Wednesday, October 22, 2008

Bank failures following oil busts: Will history repeat?

Oil fell to $70 per barrel today further suggesting the oil price boom is over. In that context, consider this quote from 2006,
"The worry is about unsophisticated players entering the [financial] market and destroying its reputation," says Mr Abdulmalik of Arcapita, whose shareholders are Saudi, Kuwait and Qatari businessmen. Only one of eight or 10 banks established [in the Gulf] during the early 1980s oil boom has survived, he notes.
My emphasis on "established."

More from the same article from the Financial Times dated October 19, 2006:
In the private sector, bankers say that a new generation of better-educated professionals has become more reluctant to hand over earnings to foreign banks and is looking to invest it itself. "In the past they would just give the money and put it in the US. Now they want to do their own deals or they want deals that bring strategic benefit to them," says one banker.

In Saudi Arabia, the recent creation of the Capital Markets Authority opened up a new opportunity to set up non-commercial banking institutions and led to a flood of applications for brokerage, asset management and investment firms.

"The critical factor was also IPOs [initial public offerings] which started people thinking that there's an exit strategy," says Brad Bourland, chief economist for the Riyadh-based Samba, a leading local bank. "Several private equity firms were started and have attracted investors."

Economists are celebrating the expansion of the financial industry. But some bankers warn of the risks in the rapid proliferation of investment companies in what are still underdeveloped markets.

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