Speaking at his first overseas engagement since his appointment earlier in the year, the new governor of the Bahrain Monetary Agency (BMA), Rashid Mohamed Al Muraj, outlined Bahrain’s key role as a financial centre and regulator in the Middle East. Addressing an FT Business roundtable in London called Bahrain: New Opportunities, New Challenges, Mr Al Muraj examined Bahrain’s position in the Gulf and the expanding markets for Islamic banking, insurance and sukuk (Islamic bonds).
Bahrain’s legacy
“I would like to highlight the maintenance of Bahrain as an efficient and competent regulatory monetary agency,” he said. “As the industry becomes more complex, it requires an efficient and competent regulatory framework and this is a legacy that Bahrain has developed over the past 30 years. The scope of our efforts is wider than Bahrain and the regional reach that Bahrain is trying to achieve is key in our thinking.
“Bahrain has evolved as a leading player in the region. We are determined to continue this course and we see many opportunities as the wider region goes through political and economic reforms.
“We think that the financial institutions in Bahrain will be key players in the development of the major structural change going on in the area. I am pleased that in recent years Bahrain has played an important role in developing the regulatory framework for the Islamic financial institutions. We have introduced many products. One of those is the sukuk,” he said.
“The other area of expertise that we have developed is takaful (Islamic insurance). Bahrain has developed the credentials, the competence and expertise to assume a leading role in this emerging industry. And, parallel to this, we have encouraged innovation in the market and encouraged the industry to come up with different organisations to set up accounting and auditing standards, co-operating closely with the major players in the industry. I would also like to highlight the development of the Liquidity Management Centre (LMC), which was hosted by the BMA and has helped to develop critical instruments for the Islamic markets.”
Jawad Ali, senior associate at international law firm King & Spalding, responded: “Bahrain is probably the leading centre for Islamically-compliant financings and investment for several reasons. It hosts the crème de la crème of Islamic banks in the Gulf, which are developing sophisticated products and selling in various jurisdictions in the region, and for that reason we call Bahrain the hub. We think the future of Islamic finance in a centre like Bahrain is big.”
Jawad Ali: Bahrain “hosts the crème de la crème of Islamic banks in the Gulf”
Mr Al Muraj said: “We will continue to build on our regulatory framework and provide clear guidance and transparency. We want to create the right environment for Islamic institutions to work in Bahrain and to give other financial centres the confidence and comfort that this new industry is well regulated.”
Track record
Is Bahrain the pre-eminent Islamic regulatory environment in the world? “We have the track record, we have built our reputation over decades. If you want to call yourself the pre-eminent leader of this industry it cannot be done overnight,” said Mr Al Muraj.
Elham Hassan, country senior partner for PricewaterhouseCoopers in Bahrain, said that inquiries about Islamic banking from anywhere in the world, including Malaysia, are directed to Bahrain “because our staff are more experienced in the subject and we are building on what Bahrain has created over a number of years”.
Mr Ali agreed: “Bahraini (Islamic) institutions top the list of those that are truly regional. And, if you look at the wealth of human resources within those institutions in Bahrain, you will probably see that they capture close to 50% of the who’s who in that market and those people are developing products not only for the region but also for the US and Europe.”
Sir Roger Tomkys (check), head of the Arab British Chamber of Commerce, asked whether there was any possibility of centralising the concept of what was and what was not in compliance with Shariah. He said that he felt this issue could prove troublesome, especially for a non-Muslim regulator such as the UK’s Financial Services Authority (FSA).
Mr Al Maraj said he believed that the industry was converging towards unified standards and the BMA was encouraging standardisation.
Rashid Mohamed Al Muraj, BMA governor
Toby Fiennes, banking supervision manager in the international firms department at the FSA, said, poignantly: “We at the FSA see ourselves as financial regulators not religious regulators. Harmonisation of Shariah standards is not something we would seek to impose or even necessarily encourage because it might stifle innovation, which we would seek to encourage. “Islamic banks throw up some quite unique issues for corporate governance. You are not just looking at protecting the shareholders, you also need to look at protecting the investment account holders, who share in the profits of the bank in the same way as shareholders. You need to build in an extra layer of governance to protect them and we in the UK are still grappling with this.”
Product challenges
Mr Al Maraj said that one of the challenges that Islamic banks face is to come up with products that satisfy the project finance requirements of the region. The challenge was to move from the short-term to long-term financing and it was in this area that Islamic financing would have its biggest impact on the development of the region, he said.
Mr Ali said that the emerging sukuk market represented an ideal vehicle for Islamic investors and an ideal instrument for project finance, although at present the market was viewing sukuk as short-term commercial paper rather than as a bond with longer tenor. He viewed sukuk much more as a long-term instrument that could be tradeable. The BMA was the first to issue sukuk a few years ago and with the LMC designed to develop a secondary market in sukuk, roundtable participants said they believed they were witnessing the beginning of a $100bn industry.
FINANCIAL LAW IN WAITING A NEW LAW has been proposed that pulls together various pieces of financial legislation and renames the Bahrain Monetary Agency (BMA). As The Banker went to press at the end of March, the draft law was awaiting final approval. When it becomes statute, it will, for the first time, bring together Bahrain’s laws on banking, insurance, capital markets and other financial services into one streamlined enactment, thereby enhancing the BMA’s ability to perform as a single regulator. Under the legislation, the BMA will be renamed the Central Bank of Bahrain to reinforce further its role as a central bank.
