Private banking is a fast-growing business in the Middle East. Buzz Clifford reports.

The winds of competition are blowing through the region's personal banking market, particularly at the top end. Local banks in the region have seen their wealthiest clients take their funds to international private banks. Now some are responding by developing their own services.

"The opportunities for domestic private banks appear to be very great indeed," says David Gibson-Moore, executive manager of private banking and share trading at the Al-Rajhi banking and investment company of Riyadh.

One area where the domestic institutions have a distinct advantage is in catering to those local investors who wish to remain within Islamic law. "The Arab Gulf banking sector is fully exposed to these trends which are running parallel with the resurgence of interest in Islamic banking and the desire, especially among the rapidly growing Muslim middle classes in the Middle East and elsewhere for Islamic banking solutions," he says.

Pieter Kunz, regional head of global private banking for the Royal Bank of Canada agrees. "Clearly the Islamic banks will continue to play an increasingly important and competitive role when seeking business from the local nationals and expatriates from neighbouring Islamic countries."

According to David Gibson-Moore a number of "local banks in the Arab Gulf and elsewhere, as well as the Islamic banking windows of international conventional banks, are offering an ever wider number of Islamic banking products of increasing sophistication to local Arab Gulf clients."

The prohibitions on trading, discounting, debt or interest payment impose certain restrictions. Although institutions are working to devise products which circumvent these constraints, gaps remain. "Islamic banks, although growing, do not yet offer all the conveniences and choices available in investment," concedes Youssef Shahed Youssef, a senior vice president of the Faysal Islamic Bank in Bahrain.

Not that the overseas players are allowing the local houses a free hand when it comes to cornering this market. Venerable Swiss bank Pictet et Cie, for instance, has teamed up with Kuwaiti-based finance house The International Investor and developed a joint venture private banking service aimed at Islamic investors.

"The company offers asset management and other financial services and products to anybody seeking Swiss banking services who has an Islamic tradition," explains Adnan Al-Bahar of The International Investor.

Local banks are not content with just directing their energies towards Islamic investors. Some are seeking to broaden their horizons and develop private banking services which will cater to all investors.

The National Bank of Oman is one organisation looking to enter the market shortly. "We are looking at developing a private banking service," says Salaam Al-Shasky, deputy general manager of retail and investment banking. "We are quite capable of managing our clients' money well for them, and adding private banking services to that expertise is something we would like to do in the longer term," he explains.

The British Bank has already launched its own product and has the added advantage of a network of 30 branches across the Arab world. Locations in Jordan, Lebanon, the Palestinian Authority and in Egypt through its associate company Egyptian British Bank makes it ideally suited to Arab expatriates. In the Gulf, it has centres in UAE, Qatar, Bahrain and access to a network of branches in Saudi Arabia through the Saudi British Bank. Arab Bank, centred in Jordan, is another institution that can boast an impressive network of branches across the Middle East.

Bahrain's Middle East Bank has also developed its own private banking service. To date, it has concentrated on the development and distribution of mutual funds and treasury products, relying on its own expertise. However, other local competitors have drawn on internationally renowned fund managers for portfolio management services.

Trying to compete in the broader private banking market is certainly more of a challenge. Local institutions enjoy neither the cachet of a Swiss bank nor access to the global investment expertise that many American and European private banks can offer.

Globally, the private banking market is becoming more competitive, and the Middle East is no exception. David Rosier, who is chairman of the Private Client Division at Mercury Asset Management, part of Merrill Lynch, says: "In the past, the older generation of nationals in the Arab Gulf tended to be comfortable in a long-standing relationship with a Swiss bank. The money, largely, would be placed on deposit. We think that has changed. The new generation, especially, want to see the money work harder."

According to a recent study by Merrill Lynch and Gemini Consulting this group controls wealth in excess of $1 trillion. The vast majority - a potential clientele of 200,000 individuals, the study estimates - are based in the Gulf States. "A very large proportion of the total HNWI wealth in the Arab world is accounted for by the six Arab Gulf countries, most particularly Saudi Arabia, the UAE and Kuwait," says J. Michael Giles, chairman of Merrill Lynch's international private banking group.

Private banking has become an amorphous term as the number of players in the market has increased. Many have developed different types of services, thus blurring the definition of what a private bank is. "It can be difficult to pin down a definition because private banking is not a product-defined area," explains Michael Maslinski, a private banking consultant. "This is because it is not a product defined business. The key element is service, but this is often overlooked in the corporate machismo, which means that people prefer to be associated with the intellectually important side of the business rather than the service side. But it is the service that is vitally important," he says.

Robert Wray, a director of UK based private bank Duncan Lawrie agrees with Maslinski. To him, it is the relationship between the bank and the customer that is the key. "The most important thing when dealing with individuals is to understand them as people, to discover their risk profile. This relationship is vital and is an emotional thing. The only way to understand clients is to put a senior manager in front of them and talk to them about the services they require."

Peter Sullivan at Hambros Bank agrees. "Private banking is a fashionable term with a lot of different meanings. You could say that it's just a more personal service than the clearing banks provide. The key feature is that products are tailor made for groups of clients, rather than just taken from a whole suite of generalised products."

Daniel Thebault, also at Hambros, gives an example of an ideal relationship. "I was visiting a client in Belgium the other day. We're looking at the guy's investments; we're helping him with his cross-border tax planning; we're considering a trust situation for him; we're helping with a possible move to another country. It's a proper medical-type relationship where everything is considered," he says.

Private banking providers differ in the type of client they are targeting. The most bespoke service providers are usually looking for clients with more than $1 million to invest. Institutions such as Credit Suisse and Citibank Private Banking, both of which are based in Zurich, have this minimum investment level. Lloyds Bank, meanwhile, targets clients with in excess of $500,000. Banking and portfolio management services can sometimes be accessed with as little as $100,000. Jersey-based Royal Bank of Scotland is one house which is looking for these "smaller" investors. At that level the service will inevitably be less personalised whilst an investment portfolio will usually concentrate on mutual funds and unit trusts, rather than individual equities.

Mike Bussey at HSBC Private Bank is targeting the higher end of the market. "Our minimum deposit is $1 million although we do have clients who place a lot more with us. We travel the world to look after our clients, and offer a window to the whole HSBC Group, as well as providing banking services and advice."

Credit Suisse, a leading Swiss institution, takes on clients with at least $1 million. "We focus on our clients financial and personal well-being. We offer advice on non-financial aspects of life, like bringing up a family, organising property, planning for children's education," he says.

Other banks are targeting those with less funds. Rebecca Stephenson of Citibank says that their Citigold private banking service is aimed at those with $100,000 and above. She describes their target market as "the wealth creators and the early rich, entrepreneurial people, internationally mobile executives; generally, people who are time starved."

A number of internationally renowned banks and institutions have established local centres in the Middle East, rather than trying to market their services from overseas.

The Swiss Banking Corporation is a major player which believes that it needs more than an offshore base to attract Gulf investors and has established offices in Dubai. "The private banking market will develop from a mainly offshore business to one where both on and offshore services are required," predicts Ernst Balsiger of SBC private banking.

Dutch giant ABN Amro has also invested heavily in building up a regional presence. It has locations in Dubai, Abu Dhabi, Saudi Arabia, Bahrain, Lebanon and Turkey.

Lloyds Bank International Private Banking also operates out of Dubai. It focuses on the discretionary management of investment portfolios and banking services. "Most of the products are booked in Switzerland which is popular here as a location for assets to be placed," says the bank's Osmond Plummer.

What international giants such as these can offer is global reach. Merrill Lynch, for instance, which has offices in Dubai, has a worldwide presence, not only in terms of investment expertise but also in being able to offer locally based private client services to high net worth individuals in numerous countries. Citibank, meanwhile, combines a presence in the Arab world with offices in 100 countries across the globe.

The core of most private banking services is cash management and traditional banking products. Some providers offer loan facilities and credit or charge cards. In the Middle East, multi-currency facilities are particularly popular. Current and deposit accounts in a wide range of global currencies are frequently available, whilst ATM card facilities allow clients to withdraw funds around the world. The true private banking service would not just make these facilities available, but provide the individual with advice in choosing the right solution and ongoing support in ensuring that the client makes best use of what is on offer.

For the expatriate HNWI, for instance, multi-currency cash management in a private banking service should include taking the necessary steps to not only match holdings with current expenditure but also to look ahead to the currency that the expatriate will ultimately need to invest in. A Canadian executive, for instance, who intends to return home, will ultimately need to have long term cash holdings denominated in Canadian dollars, but is probably being paid in US dollars and spending in the local currency.

Private banking extends well beyond bank account facilities and into what can be loosely termed as wealth management. This can include company formations, establishing and running trusts and the management of investment portfolios. Some banks have also developed guaranteed products to appeal to the more risk averse local investor.

Not surprisingly, the cachet of using a private bank comes at a price. Charges vary and there are no uniform guidelines. The key, of course, is value for money. Many charge annual fees for portfolio or trust management, whilst some also levy a yearly charge for banking and additional services. Custody, dealing, foreign currency exchange and transaction costs may also be levied.

In spite of all the competition, the local banks certainly have a role to play in the private banking market. According to Osmond Plummer, vice president of Lloyds International Private Banking in Dubai, "The local banks have a lot going for them. The possibility of having someone just down the road looking after your investment is attractive compared to telephoning an anonymous voice overseas.

If done correctly, the whole relationship-management feature can be greatly superior to anything that can be achieved long distance," he says. Cultural similarities and an empathy with local needs are also advantages for the local private banks. Whether these advantages can be turned into greater market share remains to be seen.