Forbes

May 15, 1978, Annual Directory Issue

SECTION: FEATURES; Pg. 52

LENGTH: 2556 words

HEADLINE: Banking: Who Gets The Petromoney?

BYLINE: By GEOFFREY SMITH

HIGHLIGHT:

As they are gradually learning the oil business, so are the Arabs learning the modern banking business. The big U.S. and European banks are not going to get it all much longer.

BODY:

KHALED ABU SU'UD is the longtime financial adviser to the ruler and the crown prince of Kuwait. He is visiting the London offices of Sharjah Group, one of the many new Arab financial institutions to have come to London in the past two years.

"Petromoney is government money," Su'ud is saying."Until it is needed it must be kept out of the Kuwaiti economy in reserve currencies on money markets. So wer are resorting to the large U.S. financial institutions because the dollar is the only reserve currency that can absorb all these amounts in the short term with all these instruments -- CDs [certificates of deposit], Treasury bills and so on -- that are not available in other currencies."

But just as the Arabs are training their people in petroleum technology, so are they training them in financial technology. And increasingly they are starting up their own financial institutions.

One such is the Sharjah Group. Sharjah offers wealthy Arabs instant diversification of investment by industry and by area, provided they can come up with the initial minimum stake, which is $2 million. Sharjah and two other similar Kuwaiti companies are designed, in Abus Su'ud's words, "to convince the private sector to invest their money through proper and reliable channels rather than going it alone through individuals."

The governor of North Carolina and a five-man entourage recently stopped by to visit Dr. David Sambar, president of Sharjah Investment Co. (U.K.), Ltd. and the man in charge of the group's worldwide foreign assets. "He was trying to sell us on the idea that North Carolina is a good type of state to invest in," says Sambar, "and if we are interested in a particular type of company, to be in touch with him or his secretary of commerce and they will assist us in finding it. We are delighted with the opportunity because here we are talking directly with the people involved, instead of third parties." Arabs, understandably, are fed up with dealing through middlemen, finders and assorted financial adventurers.

Thus far, Sharjah Group has invested mainly in new ventures in the Mideast -- a cement plant in Yemen, a new bank in Egypt -- but Sambar is trying to accommodate the investment objectives of his clients, ranging from blocks of shares in industrial companies or banks to, inevitably, real estate in the U.S. and Europe.

But specialized outfits like Sharjah, and a just-formed Saudi counterpart called Finarab Trust, of which Sambar is chairman as well, are the smallest part of the new Arab entry into international financial markets. They are far outnumbered by brand-new Arab banks, which range all the way from one-man representative offices in London to full-scale retail banking in Britain.

Michael J. Connor, a veteran of 11 years with the British Bank of the Middle East, heads a one-man rep office for the two-year-old, $63-million-assets Khalij Bank of the United Arab Emirates. He explains why so much Arab money flocks abroad. "There is virtually no money market in the UAE, no short-term outlets for funds and only limited outlets for trade financing, so banks like us have to look outside. The commercial lending is there to some extent -- three-month to one-year financing for importers while their inventory is at sea -- but what is missing is the call markets and the short-term things in which the bank is going to keep its liquid assets. The other thing that is missing is the longer-term Eurocurrency type of loan, three to five years."

At the moment Connor is primarily financing trade, working to establish a correspondence network with other banks. The next step would be to open a branch and take over some of this correspondence business internally, which would entail taking wholesale deposits.

Because such beginning steps are slow and sometimes painful, many Arab banks have gone into joint ventures with established U.S. and European banks. The $300-million, two-and-a-half-year-old Saudi International Bank, for example, is 50% controlled by the Saudi Arabian monetary authority, but Morgan Guaranty has a 20% stake and a management contract to run the bank. Five other European banks and two private Saudi banks have smaller positions.

Won't the big U.S. and British money-center banks eventually be edged out of the picture by banks like Saudi International once Saudi bankers gain sufficient experience? "You don't become a banker who can compete with the Citicorps, the Morgans or the Chases of the world just by deciding to come to London and create a bank," says Alfred Vintor Jr., general manager of Saudi International and formerly with Morgan Guaranty in Latin America. "I think you're looking 10 to 20 years down the pipe before the Saudis will be able to say this is a full-fledged Saudi bank." As the big petromoney fortunes now on deposit with major U.S. and European banks are spent domestically by rapidly developing Mideast economies, it will increasingly be the new Arab banks that will be there to catch that filtered-down petromoney.

The Bounced Check And The Bank Of Pigs

NOT ALL of the new Arab banks that had their names engraved in brass in London over the past couple of years are still around to see that those nameplates are polished. There have been at least two failures: The Ajman Arab Bank and the International Bank & Trust Company of the Middle East. In financially less sophisticated countries like the United Arab Emirates, which still have no central bank, it's a wonder there haven't been more bank failures.

There are no oil wells in Ajman, smallest and poorest of the seven United Arab Emirates. Little of the UAE's vast petrowealth has yet filtered down to the 22,000 Ajmanis, most of whom still fish for a living in the Persian Gulf. So eyebrows were raised last year when the Ajman government ammounced plans to build an $800-million town in the desert. Not just eyebrows were raised a few weeks later when the two-year-old Ajman Arab Bank, the state's financial adviser -- which claimed assets of $58 million -- abruptly collapsed.

Recent events, such as the arrest of Guillermo Hernandez-Cartaya in Miami by the Federal Bureau of Investigation (for entering the U.S. on a false passport), suggest that massive fraud may have been involved in the Ajman collapse. Hernandez-Cartaya, a Cuban who did time in a Havana jail for fighting on the losing side of the Bay of Pigs fiasco, was until recently chairman of WFC Corp. -- a $90-million-assets Coral Gables merchant bank that owned 40% of the Ajman Arab Bank. (The local Ajman potentate owned another 40%.) WFC Corp., whose London branch has already been shut down, is reportedly being investigated by the Federal Bureau of Investigation and the House Select Committee on Narcotics & Drug Abuse for possible criminal violations in a number of areas.

The Ajman Arab Bank was not alone. The Janata Bank also had to close its doors for a while in the Emirates last year until its parent, the Central Bank of Bangladesh, was able to bring it back to life with a capital infusion estimated at $10 million. The Janata, it seems, had been borrowing short-term money from other banks at substantial premiums and then relending it long in the booming local real estate market -- a widespread practice in the area.

And then there was the Windward Islands-headquartered International Bank & Trust Co. of the Middle East, which unwisely bounced a check for £4,000 (then about $7,000) that Fawzi Husain Abdul-Latif, UAE ambassador to Zaire, had made out last year to the London Hilton jewelers. This so infuriated the ambassador, a shareholder and former director of the bank, that he sought to force bankruptcy proceedings against the bank. Evidently the ambassador knew what he was talking about. The International Bank's London office refused to let its books be audited and quietly folded its tent in October.

The Emirates are the wildest frontier in banking.A seasoned banker, familiar with the area, describes the situation: "If you lend out, say, $1 million to a developer, you can borrow it back from the Currency Board at a fixed rate of interest usually far lower than what you lent it out for. Of course, the Currency Board gives no guarantee your loan will be repaid."

There is plenty of simple theft. With easy money, minimal controls and one bank branch for every $2,000 people, would-be borrowers aren't asked many questions. "People borrowed heavily and overnight just locked their doors and left," says the foreign banker. "There were lots of business people like this in the community and overzealous banks got their hands burned badly."

But as heists go, the Ajman Arab Bank may easily outclass them all. Last July the police of Ajman told Hernandez-Cartaya they wanted to question him about $35 million that had apparently been stolen from the Ajman Arab Bank, and took his passport away to be sure he stuck around. To cover any liability, Hernandez-Cartaya coughed up a $15-million letter of credit on a Panamanian bank he controls. He slipped out of Ajman and turned up in Miami. The Panamanian bank was in receivership and the letter of credit possibly worthless.

Bert Lance's Mideast Connection

UNQUESTIONABLY the most successful newcomer to Arab banking in London, from all outward appearances, is the controversial Bank of Credit & Commerce International -- the bank that several weeks ago made a $3.5-million loan to Bert Lance, while Lance was reportedly trying to take over Financial General Bankshares in the U.S. on behalf of BCCI.

Time was when $3.5 million would have been big money for the BCCI. But no longer. Since starting up in Abu Dhabi in 1972, BCCI has grown at an astounding pace. According to the 1977 annual report for the Luxembourg-based bank, assets have shot up from $20 million in 1973 to $2.2 billion in 1977, capital from $5.2 million to $113 million and pretax profits from $335,000 to nearly $26 million. Today there are 146 BCCI branches in 32 countries -- 45 in Britain alone, which makes BCCI the largest foreign bank in Britain in number of branches.

That may seem like unmanageable growth for rank beginners in banking but BCCI's management are hardly rank beginners. Says Ameer Siddiki, a close lieutenant of President Abu Hasan Abedi (there are no formal titles other than president in BCCI), "Eleven of our senior executives were chief executives of various banks around the world. We have two governors of central banks, and one man who was a director of the World Bank as well as chairman of an investment company -- he heads our merchant banking operation."

BCCI's top management is the cream of Pakistani banking who left their own country because, among other reasons, banks were nationalized in 1974. "Mr. Abedi had started a bank in Pakistan," Siddiki goes on. "It was called the United Bank, Ltd. and over 13 years it became the third largest bank in the country. I was with the largest bank in the country: Habib Bank, a $2.5-billion bank with 2,000 branches. After 30 years' experience I was number two in the bank and in January last year I was offered the chief executive's title. I refused because of nationalization. I came here.

"People say, "How does this happen? A bank that was just not there four or five years ago has become a $2.2-billion bank with offices in 32 countries. There must be something wrong. This hasn't happened before. How the hell do they have 45 branches in Britain?" Well, in 1974-75 Habib Bank opened 375 branches in a year! What is 45! To me personally, 45 looks ridiculous. Last year we opened just seven branches here, which is not much compared to a total network of 11,000 branch banks in the U.K. What is sevev? It is nothing.

"We are attuned to the Arab way of working," Saddiki says. "Arabs want personal service, Asian courtesy at its zenith. So you visit them at home one occasion -- send them little gifts. They couldn't care less about the gifts; it's the thought. With all due respect to the British Bank of the Middle East or Chartered Bank, They are practicing the English type of banking. Their theory is, 'The customer should come to us.' The theory here is, 'Why should the customer come to us? We should go to the customer.'"

This aggressive approach to banking has not endeared BCCI to its British banking competitors, who charge the newcomer with regularly trying to steal some of their biggest customers away (evidently with some success) with offers of cheaper interest rates. Siddiki does not deny this. "A new bank has to make its presence felt," he says.

How can BCCI show fast-growing earnings, finance lavishly decorated headquarters and new branches, a costly computerized control system, training schools for personnel, highly personalized service and at the same time charge less for loans? "Compensating business," Siddiki replies. "If you're an impodrter or an exporter, we want to handle your currency exchange, we get a commission on letters of credit or on debt collection. It's possible that one bank might charge a customer 10% and we might offer 9 1/2% because what we insist on is that compensating business."

The rapidity with which BCCI has built up its loan portfolio, however, has caused doubts about its quality and therefore considerable speculation about who really owns the bank. When the Bank of America declined to participate in a recent rights offering, its stake in BCCI was reduced from 30% to 24%. (The BofA issued a statement at the end of January that "one of the other major BCCI shareholders" was buying them out "over the next 2 1/2 years" because BCCI "is now a fully fledged global bank" and the BofA "is currently increasing its direct presence in the Middle East.") The two other major BCCI shareholders are a foundation -- International Credit & Investment Co. Ltd. (Overseas) -- that is effectively owned by all the employees of BCCI and holds a 45% stake in the bank, and a gaggle of Mideast backers, no one of whom holds more than 5%. While Siddiki declines to reveal the purchaser of the BofA stake, the betting is that it will turn out to be the ICIC foundation. So, who controls BCCI? The best guess is that Abedi and Siddiki, the Pakistanis, do. As Siddiki explains the setup, 35% of the foundation's income will go to the staff -- which means, of course, that a big piece of that will go to him and to Abedi.

What has Bert Lance got to do with all this? It seems that Abedi met Lance while negotiating to buy from him control of the National Bank of Georgia on behalf of Saudi tycoon Ghaith Pharaon. (Abedi is financial adviser to the fabulously rich Pharaon.) From those negotiations, a further relationship developed and BCCI lent Lance $3.5 million. Was it lent to buy eventual control of Financial General on behalf of BCCI? Siddiki doesn't answer the question directly: "Under U.S. law we can't buy a bank there because of Bank of America's participation in us. That participation will continue until 1980." He adds: "We don't want to go into the U.S. by the back door." Did publicity over the loan upset BCCI boss Abedi? "Mr. Abedi is not apologetic that he has this relationship with Bert Lance," Siddiki replies."He has no regrets whatever."

GRAPHIC: Photo 1, Coming Out: "Before the Arab world became a capital exporter, a lot of highly sophisticated Arab bankers were kept aside," says Sharjah's Sambar. Les Wilson; Photo 2, Query: Was Bert Lance's $3.5-million loan from BCCI unsecured, as alleged? "We'd never make a loan that size on that basis," says BCCI's Siddiki. Wide World