The founders of the Gulf Co-operation Council (GCC) declared that its member states would not compete directly against each other, but rather share industrial, financial and business sectors fairly between themselves. A quarter of a century later, it has become clear that the six member states have, in many areas, paid little more than lip service to a concept designed to ensure that the Gulf states complemented each other. It is still politically correct to say that any business initiative will not challenge those already offered elsewhere in the Gulf, but the reality is that the countries are competing energetically against each other.
From time to time, the more sanguine ministers in the region, such as Qatar's finance and economy minister Youssef Hussain Kamal, are prepared to state that this is the case. And this is no more evident than in the banking sector, where five of the six countries (the exception being Oman) are vying with each other for the title of 'regional financial capital'. Regulators, judges and financiers, with experience of Western debt and equity markets, are being hired by the dozen across the Gulf, and the world's investment banks are being offered ever more attractive packages to choose one centre ahead of the others.
Bahrain was the first to see the potential, setting up a highly successful offshore financial centre in the late 1970s, which attracted the world's leading banks, eager to get a share of the petrodollar recycling business. It is respected for a regulatory system that is both robust and flexible, but it now faces challenges from Dubai and Qatar, which have both emphasised their decision to set up a legal system based on Western standards. Saudi Arabia too has modernised its regulatory system and opened up its markets, while Kuwait has announced that it also has ambitions to be the region's financial capital.
In one sense, this competition is beneficial because it has led to an unprecedented improvement in the quality of regulation and management of the region's debt and equity markets. As Nasser Saidi, executive director of Hawkamah, the Dubai-based institute of corporate governance, notes: "In order to achieve a sustainable growth of the regional markets and financial sector, the implementation of good corporate governance is an essential element."
In the short term, there is no reason why they should not all be winners. With the region awash with oil money and an estimated $1 trillion due to be spent on project finance alone over the next decade, there is enough business for all the leading international banks to have a presence in several countries. The implicit message from governments is that those with a local presence will have a better chance of winning advisory and lending mandates for these mega-projects. But in the longer run, when there is not so much business to share around, banks will want to reduce their Middle East presence. When that happens, only one winner is likely, with the other financial centres operating just to meet local demand.
This is the main reason why all the GCC countries want to create well-regulated, efficient financial centres, offering a variety of products and services, as well as platforms for raising and trading debt and equities. The prize is great: not only will the presence of banks attract prestige, revenue and jobs, but they will also act as a catalyst for those associated service professions, such as lawyers and management consultants, not to mention increased property and leisure facilities.
The world's leading banks are looking at the region with an enthusiasm not seen since the first oil boom of the mid 1970s. The trigger has been the continued strong oil price, which has created a boom and boosted living standards. Saudi Arabia is expected to achieve a record surplus this year, while reducing debt and increasing foreign assets. "These strong conditions are likely to continue well beyond 2006," says Brad Bourland, chief economist at Riyadh-based Samba Financial Group.
Stronger flows of government money filter through not just into a boom in financing big projects, but also into the private sector. The growing number of high net worth individuals want their financial advisers nearby, rather than in London, and they want them to provide the sophisticated services that are still the preserve of Western institutions. Investment managers also have to understand local markets - wealthy individuals put their money there because earnings are high and they are reluctant to invest in the West for political reasons.
In addition, private businesses in the Gulf, which historically have borrowed money through bank loans, are now looking to float their companies on local stock markets or tap the bond market. The volume of money in the region also means that companies from across the world see the Middle East as a way of diversifying their borrowing. The final factor for international banks is that they can now set up operations in what had previously been very restricted markets: one of the obligations of joining the World Trade Organisation is that the Gulf states must open up their financial markets to foreign banks.
If size was everything, there would be only one winner - Saudi Arabia. Its market stock capitalisation is more than those of the rest of the Gulf put together. Quoted companies include petrochemical giant Sabic, and its oil wealth makes it by far the dominant economy in the region. Until recently, it was heavily protected, but in the past five years it has opened up considerably and WTO membership - it joined last year - will accelerate the process.
New banking laws mean that HSBC, Deutsche Bank, BNP Paribas and JP Morgan now offer investment banking services; there is a booming market in the flotation of new companies; and for the first time foreign residents can buy shares. The problem is that the liberalisation of the economy, which is being driven by King Abdullah, is vulnerable to setbacks, as the battle between conservatives and liberals continues.
If track record was everything, the winner would be Bahrain, which is recognised as the best country in the region for introducing and enforcing international best practice. The government has also brought the entire financial and banking sector under the control of the Central Bank of Bahrain (CBB). "This was a far-reaching reform, creating the first integrated regulator in the region and bringing together under one roof both prudential and conduct-of-business legislation for the whole sector," says Rasheed Al-Maraj, governor of the CBB.
If Western-style regulation was everything, the winners would be Dubai and Qatar. Dubai has invested billions of dollars in setting up the Dubai International Financial Centre (DIFC) in the emirate. It has already attracted a number of leading Western banks, including most recently Goldman Sachs, and offers a full range of financial services, including a world-class stock exchange. But it did not get off to a good start, sacking its internationally respected regulators Ian Hay Davison and Phillip Thorpe, and questions still remain about the division of authority between the financial centre's powers and that of the central bank of the UAE.
Gas-rich Qatar has set up its financial centre - with Phillip Thorpe as its regulatory chief - in the last year. Chief executive Stuart Pearce seeks to distinguish it from its two rivals by insisting that Qatar is "not an offshore centre like Bahrain. We are onshore in Qatar. We are also more flexible than the DIFC."
The one point of agreement between the two authorities - and what distinguishes them from Bahrain - is the belief that a Western-style legal system, arbitrated by judges with experience of international financial law, will be a decisive factor in the choices made by overseas banks. The chief judge in Qatar will be Lord Woolf, the former UK Lord Chief Justice. "What we offer are rules and regulations to European standards, with the best of global practice. There is an international legal framework for a unique kind of onshore financial centre," says Pearce.
The reality is that Saudi Arabia's size should guarantee success, but most bankers believe Saudi will take many years to get its act together. This means international banks will make their decisions based on Bahrain's track record and the Western-style regulation of Dubai and Qatar.