THE DECISION OF UK BASED banking giant HSBC to pursue a majority stake in Iraq's Dar Es Salaam Investment Bank confirms a trend. International banking groups have been stepping up their interests in the Middle East over the past couple of years, both by setting up local subsidiaries and joint ventures,

The HSBC purchase seems to indicate that banks throughout the region are now of interest restrictions on foreign ownership wit markets that is excluding foreign operators from some countries.

HSBC is taking advantage of the banking licence it was awarded last year, to buy a 51% controlling stake in Dar Es Salaam Investment Bank (DESIB) from the Khudairy family. A company spokesperson explained the bank's strategy: "HSBC is committed to playing its part in the reconstruction of Iraq and to investing in the country in the long term. In partnering with DESIB, HSBC believes that it can create a leading personal and commercial banking service."

HSBC was one of the first three banks to receive Iraqi operating licences in January last year, alongside its British counterpart Standard Chartered and National Bank of Kuwait. Three other banks, ABC, Bank Melli Iran and Housing Bank for Trade and Finance of Jordan, were awarded licences later in the year. All six are permitted to either opt for the HSBC route of taking over existing Iraqi banks or setting up a local subsidiary.

There are certainly gaps in the commercial and personal banking markets in Iraq, which HSBC has sought to take advantage of, in its quest to expand its network in the region. DESIB has eight branches in Baghdad and six elsewhere in Iraq. The British bank already has branches in Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar, Turkey and even the Palestinian Occupied Territories.

It greatly expanded its Middle East operations with the takeover of British Bank of the Middle East, which became HSBC Bank Middle East. Then, in 2001, it took over troubled state owned Demirbank of Turkey, as part of Ankara's IMF advised fire sale. The Turkish bank's 200 branches were quickly absorbed into the HSBC brand.

In 2003, the bank unveiled plans for a steady expansion programme in the Middle East, India and China, to augment its existing operations in almost 80 countries. Originally set up in the former British territory of Hong Kong, HSBC has established itself as the second biggest bank in the world and has expressed its desire to become the premier bank in the Middle East. It recorded massive profits of $17.6bn last year, in large part because of the success of its non-UK assets.

However, efforts to revive the Iraqi banking sector will not be left entirely in the hands of the private sector. As ever, most international banks are concerned with relatively prosperous personal customers and large businesses: Small and medium enterprises (SMEs) across the region continue to struggle to secure financial support. As a result, the World Bank's International Finance Corporation (IFC) has set up the $105m Iraq Small Business Finance Facility (ISBFF) in an effort to gear Iraqi bank operations towards the needs of smaller firms.

The ISBFF's first action has been to agree a $12m loan with the Al Ahli Bank of Iraq to support its SME department. Staff training and new technology is also being supplied. Sami Haddad, IFC director for the Middle East and North Africa, commented: "The project will achieve a high developmental impact. It will help revive economic activity in small enterprises at the grassroots level and create new jobs and opportunities in Iraq's private sector."

Jyrki Koskelo, the IFC's director of global financial markets, added that the Corporation "expects to do more transactions through the Iraq Small Business Finance Facility to support Iraqi banks lending to smaller businesses. We intend to work with a number of local banks to develop their capacity and to strengthen their operations." While international banks like HSBC have an important role to play, there is undoubtedly still a place for domestically owned and run operations in encouraging the development of the SMEs that provide the bedrock of any successful economy.

HSBC is certainly not alone in investing in the region. The world's largest bank, Citigroup of the US, is also planning to expand its operations in the Gulf. Visiting the Dubai International Financial Centre (DIFX) in June, the company's chief executive, Robert Druskin, explained that Citigroup's Dubai office would be used to increase the bank's presence in the region.

LIECHTENSTEINISCHE LANDESBANK (LLB) of Switzerland opened its first office in Abu Dhabi in July and plans to expand from there. The company's chief executive, Patrik Paulus, commented: "The Middle East is growing very fast with many economies booming here and LLB wants to be part of the action. This is our first entry into the Middle East. We will look at having a presence in Dubai soon, as we see tremendous opportunities in private and investment banking." Another Swiss company, Bank Sarasin, has recently set up a joint venture with Alpen Capital Corporation at DIFX.

Some banks have targeted particular sites in order to capture specific trade. For instance, Dubai Standard Chartered Bank has signed a deal with the Nakheel property developers for a monopoly on providing banking services at the new Dragon Mart in Dubai's International City. The company's chief executive, Ray Ferguson, said: "This branch will provide both tenants of the Dragon Mart complex and its visitors a full range of wholesale and consumer banking services. Within the region, Dubai is fast establishing itself as a hub for Chinese trade and with Standard Chartered enjoying a long history with both China and the UAE; we must lead the way in further assisting this developing trade pattern."

Banks from other parts of the Middle East are also becoming increasingly active in the Gulf. EFG Hermes of Egypt opened a banking and brokerage unit at the start of this year and is already handling deals, mainly mergers and acquisitions and initial public offerings (IPOs), worth more than $800m across the United Arab Emirates (UAE). However, the bank's chief executive, Mustafa Abdul Wadood, has warned that some companies had decided against seeking a listing on the UAE stock exchanges because of problems in the regulatory environment. The Ministry of Economy and Commerce must still approve all stock valuations and any companies seeking a listing must sell at least 55% equity, thereby losing control.

The UAE's minister of the economy and commerce, Shaikha Lubna Al Qassimi, is currently drawing up proposals to reform the country's financial regulations. Wadood observed: "One of our current clients has chosen to wait until these regulations are changed." However, he added: "It is evolving very quickly here. The very fact the authorities acknowledge the current system isn't working and want to change it, is encouraging." DIFX, which will be the UAE's third stock exchange, will permit companies to offer just 25% in IPOs when it opens for business in September.

Some international banks have committed themselves to increasing the proportion of local citizens among the highly skilled sections of their workforce. For example, the UK's Barclays Bank has recently signed an agreement with the National Human Resources Development and Employment Authority (Tanmia) of the UAE to provide training in banking and financial skills. An intensive three month course is to be set up and successful students will be given priority when new positions within the bank become available. There is optimism that young, educated Emiratis will be attracted to the scheme. However, it is hoped that all candidates on the course will be able to put their skills into practice in whichever bank they find employment.

Marwan Al Sawaleh, the assistant director general manager of Tanmia, said: "Increasing the number of nationals in the banking and finance sector is a key objective of our overall Emiratisation drive. Our partnership with Barclays Bank is an extension of our long-term commitment to equip UAE nationals with the required skills." Successful reform of aspects of the banking regulations has encouraged some governments to go one step further. Kuwait's early forays into a more competitive banking sector have persuaded it to open the industry up to non-Kuwaiti banks in order to improve the level of services on offer in the country. The government is to offer licences to five banks from within the Gulf and several international organisations. The governor of the Central Bank of Kuwait, Sheikh Salem Abdul Aziz Al Sabah, commented in May that the liberalisation was a reflection of the government's conviction of the need "to liberalise financial services and vary the structure of the banking and financial system in Kuwait, to develop it as a financial hub and boost its financial and commercial ties with the outside world".

He added: "At this stage the approvals will be to a limited number of international banks known for efficiency in addition to a single branch each for the national banks of the Gulf Cooperation Council (GCC) nations." Foreign banks that have already been given the go-ahead to open branches in Kuwait include National Bank of Abu Dhabi, HSBC Bank Middle East and BNP Paribas of France, while the UK's Standard Chartered is expected to follow.

There is no doubt international banks are increasing their presence in the Middle East in general and the Gulf in particular. It is difficult to assess whether this process is primarily being driven by domestic reforms or the increased opportunities on offer, but one thing is certain: Increased competition will improve services and banking rates for both personal and commercial customers so, once established, the foreign firms look set to stay, forcing local banks to respond if they are to compete in an open market.