Island kingdom Bahrain has opened a new Islamic exchange house and is launching innovative products to the market, such as an electronic trading platform, in an attempt to capture a bigger share of sharia-compliant assets. Writer Hafsa Kara

In the battle to be the world's Islamic banking hub, Bahrain is lagging some way behind Malaysia in terms of total sharia-compliant assets - there is $45bn in Bahrain compared with $103bn in Malaysia, according to The Banker's Top 500 Islamic Financial Institutions, published in November.

However, the island kingdom has not thrown in the towel just yet and over the past 12 months has stepped up its efforts to capture more assets. The country has been busy marketing itself and, in the aftermath of the World Islamic Banking Conference in Manama in November, announced a raft of measures designed to get investors and Islamic banking professionals alike back into its fold.

The Bahrain Financial Exchange (BFX) launched its Bait Al Borsa, or 'house of exchange', in October. Bait al Borsa is an Islamic stock market within the BFX. It is an exclusively sharia-compliant exchange aimed at filling the capital-raising gap in the sector.

To date, Islamic institutions looking to raise capital would resort to straight equity, from either parent banks, high-net-worth individuals or sovereign entities but, with this new exchange, Bahrain will cater to the increasingly large community of investors looking to invest funds in accordance with Islamic principles.

"We are the only ones offering this kind of product in MENA [the Middle East and North Africa]," says Arshad Khan, chief executive officer of BFX.

Middle Eastern regional financial markets are, for the most part, in the development stage and are characterised by a small number of exchanges and split liquidity.

The Bahrain exchange aims to create significant opportunities by pooling this split liquidity and servicing one of the world's fastest-growing and largest areas of financial liquidity. According to Mr Khan, Bait al Borsa will remedy the three areas that are still lacking within Islamic banking: transparency, diversity and cost efficiency. He maintains that, as products within Islamic banking become more diverse, costs will inevitably reduce and more market participants will enter the system.

Thanks to its strategic location and its good relations across the Arab and Muslim world, Bahrain is an ideal location to initiate such a project. Bait al Borsa, for its part, has taken things one step further and launched a new product: e-tayseer.

E-tayseer is a specialist electronic platform that allows Islamic banking participants to exchange, trade and take out loans on an exclusively sharia-compliant exchange. "This is a very innovative product that will change the way Muslim investors trade, speeding up the process considerably," says Mr Khan.

The platform will come into operation at the end of January and has already garnered considerable interest from regional banks looking to implement new methods of banking. Out of 14 financial institutions surveyed, all have welcomed this "long overdue" platform, according to Mr Khan.

Capacity to innovate

Industry experts such as Sameer Abdi, a partner at Ernst & Young, say these initiatives prove Bahrain's capacity to innovate and introduce new modern products reflecting the increasing importance of sharia-compliant tools across the MENA region and beyond. He says: "Products such as these go a long way towards ensuring standardisation, which remains the main area of concern in terms of modernising and ensuring the steady growth of the Islamic banking sector."

Bait al Borsa's target markets are within the Middle East region, although Mr Khan says partnerships with German and French exchanges are in the pipeline too.

Today, Bahrain's banking community is confident in its success and its position as the Middle East's leader in Islamic banking, and refuses to see Malaysia as a rival. "We are complementary in our drive to expand Islamic banking further afield," says Khalid Hamad, executive director at the Central Bank of Bahrain. "We [Bahrain and Malaysia] serve different markets and are both committed to enhancing the sector and making it more accessible to as many investors as possible."

For international bankers interested in Islamic banking and keen to capitalise on its popularity, Bahrain has much to offer. "It's a business-friendly country and has a well-managed and well-run banking system," says Yasser Saud Dahlawi, CEO of the Shariyah Review Bureau in Saudi Arabia.

A number of bankers from outside the region, even some from Asia, agree on the positive features of Bahrain.

Cheng Hao, head of Middle East investment at Industrial and Commercial Bank of China, insists the Gulf island is the place to prospect, understand and expand into Islamic banking. Bahrain, he says, "is where the money is".

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