Kenneth C. Crowe
Kenneth Crowe

Fellowship Title:

A Pan-Arab Investment

Kenneth Crowe
June 14, 1976

Fellowship Year

The views expressed by the author in this newsletter are not necessarily the views of the Foundation.

(THE CONTEXT: Foreign investment in the United States is burgeoning, while public consciousness of this perennial phenomenon has been raised by the prospect of Middle Eastern oil money buying large pieces of American corporations and real estate. The traditional investors in the U.S. have been the Europeans, but in recent years, nouveau investors…the Japanese, the Arabs, the Iranians…have appeared on the American horizon. An understanding of the impact of foreign money and foreign ownership is obscured by a lack of knowledge. The following article deals with a direct investment by almost every Arab government in a new bank in New York.)

The opening of the unique UBAF (Union de Banques Arabes et Francaises) Arab American Bank on New York City’s Park Avenue this June represents the first thrust of Pan-Arab investment into the United States.

The new bank is an independent satellite of the UBAF Group of banks, whose physical communications center is Paris, but whose philosophy spins around the almost spiritual concept of the development of the Arab World. In existence only since 1970, the group has total deposits approaching $3-billion — drawn primarily from Arab states, where the current rhetoric espouses the economic principle that Arab money belongs in Arab banks. The UBAF Group’s dominant owners are 26 private and government financial institutions representing all 20 Arab nations. The first chairman of UBAF Arab American Bank will be Dr. Fawzi El-Kaissi, the Finance Minister of Iraq.

Until the creation of UBAF, there were no global, Arab-controlled banking systems. The UBAF Group is seeding its satellite banks around the world. Already in Paris, London, Rome, Hong Kong, Tokyo, Luxembourg, Frankfurt — and now New York, the group has expansionary plans reaching towards Latin America, India and Spain.

The UBAF Arab American Bank will serve as both a channel for direct Arab investment into the United States and a depository of a small part of the petrodollars now circulating through major U.S. banks. Under its present capital structure, UBAF Arab American could only accept deposits totaling $600-million to $700-million. The bank expects 70 percent of the deposits to come from the Arab World. A Federal Reserve Board study, released this past spring, showed that the Arab oil producing nations had more than $14-billion on deposit in 21 U.S. banks — with presumably more to come in future years. The new bank’s vaults could be filled with scarcely a noticeable dip in the sums flowing into the major American banks.

In the petition for a New York State bank charter, UBAF Arab American said it would concentrate on wholesale commercial banking, which means dealing with businesses rather than individual borrowers, “with emphasis on international transactions involving the Arab World.” The petition also emphasized the point that the Arab states have become dramatically important to the economy of the United States. This argument noted that U.S. companies have several billion dollars invested in the Arab World and: “…the aggregate effect of income from U.S. investment in the Arab countries, plus U.S. exports rapidly approaching a figure of $6 billion in the current year (1975) together with capital inflow from the Arab states into the United States, have turned the Arab states into the largest foreign source of income for the U.S.”

The creation of UBAF Arab American Bank follows an international strategy established in the UBAF Group’s expansion from the original base in Paris to other financial centers in Europe and Asia. This strategy involves distributing the ownership of each new bank among a combination of host-country participants; the original Union de Banques Arabes et Francaises or UBAF (France); and individual Arab banks and financial institutions. The total of 20 percent of UBAF Arab American’s shares allocated to the four U.S. bank holding companies is the smallest share of any host-country group among the six banking companies created by UBAF. The other host groups own anywhere from 95 percent in England to 42 percent in Italy.

The breakdown of the ownership of UBAF Arab American Bank, which is capitalized at $25-million, is:

Arab banks 64 percent
UBAF Group 16 percent
U.S. banks 20 percent

The following is a list of the Arab financial institutions, which have a direct interest in the UBAF Arab American Bank. The Alahli Bank of Kuwait and the Arab Bank Limited are privately-held banks. The Saudi Arabian Monetary Agency owns 38 percent of the Riyad Bank Limited with the balance owned by individuals. The other eight are government institutions:

Alahli Bank of Kuwait $1,750,000 7%
Arab African Bank 1,750,000 7
Arab Bank Limited 1,750,000 7
Central Bank of Egypt 1,750,000 7
Central Bank of Oman 1,750,000 7
Commercial Bank of Syria 1,750,000 7
Libyan Arab Foreign Bank 1,750,000 7
National Bank of Abu Dhabi 1,750,000 7
Banque Du Maroc 1,250,000 5
Riyad Bank Limited 500,000 2
Sudan Commercial Bank 250,000 1
TOTALS: $16,000,000 64%

The above list was taken from UBAF Arab American Bank’s Certificate of Merit, filed as part of its application for a New York State banking charter. The Arab African Bank, shown above, is owned 42.4 percent by the Central Bank of Egypt; 42.4 percent by the Government of Kuwait; 10 percent by the Rafidain Bank of Iraq; 2 percent by the Central Bank of Algeria; 1 percent by the Jordanian Ministry of Finance; .5 percent by the Ministry of Finance of Qatar; and the remaining 1.7 percent by individuals.

The reason for reproducing the Arab stockholders is to show that with the exception of a few minor states, all of the major Arab oil producing countries — the countries with the petrodollars to spend and invest — are owners of the new bank.

The U.S. investors in the bank, each with 5 percent of the stock are: Bankers Trust New York Corporation; First Chicago Corporation; Security Pacific Corporation (of Los Angeles); and Texas Commerce Bancshares (of Houston). The American investors have provided $5,000,000 of the bank’s capital.

UBAF (France) is investing $3-million in UBAF Arab American for 12 percent of the shares, while each of its satellite offspring are investing $250,000 for 1 percent of the stock. They are: UBAF (London); UBAE (Italy); UBAE (Luxembourg/Frankfurt); and UBAN (Hong Kong).

The stock held by UBAF (France) and the Arab institutions directly in each of the satellite operations is well in excess of 50 percent. UBAF Group executives interviewed in Europe insisted that despite this controlling-stock linkage each satellite bank is a separate, individually-managed entity and the headquarters in Paris operates as a communications center for the pooling of ideas and the collection of statistical data. Another part of UBAF’s expansion strategy is to draw key investment and managerial staff from the host participants. For example: in the United States, UBAF Arab American Bank’s new president, Kevin G. Woelflein was a vice president of First Chicago; the general manager of UBAF (London), Walter Cronk, was seconded from Midland Bank Ltd.

The Mother of Nothing

“We call Paris: UBAF France,” a UBAF executive said in Paris, “It is the mother of nothing….The banks are completely independent. We try to discuss problems of common interest. We (in Paris) are not a controlling group.” He added: “We are not coming to the States with a committee that assures a common line of thinking.”

This banker stressed the Arabness of UBAF. “We now have 26 banking or financial institutions, all the Arab countries. There is not one single Arab country missing.”

UBAF had its beginnings in the concepts espoused by Charles de Gaulle. “His (de Gaulle’s) idea was participation,” the banker said. “Philosophically when you looked at the way the British were established in the Gulf, taking resources out of the Gulf for the benefit of the British, we felt it was time to change. It was certainly de Gaulle on the French side (inspiring the bank’s formation). It was very much in his line to get France closer to the Arab World. This had repercussions in the Arab World. We thought at the start there were many other fields this philosophy could be applied to. We were thinking of insurance, air transport….We said to the Arabs, ‘why don’t we come on the other side of the barrier and become the partner?”

The banker noted: “It (UBAF) was an idea we started discussing with our Kuwaiti friends in ‘67.” When the Alahli Bank of Kuwait was formed in 1967, the French state-owned bank, Credit Lyonnais, provided the managerial staff. The French, with that ulterior motive of developing tighter business links to the Arabs, brought de Gaulle’s thinking to the concrete level in the formation of Union de Banques Francaises et Arabes in 1970. The 26 Arab institutions hold 60 percent of UBAF (France)’s stock with the remaining 40 percent split between Credit Lyonnais (30 percent) and two small French banks: Banque Francaise du Commerce Exterieur (8 percent) and Banque Generale du Phenix (2 percent).

“Instead of being another of these banks (like U.S. and British institutions) tapping the Arab resources and using their deposits, the idea was to integrate them, using their deposits and sharing the profits with them,” the banker said.

No Sleeping Partners

UBAF (France) has made particular efforts to keep all 26 institutions — and by implication the governments behind them — closely informed of its inner workings. “None of the shareholders are sleeping partners,” the banker said. “During these six years (since 1970), we have kept the shareholders as either directors or censors. We have kept them closely informed.” The UBAF (France) board has 11 directors including five from Arab institutions. Twenty-one censors represent the remaining Arab institutions. “The weight of the censor is the same practically, although not legally as the director,” the banker said, “It’s a strange system, but it works.”

The benefits flowing from this freedom of information are registered in the bank’s deposit vaults. “If you show what deposits from each is, that stimulates the others. They see we have such and such business from Morocco, then Sudan and Egypt say, ‘why don’t we do such and such.’”

Two other factors are at play in the success of UBAF (France): the bank tries to avoid politics and the chairman, Mohamed Abushadi, has shown himself to be a master diplomat in handling the delicate and strange melange of the feudal and socialistic Arab states represented among his stockholders.

Abushadi, like so many others in the forefront of Arab World finance, received part of his education in the United States. His schooling included the American University in Washingtong D.C., and Cairo University. Prior to becoming chairman of UBAF (France) in 1970, he was chairman of the National Bank of Egypt.

The year that UBAF opened for business was the same year in which the Organization of Petroleum Exporting Countries was giving the world an inkling of the shift in the centre of power from the multi-national oil companies to the oil-producing nations. Libya opened 1970 with negotiations with its oil companies that resulted in higher posted prices and tax rates. By December, the OPEC nations had agreed on a common front campaign to pull higher prices and concessions from the oil companies. Thus the future had been shaped for the historic quadrupling of oil prices in October, 1973 — and the shift of a huge portion of the world’s wealth to the oil-rich states of the Middle East. UBAF had been growing right along with the OPEC vision. By the fall of 1975, the UBAF Group’s deposits exceeded $2.5-billion, and now presumably, they are approaching or have surpassed $3-billion.

Within a year after the creation of UBAF in Paris, the board and the bank’s management were already anxious to begin moving into the international sphere. The first expansion was to London, where UBAF Ltd. opened on June 19, 1972. An executive interviewed at UBAF’s headquarters on rue Ancelle in Paris, said: “The Libyans wanted a foot in London. We convinced them that the way was to take a share in UBAF (London).” As a result, the Libyan Arab Foreign Bank got a 25 percent interest in the new London bank.

“In Germany (UBAE Luxembourg/Frankfurt), the Arab Bank had a particular interest,” the banker said, so they were given a one-third interest.

The move into the United States created an internal problem for the UBAF Group: everybody wanted a piece of the American action. “We felt an enormous interest for that new bank among the Arab shareholders,” the banker said. “Almost all wanted a direct participation. They felt this would be very, very important. We eventually reduced the participants to 11, and we succeeded in getting them down to 64 percent.” The hunger for an interest in the American operation also demonstrates Abushadi’s skills: “Abushadi is a master diplomat,” the banker said, “After a convincing memo (to the stockholders) that it was the thing to do (to open in New York), he had to convince certain of the shareholders that they could participate through UBAF Paris.”

The logical expansion of the UBAF Group would have been first to London, the center of the Eurodollar markets, and then to New York and the huge U.S. money markets. But there was an interim delay. “London was an essential market,” the banker said. “After London, the normal choice should have been (right into) New York.” He paused, then said in explanation: “Maybe the political climate was not right.”

Negotiations with potential American partners began early in 1974, but it has taken more than two years for all of the necessary state and federal permits. Although it appears to be just a formality as final papers are filed — the final New York State bank charter has yet to be issued for UBAF Arab American as this is being written. The delays can be traced to the politics of concern over Israel within the States and to the uniqueness of the UBAF structure.

“In the U.S. banking market, you have consortium banks composed only of Americans, only of Europeans. You had never seen a consortium of American and foreign banks,” the Paris banker said. He went on: “The foreign bank to the Federal Reserve is a very strange animal.” Because of the broad diversity of ownership of UBAF Arab American and its claim to independence of any parent organization, the banker said, the Fed was concerned over the dilution of responsibility in case anything went wrong.

“The reason for a good part of our delay in putting things together was our discussions we had with the Fed to set up sufficient standards so they would have a resort,” the banker said. “We had to include the extraordinary provision of four-times the $25-million.” By this he meant that each stockholder pledged to have an amount on call available to UBAF Arab American equal to four times its original investment. As a result, the bank has a total of $100-million on call — a healthy cushion against fiscal disaster. “This had never been asked of any bank before,” he said.

“There was another extraordinary requirement,” he said. “The shareholders had to sign a commitment to abide by an agreement not to discriminate (in employment or lending practices).” This requirement came from the New York State Banking Board in accordance with new state legislation. UBAF was the first bank required to file such pledges — just one of those coincidences which have a cynical hue.

The Most Enthusiastic Bank

Financial men in Europe with an intimate knowledge of the Middle East said the seemingly interminable processing of UBAF Arab American’s application for licenses to bank in New York might still have been going on if Bankers Trust hadn’t been added as a partner in the venture. The Paris banker denied this. He said Bankers Trust was selected “because it just happens, among the New York banks, they were the most enthusiastic.” He added: nwe are the main competitors (of the major New York banks — Chase Manhattan, Citibank, and Morgan Guaranty Trust Co.). On this subject of antitrust, Bankers Trust had no settlement in the Arab countries. Juat an office in Beruit.”

The other three American partners, he pointed out, are poised in major financial centers blanketing the United States” First Chicago in the Mid West; Security Pacific on the West Coast; and Texas Commerce in the Southwest. The advantages of this intimate Arab connection to all four American banks is obvious at two levels. First, they will have a direct entrée to the Arab money men — and the petrodollars are primarily in government treasuries. Second, as a banking administrator put it: “If you wanted to operate a business in Saudi Arabia, you can now go to a bank with direct ties there….Now any bank in Texas would go to Commerce Bank.”

The linkage of UBAF to petrodollar surpluses is a theme that Abushadi promotes. In UBAF (France)’s 1973 annual report, Abushadi wrote: “Undoubtedly the decision adopted by the Arab ministers of finance who met in Cairo at the beginning of December, 1973 to direct surplus deposits to the Arab banks will provide these institutions with the resources required for their activities.”

The term satellite for the UBAF banks, which I’ve used throughout this paper, comes from Walter Cronk, the general manager of UBAF (London). Cronk in discussing how UBAF differs from other international banking operations said: “The normal pattern would be a holding company, or setting up branches. This (UBAF) is unique. This is completely unique because each bank is separately constituted with separate partners. You’ve got a sort of satellite complex in a way. I don’t know another one in the banking world like this.”

Cronk’s knowledge of international banking is extensive. He joined Midland Bank Ltd. in 1947, serving as assistant chief manager of the bank’s international division. “When I first went to Saudi Arabia in 1959,” he said, “there was virtually nothing there. You would not see a woman, not even heavily veiled. Ten years ago, Abu Dhabi was virtually sand, Now you have Intercontinental Hotels.” The setting of our conversation was in the City of London on the sixth floor of the towering, modernistic Commercial Union Building in which the Abu Dhabi Investment Fund has invested 40-million pounds for a one-third interest. Cronk got into China in 1971 in his travels through the banking world. In 1966, 67, and 68, he was seconded to Midland International Bank Ltd., the first consortium bank in the City of London. Reflecting on his deep experience, he said: “One builds a well of knowledge.”

The discussion turned to how Midland, the third largest bank in England, decided to join with the French-Arab consortium. “Midland,” Cronk said, “has been in international banking for 60 years. Pretty much, in all that time, operating on the concept it would not open branches abroad. It would deal with local banks. As a result, you have a fertile correspondent relationship. When UBAF wanted to come to London, Midland was receptive because it dealt with most or all of these (26 Arab) banks before.”

Cronk also said: “l and my colleagues have known Abushadi for 16 or 17 years. He was chairman of the National Bank of Egypt. There was a natural affinity to cement our existing relationships. It was defensive in that if Midland hadn’t done it, somebody else would. It wasn’t done on a defensive basis, however. It was on a constructive basis — to build on our existing relationships.

“We were the first Arab-Euro bank in the City, and it excited a lot of interest….The timing was appropriate. We were prescient enough to see the growing importance of the Arab World, Cronk said, “I opened the bank on 19 June 1972, which was well before the oil price rise and the popularity of the Arabs.”

In describing the operations of his organization, Cronk, the epitome of the City banker in his black suit and white shirt, said: “We’re not very exciting. We take deposits on the interbank market. We’re very active in Eurocurrency syndicate loan markets. We also do commercial banking, mainly in the field of document credit, which is a considerable part of our business. The most profitable part has been in syndicated loans.”

The Sources of Deposits

Deposits for the London bank come from a broader spectrum than UBAF (France) or as anticipated for UBAF Arab American. Cronk said: “In this one, it’s pretty well spread. We get about 40 percent of our deposits from the Arab World. If we don’t pay the right rate, we don’t get the money. About 30 percent is from the London market. About 30 percent from banks on the Continent.” The deposits in UBAF Ltd., as we sat there on Feb. 6, 1976, were the equivalent of $464-million. “That’s in three and a half years,” Cronk said. “We got off to a good start.”

Abdalla Saudi, chairman of the Libyan Arab Foreign Bank, is executive director of UBAF (London) and plays an active role in the bank. But, Cronk said, “the day to day management of the bank is left to me and my colleagues. I do have certain discretionary limits on loans.” If Cronk wants to go higher than his limit to double his discretionary level, he can obtain approval by telephone from Abushadi, who is also chairman of UBAF (London). To go even higher, he can obtain approval of the bank’s management committee once again by telephone, but any “no” is a veto of the loan.

UBAF (London) has a one percent share of the new American bank. “My one percent shareholding — all the discussions have emanated from Paris — has been shoveled here,” Cronk said.

Web of Relationships

The web of international relationships which can multiply out of the UBAF Group is demonstrated in the new Misr International Bank, a joint venture of UBAF (London), First National Bank of Chicago (a subsidiary of First Chicago), Banco di Roma Holdings, and the Bank of Alexandria. Misr International is located in Cairo. First Chicago has a five percent interest in UBAF Arab American, and Banco di Roma has 8.5 percent of UBAE (Italy).

UBAF’s new American banking allies are effervescent — as are all major U.S. banks — on the advantages of foreign investment in the United States. Alred Brittain III, chairman of Bankers Trust Company, in a speech to the Columbia Business School Club of New York, attacked the 15 major bills before Congress to control or discourage foreign investment. Brittain pointed out that OPEC’s collective income has dropped in the past year, adding, however: “Still, some OPEC nations will continue to have substantial surplus funds which cannot be absorbed by their own economies and which must be placed elsewhere in the world. Some of the money will come here.” Although his prepared text doesn’t indicate he told his audience, Brittain’s Bankers Trust has positioned itself, through its investment in UBAF Arab American, to share in those petrodollar surpluses.

A Rhetorical Contortion

Dr. Leslie C. Peacock, vice chairman of Houston’s Texas Commerce Bank, in another speech told the Institutional Investors’ Middle East Conference last September in New York, that the Western World had a moral responsibility to contribute to the success of Middle Eastern investment. Then in a rhetorical contortion, he went on to say: “On the matter of oil pricing, I find it very difficult to quarrel with the inherent right of OPEC nations to set whatever price they choose, or to attribute a significant part of existing world inflation to increased energy costs, or to blame OPEC for precipitating international financial crises as a result of the huge energy payments deficits piling up in many Third World countries.” Texas Commerce holds five percent of UBAF Arab American.

The UBAF banker in Paris said that the new UBAF Arab American Bank “certainly will invest mainly in U.S. business. We feel whether you finance an American exporter or an Arab importer, you favor the U.S. economy….The president designate (Woelflein) of our bank is more eager to make it a domestic bank. We are saying one of the aims is to help either individual or institutional (Arab) investors find their way in the States. We will have some Arabs on staff. A lot of this is linked with personal confidence, especially in the Arab World.”

In its application for the state banking charter, UBAF presented the traditional argument that “Many American banks have a direct presence in Arab countries through overseas branches, affiliates, correspondent banking relationships and representative offices.” The implication is that America in return should open the doors for Arab affiliated banks. The petition also said: “At the same time there is a need for a financial institution in the United States to serve as a conduit for investment of Arab funds and to promote increased U.S.-Arab trade.”

Some Conclusions:

“The problem with the U.S.,” a European banker told me on a trip overseas, “is suspicion. “After World War II, New York could have become the center of world finance, but banks couldn’t get in….The City (of London) has 400 banks of every color, creed and nationality.” In contrast, New York City has 118 foreign banks with offices in Manhattan. This European banker made a good point.

UBAF Arab American Bank will help to enlarge New York’s role as a center of international finance. But a point which concerns me is the presence of foreign goverment entities participating directly in America’s private sector. Perhaps in an interdependent world, the lines between the public and private sectors must meld into gray, but such situations outside the level of dire necessity make me feel uncomfortable and concerned about the philosophical fabric of our free enterprise society.

Received in New York on June 14, 1976

©1976 Kenneth C. Crowe

Kenneth C. Crowe is an Alicia Patterson Foundation award winner an leave from Newsday. He is studying the investment and movement of foreign funds into the United States with emphasis on the OPEC nations’ oil monies. This article may be published with credit to Newsday and Mr. Crowe as a Fellow of the Alicia Patterson Foundation.