport, encouragement, assistance, and comments. Within the WorldBank, the author is grateful to Messrs. Ibrahim Shihata, Vice Presidentand General Council; Robert Picciotto, Director of Projects, EMENA;Ismail Serageldin, Director of Programs, West Africa; George Zaidan,Assistant Director of Projects, EMENA; Francis Colaco, Coordinator ofthe 1985 World Development Report; and many colleagues, including MasoodAhmed, Julian Bharier, Alexander Fleming, SheriE Omar Hassan, AbdallahEl Maaroufi, and Ezzedin Shamsedin. In the Bank of England, the authorwishes to thank the staff of External Financial Statistics, especiallyDavid J. Reid, Adviser, Edward Shephard, and Derek J. Chetwin.
Outside these two institutions, the author is most indebted toMessrs. Asaad S. Asaad, Director, Abu Dhabi International Bank; Hazem ElBeblawi, Chairman, Export Development Bank of Egypt; Bourhan Chatti,former Director of Programs, Arab Fund for Economic and SocialDevelopment; Sani El Darwish, Director-General, Dar al Maal al Islami;Sharif Ghalib, Vice-President, Chase Manhattan Bank; Mahmoud El Helw,Governor, Faisal Islamic Bank of Egypt; Robert Mabro, Director, OxfordInstitute for Energy Studies; and Hikmat Nashashibi, Chief Executive,Al-Mal Group of London.
Untiring and excellent research assistance was provided byOliver Adler, Tany Maher, and the staff of Joint IMF-IBRD Library.Patient and careful typing assistance was provided by Sharon Copley andAngelica Fernandes.
The first draft was completed in the Technical Assistance andSpecial Studies Division, EMENA Projects Department. Revised draftswere completed in the Energy Strategy and Pre-Investment Division I,Energy Department.
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Table of Contents
Page
Introduction ...................................................... l
I. Developing Countries and the Capital Surplus . ....... 2
The Accumulation of Surplus . .... . . .. . . 3The Deployment of Surplus ............................. . . ......... 5The Management of Surplus ..... .............................. . 8
II. Kuwait: The Earliest Capital Surplus Country ................... 10
Developments Prior to 1974 ........................ . 11Developments Since 1974 ......................................... 18The Financial Flows (1961-84) . . ................................. 21
III. The International Orientation ofArab Financial Institutions .................................. 24
The Modest Beginning . ....................................... 04.25The Years of Affluence ................ . 28Centers of Arab Banking . . ....................................... 31Islamic Banks . . ................................................. 37Size of Arab Banks ... ... .. . ... ........ . 42
IV. Relations with the Developing Countries:Aid Institutions .... .. .............. . 44
OPEC Aid as a New Concept . ...................................... 45The Overall Profile of OPEC Aid . . . ........... 46Activities of OPEC Aid Institutions . . .... 52Cofinancing Development Projects .. 55
V. Relations with Developing Countries:Commercial Credit and Investment Institutions ................. 58
The Internationally Syndicated Loan Market ...................... 60The International Bond Market .......................... 65Direct Investments and Joint Ventures ................. 70
VI. Future Prospects ........... 81
Annex A - Government Investments .............................. . ...... 89
Annex B - Inter-Arab Private Direct Investments .. 95
Footnotes ..... . .... . 97
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Introduction
Until recently, many observers considered "OPEC capital" a new factor
in international finance, investment, and development. Between 1973 and 1984,
numerous developing countries in particular came to depend increasingly on the
flows of aid, trade, workers' remittances, commercial credits, and direct
investments from OPEC countries. With the current decline in oil revenues and
the associated budgetary constraints on members of the Organization of
Petroleum Exporting Countries (OPEC), however, the growing public opinion
seems to be that OPEC capital is a passing phenomenon. Now that the
prosperity of the OPEC economies is at stake, many developing countries are
beginning to sense potential hazards to their own economies. Their reliance
on OPEC capital is the subject of this paper.
As the OPEC capital surplus has been dominated by Arab countries, the
paper concentrates on the activities of Arab financial institutions in
developing countries. Those institutions were established during a relatively
short period of time and have become active in both developed and developing
countries. As section I points out, the extent of their involvement in
developing countries can be ascertained from the deployment of the total
surplus over time among alternative channels. The section also attempts to
identify the principles of managing the surplus among those alternative
channels.
As a participant in international finance and investment since the
1950s, and aid since the early 1960s, Kuwait was one of the first countries
there to develop a network of financial institutions to manage the flow of
Kuwaiti capital over time, especially to developing countries. The lessons of
the Kuwaiti case are highlighted in section II because of their special
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relevance for the development of financial institutions in other parts of the
Arab region.
Using Kuwait as a model, section III considers the financial
challenges and opportunities of the 1970s and early 1980s that led Arab
financial institutions to establish presence outside their respective home
countries. Of particular interest here are Islamic banks and the spread of
Arab banks outside the Arab region, not only in centers of international
finance but also in many developing countries.
These background details will provide the context for the subsequent
discussion of the activities of Arab financial institutions in developing
countries. Their activities are divided into two types: those concerned with
concessional aid flows, including the cofinancing oE projects (section IV);
and those concerned with direct investments and commercial credits, including
internationally syndicated loans and internationally managed bonds (section
V). The study concludes with an outline of future prospects of Arab financial
institutions with respect to aid flows, Islamic banking, direct investments,
and participation in syndicated Eurocurrency loans and multiple currency
bonds, especially for agencies from developing countries.
I. Developing Countries and the Capital Surplus
Despite the financial revenues that place per capita GNP in some OPEC
countries among the highest in the world, OPEC countries are developing
countries according to other socioeconomic indicators. In fact, most were
faced with financial constraints right up until 1970. Then in 1971-73,
following a period of oil price stability during the 1960s, oil prices rose
moderately. These increments were significant in more ways than one. They
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signaled the increased bargaining power of OPEC as a collective
organization. And, together with expanded oil exports, they increased oil
revenue flows to the oil exporters at hitherto unprecedented rates. These
developments shifted income distribution on a global scale from oil importers
to oil exporters. By 1973, the financial constraints to the development of
the oil-exporting countries had eased considerably, and a surplus began to
appear on the current account balance of several OPEC members. To provide a
perspective for OPEC's financial placements in developing countries, this
section examines the following aspects of this phenomenon: the accumulation of
surplus, its deployment among countries and instruments, investment
strategies, and the principles involved in its management.
The Accumulation of Surplus
By and large, the profile of OPEC's collective oil revenues follows
oil price developments. These can be divided into five periods:
1965-70: oil price stability
1971-73: gradual increases in oil prices
1974-78: the aftermath of the first major oil price increase
1979-81: the aftermath of the second major oil price increase
1982-84: falling oil prices
During 1965-70, total oil revenues for OPEC countries averaged about
US$13 billion per annum. The succession of oil price increases during 1971-73
pushed OPEC's oil revenues to US$40 billion by the end of 1973. Significant
as these increases may have been, they were dwarfed by the increments that
catapulted oil revenues to US$121 billion in 1974, and to a peak of US$295
billion in 1980. By 1984, however oil revenues had declined sharply to US$170
billion. These nominal figures give some idea of the volume of financial
flows involved in the global redistribution of income in favor of OPEC
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countries up until 1980 and the subsequent reversal of that process during the
early 1980s. Developing countries lost the most in the earlier rounds of
redistribution and gained the least in the later rounds.
The earlier flows (1971-81) helped OPEC countries finance major
expansions in their own imports, government consumption, modernization and
upgrading of the armed forces, and development programs. In some OPEC
countries, they also helped initiate or expand major programs of external
assistance and wealth redistribution. Even so, these various expenditures
failed to absorb the incoming funds, with the resalt that national savings
exceeded domestic investments. After 1981 the process began to turn around
among the OPEC countries, though understandably in varying degrees.
Although the surplus accumulation has been reasonably well documented
for OPEC as a whole, the estimates for individual countries are less reliable
and often controversial. One of the institutions to collect data
systematically has been the Bank of England, whose records show a cumulative
OPEC surplus of US$433 billion at the end of 1983. The Bank could only
account for US$378 billion, however, and thus US$55 billion was attributed to
unidentified uses. 11 A recent Brookings study thal: estimated the surplus by
country as it stood in 1982 has distinguished between the so-called low
absorbers and high absorbers. 21 The share of the low absorbers as a group
was 93 percent of the total surplus, whereas the share of the high absorbers
as a group was a mere 7 percent. Among the low absorbers, the largest shares
were those of Saudi Arabia (47 percent of the total) and Kuwait (24
percent). Among the high absorbers, the largest shares were those of Iran (9
percent) and Iraq (6 percent), but there were also large debtors, notably
Algeria, Indonesia, and Nigeria. 31
The net foreign assets of the OPEC countries changed with the major
changes in oil prices. In 1973, the level of identified surplus was about
US$21 billion. During 1974-78, the cumulative surplus increased by US$198
billion, and during 1979-82 it increased by US$257 billion. The decline of
the collective OPEC surplus for the first time in 1983 by US$7 billion and the
modest increase of less than US$3 billion in 1984 indicate that the peak had
been attained in 1982.
Despite the recent reductions in oil revenues, most OPEC countries
have not managed to institute corresponding reductions in government
expenditures. The high absorbers financed their deficits through
international borrowing. Even Iran and Iraq did so after exhausting their
substantial surpluses--estimated at US$50 billion--partly as a result of their
continued military conflict. By contrast, the low absorbers for the most part
did not resort to international borrowing; instead they relied on withdrawals
from their accumulated surplus. The countries initially identified as low
absorbers have increased their absorption over time, so that the term appears
no longer applicable to their current economic condition.
The Deployment of Surplus
Up to the end of 1984 the industrially advanced countries had
received about 66 percent of the surplus, the largest recipients being the
United States (18 percent) and the United Kingdom (11 percent). The remaining
37 percent was distributed among Austria, Belgium, Canada, Denmark, France,
Germany, Ireland, Italy, Japan, Netherlands, Norway, Spain, Sweden, and
Switzerland. The developing countries received 27 percent of surplus capital
flows; 16 percent as net disbursements of concessional assistance and the
remaining 11 percent in the form of syndicated Eurocurrency credits,
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Eurobonds, and direct investments. International organizations received about
7 percent of the cumulative surplus.
Annual total surplus fluctuated over time as a net outcome of oil
revenue flows, on the one hand, and total expenditures, on the other.
Following the first major oil price increase, the 1974 surplus alone was more
than 2½ times as much as the cumulative surplus through 1973; this point
marked the first peak. The steady surplus of the next three years was
followed by a trough in 1978. The second major oil price increase pushed the
annual surplus higher; it reached a greater peak in 1980, but then declined
rapidly thereafter. The time pattern of annual surplus placements in the
industrial countries, especially in the United States and the United Kingdom
began to show substantial withdrawals as early as 1932.
In contrast, annual surplus placements in the developing countries
rose steadily until they reached a peak in 1981, then fell thereafter. Yet,
they were significantly higher than the placements in the industrial countries
since 1982 (table 1). Although OPEC countries incurred net drawdowns of funds
in the industrial countries in 1983 and 1984, they continued to place funds in
the developing countries. These changes were most likely the result of the
variant forms of placements in the two groups of countries. The greater
liquidity of OPEC placements in the industrial countries rendered them the
more natural means with which to finance the budgetary deficits in the OPEC
countries that began to increase significantly in 1982.
The composition of cumulative surplus placements at the end of 1984
in some major markets demonstrates the point. In the United States,
placements were mainly portfolio investments: 52 percent in U.S. Treasury
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Table 1 Distribution of Annual OPEC Surplus by Recepients
(billions, U.S. dollars)
Industrially Advanced Countries Developing Countries
United United Net International
Year States Kingdom Other Subtotal Assistance Other Subtotal Institutions Total
Until 1973 3.5 7.3 0.6 11.4 4.9 1.5 6.4 4.8 22.6
1974 11.5 21.2 12.1 44.8 4.6 0.8 5.4 6.1 56.3
1975 7.9 4.1 14.1 26.1 6.2 1.2 7.4 2.1 35.6
1976 11.1 2.8 15.2 29.1 6.1 1.6 7.7 1.8 38.6
1977 7.3 5.0 20.3 32.6 6.1 2.9 9.0 1.1 42.7
1978 0.4 -1.0 12.5 11.9 8.1 4.4 12.5 2.0 26.4
1979 7.0 18.0 22.6 47.6 7.8 4.5 12.3 10.4 70.3
1980 17.1 17.8 48.9 83.8 9.6 5.4 15.0 6.4 105.2
1981 17.8 6.4 21.9 46.1 8.5 9.4 17.9 -4.3 59.71982 12.7 -10.0 -0.6 2.1 5.9 10.1 16.0 4.2 22.31983 -9.5 -13.8 2.5 -20.8 5.5 6.6 12.1 1.5 -7.21984 -3.3 -4.7 3.7 -4.3 4.5 6.3 10.8 -3.8 2.7
Cumulative 83.5 53.1 173.8 310.4 77.8 53.4 131.2 32.3 473.9
Sources: Placements in the industrial countries and with international institutions are from Bank ofEngland, Quarterly Bulletin, March, June, and September 1985. "Other industrial countries" include
bilateral placements in Austria, Belgium, Canada, Denmark, France, Germany, Ireland, Italy, Japan,
Luxembourg, Netherlands, Norway, Spain, Sweden, and Switzerland. They also include offshore centers and
Eurocurrency deposits, not easily identifiable by national borders.
Placements in developing countries are from several sources. Net Assistance is total netdisbursements of concessional assistance from OECD, Aid from OPEC Countries (Paris, 1983), p. 20; and
OPEC Fund, OPEC Fund and OPEC Aid Institutions, no.4, 1984. Other placements to developing countries
include the following:
a. Syndicated Eurocurrency Credits: Arab Eurocurrency lending for 1977 to 1982 from Mehran Nakhjavani,Arab Banks and the International Financial Markets, Middle East Economic Survey, 1983, Table 2.1, p. 14;
for 1983 and 1984 compiled from Middle East Economic Survey, several issues during 1984 and 1985.
b. Bonds: Estimated 60 percent of all issues to developing countries applied to figures compiled
annually; and the 1983 and 1984 are guesstimates, calculated from Nakhjavani, Arab Banks, pp. 63-94.
They include U.S. dollar denominated bonds, other international currencies bonds, as well as Arab
currencies bonds: Kuwaiti dinar, Bahraini dinar, Saudi riyal, and Abu Dhabi dirham. Arab currencies
were converted into U.S. dollars at the exchange rates prevailing at end of year shown, as obtained from
IMF, International Financial Statistics, Yearbook 1984.
c. Direct Investments: Private and government investments in Arab and other LDCs are based on the
following sources: John Law, Arab Investors: Who They Are, What They Buy, and Where? Chase World
Information Corporation (New York, 1981); Traute Wohlers-Scharf, Arab and Islamic Banks (Paris: OECD,1983); and M. Abdel Fadil, Alnaft Wal Wihda Alarabia, Annex Tables, Beirut, 1985.
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securities (bills, certificates, bonds, and notes), 13 percent in commercial
bank liabilities, 17 percent in corporate bonds and stocks, 11 percent in
other liabilities, and 7 percent in direct investmenits. Thus, more than 80
percent of these assets were in short-term and medium-term obligations that
involve little or no risk for principal and interest. Similarly, in the
United Kingdom, OPEC's investments at end of 1984 were highly concentrated in
commercial bank liabilities: 78 percent in foreign currency deposits and
about 9 percent in sterling deposits. In other OECI) markets, investments of
OPEC countries were similarly concentrated in short-term investments; bank
deposits alone accounted for 56 percent.
The surplus placements in developing countries were distributed
differently: 59 percent in net disbursements of concessional assistance, 23
percent in syndicated Eurocurrency credits, 4 percent in Eurobonds, and 14
percent in direct investments.
From the structure of surplus placements through 1984 irrespective of
national boundaries, it appears that bank deposi:s (estimated at US$164
billion) represented 35 percent of total identified investments, other short-
and medium-term liquid or semiliquid investments (about US$208 billion)
represented 44 percent of the total, concessional assistance to developing
countries (US$78 billion) represented 16 percent, and direct long-term
investments (US$24 billion) represented 5 percent. 4/
The Management of Surplus
In managing their surplus over time, the OPEC countries were guided
by two sets of factors: those that all investors take into consideration and
those that are unique to OPEC countries. All investors consider return,
liquidity, and the relative risks involved in the well-known tradeoff between
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short-term and long-term investments. Short-term investments provide
generally lower returns but more liquid and less risky options than do long-
term investments. The factors unique to OPEC countries are security, a
realization lag, and a decision lag. Security is probably the most important
factor determining the management of the surplus, and it explains why OPEC
countries have concentrated most of their investments in the industrially
advanced countries. The realization lag pertains to the time that elapses
before an oil country realizes that it will have a sizable new surplus; during
this period it usually prefers to place such funds in short-term claims. This
describes the situation in 1974, shortly after the first major oil price
increase, and late in 1979, shortly after the second major oil price
increase. The decision lag refers to the period necessary to reach decisions
on long-term investments, during which time available funds are placed in
short-term instruments.
The security factor explains the geographic location of funds, while
the two lag factors explain the marked changes in the maturity structure of
investments by OPEC countries over time. Estimates of the annual total
surplus between 1974 and 1984 (table 1) indicate that peaks occurred after the
two major oil price increases in 1974 and 1980, followed by decline, which was
especially sharp after the second peak. Within this total, the share of
short-term investments fluctuated, but generally followed the size of the
incremental surplus itself. 5/
The pronounced general shift toward longer-term investments was more
likely the result of the decision lag, which involved learning by doing on the
part of investment managers in OPEC countries. This suggestion is supported
by the rise in the share of longer maturity and direct investments in OECD
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markets despite the falling annual surplus. The associated decision lags were
long because of the time required to identify projects, assess their financial
and economic viability, negotiate terms and conditionalities with host
countries and/or counterparts, and identify or establish institutions that
could efficiently construct and/or manage projects. This type of careful
attention helps generate attractive returns in the long run, whether the
investment is carried out in a developed or developing country. With the
realization that the days of an increasing surplus are over, the main concern
of Arab investment managers is now to maintain the wealth accumulated
overseas. Conditions permitting, investment managers would prefer to limit
the use of such assets in financing budgetary deficits at home to the annual
investment income. To be sure, most Arab placements will continue to be in
OECD countries. However, the expanded presence of Arab financial institutions
and investment banks in developing countries suggests that the future share of
developing countries in total Arab placements will not decline. It may even
increase.
II. Kuwait: The Earliest Capital Surplus Country
The international deployment of capital on a large scale was a new
experience for the oil countries, apart from Kuwait. Almost overnight they
were called upon to manage a variety of financial activities--from short-term
investments, financial intermediation for medium- or long-term loans or bonds,
official aid and concessional assistance, to direct and portfolio
investments. Only Kuwait was in a somewhat better position to cope with these
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responsibilities since it had already developed some of the mechanisms and
institutions needed to manage a capital surplus.
With reference to relations with developing countries in particular,
the Kuwait experience demonstrates that: (a) growth and prosperity of an oil
economy often produce substantial benefits to neighboring countries in the
form of increased trade, private investments, workers remittances, and
official aid; (b) the substantial expansion of Kuwait's trade was associated
with equally substantial expansion in imports from developing countries; (c)
Kuwait's private investments in developing countries depended not only on the
safety of and returns from investments but also on the social environment and
personal ties in host countries; (d) expatriate workers were major
contributors to the financial growth and prosperity of Kuwait in the form of
consumption expenditures and to their countries of origin in the form of
remittances; and (e) official aid depended on Kuwait's political relations and
status with developing countries as well as on the size of the surplus on the
current account balance. To handle all such flows, Kuwait developed wide-
ranging financial institutions over a long period, during which its modus
operandi was learning by doing.
Developments Prior to 1974
Historically Kuwait's relations with developing countries have been
closely tied to its physical make-up and to the initiatives of its people.
Because of Kuwait's lack of land resources and geographic location, the sea
has been the principal source of employment and livelihood for Kuwaitis for
the last two centuries. Trade, fishing, and pearling were the main economic
activities during the pre-oil era.
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In the eighteenth century Kuwait emerged as a trading center serving
neighboring Arab countries, Africa's East Coast, Persia, and the Indian
Subcontinent. This prompted the British East India Company to move its
headquarters for the northern Gulf from Basrah to Kuwait. 6/ By the beginning
of the nineteenth century, Kuwaiti sailors in their dhows (trade boats) were
becoming prominent in the vast trading area of the Indian Ocean. Complex
relations developed between mariner, shipowner, and merchant. Many notable
Kuwaiti merchant families owned ships and financed the voyages. Sometimes
they found investment opportunities in the source of traded goods; for
example, some purchased date plantations or provided working capital to
growers of dates or other food crops. Furthermore, these merchant families
provided Kuwait with its social and political Leadership, as well as the
financial astuteness that is still prevalent today. 7/
The era of modern banking in Kuwait began with the establishement of
the British Bank of the Middle East (BBME) in 1942, following the discovery of
commercial quantities of oil. As elsewhere in the Gulf, BBME had a banking
monopoly in Kuwait, which continued until 1952. In that year, a group of
businessman established the first Kuwaiti-owned bank, the National bank of
Kuwait (NBK), following the trippling of the country's share of oil
revenues. Throughout the 1950s, all banking activities in Kuwait were handled
only by BBME and NBK. Whereas average annual import financing was less than
US$100 million during 1950-55, it more than doubled during 1956-60.
Substantially increased oil revenues during that period made it possible to
finance a major program of urban land purchase as a means of distributing
income to the general population. With the rapid urban growth, land prices
increased severalfold and thus significantly expanded the liquidity of the
- 13 -
private sector. The associated commercial and construction boom led to the
establishment in 1960 of two additional private commercial banks: the Gulf
Bank, and the Commercial Bank of Kuwait.
Kuwait's relations with developing countries during the 1950s largely
revolved around its neighbors. Kuwaitis traded heavily with India and Iran,
attracted skilled labor for their growing economy from Arab countries, and
invested private funds in Lebanese real estate. No data are available to
indicate the size of these early flows. The country was still a British
protectorate, and its data base was almost nonexistent.
Much of the recorded data reflect conditions since the country's
independence in 1961. The annual amount of import trade financing, for
example, increased significantly between 1961 and 1973--from an annual average
of about US$300 million in 1961-65 to about US$750 million in 1970-73.
Cumulatively, the volume of financial flows handled by the Kuwaiti banking
system in association with the import trade was about US$7 billion, US$1.7
billion of which was with developing countries. According to fragmentary
data, cumulative flows of workers' remittances during the same period amounted
to about US$1.5 billion. The cumulative value of private sector investments,
according to even more fragmentary data, was about another US$1.5 billion,
about half of which was in developing countries, principally in the Arab
region. 8-
At the same time that these developments were taking place in the
private sector the government was seeking both domestic and international
outlets owing to the substantial accumulation of public resources.
Domestically, the government established its fully owned Credit Bank in 1961
to provide small loans at subsidized interest rates for the development of
- 14 -
real estate and for industrial and agricultural projects. To extend
activities beyond Kuwait, the government also in 1961 established two major
financial institutions: the Kuwait Fund for Arab Economic Development (KFAED),
which was to manage the country's official aid program, and the Kuwait
Investment Company (KIC), which was to channel public and private funds to
investment opportunities, especially outside Kuwait:.
For years the Kuwait Fund was the only Arab aid institution for
project assistance. It provided, and continues to provide, loans on
concessional terms for specific projects that have favorable implications for
the borrowers' economic development and a satisfactory rate of economic
return. Up to 1974, the fund's resources were allocated only to Arab League
members; thereafter they were extended to all developing countries. In
addition to project assistance Kuwait's aid eEfort included substantial
general support assistance to Egypt, Syria, and Jordan, following the 1967
Khartown conference. By the end of 1973, Kuwait had contributed a total of
about US$1,100 million to those "confrontation states". 9/
Between 1962 and 1973, the Kuwait Fund processed 45 projects to
twelve Arab countries, for a total commitment of US$370 million, and gross
disbursements of US$230 million. l The sectoraL distribution of loans was
diversified but generally tilted toward infrastructure: 28 percent for
agriculture, 18 percent for industry, and 54 percent for infrastructure, the
lion's share of which was in transport (37 percent). Agricultural loans went
mostly to Morocco, Sudan, and Tunisia. Industrial loans were distributed
throughout recipient countries. Transport loans were similarly distributed
throughout, but a large share went to Egypt; and electricity loans were
concentrated in Bahrain and Tunisia. During this phase (1962-73), Egypt was
- 15 -
the largest recipient of Kuwait Fund loans (20 percent), followed by Sudan (17
percent), and Tunisia (14 percent).
The Kuwait Fund attached special importance to the overall social
objectives of projects, particularly to improving conditions in rural areas,
in neglected parts of the economy, or in underprivileged segments of the
population. Symptomatic of the fund's dynamism, even in those early years,
was the rapid expansion of its capital. From an initial capital of KD 50
million (US$140 million), the government doubled the fund's capital once in
1963, and once more in 1966 to KD 200 million (US$560 million). Later on,
during the 1970s, the fund continued to expand its capital dramatically, so
that by 1979 it had reached KD2,000 million (US$6900 million).
On the international investment front, the early activities of KIC
(50 percent government participation) were highly concentrated in
international financial instruments with diversified term structure such as
bank deposits, securities, papers and notes, and medium-term loans; they
averaged about 92 percent of the company's assets during 1965-70, none of
which were in developing countries. The remaining 8 percent were in direct
investment activities, which were concentrated in real estate and banking
throughout the Arab countries, Europe, the United States and Latin America.
The expressed policy of KIC for that period was to diversify investments to
assure a reasonable degree of safety, but at the same time maximize income.
In 1967, the KIC started underwriting and syndicating Eurodollar bonds and
convertible debentures for prime OECD borrowing agencies. In subsequent years
these activities expanded to agencies in some of the semi-industrial
developing countries in Latin America, the Middle East, and the Far East. 1I/
- 16 -
By contrast, the activities of the Kuwait Foreign Trade, Contracting
and Investment Company (KFTCIC)--established in 1964, initially with 80
percent government participation--were more concentrated in direct
investments. At first the company had planned to invest mainly in developing
countries. However, this plan did not materialize because the company found
it much easier to invest in financial papers and securities from OECD
countries. During the 1960s it invested more than 85 percent of its resources
in OECD ventures. In finance activities, KFTCIC was to extend medium- and
long-term loans to companies that allowed conversion privileges, options, or
warrants, and thereby it was eventually to obtain equity positions in
enterprises without initially foregoing interest income. 121 By 1970 it is
estimated that the government has invested about US$4 billion abroad while the
private sector had indeterminate holdings roughly valued at US$1,200
million. 13/
Another important development that must be noted was the initiative
taken in 1964 by the Kuwaiti Ministry of Finance and the Central Bank of Egypt
to establish in Cairo one of the forerunners of the inter-Arab banks, the Arab
African Bank. Kuwait and Egypt each held 42.4 percent of the shares; Iraq
subscribed later on 10 percent of the bank's capital, and the remaining 5
percent was subscribed by the governments of Algeria, Jordan, and Qatar.
Although the bank was a joint-stock company operating under Egyptian law, it
was granted special status (similar to offshore facilities in other countries)
that made it exempt from taxes and exchange-control regulations and from
banking and credit legislation covering joint-stock companies. In view of the
fierce economic nationalism in Egypt, not to mention the nationalization of
banks less than three years earlier, the exceptions extended to the Arab
- 17 -
African Bank indicated the esteem that Egyptian policymakers at the time
accorded inter-Arab financial cooperation.
The Arab African Bank was given a mandate to undertake all banking
and commercial operations in Arab and African countries, to participate in
development projects there, and to establish joint venture banks and
companies. By 1970, the Bank had a portfolio of 14 direct investment
projects--six in Africa (37 percent of the value of investments), seven in
Arab countries (49 percent), and one in Paris (14 percent) in a consortium
bank to support the development and trading activities of Arab countries. The
sectoral distribution of projects was balanced among agro-industries,
transport, tourism, housing, mining, and banking. During the 1970s, the Bank
significantly expanded its activities in African and Arab countries and
substantially increased its capital, thus becoming one of the leading finance
institutions in the Middle East. 14/
Another milestone on the road to the internationalization of Kuwaiti
financial institutions was passed in 1966 when several Kuwaiti commercial
banks in cooperation with the two investment houses of KIC and KFTCIC
established the London-based United Bank of Kuwait (UBK). London was chosen
because of the special economic and financial relations Kuwait had hitherto
had with Great Britain. The activities of UBK helped strengthen the position
of Kuwaiti banks in international operations. Furthermore, the success of UBK
and the continued accumulation of Kuwaiti private resources induced Kuwaiti
commercial and investment banks in 1969 to form the first Arab-Occidental
consortium bank with Societe Generale (Banque Franco-Arabe d'Investissements
Internationaux, known as FRAB Bank), which was to be based in Paris. This
international cooperation brought net gains to the principal participants:
- 18 -
European banks gained access to petrocapital, while Kuwaiti banks acquired
modern banking techniques along with international experience and connections
that helped them develop the capacity to build new financial mechanisms and
service products. This new form of banking not on]y enabled both sides to
reap the benefits of the growing commerce between Europe and Arab countries,
but it also allowed them to share the costs and risks of the new operations.
FRAB's activities paved the way for the consortium banks established later,
such as the Union des Banques Arabes et Francaises (UBAF) in 1970, the
European Arab Bank (EAB) in 1972, and Banque Arabe et Internationale
d'Investissements (BAII) in 1973.
What is significant about these major Arab-Occidental consortium
banks is that they were all formed before 1974; Kuwait was involved in all of
them, sometimes substantially; and they all had European banks as major
partners. On all three points, the question is: Why? The fact that these
consortium banks were formed before 1974 is explained by the marked expansion
of oil revenues in the early 1970s, which took place even before the first
major oil price increase. Kuwait participated in all because of its
pioneering efforts in international financial ventures--both on the government
side (as in the case of KIC, KFTCIC, or the Arab African Bank) and or on the
private business side (as in the cases of UBK and BAII). 151 European banks
came to be the major overseas partners mainly because of their long-standing
interest in and familiarity with commerce and finance of Arab economies in
general and of the then rapidly growing economies of ahe Gulf in particular.
Developments since 1974
Like all the oil exporters, Kuwait saw -its oil revenues expand
remarkably and suddenly following the major increase in oil prices at the end
-19 -
of 1973. However, unlike most other oil exporters, Kuwait already had some
capital markets and financial institutions to cope with the resultant capital
flows. The 1970s witnessed major changes in those markets and institutions.
In addition, Kuwaiti institutions assumed an active role in international
financial intermediation and management of international portfolio and direct
investments; they also took a leading role in official aid and concessional
assistance, and in the cofinancing of development projects.
With the growth of a large network of commercial banks and money
exchanges operating domestically and internationally, the short-term capital
market became more firmly established. Better job opportunities and pay
brought waves of expatriate workers from neighboring developing countries to
Kuwait. The needs of those expatriates and their newly established purchasing
power induced a commercial and construction boom, and with it changes in the
scope and size of local credit and financial institutions. Encouraged by the
government's policy of no exchange controls, expatriates remitted significant
amounts of resources to their countries of origin, and local financial
institutions captured the opportunity for profit by accommodating these
important and rapidly growing capital flows. New commercial banks were
established, and old banks expanded into new branches. Increased financial
flows created pressures to use available investment opportunities, both in
Kuwait and abroad. The economy's capacity to absorb short-term funds--
although it had expanded significantly during the early 1970s in comparison
with the 1960s--quickly reached its limits in the mid-1970s, and medium-term
opportunities became more attractive.
As the market for construction materials, intermediate products,
food, and consumer goods expanded, a number of import-substitution industries
- 20 -
began to appear more economically viable. The Industrial Bank of Kuwait was
thus established in 1974 to extend medium-term loans to those industries at
subsidized rates of interest. Because real estate expansion called for more
than the rollover of short-term credit, the Kuwait Real Estate Investment
Consortium (KREIC) was established in 1975 to respond to such opportunities.
Meanwhile, international outlets became increasingly attractive, and before
long a number of such institutions were establishecd: Kuwait International
Investment Company in 1975, the Financial Group of Kuwait in 1976, and the
Arab European Financial Management Company, also in 1976. These, together
with the already established KIC and KFTCIC, helped develop Kuwait's medium-
term capital market.
The medium-term capital market expanded rapidly as a result of two
factors: the growing opportunities for medium-term credit, especially outside
Kuwait; and the increasing sophistication and experience of some Kuwaiti
financial institutions. Activities now included participation in
international loan syndication; lending to multilateral organizations such as
the World Bank and Asian Development Bank; participation in the IMF oil
facility; and the establishment of the Arab Company for Trading Securities
(ACTS), whose main function was to provide a secondary market for financial
investments. For a while, it appeared that the most significant steps in the
development of Kuwait's medium-term capital market were the denomination in
Kuwaiti dinar (KD) of some international bonds and the participation of
Kuwaiti institutions in managing those bonds. By the end of 1982, Kuwaiti
institutions had participated in the management of 104 KD bond issues totaling
about US$3 billion, equivalent to 40 percent of the total value of bonds
managed by all Arab institutions. Subsequently, Kuwaiti authorities appeared
- 21 -
to have second thoughts about the internationalization of the dinar, and
argued that the process was nothing more than a borrowers' scheme to obtain
dollars at lower interest rates.
Through the expertise and talent assembled in the Kuwait Fund, Kuwait
took a leading role in establishing and managing a number of multilateral
development organizations: the Arab Fund for Economic and Social Development
in 1968; the Arab Bank for Economic Development in Africa (BADEA) and the
Inter-Arab Investment Guarantee Corporation, both in 1974; the OPEC Fund in
1976; and the International Fund for Agricultural Development (IFAD) in
1977. 16/
(These and other contributions of the Kuwait Fund are discussed in section IV.)
The Financial Flows (1961-84)
The volume of financial inflows and outflows managed by Kuwaiti
institutions is not reliably known; it is estimated here from various
sources. The reporting covers the period since Kuwait's independence, that
is, during 1961-84 (see table 2). Even though the discussion emphasizes 1974
as a significant point in the development of Kuwaiti financial institutions,
the pattern of estimated financial flows actually falls into three distinct
periods, in line with oil price movements: 1961-73, preceding the first major
oil price increase; 1974-78, following the first major oil price increase; and
1979-84, following the second major oil price increase.
The quality of the data in table 2 is manifestly uneven, as the
sources ranged from Kuwaiti government statistics in the cases of export
revenues, imports and official aid, to balance of payments estimates modified
by independent findings in the case of workers remittances, to fragmented and
- 22 -
Table 2 Financial Flows Handled by Kuwaiti Institutions: 1961-84
(billions of U.S. dollars)
Financial Outflows
Total Imports from Official
Export Total Developing Aid Workers' Private Total
Period Revenue Imports Countries Disbursements Remittances Investments Outflows
1961-73 20.2 7.0 1.7 1.4 1.5 1.5 11.4
1974-78 50.2 16.7 3.9 4.4 1.7 4.1 26.9
1979-84 88.8 42.0 10.2 6.0 4.1 4.3 56.4
Total 159.2 65.7 15.8 11.8 7.3 9.9 94.7
Sources and Notes: For the period 1961-73, see footnote 8 above, Total export revenues
and imports are from International Financial Statistics, annual;; share of imports from
developing countries from Kuwait's Central Statistical Office, Annual Statistical
Abstract. Official aid is from two sources: OECD, Aid from OPEC countries, Paris 1983,
for the period up to 1978 and OPEC Fund, OPEC Aid and OPEC Aid Institutions, no. 4 (1984),
for later years. Workers' remittances are from IMF, Yearbook of Balance of Payments
Statistics, annual, modified by fragmentary data on wage rate, employment and savings of
non-Kuwaitis from family budget studies reported in Kuwait's Annual Statistical
Abstract. Private investments from several sources including Middle East Economic Survey,
various issues; Mahmoud Abdel Fadil, Al Naft Wal Wihda Alarabia (Arabic) (Beirut 1985)Annex tables, Traute Wohlers-Scharf, Arab and Islamic Banks, (Paris: OECD 1983); M.W.
Khouja and P.G. Sadler, The Economy of Kuwait (London: Macmillal, 1979); and John Law,
Arab Investors: Who They are, What they Buy, and Where? (New York: Chase World Information
Corporation, 1981).
occasionally conflicting sources in the case of private investments.
Nonetheless, a number of observations can be made: (a) total export revenues
during the 1961-84 period was about US$159 billion, 56 percent of which
occurred after the second major oil price increase; (b) the total
international financial outflows handled by Kuwaiti institutions during the
1961-84 period was about US$95 billion, 60 percent o:E which occured after the
second major oil price increase; (c) the largest cat:egory by far in Kuwait's
financial outflows was import financing, which accounted for 69 percent of the
- 23 -
flows; (d) although investment data are not as specific as would be
desirable,it appears that the share of developing countries in private
investments was about one-half; (e) accordingly, the share of developing
countries in total Kuwaiti financial outflows was about US$40 billion, or 42
percent of the total; and (f) the composition of total outflows to developing
countries revealed that trade was more important than aid, and that workers
remittances were more significant than private investments.
Such flows together with the range of financial institutions
established as a result of financial growth have rendered Kuwait a major
financial center in the Arab region, especially in the Gulf. This center did
not develop overnight. It took nearly three decades of trial and error on the
domestic front and patient and prudent management of private and government
capital on the international front. Since the early 1980s, however, Kuwait's
standing as a financial center has been affected in varying degrees by several
crises: the Iran-Iraq war has practically wiped out Kuwait's once-thriving
re-export trade; the continued financial support for Iraq in its war with Iran
has placed increasing burdens on Kuwaiti resources; the collapse of the
parallel stock exchange (Suq al Manakh) has shaken the confidence of the small
tightly knit financial community; the serious decline in oil revenues has
added to the financial strains; the end of the once seemingly endless real
estate boom has put many institutions and individuals in a tight liquidity
squeeze; and the 1984 banking crisis associated with a 15 percent fall in the
collective profits of commercial banks has interrupted the momentum of the
country's leading banking and finance sector.
Despite the damaging effects of these crises, there is no denying
that Kuwait continues to possess a wide range of financial and investment
- 24 -
institutions that have become especially attuned to the international and
regional economic realities of the 1980s and to the present and future
challenges of the financial markets. Without deliberately setting out to
become a model for other capital surplus countries in the Gulf, Kuwait seems
to have taken on this role. It is a model that offers a number of important
lessons.
III. The International Orientation of Arab Financial Institutions
To reiterate, the internationalization of Kuwait's financial system
did not occur in vacuum, but was a part of an evolving process. Kuwait's
story is one of a domestic financial system that could not fully absorb the
liquidity associated with major oil revenue inflows. About two decades later,
the same situation developed in some of the other oil-exporting countries,
though in varying degrees. Their experience provides the basis for this
discussion of the activities of Arab financial institutions in developing
countries.
This section looks at several aspects of the international
orientation of Arab financial institutions: (a) the role of external financial
and banking interests in the development of short-term capital markets in the
low absorbers; (b) the institutional mechanisms that helped the low absorbers
enter the financial markets in general and the developing countries in
particular; (c) the activities of Arab banks in those markets; (d) the
emergence of centers of Arab banking and finance inside and outside the Arab
region; and (e) the role of Islamic banks in finance, investment, and the
development of some developing countries.
- 25 -
The Modest Beginning
Commercial banking developed much earlier among the high absorbers
(Algeria and Iraq) than among the low absorbers (the Gulf states). Long
before national interests had reached the point of establishing fully owned
modern Arab banks in the oil countries, commercial banking in those countries
was established and operated by foreign interests: the French in Algeria, the
Italians in Libya, the Dutch in Saudi Arabia, and the British in the rest.
The French established Banque d'Algerie in 1851. The Italians established
Banco di Roma in Libya in 1910. The Dutch established Nederlandsche Handel
Maatschappij as the first commercial bank in Saudi Arabia in 1926. And the
British established the Eastern Bank in Bahrain in 1920, long before the
British Bank of the Middle East became dominant in many Gulf protectorates
during their pre-independence years.
By and large, these banks served the foreign commercial and business
interests, whether of those residing in the oil countries or elsewhere.
Foreign banks derived their main business from financing external trade. In
the Gulf states, however, foreign banks were set up in anticipation of a major
expansion in local business following the successful exploration for oil.
At the same time, the indigenous communities had their own long
traditions and practices in trading, business, and money exchange and thus had
little or no need for modern commercial banking. For example, prominent
merchants collected deposits from acquaintances, financed import trade
transactions themselves, and in some cases acted as lenders to the ruling
families. 171 Financial dualism was thus embedded in the socioeconomic
structure of the oil countries, whose ancient institutions coexisted with
modern institutions, each serving the distinct financial and commercial
- 26 -
interests and needs of vastly different communities. From such a modest
beginning, some of the local banks managed to establish international presence
and stature.
In most oil countries, social modernization was closely related to
the discovery of oil in commercial quantities. The oil revenues that the
governments received, though initially small, began to finance the most
essential parts of the infrastructure. These rather limited, but continuing,
flows of government expenditures had an unmistakable multiplier effect on the
domestic economy through contracts with local merchants for goods and
services, employment of nationals, the purchasing or leasing of land, renting
of office space, and so on. Especially noticeable was the boom in land
values, which contributed to local prosperity, as it had twenty years earlier
in Kuwait. As incomes in the private sector increased, so did expenditures,
especially on imported consumer goods and durables. The resident foreign
communities profited in two related ways: through increased import trade in
which they actively participated and at times dominated, and through
commercial banks that they owned or controlled to finance imports or domestic
trading. As oil revenues expanded further over time, the consumption and
investment expenditures by government and private entities also expanded. The
corresponding monetary flows increased, as did the need to expand the
institutions managing those flows.
With the establishment of modern banks in the oil countries, the
financial dualism there began to disappear. Among the first to initiate the
trend was Saudi Arabia's family-owned National Commercial Bank, which began
its operations in Jeddah in 1938. Next came Iraq's government-owned Rafidain
Bank in Baghdad in 1941; Tripoli's National Bank of Libya in 1955; the
- 27 -
National Bank of Bahrain in 1957; the National Bank of Dubai in 1963; the
government-owned National Bank of Abu Dhabi in 1968; and Muscat's National
Bank of Oman in 1973.
However, foreign banking activities in the oil countries did not
cease at that point. In several cases, the rise of modern Arab banks
coincided with the growth and expansion of foreign banks. Both groups
followed the commercial banking practices of the metropolitan countries; in
particular, they concentrated on short-term commercial loans, related for the
most part to external and internal trading. In some countries (such as
Bahrain, Dubai, Abu Dhabi, Qatar, and Oman), Arab and foreign banks (fully
owned, or branch offices) have continued to coexist right up to the present.
In other countries, commercial banks were nationalized following Cairo's
example in 1961: Iraq nationalized its entire banking system in 1964, Algeria
in 1965, Libya in 1970, and Kuwait in 1971.
Saudi Arabia followed a middle course, and allowed both national and
fully owned foreign commercial banks to expand until 1974, when they had 12
banks with 72 branches. i8/ Significantly, 10 of the 12 banks operating in
the country at that time were foreign owned and operated. 19/ However, in
1975 the Saudi government launched a "Saudization" campaign, completed in
1981, under which all non-Saudi banks had to accept 60 percent Saudi
ownership.
As already noted in section I, even before the first major oil price
increase, financial flows into the low absorbers increased significantly
following the moves in oil prices in 1971 and 1972, which expanded the
activities of Arab and foreign banks. Up to that point, existing financial
institutions had been able to handle the resultant financial flows. However,
- 28 -
the economies of the low absorbers as a whole were not prepared to handle the
enormous expansion in oil revenues that followed soon thereafter.
The Years of Affluence
The new reality of surplus capital created the need for more complex
financial systems and more sophisticated banking institutions. The existing
local systems quickly became overloaded and soon both local and international
financial markets were responding to the surplus capital. In the local
markets, entrepreneurs pushed local activities in trade and construction to
record levels. In a short period, large flows of workers came into the oil
countries from neighboring and distant countries seeking better work
opportunities and higher pay. For a few years, expatriate workers' demands
for goods, services, and housing appeared to continue practically unchecked.
The substantial profits that local businessmen, made in a short period
encouraged them to become more aggressive in trading and investing. They
moved from the traditional ways of financing activities with their own capital
to borrowing, sometimes heavily, from the local banks, which were awash in
liquidity. For a while, the supply of funds in most Arab oil-exporting
countries appeared to be virtually unlimited and the question was to what
extent could local entrepreneurs absorb borrowed funds. Under these
conditions, the cost of capital was low and conditions of lending were quite
relaxed. Loans were made not on the basis of feasibility studies or balance
sheets, but on the strength of the individual applicant's family connections
and personal reputation. The short-term capital market was thus pushed into
an environment of unbounded optimism.
On the international front, a large part of the funds generated was
quickly channeled into larger and more diverse marlkets; this move signaled the
- 29 -
birth of the so-called recycling problem in international financial markets.
The Euromarket, which was emerging in the early 1970s, was given a major boost
from the capital surplus flowing through Arab and non-Arab institutions. The
Euromarket which was relatively free of supervision, inspired innovation and
aggressive banking that not only attracted Arab capital, but eventually
attracted Arab institutions themselves to become participants. 20/
The hitherto Kuwait-dominated consortium banks attracted other Arab
financial institutions after 1974, thereby changing the structure of their
ownership and management. As the size and country composition of Arab
financial flows changed, the functions of the consortium banks evolved beyond
their initial objectives, as will be shown below.
The consortium bank formula appealed to Arab financial institutions
just as it had appealed to Kuwaiti institutions earlier. Few Arab banks had
been exposed to international banking techniques and international financial
and investment know-how, and their connections in international banking and
business circles were rather limited. To break into these new domains the new
Arab banks had to take risks that they were not willing to take on their own,
especially when the stakes were quite high with the markedly increasing
petrocapital flows. The idea of sharing costs and risks with leading European
banks, just as Kuwaiti banks had done before, appeared a particularly
attractive solution. Some Arab banks, in fact, joined in existing Kuwaiti-
European consortium banks. Others preferred to establish new Arab-Occidental
consortium banks. The consortium banking formula was a marriage of
convenience that brought benefits to both the European and Arab banks.
Although FRAB was initially started by Kuwaiti banks and Societe
General, it evolved quickly and soon included other Arab banks from Saudi
- 30 -
Arabia, UAE, Libya, Tunisia, Algeria, and Morocco and OECD banks from Belgium,
Holland, Switzerland, Spain, Greece, and Japan. Similarly, 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 in BAII and EAB.
Although most consortium banks were initially set up to promote Arab-
Occidental business relations, their mandate expanded quickly to cover a wide
range of activities, including commercial banking, trade fin*ncing, fo*eign
exchange, money market, and loan syndication. Some, however, still added
special features to their services. In order to attract the rich individual
Arab investors, BAII, for example, initiated, real estate management,
insurance, and stock market programs. Thus, BAII was acting as a financial
advisor to Arab investors. In addition, the bank became quite active in the
Eurobond market, managing large issues in both OECD and Arab currencies
(including UAE dirham, Kuwaiti dinar, and Bahraini dinar).
The participation of an increasing number of non-Kuwaiti Arab banks
in existing consortium banks accelerated their growth momentum and enabled
them to enter into joint ventures with leading banks in the major financial
centers 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
world. 21/ The waves of business and financial opportunities involving the
newly created oil-related wealth led to the establishment of specialized
international banks to promote bilateral cooperation between Mediterranean
countries and Arab countries. Thus, the Banco Arab-Espanol (Aresbank) was
- 31 -
established in Madrid in 1975 with a capital of US$19 million; the Banco
Saudi-Espanol (Saudesbank) was established also in Madrid in 1979 with a
capital of US$53 million; the Arab-Hellenic Bank was established in Athens in
1979 with a capital of US$15 million; and the Arab-Turkish Bank was
established in Istanbul in 1977 with a capital of US$20 million. Some of the
activities of these bilateral banks were short-term oriented; others were
investment oriented, and financed projects in host countries. An example of
short-term activities, was the Arab-Turkish Bank's active involvement in
financing the rapidly growing Arab-Turkish trade, repatriating the increased
flows of Turkish workers remittances especially from Saudi Arabia, and issuing
of international guarantees for Turkish contractors working in Arab countries,
notably Libya and Saudi Arabia.
Arab banks were present not only in international financial centers
and Mediterranean capitals, but also in 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 petrochemicals. It appears that,
by the late 1970s, Arab financial institutions had responded to the new
international business challenges by establishing a global network.
Centers of Arab Banking
The rapid growth of Arab banking was associated with the development
of major clusterings of Arab banks in several cities/states. In the Arab
region, Kuwait, Bahrain, and, to a lesser extent, Cairo emerged as such
centers. Other clusters grew up in London, Paris, New York, Geneva,
- 32 -
Frankfurt, Singapore, and Hong Kong. Arab regional centers shifted over
time. Up to the late 1960s, Beirut was the zacknowledged center of Arab
banking and finance. Although the focal point of Arab banking shifted from
Lebanon to the Gulf in the early 1970s, no Arab city could entirely replace
Beirut in its diverse financial functions. 221 Within the Gulf, a degree of
specialization was evident by the late 1970s, with Kuwait emerging as an
investment center and Bahrain as a money market center. For a while, Dubai
appeared on its way to becoming a merchant bankinag center, but this has not
transpired. As Kuwait was already covered in section II, this section
presents some detail on Bahrain.
Bahrain became an Arab center of finance through a combination of
factors: the government's need to diversify the domestic economic base, the
adoption of flexible policies to achieve the diversification strategy, the
country's special locational advantages, the traditional orientation of
Bahrainis to private enterprise, and the absence of chauvinistic pressures.
Equally important was the 'community orientation' of other Gulf countries
towards Bahrain; e.g. the early inter-Gulf countries financial institutions
were established in Bahrain (Bank of Bahrain and Kuwait, and the Gulf Bank).
In the early 1970s, Bahrain's oil exports began to decline because of
dwindling oil resources. The government subsequently adopted a three-pronged
diversification strategy to prepare Bahrain for the postoil era: It promoted
energy-intensive industries (aluminum), servicing of oil tanker traffic in the
Gulf (drydock), and financial services. Both the drydock and financial
services derive from Bahrain's advantageous location close to the shores of
Saudi Arabia in the middle of the Gulf. The island thus provides oil tankers
with a desirable repairs and maintenance stop. Moreover, Bahrain's time zone
- 33 -
allows it to deal with financial centers running from London to New York, San
Francisco, Tokyo, and Singapore since it can conduct foreign exchange business
after Singapore closes, but before the European centers open. In addition,
Bahrain's long association with international commerce has helped it to excel
in finance. Individually, Bahrainis prefer business activities to government
employment. Collectively, they welcome and work quite well with foreign
businessmen, regardless of their national origins. No national sensitivities
are stirred in Bahrain with presence or growth of multinational enterprises,
and the relationships with other Arab states in the Gulf have been excellent.
Foreign banks unable to establish themselves in Kuwait or Saudi
Arabia because of legal barriers have found Bahrain a convenient
alternative. With the 1975 legislation of offshore banking units (OBUs)
modeled along the lines of operations in Singapore and in the Cayman Islands,
Bahrain became a highly attractive banking center. Most major banks
established branch offices, and by 1983 there were 21 commercial banks, 63
representative offices (35 in 1980), 16 investment companies, 6 foreign
exchange brokers, 77 OBUs (51 in 1980), and another 2 OBUs licensed to start.
23/ The rapid expansion of foreign banking is particularly evident in the
numbers of representative offices and OBUs. In fact, "the list of Bahrain
banks reads almost like a roll call of the world's most famous institutions."
24/ In institutional range, Bahrain has begun to rival such international
banking centers as Singapore, Hong Kong, Luxembourg, and Nassau, and its
banking community is growing more and more diverse.
The direction of capital flows into and out of Bahrain is
noteworthy. For the most part, capital flows into Bahrain originate in the
Arab countries and Western Europe. The share of Arab countries as sources of
- 34 -
funds steadily expanded from 50 percent in 1978 to 66 percent in 1983; that of
Western Europe steadily declined from 30 percent in 1978 to 21 percent in
1983; and that of other sources combined (such as the United States or Asia)
also declined, from 20 percent in 1978 to 14 percent in 1983. Capital from
Bahrain flows to borrowers practically everywhere. IIowever, Bahrain is a net
exporter of funds to the Far East (Hong Kong, Singapore, Tokyo), Asia, Latin
America, and lately Western Europe. 25/ The fact that 66 percent of the funds
originate in Arab countries while about 50 percent is lent to Arab clients has
led observers to conclude that Bahrain was a center for recycling oil revenues
to the outside world.
Assets of OBUs increased rapidly over a short time span, from US$23.4
billion in 1978 to US$62.7 billion at the end of 1983. Significantly,
however, the pace of growth was not uniform throughout this period. It
accelerated initially, reached a peak of some 35 percent during 1981, then
decelerated to a mere 6 percent during 1983. Although the picture for 1984 is
still incomplete, the volume of OBU assets appears to be declining for the
first time. 26/ This reversal of the growth momentum is the result of several
factors: the serious decline in oil revenues flowing to the oil-exporting
states, the related decline in the volume of shipping maintenance/repairs in
the dry dock, the continued war between neighboring 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 in 1984 with the
departure of some banks, such as Security Pacific, and early in 1985 with the
distress sale of the Arab Asian Bank to a minority shareholder and the major
reorganization of the United Gulf Bank.
- 35 -
Before the crisis finally settles, Bahrain's financial environment
seems headed for more shakeouts. Furthermore, the major reforms in banking
policies instituted in neighboring Saudi Arabia and Kuwait may seriously
diminish the short-term excess liquidity that OBUs can absorb from these
countries. Thus, for the forseeable future the Bahraini economy is likely to
be vulnerable to external shocks. Nevertheless, Bahrain continues to be both
a regional center for Arab banks and a link in their international
activities. At the same time, policymakers are concerned about the depth of
the ongoing crisis.
Elsewhere in the Arab region, Cairo has been making an effort to
become a center of Arab banking (though not without difficulty). By 1983, it
was the host to about 30 Arab banks, of which 14 were commercial banks, 9
investment banks, and 7 representative offices. Egypt's special relations
with sister Arab states, its large labor exports to the oil countries and the
resultant substantial remittances, its Infitah policy (open door) and the
associated banking reforms, its large and growing absorptive capacity, its
good location and relative political stability have all induced Arab banks to
establish a presence in Cairo.
The difficulties Cairo has faced in becoming an Arab banking center
stem in part from the vagaries of Middle East politics, examples of which are
the Arab boycott of Egypt following the Camp David accords with Israel and
Sadat's assasination. Even greater constraints have been imposed by
nonpolitical factors, most notably the Egyptian bureaucracy. For this reason,
Cairo's position in Arab banking circles will depend crucially on government
initiative to minimize restrictions on currency transfers, establish
- 36 -
consistent macro management, and do away with the confused multiple exchange
system.
By and large, the first modern banking institutions in Arab countries
have been branches of either British or French banks, the reason being that
some Arab territories were colonies of Britain or France during the last two
centuries. This long association affected the direction in which Arab banks
expanded during the early 1970s. That is to say, London and Paris naturally
became the first international centers to host Arab financial institutions,
and they still remain the two largest international centers of Arab banking.
It is difficult to determine exactly how many "Arab" banks are located in
London, but a 1983 list shows 60 banks, 3 of which were established before
1970, 12 during 1970-75, 22 during 1976-80, 16 after 1980, and the remaining 7
at an unknown time. 271 Paris, the second largest center of Arab financial
institutions abroad, hosts about 39 Arab banks, 3 of which were established
before 1970, 7 during 1970-75, 26 during 1976-80, and 3 after 1980. 28/ It
should be noted, however, that lately Arab banks in Paris have become
uncertain about their future in face of France's recent program of bank
nationalizations, which have included French share-holdings in Arab consortia.
In the early 1980s, several other centers emerged as international
bases of Arab financial institutions, fundamentally because of their position
in the expanding trade, finance, and investment relations with the oil-
exporting countries. Of these, New York is the world center of dollar
transactions and the base of most U.S. giant banks with which Arab governments
and individuals have deposited large sums; it hosts 19 Arab banks, only 3 of
which were established before 1980. The United States is the largest trading
partner of many oil exporters in the Arab region, and the need for trade
- 37 -
financing will not diminish. To the private Arab investors, the United States
provides a safe base and the most numerous and diversified investment
opportunities.
Singapore and Hong Kong are key centers of commerce, finance, and
investments in the Far East; Singapore hosts 19 Arab banks, while Hong Kong
hosts 15. With the announcement that Hong Kong will be returned to China,
this center may have lost some of its attractiveness to Arab banks.
Switzerland is another traditional banking center with which the Arabs have
had a long association; it hosts 15 Arab banks. Other centers are mostly
Mediterranean bases with which the Arab countries share their culture,
history, and commerce; these include Cyprus, Rome, Athens, and Madrid. By the
early 1980s, the international network of Arab banks had reached into both the
major and minor finance centers of the world.
Islamic Banks
Any discussion of the international orientation of Arab banks would
be remiss if it failed to mention Islamic banks. Major capital inflows to
OPEC countries, many of which are Moslem countries, created challenges to
establish Islamic financial institutions, first within their own borders then
internationally. This is said to be part of a broader revival of Islam and
its values. To the world's Moslems, an Islamic economic order represents an
alternative to capitalist and socialist systems. The principles of Islamic
economics derive from Shari'a, the legal system based on the Quran (the Holy
Book of Islam) and Sunna (the traditions of the Prophet Muhammad). Instead of
a lender-borrower relationship, Islamic finance relies on the notion of
distributive justice, that of equitable risk sharing by the sources of capital
(banks) and the users of capital (entrepreneurs).
- 38 -
The first Islamic bank was privately established in Egypt in 1962,
but it was not until 1975 that the concept of Islamic financial institutions
received a major boost with the establishment of the Islamic Development Bank,
which was capitalized at 2 billion SDRs and whose membership consisted of more
than 40 Moslem country governments. About two-thirds of its capital came from
four Arab oil countries: Saudi Arabia (25 percent), Libya (16 percent), the
UAE (14 percent), and Kuwait (13 percent). The Islamic Development Bank is
commissioned to foster economic development and social progress in the member
countries according to Islamic law. To provide technical advice and promote
cooperation among Islamic banks, it helped establish the International
Association of Islamic Banks (IAIB) in 1978. The rapid expansion of Islamic
banks after the late 1970s created substantial demands for staff training,
which could not be adequately met by IAIB. Another agency was thus
established for the specific purpose of training the staff of Islamic banks.
This agency was the International Institute of Islamic Banking and Economics,
established in 1982 in Lefkosa, Cyprus. 29/
Most Islamic banks were established in the late 1970s and early
1980s. At present, some thirty Islamic financial institutions operate in
Arab, Moslem, and other countries. Among the Arab countries they operate in
Egypt, Sudan, Jordan, and the Gulf, and of the other Moslem countries,
Pakistan, Iran, Bangladesh, and Malaysia have Islamic banks. They can also be
found in non-Moslem countries (e.g., the Philippines, South Africa, Nassau,
Luxembourg, Cyprus, and Australia); and some are present in financial centers
such as London and Geneva. For the most part, Islamic banks depend on
private, not governmental, initiative. The most notable exception is Kuwait
- 39 -
Finance House, established in 1978 with a 49 percent government shareholding,
which was increased to 60 percent in 1984. 30/
The distinction between commercial and investment banks is not quite
applicable to Islamic banks, because their operations are of a different type,
the most common being Morabaha, Mosharaka, Modaraba, and to a lesser extent,
Ijara and Ijara wa Iqtina. Morabaha refers to the resale of goods with the
addition of a fixed surcharge on the original cost, on a deferred payment
basis. Under the Mosharaka principle, an Islamic bank and a client establish
a partnership, sharing profits and losses until the time, normally fixed, when
the client will buy out the bank's holding. The Modaraba contract is a silent
partnership that clearly distinguishes between the capital source (bank) and
the entrepreneur (modareb) who manages the project. Remuneration is based on
a predetermined percentage of profits, whereas losses are to be borne by
capital providers alone; the modareb foregoes remuneration for his work.
Ijara is rental financing where the bank acquires equipment or buildings and
makes them available on a straightforward rental basis. The Ijara wa Iqtina
is hire-purchase financing which works in a similar way to Ijara, except that
the client may acquire the rented assets by paying installments into a savings
account. 31/
The assets of some of the leading Islamic banks have grown rapidly,
averaging about 38 percent per year in 1982 and 1983 (see Table 3). However,
the size of these banks measured in absolute and relative terms is still quite
small. The collective assets of the sample of banks shown in table 3 was
US$1.5 billion in 1981, US$3.9 billion in 1982, and US$5.3 billion in 1983.
Significantly, the Kuwait Finance House alone accounted for about half of the
assets of this group. The assets of the group are dwarfed by those of the
- 40 -
Table 3 Assets of Selected Islamic Banks
(millions of indicated currencies)
Year Assets
Bank Location Established Denomination 1982 1983
Faisal Islamic Bank Cairo 1977 U.S. dollar 997 1,504
Islamic International Bank Cairo 1980 U.S. dollar 89 412
Dar Almaal Al islami Geneva 1981 U.S. dollar 310 286
Kuwait Finance House Kuwait 1978 Kuwaiti dinar 569 800
Faisal Islamic Bank Khartoum 1977 Sudanese Pound 278 n.a.
Dubai Islamic Bank Dubai 1975 UAE dirham 509 805
Jordan Islamic Bank Amman 1978 Jordanian dinar 45 72
Bahrain Islamic Bank Manama 1978 Arab dinar a! 29 n.a.
Total in million U.S. dollar equivalent 3,872 5,320
Note: n.a. denotes not available.
a. One Arab dinar equals one SDR.
The Islamic Development Bank (IDB) was excluded from the table because its functions
and objectives differ significantly from the rest of the banks shown. Relevant dataon IDB appear instead with other similar development organizations in section IV.
Sources: Annual reports of banks shown, and Middle East Economic Survey, several 1984 issues.
leading Arab banks (see table 4). For example, the collective assets of the
identified sample were less than one-fourth of the assets of the Rafidain Bank
of Baghdad, which, as the largest Arab bank in 1983, ranked 83rd on the
Banker's 500 list. This group's assets were at about the same level as those
of the Credit Populaire d'Algerie, whose rank was 291 on the Banker's 500
list.
- 41 -
In view of their relative size, Islamic banks thus far have not
offered an alternative banking formula. However, such an assessment is not
fair because Islamic banks have been in existence for no more than a decade
whereas conventional banks as we know them today have evolved over a period of
more than two centuries. What is clear, however, is that the institutional
framework of Islamic banks is in place and that their connections with centers
of international finance and Moslem countries are already firmly established.
Furthermore, it appears that Islamic banks can carve out a specialized role
for themselves in servicing Moslem communities throughout the world. In
particular, Islamic banks are ideally suited to mobilizing resources from the
world's large Moslem communities, which in principle refuse the notion of
'Riba' (interest charging and receiving). In the Islamic view this is the
principal tenet of modern banking. In Saudi Arabia alone, Islamic banks have
considerable potential among households that do not have bank accounts,
estimated to be 35-60 percent of total Saudi households. How Islamic banks
will perform this specific task remains to be seen.
The increased popularity of Islamic banks could not have been due to
especially favorable returns on deposits and equity or to unusually high
dividends on paid-up capital, by comparison with commercial banks. During the
period 1980-82 returns on deposits and equity in Islamic banks have been in
the range of 2-16 percent while those of the nine commercial banks in Saudi
Arabia have been in the range of 27-47 percent. Neither was there a
correlation between returns on deposits/equity and growth of assets, i.e. the
fastest growing Islamic banks were not necessarily the best performers. The
only logical explanation of growth of Islamic banks is their special appeal to
devout Moslems whose numbers are increasing worldwide. 32/ Growth
- 42 -
differentials in the size of Islamic banks may partly be explained by
differences in the connections of bank chiefs with sources of funds.
Since 1983, both Arab and Islamic banks have experienced setbacks
owing to a number of factors, any one of which they would have been able to
weather under normal business conditions in the Gulf. It is the combination
of all these factors--the decline in oil revenues, the end of the real estate
boom, the fall in precious metal prices, the post-Manakh crisis, and the Iran-
Iraq war--that has reversed the fortunes of many banks, including Islamic
banks, and caught them in a difficult liquidity sctueeze. 33/
Size of Arab Banks
As the preceding sections have shown, Arab banks have recorded rapid
growth in recent years. The list of the largest 500 banks compiled by The
Banker (in terms of assets) contained only seventeen Arab banks in 1980. In
1983 the same list had nearly double that number, thirty-two Arab banks. Even
though oil revenues declined significantly duri.ng that three-year period,
assets of Arab banks expanded faster than averag,s, so that more banks joined
the largest 500 list, replacing others in the process. In terms of assets,
however, Arab banks continue to be small in comparison with the industry
leaders. In 1983, the assets of the largest Arab bank, Rafidain Bank of
Baghdad, were US$22.4 billion, which amounted to only 18 percent of the assets
of Citicorp, the world's largest banking corporation. Nevertheless, the gap
between Arab banks and the industry leaders has been narrowing. In 1980
Citicorp's assets were greater than the combined assets of all 17 Arab banks
on the list, but by 1983 they were 76 percent of the combined assets of the
largest 17 Arab banks, and 57 percent of the combined assets of all 32 Arab
banks appearing on the list.
- 43 -
Table 4 Largest Arab Banks
(1980 and 1983)
Year Assets (USSbillion) 1983
Bank Headquarters Established 1980 1983 Rank
1. Rafidain Bank Baghdad 1941 8.8 22.4 83
2. National Commercial Bank Jeddah 1983 14.9 14.7 119
3. Bank of Credit & Commerce Luxembourg 1972 5.3 12.3 136
International
4. B. Nationale d'Algerie Algiers 1966 6.3 11.4 146
5. Union de Banques Arabes Paris 1970 4.8 11.2 148
et Francaises
6. Arab Bank Amman 1930 7.1 10.4 157
7. National Bank of Kuwait Kuwait 1952 5.0 9.0 171
8. Arab Banking Corp. Bahrain 1980 1.9 8.8 175
9. Commercial Bank of Syria Damascus 1967 3.3 8.6 178
10. Riyad Bank Jeddah 1957 4.2 7.8 199
11. National Bank of Egypt Cairo 1898 4.4 7.5 208
12. Gulf International Bank Bahrain 1975 2.9 7.4 211
13. Banque Exterieure d'Algerie Aigiers 1967 5.9 7.4 214
14. Gulf Bank Kuwait 1960 4.2 7.1 2-22
15. Commercial Bank of Kuwait Kuwait 1961 5.1 6.6 238
16. National Bank of Abu Dhabi Abu Dhabi 1968 4.7 6.1 252
17. Banque Misr Cairo 1920 3.7 6.1 254
18. Alahli Bank of Kuwait Kuwait 1967 4.7 5.8 269
19. Credit Populaire d'Algerie Algiers 1966 3.0 5.2 291
20. Banque du Caire Cairo 1952 2.4 4.6 329
21. Arab African International Cairo 1964 2.7 4.4 333
Bank
22. Suadi International Bank London 1975 2.7 4.0 358
23. Bank of Kuwait & The Kuwait 1971 2.0 3.6 398
Middle East
24. Saudi American Bank Riyadh 1980 2.1 3.5 399
25. National Commercial B.a Tripoli 1970 2.1 3.4 418
26. Compagnie Arabe et Luxembourg 1973 2.4 3.3 427
Internationale
d'Investissement
27. Al Bank Al Saudi Al Jeddah 1977 3.2 3.2 437
Faransi
28. Bank of Alexandria Cairo 1957 1.8 3.2 443
29. Wahda Bank Benghazi 1970 2.5 3.0 459
30. Jamahyria Bank Tripoli 1969 1.3 2.5 489
31. Libyan Arab Foreign Bank Tripoli 1972 3.7 2.5 491
32. Burgan Bank Kuwait 1975 1.5 2.3 500
Sources: The Banker, June 1984; and Alexander E. Fleming, "Survey of Origin and Development of Arab
Banks," IMF Survey (Washington, D.C., February 8, 1982).
- 44 -
The largest Arab banks were set up before 1973; 25 of the 32
appearing on the Top 500 list fall in this category. Of the remaining 7, 5
were established during 1973-79 (Gulf International Bank, Saudi International
Bank, Compagnie Arabe et Internationale d'Investissement, Al Bank Al Suadi Al
Faransi, and Burgan Bank of Kuwait) and 2 in 1980 (Arab Banking Corp. and
Saudi American Bank) (see table 4). All seven hiave been among the fastest
growing banks. All moved upward on The Banker list between 1980 and 1983.
Significantly, some of the largest Arab banks are based in the
nonoil countries. Appearing on the Top 500 lisl: are five banks from Egypt
(combined assets US$25.8 billion), one from Jordan (US$10.4 billion assets),
and one from Syria (US$8.6 billion assets). However, the oil countries show
more banks and larger assets. For example, Kuwait has the largest number of
banks with the largest combined assets on the list: six, with combined assets
of US$34.4 billion.
IV. Relations with Developing Countries:Aid Institutions
Although the relations between the oil exporters and other developing
countries cover aid, direct investments, commercial credits, trade and labor
remittances, this paper concentrates on the first three activities. Arab aid
to developing countries is discussed in the present section, and Arab
commercial credit and investments in developing countries are discussed in
section V.
As already indicated in section II, Arab aid programs actually
started well before the first major oil price increase. However, it was not
until the early 1970s that several Arab/OPEC countries allocated significant
portions of their national incomes to aid programs. The cumulative size of
- 45 -
OPEC aid through 1984 was US$79 billion, of which US$73 billion came from Arab
aid sources. Less than 30 percent of those flows were managed by aid
institutions, which distributed the resources roughly equally between African
and Asian developing countries, with a minor share going to Latin America.
Although aid was distributed among many sectors, special emphasis was placed
on infrastructure projects, particularly transport.
As a matter of convenience, Arab/OPEC aid institutions cofinanced
several development projects with international organizations. Through the
cofinancing formula, the latter expanded their sources of funds while the
former overcame staff limitations and established project lending portfolios
in a short period. The formula continues to be operational.
OPEC Aid as A New Concept
The Kuwait Fund for Arab Economic Development established in 1961 was
the first aid institution set up by a developing country to provide
concessional assistance to other developing countries (see section II,
Developments Prior to 1974). This early Arab aid was motivated by ethical,
religious, and cultural considerations and an enlightened foreign policy, the
goal of which was to establish among Arab countries a vested interest in the
independence and prosperity of Kuwait. The Kuwait aid program marked the
start of what later became a trend among several OPEC member countries. For a
period during the 1960s, the birth of this new world phenomenon was perceived
in some development circles as an anomaly.
The conditions surrounding the establishment of Kuwait's aid program
and of its executing agency, the Kuwait Fund, cannot be fully appreciated
without looking at some economic indicators for the OPEC members. In 1960,
neither Kuwait's total oil revenues nor its GNP were extraordinary in
comparison with those of other OPEC countries. However, when the country's
- 46 -
then-tiny population of 280,000 is taken into account, Kuwait's per capita oil
revenue was several times that of the other founding members of OPEC the same
year: It was more than 12 times that of Saudi Arabia and Venezuela, more than
50 times that of Iraq, and more than 90 times that of Iran. Even when
compared with per capita GNP in the industrially advanced countries, Kuwait's
was 5 times the median value, corresponding to per capita GNP in France or the
United Kingdom. Most impressive is the fact that Kuwait's 1960 per capita GNP
was twice as much as that of the United States. 34/
The strong participation of practically all OPEC members in the
establishment of a relatively large number of bilateral and multilateral
development agencies during a short period, some even before the first major
oil price increase, was a noteworthy development. For example, the Abu Dhabi
Fund for Arab Economic Development was established as a national aid agency in
July 1971, and the Arab Fund for Economic and Social Development was
established as a regional aid agency in December 1971. Over the next five
years, OPEC members established five more bilateral aid agencies and
spearheaded efforts by developing countries to establish seven more
multilateral development agencies (table 5). 35/ By 1984, after less than
eight years of actual operations, the total authorized capital of the ten
major OPEC funds stood at US$28 billion, the paid-in capital at US$19 billion,
cumulative commitments at US$24 billion, and actual disbursements at US$16
billion.
The Overall Profile of OPEC Aid
Significant as the preceding figures appear, they pertain only to aid
flows for project financing, the smaller component of OPEC aid. Other
components include the dominant category of general support assistance, as
well as non-project assistance. Through 1984, the cumulative net
Table 5 Profile Of OPEC Aid Institutions (as of end 1984)
(As of end of 1984)
Year Capital, US$ Million Cumulative Financing
Institution a/ Base Established Started Authorized Paid-in Commitments Disbursements
Multilateral Institutions
Arab Fund for Economic and Social
Development Kuwait Dec 1971 Jan 1974 2,800 1,822 2,229 1 078
Arab Bank for Economic Development
in Africa (BADEA) Khartoum Nov 1973 Mar 1975 988 985 883 527
Islamic Development Bank Jeddah Oct 1975 Oct 1976 2,010 1,281 4,686 3,771
OPEC Fund for International
Development Vienna Jan 1976 Aug 1976 3,435 2,513 2,034 1,418Arab Authority for Agricultural
Investment and Development (AAAID) Khartoum Nov 1976 May 1978 540 340 67 bl 50 _/
Subtotal 9,773 6,941 9,899 6,844
Bilateral Institutions
Kuwait Fund for Arab Economic
Development Kuwait Dec 1961 Mar 1962 6,900 2,952 4,508 2,682
Abu Dhabi Fund for Arab Economic
Development Abu Dhabi Jul 1971 Sep 1974 544 581 1,065 865
Iraqi Fund for External Development Baghdad Jun 1974 Jan 1977 1,009 723 1,484 694
Venezuelan Investment Fund Caracas Jun 1974 Dec 1974 3,000 3,000 3,046 2,637
Saudi Fund for Development Riyadh Sep 1974 Feb 1975 7,163 5,300 4,510 2,291
Subtotal 18,616 12,556 14,613 9,169
Total 28,389 19,497 24,512 16,031
a. Institutions are listed in chronological order in each category.
b. In addition to AAAID's equity participations, it has guaranteed loans offered to its subsidiary companies in the order
of US$86 million.
Source: The OPEC Fund, OPEC Aid and OPEC Aid Institutions - A Profile, No. 5 (Vienna, 1985).
- 48 -
disbursements of concessional assistance made by OE'EC member countries totaled
about US$79 billion in economic, not military, aid. Distributed over time in
relation to major oil price increases, these net aid flows may be estimated as
follows: US$5 billion through 1973 (before the first major oil price
increase); US$31 billion during 1974-78 (after the first major oil price
increase but before the second); and US$43 billion during 1979-84 (when the
effects of the second major oil price increase were felt).
To be placed in perspective, these aid fLows should be related both
to the aid flows of other major sources (the Organization for Economic
Cooperation and Development [OECD] and the Council for Mutual Economic
Assistance [CMEA]) and to their collective GNP. During the sub-period 1973-
84, ODA aid flows from OECD sources were US$244 billion and from CMEA US$25
billion; those from OPEC were US$77 billion (i.e., excluding pre-1973 aid),
and thus represented 23 percent of aid given by all major donors. With
respect to group GNP, although the annual average aid flows from OECD were
about one-third of 1 percent, and the corresponding flow from CMEA less than
one-fifth of 1 percent, that of OPEC was about 2 percent (table 6).
The overall average of 2 percent durJing 1973-83 masks several
significant details. The first is the misleading notion that total aid flows
are to be related to the collective GNP of all OPEC members. Given that the
low absorbers were the major sources of OPEC aid, it is more appropriate to
relate aid to the GNP of the low absorbers. In that case, the ratio during
1973-84 becomes 4 percent, double the overall ratio.
For many years, several individual OPEC donors continued to grant aid
at ratios well above 4 percent of GNP, the overall average for the low
absorbers. The highest ratios were recorded in 1975, when they reached 7
- 49 -
Table 6 OPEC Aid Flows in Relation to GNP, Selected Countries (1973-84)(percentages, except where otherwise noted)
Country 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984
Algeria .36 .37 .28 .33 .21 .16 .92 .26 .24 .29 -- --
Iran .02 1.03 1.13 1.13 .27 .33 -- -- -- --
Iraq .21 3.98 1.62 1.44 .33 .76 2.53 2.89 .40 --
Kuwait 8.62 5.33 7.40 3.63 8.10 5.46 3.50 3.40 3.55 4.86Libya 3.33 1.26 2.29 .63 .57 .79 .43 1.18 1.11 .18Nigeria .04 .60 .05 .19 .10 .05 .04 .04 .20 .08Qatar 15.62 9.26 15.58 7.95 7.56 3.38 6.18 4.03 3.75 3.80Saudla Arabia 4.12 9.32 7.76 6.46 5.24 8.39 5.55 5.19 3.58 2.82U.A.E 12.67 7.04 11.68 8.88 7.23 6.35 5.03 3.10 2.88 2.06Venezuela .11 1.93 .11 .34 .07 .22 .22 .21 .10 .32
Overall OPEC
Percentage 1.89 2.53 2.92 2.32 1.96 2.43 1.84 1.80 1.51 1.06 1.05 0.86Total in
USS Billions 1.75 4.60 6.24 6.10 6.10 8.13 7.83 9.59 8.53 5.89 5.47 4.55
OECD-OMA
USS Billion 9.35 11.30 13.90 13.70 14.70 20.00 22.80 27.30 25.60 27.90 23.2 28.6
As Percentage
of GNP .33 .33 .36 .33 .31 .35 .35 .38 .35 .38 .36 .36
CMEA Percentage .13 .10 .14 .13 .13 .12 .15 .17 .21 .21 .21 .21
Sources: World Bank, World Development Report, 1978, table 12, pp. 98-99; and 1984, table 18,pp. 252-253; OECD, Aid from OPEC (Paris, 1983), table 11.1 and 11.2; OPEC Fund, OPEC Aid andOPEC Aid Institutions - A Profile, No. 5; and OPEC Secretariat.
- 50 -
percent for Kuwait, 8 percent for Saudi Arabia, 12 percent for U.A.E., and 16
percent for Qatar. During the same period, three industrial countries, the
Netherlands, Norway, and Sweden, reached a ratio of about 1 percent. 36/ Even
more significant is the fact that in absolute dollar terms, several OPEC
members ranked ahead of some of the most industrially advanced countries. For
example, since 1976, Saudi Arabia has been the second largest source of
concessionary aid, Kuwait has consistently ranked among the largest ten
donors, and UAE was a major donor during 1974-81.
Compared to the GNP of OECD or CMEA countries, that of the largest
OPEC aid sources is but a minute fraction. In 1984, the combined GNP of the
five low absorbers was US$196 billion, equivalent to 2.3 percent of the
combined GNP of the OECD countries, and 7.3 percent of the combined GNP of the
CMEA countries. 371
Several features characterize OPEC aid flows. First, OPEC aid
originates from the liquidation of exhaustible oil resources. The relative
sacrifice for individual OPEC members is, therefore, much higher than
suggested by the ratios of aid to GNP, already several times higher than those
of OECD countries. Second, unlike most OECD aid, OPEC aid is generally
untied, especially with regard to the procurement of goods and services. In
fact, in all but some insignificant cases, OPEC aid flows financed goods and
services produced in non-OPEC countries. Third, OPEC aid originates primarily
in the Arab countries, especially the so-called low absorbers. Fourth,
despite the high visibility of OPEC aid institutions in international
development circles, the associated aid flows are but a small fraction of
total OPEC aid. Finally, within the OPEC aid institutions, national agencies
often have larger resources than multilateral agencies. 381
- 51 -
Although some of the aid flows were directed through multilateral
arrangements, most flowed through bilateral channels. About 24 percent of the
cumulative aid flows during 1968-84 went through multilateral channels: About
$12 billion in the government-to-government aid to Egypt, Jordan, and Syria
(15 percent), and $7 billion in project assistance (9 percent). Thus,
bilateral aid has been the dominant factor, representing 76 percent of OPEC
aid flows over time. The preponderance of bilateral aid is to be expected,
since foreign aid is usually an important tool of a country's policy.
Bilateral aid is distributed among three categories: general support
assistance $41 billion (52 percent), non-project assistance $10 billion (13
percent), and project assistance $9 billion (11 percent).
The geographic distribution of the destination of the bilateral flows
is not easily documented, because Saudi Arabia--the leading donor--does not
provide detailed information on its bilateral aid flows. The identified
bilateral disbursements were distributed as follows: Africa, 27 percent;
Asia, 66 percent; and Latin America, 7 percent of the total. To be sure,
figures for Africa and Asia include flows to members of the League of Arab
States. The share of Arab countries in the identified bilateral disbursements
would be about 70 percent.
This concentrated pattern seems to be quite common in bilateral aid
flows worldwide. Typically, sources of concessional aid are tied to selected
recipient countries by factors of culture, politics, or economics. Thus, most
British aid goes to Commonwealth countries; French aid to francophone ex-
colonies; Soviet aid to socialist or quasi-socialist countries; and so on.
For more obvious reasons, the concentration of Arab bilateral aid in the other
- 52 -
Arab countries is thus a natural reflection of the long established ties among
the countries of the Arab region.
Activities of OPEC Aid Institutions
The first major oil price increase greatly expanded the capital of
existing institutions and enabled OPEC members to establish eleven additional
institutions within a short period thereafter, six of which were
multilateral. Similarly, the second major oil price increase further boosted
the liquidity position of OPEC countries and facilitated the significant
capital expansion of existing aid institutions. Thus, in less than eight
years, the number of OPEC aid institutions expanded from four to fifteen and
their capital resources from US$1.2 billion to more than US$28.4 billion.
This expansion of capital resources helped broaden the scope of
activities of existing aid institutions, both geographically and
functionally. Although the scope of multilateral iregional aid institutions
remained the same, the scope of existing bilateral aid institutions expanded
from the regional to the international domain. Botha the Kuwait Fund and the
Abu Dhabi Fund broadened their scope from Arab coLntries to the developing
world. In addition, from the outset most of the post-1974 OPEC aid
institutions--that is, the Saudi Fund, the Iraqi Fund, the Islamic Development
Bank, and the OPEC Fund--had a mandate that covered all developing countries.
The change in functional scope has been equally substantial. Up to
1973, the activities of OPEC aid institutions were concentrated mainly on
project financing. This form of assistance often ensures that certain
standards are applied in the identification and selection of projects;
moreover, it helps to increase the investment rate in recipient countries and
provides an element of technical assistance to those recipients. At the same
time, this form of assistance is characterized by long administrative
- 53 -
involvement with feasibility studies, economic appraisals, and the drawing-up
of elaborate contracts, and it takes time to disburse. As a result, the
associated financial flows, whatever the volume of funds allocated or
committed, tend to be constrained. Hence, more and more OPEC donors have
resorted to general support grants and loans.
OPEC aid institutions have also provided investment guarantees.
Direct investments, unlike aid, are based on the long-term mutual interests of
the source and host countries. To build a network of interdependent interests
in the region, the Arab members of OPEC sought to explore mechanisms to
encourage inter-Arab private capital flows. The Inter-Arab Investments
Guarantee Corporation (IAICC) was thus established in 1974 to promote private
capital flows among Arab countries. Although substantial private inter-Arab
investment flows did take place (estimated to have reached at least about US$5
billion), a small portion of these flows (some US$200 million) was channeled
into schemes involving IAIGC. Such limitation was due mainly to the limited
capitalization of IAIGC itself.
The operations of the OPEC aid agencies reveal some interesting
patterns. The geographic distribution of loan commitments made by OPEC
development funds is shown in table 7. These allocations were about the same
as those for Africa and Asia: US$10.6 billion to Africa (representing
43 percent of the total), US$10.7 billion to Asia (representing 44 percent),
and US$3.1 billion to Latin America and other countries (representing
13 percent). Except for the Venezuelan Fund (VIF), Africa's share as a
recipient has not fallen below 41 percent in any OPEC aid institution, and it
has been 100 percent in BADEA. By contrast, the share of Asian countries in
national OPEC agency allocations has been more than 50 percent (again
- 54 -
Table 7 Geographic Distribution Of OPEC Aid Agency Commitments At End 1984
Percentage Total Allocations
Latin America Number of Number of
Africa Asia and Other US$MiI Percentage Countries Opers.
Multilateral Funds
Arab Fund 60.0 40.0 -- 2,229 9.4 16 163BADEA 100.0 -- -- 883 2.7 37 110
Islamic Bank 44.2 55.8 -- 4,686 16.9 36 359
OPEC Fund 46.2 42.7 11.1 2,034 8.5 82 384
Bilateral FundsKuwait Fund 48.0 51.2 0.8 4,508 19.7 62 286
Abu Dhabi Fund 41.2 58.1 0.7 1,065 4.6 40 84
Iraqi Fund 41.5 53.3 5.2 1,484 7.6 31 69
VenezuelanInvestment Fund -- -- 100.0 3,046 10.9 n.a. n.a.
Saudi Fund 45.9 52.0 2.1 4,510 19.7 53 202
Regional Total
(USS Mil.) 10,585 10,731 3,129 24,445 100.0 99 1657
Percentage of Total
Allocations 43.3 43.9 12.8 100.0
Note: n.a. denotes not available.
Africa includes the following members of the League of Arab States: Algeria, Djibouti, Egypt,
Libya, Mauritania, Morocco, Somalia, Sudan, and Tunisia. With the exception of Libya, most
African states were recipients of OPEC aid. Asia includes the following members of the League of
Arab States: Bahrain, Iraq, Jordan, Kuwait, Lebanon, Oman, Qal-ar, Saudi Arabia, Syria, United
Arab Emirates, North Yemen, and South Yemen. Except for most OPEC donors, the rest of Arab
states, among others in Asia, were recipients of OPEC aid. The above data do not include theIran Organization or its allocations due to incomplete data coverage since 1978. For data up to
1978 see UNCTAD, Financial Solidarity for Development (New York, 1984), pp. 40-43. According to
the statute of the Venezuelan Investment Fund (VIF), the amounts it dedicates to development
assistance at any given time cannot exceed 15 percent of its assets. At the end of 1983, VIF's
development assistance was equivalent to US$2,498 million, as shown above.
Sources: Coordination Seretariat of Arab National and Regional Development Institutions,
Financing Operations, December 31, 1984, and Middle East Economic Survey (MEES), May 6, 1985;
except for the Venezuelan Investment Fund, figures for which pertain to 1983, obtained from OPEC,
OPEC Aid and OPEC Aid Institutions - A Profile, No. 5.
- 55 -
excluding VIF), whereas it has been more variable in the multilateral
agencies: 40 percent from the Arab Fund, 43 percent from the OPEC Fund, and
56 percent from the Islamic Bank. If Arab countries in Africa and Asia were
separated as a distinct group from the rest of OPEC aid recipients, their
share would be about US$11.1 billion (or 46 percent of the total).
As for total allocations as they stood at the end of 1984, the
Islamic Bank made the largest contribution (US$4.6 billion) representing 19
percent. Both the Kuwait Fund and the Saudi Fund made the second largest
contributions (US$4.5 billion each), which represented about 18 percent
each. The contribution of the Venezuelan Fund was US$3.0 billion, which was
equivalent to 12 percent of the total. Two funds had roughly the same
relative contribution: the Arab Fund (US$2.2 billion) and the OPEC Fund
(US$2.0 billion), each representing about 9 percent. 39/ The smallest
relative contributions were made by BADEA and the Abu Dhabi Fund (about 5
percent each).
According to the sectoral distribution of loan commitments shown in
table 8, transport receives the largest allocation (31 percent), energy, the
second largest (23 percent), and agriculture, industry, and other roughly
equal shares, about one-sixth each. If transport, energy, and others are
combined in a broader definition of "infrastructure," they end up absorbing
two-thirds of total allocations. This is a perfectly natural corollary of the
relative needs of developing countries, and of the response of OPEC funds to
those needs.
Cofinancing Development Projects
Through 1983 about US$3.3 billion have been committed by Arab/OPEC
aid agencies to the financing of development projects with the World Bank.
- 56 -
Table 8 Sector Distribution of OPEC AidAgency Commitments At End 1984
PercentageAgriculture/Agro TotalIndustries Industry Transport Energy Other (US$ Million)
Multilateral funds
Arab Fund 16.0 13.3 26.2 19.1 25.4 2,229BADEA 21.1 12.1 40.2 12.2 14.4 883Islamic Bank 11.1 26.2 27.6 8.2 26.9 4,686OPEC Fund 12.5 6.2 15.7 51.0 14.6 2,034
Bilateral funds
Kuwait Fund 20.2 19.3 30.0 25.3 5.2 4,508Abu Dhabi Fund 13.9 47.9 12.4 23.8 2.0 1,065Iraqi Fund 12.2 19.0 56.9 2.8 9.1 1,494Saudi Fund 17.4 7.0 36.4 21.3 17.9 4,510Venezuelan Fund 11.6 1.2 24.6 55.9 6.7 3,046
Percentage of TotalAllocations 17.1 14.7 30.8 23.4 14.0
Sectoral Total(US$ Mil) 4,180 3,593 7,529 5,720 3,422 24,445
Note: The above data do not include the Iran Organization or the Libyan ArabForeign Bank owing to incomplete data coverage. Data on the VIF include oil salescredits with local counterpart funds for project financing. Agriculture includeslivestock and rural development; industry includes mining; transport includescommunications and storage; and other includes education, health, nationaldevelopment banks, water supply, and sewerage.
Sources: The first two columns are derived from UNCTAD, Financial Solidarity forDevelopment, 1984, and the last column from OPEC Fund, OPEC Aid and OPEC AidInstitutions - A Profile, no. 5.
- 57 -
This sum represents about 14 percent of Arab/OPEC Funds cumulative loan
commitments. It also represents the same portion of total World Bank
cofinancing with official sources (see table 9). Two multilateral Funds, the
Arab Fund and the OPEC Fund, together cofinanced 94 projects with the World
Bank, and their contribution totaled US$1.1 billion. This is equivalent to
about 17 percent of World Bank cofinancing with multilateral official
sources. The three national funds--the Kuwait Fund, the Saudi Fund, and the
Abu Dhabi Fund--together cofinanced 119 projects with a total sum of US$2.2
billion. This is equivalent to about 23 percent of World Bank cofinancing
with national official aid sources.
Table 9 Cofinancing with Official Arab/OPEC Aid Agencies,Cumulative 1974-83 (millions of U.S. dollars)
Number of US$ MillionInstitution Projects Cofinanced Cofinanced
Multinational-Arab Fund 32 611OPEC Fund 62 493
Subtotal 94 1104
National-Kuwait Fund 69 1109Saudi Fund 36 920Abu Dhabi Fund 14 211
Subtotal 119 2240
TOTAL 213 3344
Source: The World Bank, Cofinancing (Washington D.C., 1983), Annex 2,tables 4, 5, and 6.
- 58 -
The cofinancing formula was found to be mutually attractive to the
World Bank and to the Arab/OPEC aid agencies. The formula assists the World
Bank in mobilizing needed resources on a global scale to finance an increasing
number of larger and more expensive projects. In 1970, the World Bank Group
(IBRD and IDA) made 119 loans for a total of U'S$2.2 billion, at an average
US$18 million per loan. In 1983, the number of loans increased to 243 for a
total of US$14.5 billion, at an average US$60 inillion per loan. 40/ As a
result of the Bank's lending expansion, it has been borrowing increasingly in
the open market. Meanwhile, these activities have coincided with the major
resource inflows to OPEC countries and the establishment of most of their
official aid agencies.
These same agencies saw in the cofinancing formula a useful vehicle
with which to overcome staffing limitations, that is, by quickly establishing
links with highly experienced institutions that could readily provide well-
studied projects. When they were faced with staffing limitations in their
formative years, some Arab/OPEC funds recruited senior staff on secondment
from the World Bank.
V. Relations with Developing Countries:Commercial Credit and Investment Institutions
Although aid has become a major activity of Arab financial
institutions in developing countries, other activities have also grown in
importance since the 1970s. Orders of magnitude of cumulative flows through
1984 suggest that aid constituted 49 percent of the total, syndicated loans 27
percent, bonds 7 percent and direct investments 17 percent (table 10).
- 59 -
Significantly, 83 percent of those flows were directed to developing
countries, especially in neighboring Arab countries.
Table 10 Selected Flows of Arab Financial Institutions,Cumulative through 1984 (in billions U.S. dollars)
To Developing To ArabActivity Total Flows Countries Countries
Concessionary Aid 73 73 53Syndicated Loans 41 31 18Bonds 11 5 3Direct Investments 24 16 14
TOTAL 149 125 88
Source: Text discussion and tables. Concessionary aid figuresrefer to Arab sources only.
Since 1977, Arab banks have become active in the market for
international loan syndication. One-fourth of these loans have been for
clients from OECD and socialist countries, and the remaining three-fourths for
clients from developing countries. During this time, Arab financial
institutions have begun to assume an increasing share of the total market for
loans and, in the process, some world-class Arab banks have begun to emerge.
Arab financial institutions have been active in public placements in
the bond market since 1974, but private placements started as early as 1968.
For several years, Kuwaiti banks took the lead by issuing Kuwaiti dinar-
denominated bonds. By 1982 more than 500 publicly and privately placed bond
- 60 -
issues were made, about half of which were Eor clients in developing
countries. However, most bonds issued by Arab barLks were denominated in U.S.
dollars, mainly because oil revenues were in U.S. dollars. Arab banks also
participated in issuing and managing bonds denominated in other OECD
currencies.
The global distribution of Arab direct investments shows a heavy
concentration in OECD and Arab nonoil economies. The share of other
developing countries in Arab direct investments has been in the range of 5-10
percent. Furthermore, government investments appear to have predominated over
private investments. Considerations of size tended to dictate the
organizational framework of new investment projects; larger projects were
generally carried out through multilateral arrangements, whereas smaller
projects were bilaterally organized. What is most significant is that Arab
investors are not different from investors anywhere in their concern for
security, return, and growth potential. This is equally true for private
individuals or agencies as for government investment institutions. Although,
inter-Arab direct investments and joint ventures cover a wide range of
projects and sectors, government institutions have focused more on petroleum
and mining projects, transport, agro-industries, and banking. Similarly,
private investors have wide-ranging interests, but they have tended to focus
on manufacturing, banking, and real estate development.
The Internationally Syndicated Loan Market
Arab banks have participated in loan syndication in two ways: through
consortium banks, which helped to transfer relevant know-how to the staff of
Arab banks, and on their own, without the assistance of European banks. Table
- 61 -
11 shows the volume of Eurocurrency credits syndicated by Arab banks
distributed over time by the geographic location of recipients.
The participation of Arab banks in syndicated Eurocurrency credits
rapidly expanded from about US$1 billion in 1977, to US$4 billion in 1980, and
US$10 billion in 1982, but it dropped to less than US$6 billion in 1984. On
the average, their annual lending rate during 1977-80 was about US$2 billion;
and during 1981-84 it was about US$8 billion. This shift in the level of
syndicated loans by Arab banks was mainly due to increased exports of Arab
capital following the second major oil price increase.
The geographical distribution of these syndicated loans during 1977-
84 as a whole shows that the share of Arab clients was about 44 percent,
Western Europe 18 percent, Latin America 13 percent, Asia 17 percent, and sub-
Saharan Africa less than 2 percent. The USSR and Eastern Europe also had
clients in the market for Eurocurrency loans syndicated by Arab banks; these
accounted for about 5 percent of the total. A regrouping of these ratios
shows that 76 percent of the Arab syndicated loans went clients in developing
countries. Even though a substantial portion of the loans went to clients in
the non-oil Arab countries, 56 percent of the total went to clients outside
the Arab region.
Significant as these figures are, they need to be placed in the
proper context of the Eurocurrency credit market. The volume of syndicated
loans in this market expanded quickly, from about US$42 billion in 1977 to a
peak of US$133 billion in 1981, fell to US$74 billion in 1983, but increased
to more than US$100 billion in 1984 (table 11). The international debt crisis
that preoccupied international finance and development circles in 1982 played
the decisive role in the substantial contraction of the Eurocurrency credit
Table 11 Regional Distribution Of Arab Banks in Syndicated Eurocurrency Credits, 1977-84
(US$ Millin and percentages)
1977 1978 1979 1980 1981 1982 1983 1984 Total 1977-84
Receiving Area US$ % US$ % US$ x us$ % US$ % US$ 7 US$ % us$ % US$
Arab Comtries 668 70.2 1,679 72.4 1,379 55.4 915 25.5 3,009 33.1 4,284 43.7 3,583 51.3 2,577 45.1 18,049 44.2
Western Europe 77 8.1 147 6.3 565 22.7 775 21.6 1,957 21.5 1,4% 15.3 1,527 21.9 951 16.6 7,495 18.3
USSR & East Europe - - 166 7.2 168 6.8 333 9.3 685 7.5 363 3.7 128 1.8 323 5.7 2,166 5.3
Latin Arer-ica 100 10.5 200 8.6 187 7.5 762 21.3 1,944 21.4 1,773 18.1 62 0.9 224 3.9 5,252 12.8
Asian Countries 67 7.1 95 4.1 192 7.7 627 17.5 1,237 13.6 1,626 16.6 1,486 21.3 1,513 26.5 6,843 16.7
Sub-Saharan Africa 26 2.8 - - - - 170 4.7 236 2.6 123 1.3 65 0.9 2 - 622 1.5
Others 13 1.3 33 1.4 - - - - 35 0.4 135 1.4 133 1.9 126 2.2 475 1.2
Arab Eurocurrency 951 100.0 2,320 100.0 2,491 100.0 3,582 10.0 9,103 IOC).0 9,80D 100.0 6,985 10D.0 5,716 100.0 40,948 100.0
LendingEurocurrency Market 41,800 70,200 82,800 77,400 133,400 84,900 74,200 100,70X! 665,400
x .,,A44
Arab Share (%) 2.4% 3.3% 3.0X 4.7Z 6.8% 11.5% 9.47 5.7% 6.2%
a/ Jan. - Nov. 1984 only.
Sources: Arab Eurocurrency lerding for 1977 to 1982 fran Mehran Nakhjavani, Arab Barks and the International Financial Markets, Middle East Econic Survey, 1983, Table 2.1,
p. 14; for 1983 and 1984 fran Middle East Eaxcanic Survey, 14 January 1985. Total Eurocurrency nmrket lending from Morgan Guarantee Trust Comarny, World Financial Markets
(New York, JamLiary 1985).
- 63 -
market. The average annual share of Arab banks in these flows jumped
significantly from 3.4 percent during 1977-80 to about 8 percent during 1981-
84. This jump was due to two developments that occurred at the same time: the
major expansion in capital exports by Arab financial institutions and the
increased use of syndicated Eurocurrency lending as a vehicle of capital
exports. Significantly, the time profile of Arab Eurocurrency lending
followed the general time profile of the syndicated Eurocurrency Loan market
as a whole. In fact, in 1981-84 Arab lending dropped by 37 percent, while
total market lending dropped by 25 percent. It should be noted, however, that
syndicated Eurocurrency lending is only one part of international lending. In
relation to total international lending, the lending of Arab banks would
account for a much smaller proportion of the total. 41/
Cultural and practical factors also play an important role in Arab-
syndicated Eurocurrency loans. Arab clients have a large share in these loans
because the lead managers of such loans are most familiar with the economic
and financial conditions of that part of the world. The share of European
clients is also substantial because many lead managers have European partners
who are familiar with European countries and the credit worthiness of the
customers.
The totals for 1977-84 as a whole mask some interesting annual
developments. For example, the share of the Arab clients fluctuated
significantly: from 70 percent in 1977 and 1978, to 25 percent in 1980, up to
55 percent in 1983, and down to 45 percent in 1984. They seem to have played
the role of "swing borrowers". The share of clients from the USSR and Eastern
Europe has declined. The share of Latin American clients increased quickly,
but then declined even faster after 1982, when the Latin American debt crisis
- 64 -
loomed large on the international horizon. The share of Asian clients picked
up significantly after 1979, from an average of 6 percent to an average of
about 19 percent, indicating both increased familiarity of Arab banks with
Asian clients, and expansion in Arab-Asian business ties.
The institutions responsible for the syndicated loans are numerous
and their shares vary widely as seen from a compilation of activities during
1979-83. Largest among these institutions are the Gulf International Bank
(GIB, US$4.8 billion) and the Arab Banking Corporation (ABC, US$4.6
billion). Above the US$2 billion level were the National Commercial Bank of
Saudi Arabia, the Arab Bank Group, the National 13ank of Kuwait, and the UBAF
group. In the US$1 to US$2 billion range were KFTCIC, the BAII Group, the
Saudi International Bank, and the Arab African International Bank.
Significantly, the 20 leading Arab banks accounled for about 88 percent of
total syndicated Eurocurrency loans during 1979-83, while the remaining 12
percent were handled by some 30 smaller banks. 42/
The customers of Arab-syndicated loans include corporations that are
among the largest and best-known throughout the world. The maturity structure
varies from one to ten years, and the size of the loan also varies, from US$3
to US$300 million. The number of loans concluded every year to non-Arab
borrowers is indicative of the tempo of business expansion: 2 loans in 1977,
7 loans in 1978 (the largest, US$70 million, to Yugoslav banks), 10 loans in
1979 (the largest, US$90 million, also to Yugoslav banks), 18 loans in 1980
(the largest, US$300 million, to Bank of China), 27 loans in 1981 (the
largest, US$260 million, to BANADE of Brazil), 24 loans in 1982 (the largest,
US$250 million, to the National Bank of Yugoslavia), and 8 loans in the first
half of 1983 (the largest, US$117.5 million, to Cia. Sevillana de Electricidad
- 65 -
of Spain). Although most of these loans were denominated in U.S. dollars,
some were in German deutschmark, Japanese yen, and French francs, among
others. 43/
Interestingly, Eurocurrency loan syndication, the most recent
activity of Arab banks, now accounts for a major portion of their cumulative
international financial flows (table 10). Loan syndication started modestly
in 1977, by which time Arab banks had already been engaged in bond issues
(worth a cumulative amount of US$1 billion) for about a decade, and in direct
investments (worth a cumulative US$5.5 billion) for even longer. Eurocurrency
loan syndication has appealed to Arab banks, particularly to newly established
banks, because it has enabled them to expand capital exports from Arab
countries but has not required specialized skills on the part of staff,
because European participants did provide such skills and know-how. For the
newly established Arab banks, eager to show significant results to their
constituencies in a short period, loan syndication was both an effective and
suitable formula. Euroloan syndication appears to have lost some of its
appeal, however, in that the market has contracted substantially since
reaching a peak in 1981.
The International Bond Market
Arab institutions participated in the international bond market for
the first time in 1968 with private placements for World Bank bonds,
denominated in Kuwaiti dinar. Betwen 1968 and 1973, they concluded six such
placements having a total equivalent value of about US$450 million. Most were
carried through the Kuwait Investment Company (KIC). In 1974 four bonds
denominated in Kuwaiti dinar were issued--one was issued privately by KIC to
the Asian Development Bank, and three were lead-managed public issues (one by
- 66 -
KIIC and two by KFTCIC) to public entities in the l?hilippines, Austria, and
Ireland. From that point on, the KD bond market expanded both in size and
coverage (table 12). In 1976, Arab institutions began to manage bonds
denominated in UAE dirham, Bahrini dinar, and Saudi riyal, among others. Then
in 1977 they started handling a few bonds denominated in U.S. dollars, but the
substantial expansion did not occur until 1980.
Between 1974 and 1982, Kuwaiti institutions placed 98 KD bond issues
totaling KD 694 million, or about US$2.5 billion. These together with the
1968-73 issues added up to 104 issues with a total value of about US$2.9
billion. Of these, 17 (valued at US$850 million) were private placements and
the remaining 87 were public placements. KIIC lead-managed the largest number
of bonds, equivalent in value to the combined issues of KIC and KFTCIC. The
"three K's" dominated the Kuwaiti dinar bond market, leaving only a handful of
bonds to be managed by other smaller investment banks.
The list of borrowers includes banks and public enterprises
throughout the world. The geographical distribution of the KD bonds publicly
issued to foreign entities showed a heavy concentration of borrowers in OECD
countries (25 bonds), followed by Latin America (14 bonds) and East Europe (13
bonds). Arab and Asian borrowers came next, with 10 and 9 bonds,
respectively. Only two bonds were made to African institutions--these were
issued to the African Development Bank in 1977. Thus, about half of the KD
bonds issued to foreign entities were for clients in developing countries, who
were judged like others, on the basis of their credit worthiness and ability
to repay principal and interest.
Arab banks (including Kuwaiti institutions) have been more involved
in lead-managing bonds denominated in other currencies, mostly in U.S. dollars
Table 12 Arab Banis In TIe Blx Market
Total ArabKD Bonds D Bon SR Bonds IH Bonds arrecy Bods US$ Bonds Otber londs Total
Year No. Mil. US$Eq. No. Mil. US$Eq. No. Mil. US$Eq. No. Mil. US$Eq. No. US%4il. No. US$Mil. No. US$iil. No. USjMl.
1968-73 6 130.0 450.0 - - - - - - - - 6 450.0 - - - - 6 450
1974 4 20.0 68.2 - - - - - - - - - 4 68.2 - - - - 4 68
1975 8 47.5 163.9 - - - - - - - - - 8 163.9 - - - - 8 164
1976 16 85.0 290.7 - - - - - - 1 100.0 25.3 17 316.0 - - - - 17 316
1977 10 46.0 160.5 3 40.0 101.2 3 285.0 80.7 1 150.0 38.5 17 380.9 n.a 150 - - n.a 531
1978 20 153.5 558.7 2 15.0 38.7 2 75.0 22.1 - 24 619.5 n.a 150 - - n.a 770 a
1979 19 148.0 535.8 - - - - - - - - - 19 535.8 22 169 11 35.9 52 741
1980 3 17.0 62.9 - - - - - - - - - 3 62.9 45 500 27 293.6 75 857
1981 10 124.0 445.2 - - - - - - - - - 10 445.2 111 931 36 299.6 157 1676
1982 8 53.0 185.5 - - - - - - - - - 8 185.5 94 1,325 26 107.8 128 1619
Total 104 824.0 2921.4 5 55.0 139.9 5 360.0 102.8 2 250.0 63.8 116 3,227.9 n.a 3,225 100 736.9 n.a 7192
n.a. Not available.
Source: Calaclated fran Nakhjavani, Arab Banks and the Internatianal Financial Markets, 1983, pp. 63-4. Caiersian of Arab currencies into US$ ws dom atexcdange rates prevailing at end of year shin. KD is Klmiti dinar, HD Bahraini dlnar, SR Saudi riyal, and EI Abu fhabi di*n. Total amal Arab currenrcy bondsshln bere differ fran Niahjavani's figure an p. 64.
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because, as already mentioned in the discussion of Euroloan syndication,
payments for oil are typically made in U.S. dollars. Other currency bonds
included issues in French francs, Dutch guilder, German deutschmark, Japanese
yen, Canadian dollars, and British sterling, among many others. Although Arab
banks were involved in managing international bond issues before 1979, that
year marked their first large-scale participation in bonds denominated in a
wide variety of currencies. The large inflows of Eunds following the second
major oil price increase must have emboldened the managing institutions and
boosted their confidence. Although the number and value of bonds issued by
Arab banks in the U.S. dollar sector before 1979 are not known, it is believed
that the total number of bonds issued by Arab banks in all sectors during
1968-82 must have been greater than 500; table 12 identifies 488 that exclude
bonds issued in the U.S. dollar sector in 1977 and 1978. The total value of
all bond issues was equivalent to US$7.2 billion, US$4.9 billion of which were
issued during 1979-82 alone. A total of 412 bonds were issued during this
subperiod, 66 percent of which were in the U.S. dollar sector. In value
terms, the U.S. dollar sector was 60 percent of the total during the 1974-82.
As table 10 has shown, Arab banks have been least active in managing
Eurobonds. The question is: Why? The reasons rest partly with the nature of
the Eurobond market and partly with the Arab banks themselves. Bonds are
inherently difficult to handle because of the complex structure needed to
manage them and the diverse skills required to man such structure, a task that
involves project evaluation, risk assessment and monitoring, legal
documentation, negotiation, disbursements and conditionality, connections for
placements, secondary markets, and so on. Nor has it been easy for new comers
like Arab banks to break into the international bond market, which up to now
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has been dominated by a closely-knit fraternity of underwriters. By and
large, Eurobonds have remained the coveted domain of a select group of finance
houses that pionered the instruments two decades ago and have since developed
lasting ties with the issuers, whether corporate or sovereign.
As newcomers, Arab financial intermediaries have become aware of the
need to develop both a risk-taking approach to the underwriting of new issues
and a wider circle of placements. The reluctance to take risks is
fundamentally due to the shortage of Arab investment bankers with enough
experience, high-level professionalism, and wide connections. The small
circle of securities clients has been the result of Arab banks limiting their
scope of placement to their home governments or to their own account.
However, judging by some partial evidence in 1985, it appars that this circle
has begun tc grow significantly by serving clients from the industrial
countries.
Furthermore, a significant potential exists for greater involvement
in the Eurobond market, primarily through Arab clients who have recently
entered, or might enter, the Eurobond market as borrowers. Arab institutions
that have entered the market include banks such as ABC, Al-Ahli of Kuwait,
FRAB, BAII, and National Commercial Bank of Jeddah; and sovereign entities
such as Morocco, Algeria, and Tunisia. Equally significant is the rapid
growth of the Eurobond market from US$55 billion in 1981 to US$100 billion in
1984/85 44/. This growth, which has coincided with the decline in the
syndicated Euroloan market mentioned above, reflects a global trend toward the
"securitization" of borrowings. Ultimately, if Arab banks are to become more
active participants in the Eurobond market and/or the lead-managers of
Eurobond issues for Arab borrowers, they must establish a more solid record of
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experience. Only in this way will they develop a greater degree of
professionalism, innovation, and placement ability. 45/
Direct Investments and Joint Ventures
Investment institutions have special significance because of the
magnified effects they create in host economies and the additional resources
they help mobilize in source countries beyond the confines of their original
size. Compared with the other forms of capital flows to developing countries
from Arab sources, direct investment flows appear to be sizable. Although
such flows are not easy to estimate it is instruc-ive to piece together the
available sketchy information. This makes it possible to at least identify
the major sources, consider their distribution among countries and sectors,
and examine the factors underlying the emerging patterns.
The first indication of the size of Arab clirect investments portrays
the situation in 1975. At that time, total Arab commitments for direct
investment ventures were estimated to be about U'S$5 billion, 23 percent of
which were in OECD countries and 77 percent in deveLoping countries, primarily
in the Arab region. Most of these investments came from Saudi Arabia (54
percent) and Kuwait (29 percent), and to a lesser extent from UAE (8 percent)
and Iraq (7 percent). 46/
The above figures should be treated with caution because they are
estimates of contractual commitments by investors in the oil countries and
have been compiled somewhat randomly from occasional announcements in two
specialized publications on the Middle East: Middle East Economic Digest
(MEED) and Middle East Economic Survey (MEES). Furthermore, it is highly
likely that actual direct investments made through 1975 were smaller than
these contractual commitments, especially if some of the expenditures went to
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new projects, where a lag of several years usually separates contractual
commitments from project completion. Therefore, the US$5 billion cited is
likely to be an exaggerated estimate of actual direct investment flows through
1975.
Several years later, Chase World Information Corporation published a
comprehensive account of direct investments made by Arabs both within and
outside the Arab region. Although the report limits discussion of investment
sources to Saudi Arabia, Kuwait, and UAE and of investment hosts to the United
States and United Kingdom, it does distinguish between government and private
investors. However, many of the investments in the United States and United
Kingdom are not given a monetary value. For example, the report lists 72
ventures as direct investments in the United States, but cites a monetary
value (adding up to less than US$600 million) for only 42. For the United
Kingdom, it cites 49 ventures but indicates the monetary value (adding up to
less than US$500 million) for only 11. 471 From the other sources of data, it
appears that combined Arab direct investments in the United States and United
Kingdom in the early 1980s were on the order of US$6 billion, and the rest of
OECD accounts for another US$3 billion. 48/ By contrast, Arab direct
investments in developing countries were overwhelmingly concentrated in the
Arab region, to the tune of some US$14 billion, 49/ which represents more than
85 percent of total Arab direct investments in developing countries, as will
be shown below.
Although estimates of direct private investments continue to be
tentative, those for government investments tend to be generally more reliable
because they are a matter of public record. As explained below, it was
possible to trace 57 governmental investment ventures in the Arab region; they
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had a total capitalized value of about US$9.6 billion. By contrast, 99
private or mixed (private/government) inter-Arab direct investment ventures
could be identified; their total value was US$2.5 billion. Only US$1.3
billion of this amount was contributed by private investors from the oil
countries. Another US$3.5 billion is conservatively estimated to be
unidentified inter-Arab private direct investments; this brings the total to
less than US$5 billion. The following discussion distinguishes between
government and private direct investments. It treats all Arab banks as a
special form of direct investment in developing countries.
(a) Inter-Arab Government Investments
Arab governments have made direct investments in the Arab region in
different ways. Some have channeled funds through multilateral investment
consortia to finance and promote the development af specific sectors or of
private enterprise in general. Examples are the consortia set up to finance
and promote investments in petroleum, mining, agribusiness, fisheries,
livestock, drugs, or medical appliance sectors (see annex A, table 1). One of
the institutions set up to promote the development of private enterprise is
the Arab Investment Company, which was modeled along the lines of the
International Finance Corporation, an affiliate oil the World Bank. Arab
governments have also participated in multilateral joint ventures directly
involved in specific sectors, such as industry, services, or banking and
finance. Aside from these multilateral institutions, Arab governments have
set up national or bilateral investment corporations (annex A, table 2) as
well as national/bilateral joint ventures in industry, services, or banking
and finance (annex A, table 3). The structure of (identified) inter-Arab
government direct investments is summarized in table 13.
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Table 13 Inter-Arab Governmental Direct Investments
Millions of Number ofU.S. dollars Enterprises
Investment Institutions:
Investment Consortia 2,096 7(multilateral)
Investment Corporataions 1,765 18(national/bilateral)
Subtotal 3,861 25
Joint Ventures:
MultilateralIndustry and Services 3,875 15Banking and Finance 1,407 7
National/BilateralIndustry and Services 215 2Banking and Finance 202 8
Subtotal 5,699 32
Total 9,560 57
Source: Annex A, tables 1, 2, 3.
Thus, Arab governments collectively or individually have put up
resources close to US$3.8 billion for specialized or general-purpose
investment institutions, and they have put up about US$5.7 billion to expand
the productive capacity in some key sectors in host Arab countries.
Investment institutions are usually instrumental in creating local enterprises
and thus in adding severalfold to their original size. Examples abound, three
of which may be cited from Lebanon, Egypt, and Sudan. The Kuwaiti-Lebanese
Intra Investment Company is a major shareholder of El Mashrek Bank, Port of
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Beirut, and Middle East Airlines. The Kuwait-Egypt Investment Company helped
establish several joint ventures in the manufacturing of shoes, building
materials, marble and granite, and plastic pipe, as well as in tourism and
hotels. The Sudanese-Kuwaiti Investment Company was instrumental in
establishing a number of joint ventures in building and construction, road
transport, and livestock production.
Table 13 also shows the dominant weight of multilateral institutions
(about two-thirds) in total government investments. Most of these
institutions were established shortly after 1973, in response to a new mood
and a peak of inter-Arab economic solidarity never experienced to the same
extent before or after. The rise of multilateral institutions during the mid-
1970s may have reflected in part the desire of other capital surplus
governments not to go through the same experience of learning by doing as
Kuwait had earlier. This suggestion can be supported on two grounds: (a) the
time lag necessary under the circumstances to develop successful international
investment institutions; and (b) the risk-sharing appeal of the multilateral
formula, especially if it brings along Kuwaiti experience and management
skills. The freezing of Egypt's membership in these organizations, following
the Camp David accords with Israel in 1979, shifted the location of some
multilateral institutions from Egypt to other countries (e.g., ACDIMA moved
from Cairo to Amman) and seriously disrupted the activity of others (the Gulf
Organization for Military Industries).
Eleven Arab states, both rich and poor, have hosted multilateral
institutions. Among the rich states, Bahrain has a hosted 5 such
institutions, Kuwait 2, Libya 2, Saudi Arabia 3, and UAE 1. Among the poor
states, Egypt has hosted 4, Jordan 4, Mauritania 1, Sudan 3, Syria 1, and
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North Yemen 1. In addition, ten Arab states have hosted national/bilateral
institutions. Among the rich, Kuwait has hosted 6, Oman 3, Saudi Arabia 1,
and UAE 2. Among the poor, Egypt has hosted 7, Jordan 2, Mauritania 1, Sudan
2, Syria 1, and Tunisia 2 (annex A, tables 1, 2, 3).
If these intergovernmental investments were made to capture a long-
term potential, they were not entirely set up on the basis of financial or
economic criteria. Although political considerations did play a role, both in
their establishment and the location of their headquarters, they were not the
dominant factor; rather, economics played the major role. If it was a mix of
politics and economics that guided inter-Arab government investments, a mix of
culture and economics appears to have motivated inter-Arab private
investments, as noted below.
(b) Inter-Arab Private Investments
Data were available for only 99 inter-Arab private investment
ventures (annex B). Their total value equals about US$2,510 million, of which
US$1,340 million was paid-in capital contribution by private investors in the
oil countries. Observers of direct investment ventures in the Arab region
believe that there must be several hundred inter-Arab private investment
ventures. 50/ If the identified investments are conservatively estimated to
represent about one-fourth of what actually exists, the total contribution of
private investments from the oil-exporting countries rises to about US$5
billion. The group of projects identified in the present study may thus be
construed as a sample, and possibly a biased sample, of inter-Arab private
direct investments. The bias will become clear as the analysis proceeds.
Whereas Kuwaiti private investors dominate inter-Arab direct
investments, investors from Saudi Arabia and UAE generally prefer multilateral
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formats, especially those led by Kuwaiti investors. According to the data,
private Kuwaiti participation is overwhelming. About 67 percent of the
identified joint ventures are exclusively owned or controlled by Kuwaiti
investors. In value terms, the dominance of Kuwaiti investors is even
greater, amounting to about 88 percent. This may in part be due to excess
liquidity in Kuwait and the ban imposed in the mid-1970s on registering
shareholding companies on the Kuwaiti stock exchange. The other ventures that
show exclusive or shared participation by private investors from Saudi Arabia
or UAE appear to be downwardly biased--they account for only 12 percent of the
total contribution of inter-Arab private direct investments.
Private direct investment ventures were identified in several Arab
countries: Bahrain (28.2 percent), Egypt (1.5 percent), Jordan (2.5 percent),
Lebanon (0.2 percent), Mauritania (0.7 percent), Morocco (2.5 percent), Oman
(0.1 percent), Saudi Arabia (0.6 percent), Somalia (0.4 percent), Sudan (4.7
percent), Tunisia (0.7 percent), UAE (56.2 percent), and North Yemen (1.6
percent) (see annex B). Thus, more than 50 percent of inter-Arab private
direct investments are located in one country, and more than 84 percent in
two.
Several factors explain the dominance of Bahrain and UAE as hosts to
private direct investments originating in sister oil states: geographic
proximity; a shared culture and tradition; access to excellent financial
services; conducive local business and social environment; and the absence of
restrictive legislation. Furthermore, as already indicated in Section III
above, Bahrain's oil reserves will be depleted in the not-too-distant future
and its policymakers are looking to Arab direct investments to diversify the
island's economic base and help it continue to grow. In the UAE, some of the
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emirates have no oil (Sharjah, Ajman, Ras al Khaimah) and depend almost
exclusively on nonoil activities for their livelihood. Nevertheless, it
appears that the relative weight of Bahrain and UAE among countries hosting
inter-Arab private direct investments is probably exaggerated, much as the
relative weight of other countries--such as Egypt, Lebanon, and Tunisia--is
downwardly biased.
Some Arab countries are notably absent from the host list, and others
that are themselves the source of large investments are included. Libya,
Syria, Algeria, and South Yemen do not appear on the compiled list of annex B
as hosts of inter-Arab private direct investments, even though it is commonly
known that Syria hosts sizable private investments from the Gulf states in the
real estate sector and that Libya and Syria host government investments. In
general, however, the socialist orientation, public policy, and legislation in
these countries may appear to be in conflict with private direct invest-
ments. By contrast, the liberal market orientation of Saudi Arabia and UAE
places them on the list, even though they are among the major sources of such
investments.
The frequency distribution of identified private direct investment
ventures by sector shows six significant clusterings. With respect to total
paid-in capital, the following relative sectoral weights were calculated:
real estate (12.4 percent); manufacturing (33.8 percent); banking, insurance,
and finance (35.3 percent); mining (6.7 percent); agribusiness (5.3 percent);
and services and other (6.4 percent) (see annex B). Whereas the dominance of
banking and finance was more or less expected, the relatively small share of
real estate and the relatively large share of manufacturing appear to be
somewhat surprising. Countries that are widely known to have major
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investments in the real estate sector--for example, Bahrain, Egypt, Jordan,
Lebanon, and Tunisia--do not show up in the talbulations. If real estate
investments had been properly traced, or investors had been willing to provide
more information, the relative share of the real estate sector would
undoubtedly have been adjusted upward, simultaneously reducing the relative
shares of all the other sectors.
The sectoral distribution of investments by country shows that
manufacturing and banking, followed by services, are the most common
activities to attract investors in almost all the countries. The same
distribution also shows that real estate is concentrated mainly in Morocco and
UAE, mining in Bahrain and Morocco, and agribusiness in Sudan and UAE.
Insofar as private investments are concerned, i't seems unusual to find no
agribusiness investment ventures in countries with a natural advantage, such
as Egypt, Jordan, Lebanon, Morocco, or Tunisia. The problem here is that
inter-Arab private investment ventures in general are difficult to trace, and
even when they are properly traced, they do not provide much information.
This spread of inter-Arab private investment activity needs to be
placed in the proper context of the Arab business environment. In most Arab
countries, direct investments face formidable barriers, particularly: (1)
inadequate infrastructure, including transportation, telecommunications, air
and sea ports, business support services, and so on; (2) widespread
bureaucratic red tape, especially in countries withi a social orientation, such
as Egypt, Sudan, Syria, even though the state policy is expressly "open door";
(3) currency restrictions in transferring investment profits to countries of
origin; and (4) a shortage of skilled staff for new investment ventures,
especially in management positions.
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Notwithstanding these barriers, inter-Arab direct investment
ventures, both government and private, have expanded and continue to expand.
Foremost among the factors inducing continued expansion are: (1) the
proximity and easy access to investment sources and investment hosts; (2)
investors' familiarity with the culture and language of the hosts, and vice
versa; (3) weak enforcement of income tax and other relevant business taxes;
and (4) the sizable returns on investments.
(c) Arab Petrocapital Banks in Developing Countries
Although most Arab direct investment ventures in developing countries
are located in the Arab region itself, some exist outside the region, most
notably in the banking and finance sector. The total number of inter-Arab
banking ventures within the Arab region itself is 79, but Arab banks in other
developing countries are not far behind with 60 (table 14).
Table 14 Arab Banks in Developing Countries
Branches/Repre- Joint VenturesRegion sentative Offices Commercial Investment Total
Arab 32 23 24 79Other Africa 9 6 - 15Other Asia 19 9 6 34Latin America 5 4 2 11
Total 65 42 32 139
Source: Calculated from Wohlers-Scharf, Arab and Islamic Banks, AnnexVIII, pp. 152-57.
- 80 -
Countries that host Arab petrodollar banks, both commercial (C) and
investment (I), in the Arab region are as follows: Djibouti (1C); Egypt
(14C/9I); Jordan (8C/31); Lebanon (14C/2I); Mauritania (2C); Morocco (lC/lI);
Oman (8C); Somalia (1C); Sudan (3C/3I); and Tunisia (3C/6I). In Africa, Arab
banks are only commercial. The following countries have one bank each: Chad,
Gabon, Ghana, Ivory Coast, Kenya, Liberia, Mauritius, Niger, Nigeria, Senegal,
Seychelles, Sierra Leone, Swaziland, Togo, and Uganda. In Asia, the following
countries host Arab petrocapital banks: Bangladesh (IC); Hong Kong (10C);
India (3C/MI); Indonesia (IC); South Korea (4C); Malaysia (2I); Pakistan
M5C/3M); Singapore (IC); and Sri Lanka (3C). Finally, in Latin America the
host countries are: Brazil (2CM2M); Colombia (1C); Panama (4C); Peru (1C); and
Venezuela (1C).
The commercial banks--whether branches, representative offices, or
joint ventures--are engaged mainly in financing trade flows, either within the
Arab region, or between the Arab region and other countries. These include
petroleum exports from the Arab countries to the rest of developing countries
and exports from those countries to the rapidly expanding Arab markets. In
some cases, commercial banks channel the savings of hundreds of thousands of
workers to their countries of origin, primarily Egypt, Jordan, Yemen, Turkey,
Bangladesh, India, South Korea, Malaysia, Pakistan, and Sri Lanka.
The joint venture Arab investment banks in developing countries
outside the Arab region are comrised of six in Asia and two in Latin
America. These banks have been active "advance posts" for Arab petrocapital,
canvassing the local scenes for attractive investment opportunities in a wide
variety of sectors. They have mobilized resources not only in the host
countries, but also in countries of origin, ;ometimes from sources not
directly involved with parent institutions.
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VI. Future Prospects
This paper concludes with an assessment of the future prospects of
Arab financial institutions in developing countries. The activities of these
institutions during the 1970s and early 1980s were shaped largely by
continuously increasing oil revenues and the associated capital surplus. How
the recent decline in oil revenues and the drawdown of the surplus will affect
these activities in the remainder of 1980s and in the 1990s remains to be
seen.
The first point to note is that oil prices during the 1980s are more
likely to be determined by the free interplay of supply and demand in the
international oil market. By 1985, this market was showing considerable
softening and oil prices were drifting downwards. The associated high supply
elasticity in most OPEC members was caused by idle oil production capacity.
Future increases in oil revenues for the individual oil exporters, if any,
will thus come from increases in the quantity of exported oil.
The drop in OPEC oil revenues since 1981 has been associated with
various changes in government expenditures, which have hitherto been the
engine of growth in member countries. Although government current
expenditures have declined somewhat in Saudi Arabia, Qatar, and UAE, they have
continued to expand at modest rates in Kuwait. By contrast, government
investment or development expenditures have declined substantially below their
1981 peak levels, for example, in the UAE by 35 percent and in Saudi Arabia by
37 percent. 51/ All these countries have introduced fiscal discipline after
years of accelerating expansion. At the same time, a recession of major
proportions has begun to develop and has already reduced private incomes and
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expenditures. During the remainder of the 1980s, however, government
expenditures in nearly all OPEC countries are expected to increase owing to
demographic expansion.
In the face of these trends if OPEC oil revenues decline or cease to
increase, OPEC governments will incur budgetary deficits which must be
financed through either external borrowing or drawdown of reserves and
investments abroad. In the latter, maintenance of the principal sums is
possible only if the size of budgetary deficits is limited to the income
generated from financial placements and investments abroad, estimated roughly
at about US$6 billions for Kuwait, US$2 billions for Libya, US$1 billion for
Qatar, US$12 billions for Saudi Arabia, and US$3 billions for UAE. Some of
these countries may have to dip into the principal of their investments, as
was indeed the case in Saudi Arabia during 1983-84 and 1984-85. 52/ Other
OPEC members have already gone beyond their accumulated surpluses: Algeria,
Ecuador, Indonesia, Iraq, Iran, and Nigeria have even accumulated large
debts. The accumulated surplus attained in 1981 was not only a historical
peak for OPEC collectively, but also a peak for most individual member
countries, who started their withdrawals shortly thereafter.
As a result, Arab/OPEC aid has declined steadily since that time.
Although aid disbursements in 1984 were less than one half of their 1980 peak
level, their ratio to GNP in the relevant donor countries continued to exceed
2 percent, which is several times the ratio associated with other sources of
concessional assistance (OECD, CMEA). During the rest of the 1980s, total
Arab/OPEC aid, especially from bilateral sources, may decline further because
the donor countries will most likely continue to bea squeezed by stagnant or
declining oil revenues and rising government exp,snditures. However, the
smaller portion of aid flows managed by Arab/OPEC development funds for
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project financing or program loans may not decline markedly. Recent
statements suggests that the disbursements of some funds may stabilize or
possibly increase somewhat through 1990.
Aside from aid, the present financial crisis in a number of OPEC
countries may tend to cast a shadow on or exagerate the potential damage for
commercial and investment prospects of Arab financial institutions, especially
in regard to their activities in developing countries. For this reason, it is
necessary to assess the business opportunities and challenges which are likely
to face Arab financial institutions during the next few years.
The rapid expansion in the trade flows of OPEC countries boosted the
profits of Arab banks active in trade financing and encouraged those banks to
establish a major presence beyond their national borders (see section III).
In 1971 the imports of OPEC countries totaled about US$11 billion and exports
about US$21 billion. By 1983, these figures had risen to US$139 billion and
US$193 billion, respectively. A decline in the volume of this trade due to
diminished economic activity in the trading countries--such as the one that
has been taking place since the early 1980s--is unlikely to continue
indefinitely into the future. Financing of import trade is likely to
stabilize in the near term to the tune of US$120 billion per year--a sizable
figure by any standard.
The trade flows between OPEC countries and developing countries also
grew rapidly between 1971 and 1983: Imports rose from US$1.2 billion to about
US$27 billion, and exports from US$3.5 billion to US$57 billion. 531 This
expansion was at least partly responsible for the rapid growth of Arab banks
in developing countries. Significantly, the recent contraction in the total
trade flows of OPEC countries was accompanied by a less proportionate
contraction in their trade with developing countries. It is unclear, however,
- 84 -
whether this outcome was the result of conscious decisions by the trading
partners.
The prospects for international activities of Arab banks, both in
medium- and long-term financial and direct investments, appear to be uneven.
Institutions participating in Euroloan syndication or Eurobond management are
facing a more difficult and uncertain environment than they did during the
affluent years. The international debt crisis, which is looming greater than
ever, has already caused substantial shrinkage ir the syndicated Euroloan
market from 1981 to 1983, the period in which Arab banks increased their share
in that market. Compared to other banks, however, Arab banks have financed
only a small portion of Latin American debts. Although there are some signs
that the syndicated Euroloan market may be revived, Arab banks are reluctant
to participate fully, especially now that oil revenues and investable
surpluses have declined. At the same time, to the extent that the total demand
for medium-term and long-term credit by developed and developing countries is
continuing to grow, the Eurobond market has expanded significantly. This has
been in part a response to the shrinkage in Euroloan syndications and in part
an effort to spread risks by transforming borrowing into securities. During
1983-85 Arab banks have expanded their participation in the Eurobond market.
The prospects for further expansion in the Eurobond market will largely depend
on the present efforts of Arab banks to improve their management and technical
staff, as well as expand their connections and placement capabilities. Their
natural market "niche" is with sovereign and corporate clients from developing
countries in general, and Arab countries in particular.
The relevant question is how can Arab bankLs expand their activities
in the Eurobond market after oil revenues have declined so seriously. The
answer resides in their high capitalization by international standards. The
- 85 -
ratio of equity plus reserves to assets in most Arab banks exceeds 15 percent,
whereas it is only 3-7 percent for most international bank. 54/
It is this factor which will give Arab banks room for further growth of their
international operations despite the decline in oil revenues.
Prospects of Arab direct investments are mixed. Within the Arab
region, intergovernment investments have performed unevenly. Despite success
stories such as the Sumed pipeline, the Arab Mining Company, some Tunisian
investments, Jordanian joint ventures, and Egyptian real estate investments,
most others are doing poorly. The performance of Arab financial and
industrial investments in Egypt and Sudan, for example, has been severely
handicapped by the bureaucracy, inconsistent macro management, and
restrictions on banks and currency transfers. In addition, the dramatic
devaluations of national currencies in Egypt, Sudan, and Morocco have
adversely affected the profitability of Arab investments in terms of hard
currency. In North Yemen, the government considers international investments
another form of external assistance. For all these reasons, most inter-Arab
investment institutions have had to reassess their operations in the last few
years. Their growth prospects for the near future are rather questionable.
By contrast, private direct investments have been growing steadily.
They are most likely to continue on this course, which has already started to
dominate Arab investment flows. Most of this private capital comes from the
cumulative profits of the affluent years that have moved out of the Gulf
region in the wake of the recession, the Iran-Iraq war, and the Manakh
fallout. These movements have been initiated primarily by wealthy individuals
who either have empires of their own, or who have set up elite investment
clubs comprising a few families each. 55/ Future growth will therefore most
likely come from the less wealthy but more numerous individuals and families
- 86 -
throughout the Gulf region. Left to their own initiative, those private
capital movements will tend to gravitate toward developing countries with
which investors have special family, ethnic, or cultural ties. For the most
part, managing such investments is a family affair. Tapped into formal
institutions, the geographic allocation of private investments tends to follow
more objective criteria reminiscent of Kuwaiti investment banks in their
formative years. Typically, private direct investments in such cases are made
and monitored by professional managers. Both i-amily and professionally
managed international private direct investments are likely to continue their
growth into the future.
Islamic banks, in addition to facing the risks and difficulties that
all banks must cope with to succeed, have the added challenge of figuring out
how to handle the question of interest and its compounding. Much has been
accomplished in a short period: The domain of Islam;ic banking has been agreed
upon between sources of funds and users of funds; financial instruments have
been created and have produced reasonable results; and Islamic banks have been
accepted by the finance industry because they have expanded their market
without adversely affecting the markets of conventional banking. However, in
a world of growing financial interdependence, more aLnd more Islamic banks face
the challenge of having to conduct business with institutions whose very modus
operandi revolves around receiving and paying interest.
Until Islamic banks can create an alternative self-contained universe
of their own that would perpetually shield them from interaction with
conventional banks in interest-bearing transactions, their difficulties will
continue. Their relatively small size makes that possibility rather remote.
However, it should also be recognized that the potential of Islamic banks to
mobilize funds from clients who strictly adhere to the principles of Islam is
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not minimal, and remains to be realized on a scale larger than has hitherto
been attempted. Although the financial system in most Moslem countries does
not operate in the same way as Islamic banks do, Moslem communities throughout
the world--estimated to be in excess of 750 million--are becoming increasingly
interested in the notion of Islamic banks. To the extent that some sectors of
Moslem communities were not using the modern banking system because they did
not accept the notion of Riba, Islamic banks will be in a position to mobilize
the savings in such communities. In the final analysis, Islamic banks will
most likely complement the services of conventional banks, but will not
provide an alternative.
The prospects for Arab centers of finance are also uncertain. The
recent financial shakeout in both Kuwait and Bharain has diminished their
status as centers for exporting Arab capital. In Kuwait, recently adopted
strict monetary discipline is forcing bank mergers, while in Bharain the
decline in capital flows is forcing the departure of some offshore banking
units. When the crisis is over, banking institutions in the two countries
will have become more attuned to the fickle conditions of financial markets.
Their activities in developing countries will no doubt be based on more
methodical assessments of profitability.
With proper policy reforms, the relative position of Cairo may be
strengthened owing to the financial developments that have been unfolding in
Egypt during the last few years. Among other factors, the substantial
remittances of Egyptian workers have caused changes both in local financial
institutions and in the philosophy of mananging such funds.56/ Contrary to
popular misconceptions, the size of the labor markets in the oil countries has
not declined since 1980, and there is increasing evidence, at least from Saudi
Arabia and Kuwait, that the expatriate workforce may not fall drastically in
- 88 -
the next few years. If, as seems likely, workers' remittances do not decline
significantly, further changes may take place in Egypt's financial management
and, by implication, in its position as an emerging center of Arab finance.
Now that Arab financial institutions have established a presence in
international financial/development circles and have gained experience in
transferring substantial amounts of resources to developing countries, they
can expect other challenges in the future. The greatest of these challenges
for some will be to survive the vagaries of the international financial
environment, which has changed significantly since the debt crisis broke out
in 1982, leaving financial intermediaries on shakier ground than ever before
and the economies of developing countries more vulnerable. At the same time,
the decline in oil revenues has diminished the natural advantage that many
Arab banks have relied upon to enter the international markets, namely their
ready access to exports of Arab capital. Yet, accompanying such challenges
are opportunities for growth and consolidation. These could be captured if
Arab banks tackled creatively the difficult but necessary tasks of building
their staff capabilities, expanding their investmenl: functions, and extending
their placement contacts. Unimaginative managers will face the most difficult
times ahead.
- 89 -
Annex A
Government Investments
- 91 -
Table Al Multilateral Arab Government Investment Consortia
Year AuthorizedInvestment Consortium Established Location Capital
(US$ millions)
Arab Investment Company (TAIC) 1974 Riyadh 291Arab Petroleum InvestmentCorporation (APICORP) 1975 Dhahran 360
Arab Mining Company (ARMICO) 1976 Amman 438Arab Authority for AgriculturalInvestment and Development (AAAID) 1977 Khartoum 547
Arab Company for Fisheries Jeddah 21Arab Company for Livestock Development 1974 Damascus 219Arab Company for Drug Industries a/and Medical Appliances (ACDIMA) 1976 Cairo/Amman a 220
TOTAL 2,096
a/ Location of ACDIMA shifted from Cairo to Amman in 1979, following theEgyptian-Israeli accords.
Sources: Personal communications with secretariat of League of ArabStates; M. Abdel Fadil, Alnaft wal Wihda Alarabia, annex tables; and JohnLaw, Arab Investors, vol. II, ch. 3.
- 92 -
Table A2 Arab Government Investment Corporations(National and Bilateral)
Capital GovernmentYear Authorized Share
Corporation Established Location (US$ million) (percent)
KFTCIC 1965 Kuwait 100.0 80Kuwait-Egyptian InvestmentCompany (KEIC) 1974 Cairo 25.0 100
Sudanese-Kuwaiti InvestmentCompany (SKIC) 1972 Kuwait 7.5 100
Kuwait Real Estate InvestmentConsortium (KREIC) 1975 Kuwait 110.0 80
Kuwait Investment Company (KIC) 1961 Kuwait 76.0 50Industrial Bank of Kuwait (IBK) 1974 Kuwait 36.5 49Kuwait International PetroleumInvestment Company (KIPIC) 1981 Kuwait 365.0 70
Kuwait Finance House (KFH) 1978 Kuwait 36.0 49Saudi-Egyptian ReconstructionCompany 1975 Cairo 50.0
Saudi-Egyptian Company forInvestment and Finance 1974 Cairo 200.0
Syrian-Saudi Company for Indus-trial and Agricultural Invest. 1976 Damascus 50.0 100
Saudi-Tunisian Investment Company Tuni.s 250.0 100Saudi International bank (SIB) 1975 London 54.0 50Abu Dhabi Investment Authority(ADIA) Abu Dhabi 200.0 100
Abu Dhabi Investment Company (ADIC) 1977 Abu Dhabi 50.0Joint Arab Investment Corporation 1975 Cairo 50.0Emirates and Sudan InvestmentCompany (ESIC) Khartoum 105.0 100
1,765.0Saudi Arabian Basic IndustriesCorporation (SABIC) Riyadh 3,000.0
Sources: Personal communications with secretariat of League of Arab States;M. Abdel Fadil, Alnaft wal Wihda Alarabia, annex tables; John Law, ArabInvestors, vol. II, Chapters 1 and 2; Traute Wohlers-Scharf, Arab and IslamicBanks Annexes X and XII.
- 93 -
Table A3 Arab Multilateral Government Joint Ventures
CapitalYear Authorized
Company Established Location (US$ million)
(A. Industry and Services)
Arab Maritime PetroleumTransport Company 1973 Kuwait 500
Arab Shipbuilding andRepair Yard Company (ASRY) 1974 Bahrain 340
Arab Petroleum Services Company 1977 Libya 338United Arab Shipping Company Kuwait 995Arab Potash Company Jordan 194Gulf Petrochemicals Industries Bahrain 179Arab Petroleum Pipeline Company(SUMED) 1973 Alexandria 400
Arab Company for EngineeringDesign 1981 Abu Dhabi 20
Arab Drilling and WorkoverCompany Libya 41
Qalb Iron Ore Mines Mauritania 182Arab Hotels Company North Yemen 25Jordanian Fertilizer IndustriesCompany Amman 135
Kenana Sugar Company Sudan 412Syrian-Arab Company for Hotelsand Tourism Damascus 8
Gulf Aluminum Rolling Mill Company Bahrain 1063,875
(B. Banking, Insurance, and Finance)
Year Capital in $mil. 1983Corporation Estab. Location Authorized Paid in Assets
Gulf International Bank (GIB) 1975 Bahrain 500 265 7,400Arab Banking Corporation (ABC) 1980 Bahrain 1,000 745 8,800Arab African InternationalBank (AAIB) 1964 Cairo 100 4,400
Arab International Bank (AIB) 1971 Cairo 100 2,000Arab Jordanian Investment Bank 1978 Amman 15 600UBAF group 1970 Paris 112 11,200CAII 1973 Luxembourg 70 70 3,300
1,407
Source: John Law, Arab Invstors vol. II; Part A from Chapter 5 and Appendix 6,pp. 201-218; and Part B from Chapter 4. Estimates of 1983 assets arefrom The Banker, June 1984.
- 95 -
Anrex B
Inter-Arab Private Direct Investments(Paid-in Capital, US$ million, as of 1981)
Barkirg ServicesInvest. Real Est. Mwiff. Fin/Ins. Mining Agribus and Others Total
Host Source No. $ No. $ No. $ No. $ No. $ No. $ No. $
Bahrain SA - - - - 1 8.5 - - - - - - 1 8.5Kt - - 1 85.0 7 166.1 1 75.0 - - 3 38.8 12 364.9mlti - - 1 4.4 - - - - - - - - 1 4.4Sub-total - - 2 89.4 8 174.6 1 75.0 - - 3 38.8 14 377.8
Egypt Kt - - 2 7.9 2 3.5 - - - - - - 4 11.4UAE - - - - 1 0.5 - - - - - - 1 0.5Kalti - - 1 1.8 3 6.6 - - - - - - 4 8.4Sub-total - - 3 9.7 6 10.6 - - - - - - 9 20.3
Jordan Kt - - - - 3 10.9 - - - - - - 3 '0.9Multi - - 2 10.7 2 5.8 - - - - 1 5.7 5 22.2Sub-total - - 2 10.7 5 16.7 - - - - 1 5.7 8 33.1
Lebanon Kt - - - - 1 3.0 - - - - - - 1 3.0
Mauritania Kt - - 1 10.0 - - - - - - - - 1 10.0
Mbrocco Kt 6 6.4 4 2.2 - - 2 0.9 - - 4 1.5 16 11.0Kaiiti - - 4 15.1 1 0.7 1 7.2 - - - - 6 23.0Sub-total 6 6.4 8 17.3 1 0.7 3 8.1 - - 4 1.5 22 34.0
Saudi Klti 1 8.6 - - - - - - - - - - 1 8.6Arabia
Snalia Multi - - - - - - 1 5.0 - - - - 1 5.0
Suda Kt - - 1 2.5 - - - - 1 2.2 1 1.0 3 5.7Mutli - - 1 13.8 - - - - 3 43.4 - - 4 57.2Sub-total - - 2 16.3 - - - - 4 45.6 1 1.0 7 62.9
Trnisia Kt - - - - 3 2.3 - - - - - - 3 2.3Multi - - 2 3.5 1 0.7 - - - - 1 2.5 4 6.7Sub-total - - 2 3.5 4 3.0 - - - - 1 2.5 7 9.0
Omn Kt - - - - 1 1.4 - - - - - - 1 1.4
UAE Kt 4 135.7 7 296.5 7 260.6 - - 2 24.5 2 35.5 22 752.8
Yeen, N. Kt - - - - 1 2.2 - - - - - - 1 2.2mlti 1 16.0 - - - - 1 1.5 1 1.5 1 0.6 4 19.6Sub-total 1 16.0 - - 1 2.2 1 1.5 1 1.5 1 0.6 5 21.8
Totals SAL - - - - 1 8.5 - - - - - - 1 8.5Kt 10 142.1 16 404.1 25 450.0 3 75.9 3 26.7 10 76.8 67 1,175.6UAE - - - - 1 0.5 - - - - - - 1 0.5Multi 2 24.6 11 49.3 7 13.8 3 13.7 4 44.9 3 8.8 30 155.1Total 12 166.7 27 453.4 34 472.8 6 89.6 7 71.6 13 85.6 99 1,339.7
Note: Fiixes show paid-in capital, millions US dollars equivalent, in private or dixed joint ventures.
Soarce: Cbmputed from Jdm Law, Arab Investors, vol. II, pp. 135-180, and Appenidices 6 and 7.
- 97 -
Footnotes
1/ "Oil Exporters' Surpluses and Their Deployment," Bank of EnglandQuarterly Bulletin (March 1985).
2/ The term "low absorbers" refers to Kuwait, Libya, Qatar, SaudiArabia, and United Arab Emirates (UAE), while the term "highabsorbers" refers to the remaining OPEC members.
3/ Richard P. Mattione, OPEC's Investments and the InternationalFinancial System, Washington, D.C.: 1985, Brookings Institution,table 2-4, p.11.
4/ Based on several sources, including, Mattione, OPEC's Investments.Table 2.5; U.S. Department of Treasury, Treasury Bulletin (Summer1984); U.S. Department of Labor, Survey of Current Business (March1984); Bank of England, Quarterly Bulletin, 1984 and 1985 issues; andestimates for direct investments, based partly on section V of thisstudy. Given the nature of data reporting, some direct investmentsin industrial countries continue to be erroneously classified asinvestments in securities, which producers a downwardly biasedestimate of direct investments.
5/ See note 4.
6/ Ragaei El-Mallakh, Economic Development and Regional Cooperation:Kuwait (Chicago: Chicago University Press, 1968), pp. 10-12.
7/ M. W. Khouja and P. G. Sadler, The Economy of Kuwait (London:Macmillan, 1979), pp. 9-14.
8/ Import trade data are from International Financial Statistics,annual, and imports from developing countries from Kuwait's CentralStatistical Office, Annual Statistical Abstract. Figures on workersremittances are estimates based on Kuwait's balance of paymentsstatistics and fragmentary data on wage rate, employment, and savingsof non-Kuwaitis from family budget studies, also reported in theAnnual Statistical Abstract. Private sector investments areestimates based on three sources: El Mallakh, Economic Development,p. 83, Khouja and Sadler, The Economy of Kuwait, pp. 190-208, andFakhri Shehab, "Kuwait: A Super-Affluent Society," Foreign Affairs(April 1964), pp. 461-74.
9/ OECD, Aid from OPEC Countries (Paris, 1983), p. 46.
10/ Kuwait Fund annual reports.
11/ KIC Annual Reports.
- 98 -
12/ KFTCIC annual reports.
13/ Estimate based on fragmented information about the use of oilrevenues during the 1950s and 1960s from l:wo sources: El Mallakh,Economic Development, and State of Kuwait, Central StatisticalOffice, Annual Statistical Abstract, several, issues.
14/ Arab African Bank, annual reports.
15/ The role of Abdel Latif Al Hamad was significant. He was theDirector-General of Kuwait Fund, the Managing Director of KIC, andthe Chairman of UBK and BAII.
16/ Ibrahim F. I. Shihata, The Other Face of OPEC (New York: Longman,1982), especially Chapters 5 and 13.
17/ Geoffrey Jones "Banking in the Gulf before 1960", London School ofEconomics, 1985 (Mimeographed).
18/ El Mallakh, Saudi Arabia Rush to Development, Baltimore, Md.: JohnsHopkins University Press, 1982), p. 300.
19/ Traute Wohlers-Scharf, Arab and Islamic Banks (Paris: 1983) OECD,p. 19, and Annex I.
20/ Mehran Nakhjavani, "The Role of Arab Banks in the Euromarkets,' ArabBanking and Finance Handbook (Manama, Bahrain: Falcon Publishing,1983), pp. 17-22.
21/ Barun Roy, "Arab-Asian Banking Ties Grow," Arab Banking and FinanceHandbook (Manama, Bahrain: Falcon Publishing, 1983), pp. 29-35.
22/ Rodney Wilson, Banking and Finance in the Arab Middle East (New York:St. Martin's Press, 1983), pp. 99-123.
23/ Bahrain Monetary Agency, Annual Report, 1983.
24/ Wilson, Banking and Finance, pp. 112.
25/ Alan E. Moore, "Bahrain's Offshore Banking Units," Arab Banking andFinance Handbook (Manama, Bahrain: Falcon Publishing, 1983)pp. 89-94.
26/ See for example The Financial Times, July 22, 1985.
27/ Curiously, a 1984 list complied by the Banker showed Arab banks inLondon to have been only 32 banks. Obviously, the variance is due todiffering definitions of what separates a bank from other financialinstitutions. See The Banker, November 1984.
28/ Financial Times, October 3, 1983.
- 99 -
29/ Wohlers-Scharf, Arab and Islamic Banks, pp. 74-100.
30/ Euromoney August 1984, pp. 170-172.
31/ M. N. Siddiqi, Banking Without Interest, (Leicester: IslamicFoundation, 1983); and Wohlers-Scharf, Arab and Islamic Banks, pp.74-95.
32/ Naiem A. Sherbiny, Oil and the Internationalization of Arab Banks,(Oxford, 1985), Oxford Institute for Energy Studies, F6, pp. 45-47.
33/ Euromoney, August 1984, pp. 170-172; and March 1985, pp. 133-136.
34/ Based on IMF, International Financial Statistics, 1984 Yearbook, andThe World Development Report, 1985, Statistical annexes.
35/ Because of the lack of detailed data and/or the different nature andterms of flows, some OPEC institutions are not shown in table 5. Twoof the bilateral institutions are omitted: the Libyan Arab ForeignBank, and the Organization for Investment, Economic and TechnicalAssistance of Iran (Iran Organization). Three multilateralinstitutions are not shown: the Arab Fund for Technical Assistanceto African and Arab Countries (AFTAAAC), the Arab Gulf Program forUnited Nations Development Organizations (AGFUND), and the IslamicSolidarity Fund (ISF). Information on these institutions may beobtained from three sources: the OPEC Fund, OPEC Aid and OPEC AidInstitutions--A Profile, No. 4 (Vienna, 1985); OECD, Aid From OPECCountries (Paris, 1983); and UNCTAD, Financial Solidarity forDevelopment, 1973-1981 Review (New York, 1984).
37/ OPEC Fund, OPEC Aid and OPEC Aid Institutions - A Profile, No.4.
38/ For a detailed discussion of these and other points, See Ibrahim F.I.Shihata and Naiem A. Sherbiny, "The OPEC Aid Phenomenon inPerspective" OPEC Fund, Pamphlet Series (forthcoming).
39/ Figures for the OPEC Fund are related to its loan operations and donot include contributions to other international agencies made by theFund on behalf of its members or other grants.
40/ Figures combine IBRD loans and IDA credits, computed from the WorldBank, Annual Report, several issues.
41/ Alexander E. Fleming, "Survey of Origin and Development of ArabBanks," IMF Survey (Washington, D.C., February 8, 1982).
42/ Calculated from Naiem A. Sherbiny, Oil and the Internationalizationof Arab Banks, Annex, table A-2.
- 100 -
43 Mehran Nakhjavani, Arab Banks and the International FinancialMarkets, Middle East Economic Survey (Cyprus, 1983), pp. 25-27.
44/ "Survey of Arab Banking" The Financial Times, Oct. 14, 1985, p. 2.
45/ Hikmat S. Nashashibi, "Arab Involvement in the Eurobond Market"Euromoney Seminar, March 1985, London.
46/ Ragaei El Mallakh, Mihssen Kadhim, Barry Poulson, Capital Investmentin the Middle East (New York: Praeger, 1977), table 4.11, p. 89.
47/ John Law, Arab Investors: Who they Are, What they Buy, and Where(New York: Chase World Information Corporation, 1981). Figures usedare calculated from appendixes 7 and 8 of vol. 1.
48/ Mattione (1985), OPEC's Investment, tables 2-5 and 2-9; Bank ofEngland, Quarterly Bulletin, March 1985.
49/ Compare with the $40 billion estimate of total joint Arab projectsmade by the Financial Times, October 3, 1983, for combined privateand government investments.
50/ See MEED and MEES various issues, 1982-84.
51/ As computed from budget statistics occasionally published in MEES,various 1985 issues.
52/ Kingdom of Saudi Arabia, Government Budget, 1403/1404 A.H. and1404/1405 A.H.
53/ Calculated from IMF, Direction of Trade, several issues.
54/ Address by Sheikh Ali Khalifa Al Sabah in September 1984 to the ArabBankers Association in London, as reported in Middle East EconomicSurvey, 24 September 1984.
55/ The Financial Times, October 3, 1983.
56/ The Egyptian government recently established the "Egyptians AbroadInvestment Company" with an authorized capital of $100 million tomobilize workers' remittances into local project financing.
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