Cablegate: Bahrain Central Bank Criticized for Financial

DE RUEHMK #0668/01 3281221
P 241221Z NOV 09

C O N F I D E N T I A L SECTION 01 OF 02 MANAMA 000668


E.O. 12958: DECL: 11/24/2019


Classified By: Ambassador Adam Ereli for reasons 1.4 (b) and (d).

1.(C) Summary: Leading bankers and economists in Bahrain have criticized the Central Bank of Bahrain (CBB) for failing to adequately protect and regulate the financial markets over the past several years, and then reacting in ways that exacerbated the resulting problems. An increasing number have laid the blame squarely at the feet of CBB Governor Rasheed Maraj, who they say has historically acted too hesitantly and when he finally took strong action, was undercut by the King. Despite this, there is no evidence of a loss of confidence in Maraj within the government. End Summary.

2.(SBU) The Bahrain Economic Society, together with local bankers and economists, blamed the CBB for failing to detect and prevent banks' overexposure to risk in real estate markets. University of Bahrain Economics Professor Dr. Ahmed Al Jami said that the Islamic banking sector had the most exposure to real estate losses, and predicted that there would be larger losses announced soon. (Note: In the first three quarters of 2009 Gulf Finance House posted losses exceeding $92 million, and Ithmaar Bank posted losses of $84 million--both are Islamic banks with significant real estate holdings. End Note.)

3.(C) In August 2008, before Bahraini banks had reported significant impact from the international financial crisis, Governor Maraj told econoff that all banks in Bahrain, including the Islamic sector, were Basel II compliant and there was minimal need to worry about their capital adequacy, despite widespread public misgivings about the amount of real estate that many banks kept on their balance sheets. (Some banks such as Ithmaar Bank and Abu Dhabi Investment House held more than 50% of total assets in real estate.) On August 1, 2009, Maraj circulated an order to banks to diversify their portfolios and bring real estate holdings down to no more than 30% of their portfolios. Bankers and economic observers soon went public with their displeasure at the order. (Note: Maraj has publically encouraged banks to diversify away from real estate since at least 2007, but had not mandated an asset cap until August. End Note.)

4.(C) MP Dr. Abdul-Aziz Abol publicly criticized the timing of the order, saying that it was too late because the damage had already been done. Ithmaar CEO Khalid Janahi argued in August that ordering banks to divest real estate holdings when the market was down would be devastating and have a lasting impact on the wholesale banking sector. Many prominent bankers followed Janahi's lead, including the management of both Gulf Finance House (GFH) and Kuwait Finance House (KFH), in a series of public statements and on August 18 the CBB suspended the order pending further review. On November 7, the CBB officially withdrew the order. On November 19, Janahi told econoff that the directive to recall the order came from King Hamad, who was unhappy with the way Miraj had handled the matter. (Note: The CBB has denied multiple business ventures of Janahi and Ithmaar Bank over the past year, including acquisitions and offerings. End note.)

5.(C) In published interviews, Janahi blamed the CBB for much of the turmoil in the banking sector, stating that the bank had not followed established policies and instead had reacted haphazardly. He told econoff that the CBB circulated a memorandum in August instructing banks to reduce consumer credit across the board without regard to credit worthiness. Janahi complained that this would discourage consumer spending at the exact time that the economy needs an increase in spending, and expressed fear that directives like this would ripple through the economy causing disruptions where there were none before. The business community has echoed Janahi's sentiments. Leading businessman Khalid Kanoo repeated to econoff an assertion he made earlier in the Arabic daily Al Ayam, that the CBB should be encouraging lending and spending, just as every other Central Bank in the GCC has done. He opined that the CBB was clearly behind the curve in response to the crisis.

6.(C) J.P. Morgan Managing Director Ali Moosa described the public criticism to econoff as nothing more than sour grapes--a case of bankers who should have known better getting caught out, over-exposed, and trying to lay off some of the blame on the CBB for not protecting them from themselves. Moosa said that having done business in the region for many years, he considers the CBB as the most competent and professional--from top to bottom--of any MANAMA 00000668 002 OF 002 central bank in the Middle East or North Africa.

7.(C) Comment: The increased criticism of the CBB comes on the heels of the failure of TIBC and Awal Bank as part of the Saad/Gosaibi Group conflict (reftel), which some bankers are now pointing at the CBB for blame. KFH General Manager Abdulhakim Al Khayyat asserted to econoff on November 18 that a competent central bank should have seen it coming. Khayyat and Janahi separately complained to econoff that the situation of having orders circulated and then quickly suspended was almost as bad as the content of the orders themselves -- since banks rely on a certain amount of stability and predictability in their decision making process. Deserved or not, some of the banking community blames Maraj and the CBB for their economic woes, and is becoming increasingly vocal about it.

8.(C) Comment continued: Despite dissatisfaction with the CBB from the business community, there has been no indication of waning support for Maraj from the King or others in the government (other than Janahi's assertion). Over the past several years, the CBB and Maraj have been widely praised for their policies and success in building the not only the Islamic banking sector, but the Financial Services sector as well. Regardless of public opinion, it is unlikely that senior leadership would make any move to reorganize the CBB during a period of financial turmoil. If needed to shore up market confidence, the CBB's previous governor, Sheikh Ahmed bin Mohammed Al Khalifa (currently the Minister of Finance,) could easily play a more active role in Central Bank operations without the need for formal changes. End Comment. ERELI

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