What are the implications of the Gulf citizens' negative predisposition towards commercial banks, vis-a-vis Islamic banks? This note utilizes Porter's five factor framework to describe environmental aspects driving competition in the banking industry. The note provides the various stages of historical developments in the Arab Gulf banking industry since the colonial era of the British mandate until recent times.

The declining demand for OPEC oil has caused a decline in oil revenue accruing to the Arab Gulf States from a peak of US $ 165 billion in 1981 to less than US $ 40 billion in 1988. This has led the Gulf governments to substantially reduce its expenditure, creating a slowdown in economic activity. This in turn has made the Gulf banking more competitive and has given Gulf banks new inputs to further their involvement in international financial market operations.