LONDON, 8 April — Two recent events have sent out mixed signals regarding the banking sector in the Gulf Cooperation Council (GCC) states, and they both involve Saudi Arabia.

On the one hand, the issuance of a banking license to Dubai-based Emirates Bank International (EBI) by Saudi Arabia in February, has caught the Gulf banking sector, including EBI, napping.

The license means that EBI can now open a full commercial banking branch in Riyadh. EBI executives actually put in an application for a banking license with the Saudi Arabian Monetary Agency (SAMA) a few years ago. Although the Dubai-based bank was monitoring the application with SAMA, it had no inkling that a license was forthcoming.

On the other hand, I can reveal that the much-publicized merger between the Kuwaiti investment bank, The International Investor (TII) and the Saudi-owned but Bahrain-incorporated AlBaraka Banking Group (ABG), is off.

The merger even got the go-ahead from the Bahrain Monetary Agency (BMA), and the merged entity’s new shareholder and capital structure had been agreed and was largely in place, following a successful initial public offering (IPO) by TII at the end of last year to raise $125 million of additional funds to part-finance the cost of the merger.

ABG, is the commercial banking division of the Jeddah-based Dallah AlBaraka Group (DBG), headed by Saleh Kamel.

Why the merger was called off at this eleventh hour, only the two negotiating teams can reveal. But unfortunately, to the market, it does have the air of an Arabian farce, and is an unwelcome blow to the Gulf Islamic banking sector, given that both TII and ABG are pioneering Islamic financial institutions.

It was only in December that TII appointed US consultants, McKinsey & Co., to provide advisory services on the merger with ABG. The three parties set up a task force to formulate a plan to enhance the new entity’s revenue performance, cost reduction, market competitiveness, product diversity, geographic focus, organizational development and corporate governance.

The marriage supposedly ‘made in heaven’ was never consumated, and has resulted in a shambles, given that the merged entity actually published its first consolidated accounts retrospectively for fiscal year ending Dec. 31, 2001.

Coming back to the first development, does Emirates International’s license signify a new open door policy on the part of SAMA? This is unlikely.

The license is only the second new banking license issued by Saudi Arabia since the late 1980s. In 1999, the Kingdom issued a banking license to the Bahrain-based consortium bank, Gulf International Bank (GIB), following its merger with the London-incorporated Saudi International Bank.

Because GIB is a consortium bank, that is, it is owned by various governments or government agencies, SAMA actually has a 22.2 percent stake in GIB. Some analysts, therefore see this as an insider license.

The GCC summit did agree a few years ago to open up the banking sector in member countries to institutions from each other’s jurisdictions. But there has hardly been any significant movement in this direction especially from the three important players in Saudi Arabia, the UAE and Kuwait. All three countries’ banking and financial services sector remain largely closed even to fellow GCC institutions.

Bahrain is the exception in that it is an offshore financial center, and its onshore market is so small that not many banks would be interested in an onshore presence. Having said that, the BMA did grant Kuwait Finance House (KFH) an onshore license recently, and KFH confirms that it is interested in opening up a commercial banking presence in Bahrain.

Banking relations between the GCC states are still largely based on petty nationalism. It would be interesting to see whether the UAE Central Bank reciprocates and allows a Saudi bank to open a branch in Dubai or Abu Dhabi.

If Gulf banking is to have any chance of competing on a global basis, then logic demands a spate of mergers and consolidations, perhaps to build up a dozen or so strategic global players, backed by the required capital, GCC branch network, products, depositor base, and management expertise. It is inevitable that the Saudi banks, with their capital and branch network clout, would lead the way. But it is going to be an uphill task to forge such strategic alliances above so-called ‘national interests’.

There have been some movement in this direction — the notable merger between United Bank of Kuwait and Al-Ahli Commercial Bank to form the Al-Ahli United Bank based in Bahrain.

There have been rumors of mergers involving Riyad Bank, Al-Rajhi Banking and Investment Corporation (ARABIC) and even National Commercial Bank (NCB). But these have all turned out to be unfounded.

The failed merger between The International Investor and AlBaraka Banking Group may psychologically affect future mergers in the Gulf banking sector, if only in the short term. Although, even in the developed economies, mergers can also go wrong.

In the UK, for instance, Shami Ahmed, the entrepreneur who owns the Joe Bloggs jean and clothing label, has called off his takeover bid of Moss Bros, the beleaguered menswear company, because the latter refused to give Ahmed access to its accounts. However, in the case of TII and ABG, the merger was actually announced and promoted as a reality.

There are several reasons why the GCC needs to get its skates on to rationalize, restructure and rethink its financial services liberalization policy and program.

Sooner or later all the Gulf states including Saudi Arabia would eventually become members of the World Trade Organization (WTO). This means that they would have a grace period of between five years to ten years to force through their liberalization programs.

If the GCC countries open up much further and more urgently to each other, then this could be the rehearsal for its opening up to the world. The Kingdom should be leading this banking revolution, because its banks in general are by far the most powerful in terms of assets, branch networks, deposit base, balance sheet, and even performance.

But it would be foolhardy to rely on this fact and to be complacent, especially as globalization gets a stronger grip on the financial sector, although it is still gradual. As post 9/11 has reminded us, when the chips are down, not even the carrot of billions of dollars of Gulf private capital is tempting enough, considering that private capital in the US and Western Europe is over a trillion dollars; and the private wealth of overseas Chinese is fast approaching similar dimensions.

It is no secret that there is a long queue of foreign banks wishing to have a presence in the Gulf especially in Saudi Arabia, Kuwait and the UAE. The aim is open up most areas of the financial services sector and thus to increase competition.

The Saudi rationale is that this would remove the necessity for a banking license. But the catch is that institutions would only be able to offer financial services that do not involve deposit taking.

In other words, the Kingdom plans to open up investment banking, corporate finance, structured finance, but not commercial retail banking.

Neither the Kingdom nor the other GCC countries can have their cake and eat it.