In the past three decades or more Bahrain has developed as a regional financial centre for the Gulf and for much of the Arab world. Unlike other Gulf states with abundant oil and gas resources, Bahrain has relatively little in the way of natural resources and has built its financial services industry into its prime economic motor, accounting for 27.6% of gross domestic product (GDP) at year-end 2005.
Just as markets change, Bahrain has had to adapt to major upheavals such as the 1990-91 Gulf war and refine its financial focus to meet regional demands. But while Bahrain has been able to reinvent itself over the decades and target new areas such as Islamic finance and insurance, today it faces its stiffest challenge yet in maintaining its regional role as other countries in the region, including Saudi Arabia, open their financial sectors and provide direct competition.
A new role
With high oil and gas revenues driving booming economies in the Gulf, how does this affect Bahrain? Speaking to The Banker, Rasheed Al Maraj, governor of the Central Bank of Bahrain (CBB), is optimistic about the full integration of financial markets in the region. “All areas are taking off now but there is no one solution that fits all the GCC [Gulf Co-operation Council] states. Bahrain has played a key role in the past but offshore wholesale banking does not exist any more here.
“Wholesale banking will remain in Bahrain but will not be a major growth area for us. We are seeing ourselves more in terms of Islamic banking, asset management, insurance and the mutual fund business, which will be the major growth areas.”
The CBB is reviewing the capital markets structure and collective investment schemes, says Mr Al Maraj. “But what really matters to us is the quality of corporate governance: it is not how much regulation you have [that is important], it is conducting business to the highest standards of corporate governance. We want to ensure the highest possible standards and safeguard the integrity of the business.”
Over many years, Bahrain has built a strong reputation as a sound and well-regulated financial centre, and its core integrity is the prime reason why the island centre is home to 387 financial institutions.
Sharing in the regional boom, the total assets of all 150 banks in Bahrain rose by 33.5% in 2006 to $187.4bn, a significant increase. In the past, Bahrain’s offshore banks played the dominant role in the country’s banking system, accounting for 82% of total assets in 2005, but the offshore distinction has now been abandoned. As the governor emphasises: “The way we look at financial services, we are not trying to ring-fence the industry in a special status, it is part and parcel of our system. Offshoring is no more and banking and insurance now encompass everything.”
The 150 banks in Bahrain are made up of 86 wholesale banks, 28 retail banks, including 10 locally incorporated banks and 15 branches of foreign banks. There are also 36 bank representative offices. Included in the above is the expanding number of Islamic banks, which now total 26 institutions. The total assets of these 26 Islamic banks has been growing steadily to reach $12.2bn at year-end 2006 following increased regional and inter–national interest in Islamic products such as sukuks (Islamic bonds).
Islamic capital
Both the CBB and the Bahrain government are supporting the growth and expansion of the Islamic finance industry, including the growth of Islamic capital markets. Bahrain has emerged as one of the world’s premier Islamic financial capitals with a high concentration of Islamic financial institutions. As well as the 26 banks, there are 13 Islamic insurance (takaful) companies and 88 investment funds. Also, Bahrain is home to some prominent organisations: the Accounting & Auditing Organisation for Islamic Financial Institutions, the International Islamic Financial Market, the Liquidity Management Centre and the Islamic International Rating Agency.
Bahrain’s regulatory strength and strong Islamic credentials can also be seen in the growth of the insurance sector. In March, German insurance giant Allianz received a licence from the CBB to establish an insurance operation in Bahrain. Allianz Takaful (Bahrain) will serve as the Allianz Group’s global hub for Islamic insurance and is the third international insurance group to be granted such a licence in recent months. Overall, there are now more than 159 firms in the insurance sector, including takaful, and products such as life insurance, investment-linked insurance and health insurance are now seen as a huge untapped opportunity.
Mutual funds, although relatively small, have grown dramatically. the total assets under management of 2064 CBB-authorised mutual funds increased by more than 70% to $9.3bn in the year to September 2006 and growth in the previous four years exceeded 300%. Bahrain’s mutual fund industry is seen to have come of age and, with the region booming, the country is proving to be an attractive destination for the registration of regionally-focused funds.
High performance
Like elsewhere in the region, Bahrain’s major banks produced record results in 2006. Gulf International Bank (GIB), Bahrain’s largest bank and the leading project finance house in the region, boosted profits by 26% to a record $255.5m in 2006. Last month, it increased its paid up capital by $500m to $1.5bn to enable it, according to chief executive Dr Khaled Al-Fayez, to continue to expand its operations in its core market in the GCC.
GIB, which is owned by the six GCC states and 27.5% by the Saudi Arabian Monetary Agency, has formidable investment banking experience in the Gulf and has a branch in Saudi Arabia. It has increased net income threefold over the past four years and, although Dr Al-Fayez acknowledges that there is increasing investment banking competition from new institutions in Saudi Arabia and elsewhere, GIB’s franchise continues to expand.
The profits of another Bahrain powerhouse, Arab Banking Corporation (ABC), jumped by 51.9% in 2006 to a record $205m. With a global strategy that spreads its loan book equally between North America, Europe and the Arab world, ABC expects strong growth not only in the GCC, but also in north Africa where it is expanding its branch network in Egypt and opening up in Libya and Algeria. The bank has also applied for a securities licence in Saudi Arabia, is increasing the paid-up capital of Bahrain-based ABC Islamic Bank to $250m and plans to be licensed in the United Arab Emirates in the second quarter this year.
Ahli United Group, which is also building a regional network, achieved strong profit growth of 25.8% to reach $207.5m in 2006. The group, which has a network stretching from Egypt to Iraq, sees itself as a premier pan-Gulf-Middle Eastern retail/corporate/ private bank with established Organisation for Economic Co-operation and Development asset origination and distribution capabilities.
Other Bahraini banks also proved very successful in 2006: National Bank of Bahrain and Bank of Bahrain & Kuwait posted record profits to reach $98m and $87m respectively. Smaller banks did well, too: Unicorn Investment Bank, one of a number of fast-growing Islamic banks, increased profits by 27.5% to $30.1m, for example.
Regional competition
Although the banks are doing well, the new Bahrain Financial Harbour provides an important new financial edifice for Manama and Bahrain’s regulatory structure remains a key strength, nevertheless other financial centres, such as Dubai, Qatar and Riyadh, are attracting new financial players to the region. The enthusiastic chief executive of Unicorn, Majid Al-Refai, is adamant: “If you want banking you go to Bahrain. Bahrain is the Islamic banking capital and the banking centre of the Gulf.” However, recent new players to the region such, as Goldman Sachs and Lebanon’s Bank Audi, chose to set up in Dubai and Qatar respectively. And recently, Riyadh-based Samba Financial Group preferred to establish its first Gulf presence outside Saudi Arabia in Dubai rather than in Bahrain.
The CBB governor says emphatically that the 45 new securities firms in Saudi Arabia “are not affecting our core business in Bahrain”, but new financial centres in the Gulf want a bigger share of the expanding regional financial pie for themselves. The expansion in Dubai, Qatar, and Riyadh too, is increasing overall competition. The question now is what Bahrain can do to fight back.
