Concerns about security and perceived weaknesses in market regulation are limiting the number of western banks setting up in the Middle East, a new report has concluded.

The Economist Intelligence Unit (EIU), the influential London-based think-tank, says that more and more banks are keen on the idea of a presence in the region, but many are concerned about the safety of employees and the transparency of day-to-day business.

Their findings agree with what Douglas Clark Johnson, CEO of American firm Calyx Financial, told an audience of banking officials in Bahrain recently, when he stressed that GCC companies must challenge misconceptions about the region.

Chief among the concerns of foreign-based financial institutions appears to be what they view as poor regulatory standards, with 70% of those questioned by the EIU citing that reason as a deterrent to investing in the region.

“Foreign banks and other companies will continue to need reassurance from governments in the Middle East that they can operate in a stable political environment and that there will be a sustained trend towards economic and legislative reform in the years ahead,” says Rob Mitchell, editor of the EIU’s just published Investment in the Middle East: Opportunities and Challenges for Financial Institutions report.

However, amid the concerns voiced by the 168 senior executives from financial services firms polled by EIU emerged a picture which augers well for the Middle East.

The continued good health of markets in the region has seen the significance of the Middle East to investors increase substantially in recent years and the report tellingly notes: “The growing importance of the Middle East as a region is leading many financial institutions to consider establishing a permanent office or network of offices there. The ‘suitcase strategy’ – managing operations from overseas and flying in for short visits – is increasingly seen as untenable and is fast becoming a thing of the past.”

The financial good health of the region seems assured, at least in the short-term, as just over half of those surveyed told the EIU that they either had an office in the area or planned to open one within three years.

As a business location, Bahrain has certain clear advantages on other countries in the region, with one of the most common obstacles to business cited by those surveyed – the need for a local partner before any operations can commence, as has been the case in Dubai – not a factor in the Kingdom.

Experts believe that if peace holds in the region, and certain reassurances can be offered to foreign banks, then the future for banking and investment in the Middle East looks good.

Mitchell notes: “A combination of growth and gradual economic reform in the Middle East has stimulated interest in the region among many western financial services firms”.