The Central Bank of Bahrain (CBB) has taken control of banks belonging to two Saudi groups in the latest escalation in one of the largest financial scandals the Gulf region has seen.

The central bank said it has assumed control of Awal Bank, owned by Saad Group and The International Banking Corporation (TIBC), which is owned by Ahmad Hamad Algosaibi and Brothers (AHAB).

TIBC had assets of $3.8 billion and Awal Bank had $7.6 billion at year-end.

The CBB said it had exercised its powers under Section 136(a) of the Central Bank of Bahrain Law to appoint administrators to the banks. 

It said the CBB will itself act as the administrator until the appointment of external administrators is made.

The CBB’s action follows the submission of investigators’ reports that it had commissioned on both Awal Bank and TIBC.  The purpose of the reports was to assess the circumstances which resulted in the banks’ declaration that they were unable to meet their obligations, said a CBB statement. 

Based on the findings of the investigation, the CBB has determined that the banks have a substantial short-fall of assets compared to their liabilities, it said.

Once appointed by the CBB the external administrators will be instructed to identify the outstanding claims of creditors and to develop proposals for satisfying those claims to the extent permitted by the realizable assets of the banks, it said. 

The CBB has been in regular communication with representatives of the creditor committees of the banks.

The CBB is also reviewing the actions of certain persons connected with the management of the banks to ensure that they have complied with the standard of fitness and propriety that the CBB requires of those holding such positions in a licensed entity, the statement said. -

The two troubled Saudi groups are restructuring huge debt piles and a number of court cases have been filed by different parties over alleged financial irregularities.

'This obviously means there was insufficient risk management on the part of these banks before,' said economist Eckart Woertz at the Gulf Research Center in Dubai.

'Going ahead, the central bank will need to put up tougher regulations and the risk management of banks needs to improve.'    

Saad's chairman Maan Al-Sanea is alleged to have siphoned about $10 billion out of the Algosaibi family company into his own business, according to court papers. Saad has said it has no business links with Algosaibi.

The central bank, which said on June 23 it had launched an investigation at TIBC, did not provide a detailed reason for its decision and only referred to an article of its banking regulations.

A spokesman for TIBC confirmed the central bank's decision but declined further comment, while Awal Bank was not immediately available for comment. -Reuters and TradeArabia News Service