H E Rasheed Al-Maraj, Governor, Central Bank of Bahrain
The malaise that has hit the world's economies has left Bahrain relatively unscathed, leaving the country to concentrate on its Islamic finance offerings.
The financial crisis has made its impact felt in the countries of the Middle East and north Africa (MENA) region as it has throughout the world. As a leading financial centre of the MENA region, Bahrain has not been immune to the aftershocks, although the impact has been more muted than in many other countries.
Despite Bahrain's strong fiscal and reserves position, the decline in the price of oil from its peak last July has had an impact on government revenues as well as financial system liquidity. In the final quarter of 2008 and the first quarter of this year, Bahrain's stock market fell along with those in the rest of the world. Although Bahrain's property markets were not subject to the same speculative excesses as those seen elsewhere, there has been a downturn in the level of activity, with negative effects hitting some developers and lenders. Additionally, to the extent that some projects have relied on finance provided by major international institutions, they have suffered from the more limited availability of credit that has been a feature of the post-Lehman world. Fortunately in Bahrain we have enough resources of our own that we can cover most of their financing gaps.
No harsh measures
Nonetheless, Bahrain's financial institutions and markets have not suffered to anything like the extent of advanced economies. We have not needed to take the sort of extraordinary measures seen elsewhere in the world to protect our financial system, such as government capital injections or blanket guarantees of deposits.
There are two key reasons for this. First, many of Bahrain's major players have focused on business close to home in the MENA region and therefore their international exposure has been limited. With relatively few exceptions, Bahrain's financial institutions have generally avoided exposures to the sorts of structured financial products that have caused such problems for Western banks.
Second, capital and liquidity buffers have been relatively high. For example, in Bahrain we set a minimum capital ratio of 12% for our banks and expect them to maintain a conservative loan-to-deposit ratio to limit their exposure to volatile funding sources. In addition, the managers of our financial institutions have been relatively cautious in their approach so that they have not, for example, borrowed heavily in international markets. As a result, leverage remains relatively low among our banks - in the order of the low to mid-teens rather than the 20 or 30 times leverage seen in the advanced economies. This has given us some protection.
Local problems
This is not to suggest that Bahrain has been immune to problems. The events at two wholesale banks, TIBC and Awal, have understandably attracted a good deal of media and public attention. Unravelling the exact sequence of events that led up to the defaults by these banks is a complex task which inevitably takes some time. However, leading international law firms have now been appointed as administrators at both of them. Our intention is to ensure that the administration processes are conducted as model cases and we hope creditors will take comfort from the transparency and professionalism with which these administrations are being handled.
More generally, we must take stock and learn the lessons of the crisis. We have recently issued a consultation paper on standards of liquidity management. The crisis has shown that regulators need to be much more concerned about liquidity than they have been in the recent past and our aim is to ensure that international best practices are adopted in Bahrain. We will also review other aspects of our rulebook to ensure that lessons are learned and are watching closely the new proposals emerging from international standard-setting bodies such as the Basel Committee.
Islamic finance hub
A side effect of the global crisis has been the quickening of interest in Islamic finance - insurance as well as banking and investment - for which Bahrain is considered one of the leading centres in the world. The heightened interest in Islamic finance provides us with a great opportunity. At the central bank of Bahrain we will strive to maintain our leading global position in this form of finance and our regional position as a key financial centre for the MENA region.
H E Rasheed Al-Maraj is the governor of the central bank of Bahrain
