Bahrain is set on becoming an oil-fuelled beacon for Islamic finance; nurturing talent, bolstering banks and tightening regulations. However, since the financial crisis dampened confidence in the Islamic finance sector, Isla MacFarlane looks at how the country it will use its advantages to reignite it.
Bahrain has a long history in the Islamic banking and finance industry, beginning when Bahrain Islamic Bank opened its doors in 1979. The early years saw slow growth in the industry, with only five Islamic banks and one offshore banking unit by 1994. However, nourished by excessive liquidity following the Gulf war of 1991 the industry enjoyed a growth spurt as demand for Islamic products gushed upwards along with the oil prices.
Today, Bahrain plays host to the largest concentration of Islamic financial institutions in the world. At the end of 2009, 27 of the 140 banks operating in Bahrain were Shari'ah-compliant lenders, with combined assets of $25.5 billion - more than 10 per cent of the sector's total. In addition, at the beginning of 2009, there were 18 Takaful companies and one ReTakaful company within the Kingdom's shores, out of a total of 177 insurance policy writers with offices in Bahrain.
Bahrain also houses a number of organisations central to the development of Islamic finance, including the Accounting and Auditing Organization for Islamic Financial Institutions, the General Council for Islamic Banks and Financial Institutions, the International Islamic Financial Market and the International Islamic Rating Agency.
The Central Bank of Bahrain (CBB) boasts that the country is at the forefront of Islamic securities, including short-term Sukuk, as well as leasing securities, and that it has become the preferred destination for Islamic funds. The Islamic fund industry grew by 78.5 per cent to $1.3 billion in 2007, invested through 87 funds, compared with $750 million and 80 funds in 2006, according to the CBB. There are currently 43 Islamic funds registered in Bahrain.
Sheikh Mohammed bin Essa Al Khalifa, Chief Executive of the Economic Development Board, said, "The remarkable increase in Islamic finance is fresh evidence that Bahrain's national economic strategy is paying off, in terms of creating business, revenue and employment. Fund managers, like many other businesses, are setting up in Bahrain because they know they will benefit from the region's most educated workforce, an ample supply of support services and infrastructure, and systems of regulation and taxation designed to make it safer, easier and more profitable to do business."
However, the global financial crisis cast a shadow over Bahrain's Islamic banks in the fourth quarter of last year, which saw an increase in provisioning for bad loans and a decline in income from investments. Bahrain Islamic Bank, Bahrain's biggest Islamic retail bank by market value, said that provisions for impairments in the third quarter of last year increased more than threefold to $5.31 million from $1.59 million in the same period last year. Its income in the quarter slumped 57.91 per cent to $12.7 million, after last year's income was boosted by $15.9 million in higher real estate valuations.
"Islamic banks in Bahrain are relatively more vulnerable compared to the conventional banks," said Suleman Soorani, a Banking Analyst for Sico Investment Bank. "However it is very hard to make predictions because balance sheets for Islamic banks are very non-transparent. The exposure of Islamic banks to the real estate sector also poses a risk, and I think the Central Bank will continue to monitor the developments in Islamic banks closely."
Bahrain Islamic Bank said that it had complied with regulators' demands to book higher provisions for bad debt. The CBB required banks to book provisions of 50 per cent during the first half of last year on their exposures to troubled Saudi Saad Group and Ahmad Hamad Algosaibi & Bros. A large number of banks in the region lent to the two groups and reported lower earnings partially due to provisions required by regulators.
Ahmed Abbas, the Chief Executive Officer of Liquidity Management Centre, said, "I know of four banks in Bahrain, I will not name them, who were at the very last stage of negotiations with Saad and Ahmad Hamad Algosaibi & Bros. It was Saad and Ahmad Hamad Algosaibi & Bros who did not like the terms that these banks were offering. If that's not luck I don't know what is."
Abbas pessimistically predicted that Islamic banks in Bahrain may not report higher profits at the end of 2010. He said, "It's going to be another tough year. Institutions are now suffering from negative sentiment. People who were very content with yields of six per cent now want 12 or 15 per cent. Islamic banks are not in as bad shape in terms of assets, but definitely in terms of liquidity and going beyond your means, there is an issue."
However, there were Islamic banks in Bahrain who managed to triumph over the turbulence that 2009 brought. Tadhamon Capital, an Islamic investment company based in Bahrain, posted a net profit of $28.6 million for its first period of operations.
Abdulgabbar Hayel Saeed, the Chairman of Tadhamon Capital, said, "We commenced our business at a time when the world was gripped by the worst financial crisis in a century. In spite of the difficult challenges, we are extrem ely pleased with our performance."
Saeed expressed his sincere gratitude to the company's clients, the regulatory authorities in Bahrain, and to the company's employees for their steadfast commitment.
Bahrain-based First Energy Bank (FEB) also trumpeted sound profits, raking in $14.2 million in 2009, as compared to $42,000 in 2008. Vahan Zanoyan, the Chief Executive Officer of FEB, said, "We are very pleased with where we are today, as can be seen from our results for last year, which was in fact our first full year of operations, and which are due ultimately to the strategic business activities we undertook over the course of the year. 2010 is looking like an even more promising year to us, as we have now established a presence in the region and are ready to begin acting on many of the potential investment opportunities in our pipeline. We expect 2010 to become yet another monumental year for FEB."
According to Bahrain's Finance Minister, Sheikh Ahmed bin Mohammed Al-Khalifa, despite the losses suffered, Bahrain's Islamic sector managed to avoid the worst of the global recession because of its close adherence to Shari'ah principles. He said, "We've never claimed we were immune. We were exposed like the rest of the world. But by adhering to best practices, were able to make sure that we minimised the damage to controllable levels."
According to Abbas, one natural advantage Bahrain has is its people. "I will repeat what was said to me a long time ago during Dubai's heydays," said Abbas, "Someone from Dubai said to me that Bahrainis had something that he envied - local talent. I think that is one of Bahrain's strongest points. There is a local banking community, people who will not flee at the first sign of trouble. We've survived quite a few shocks."
Local talent is something that Bahrain is keen to nurture, with institutions such as the Bahrain Institute of Banking and Finance (BIBF), who are committed to providing the highest levels of training, education and professional development programmes to the financial services industry in Bahrain. According to Garry Muriwai, the Director of the Bahrain Institute of Banking and Finance (BIBF), there is a pressing need to deepen the pool of available trained and experienced staff able to work in the sector.
He said, "The Islamic finance industry will face a severe shortage of skilled professionals with a dual knowledge of both finance and Islamic finance in the next decade."
In an effort to bridge the skills deficit, Bahrain's Waqf Fund for Research, Education and Training is working with local and international organisations to enhance the knowledge of those already employed in the sector and to help channel those about to embark on a professional career into the Islamic finance industry.
The fund is working with the BIBF to increase the skills base for the sector through a graduate sponsorship programme. It provides support for graduate students from the banking, finance, accounting and economics streams of the University of Bahrain and other institutions to obtain diplomas from the institute, while also receiving work experience at selected banks.
The BIBF's director said he was certain graduates of the programme would go on to further raise the skills standards within the sector. He said, "We are confident they are well-equipped with the necessary knowledge and sufficient exposure on how the market operates to be successful in their respective careers and to add value to the Islamic finance sector."
According to Khalid Hamad, Executive Director for the Banking Supervision at CBB, another advantage Bahrain offers is its regulatory system. He said, "Whilst the underlying principles of Islamic finance have safeguarded it against the worst of the economic downturn, it is Bahrain's tried and trusted world-class regulatory standards that have helped attract institutions to the country and led to the rapid growth of Islamic finance assets."
Abbas agreed that regulations are getting tougher and tougher in Bahrain. He said, "Every bank will tell you that it did not first go to its board with its results - it had to first clear them with the CBB. And by clear, I don't mean that they send them the papers and they send back their approval; by clear I mean you sit there for hours having every detail in your balance sheet scrutinised. Today is as transparent as the banking sector in Bahrain has ever been."
As the dust settles after the financial crisis, it is clear that it has left its mark on the Islamic finance sector. That was the message from Central Bank of Bahrain Governor Rasheed Al Maraj to delegates at the opening of the seventh Annual Islamic Finance Services Board (IFSB) meeting in Bahrain on 4 May.
He said, "The issue is not whether the Islamic financial industry needs to learn lessons from the crisis, but what lessons it should learn and how it needs to adapt in the light of lessons learned from the crisis.
"In the early days of the crisis, there was a widespread assumption that Islamic finance would continue this strong growth into the future. The view of many people in the industry was that it was not at risk from the crisis. I never shared that point of view. I was not convinced that the Islamic financial industry could avoid suffering some fallout from the worst financial crisis in several generations.
"In recent months as the global financial crisis has deepened, many commentators have pointed out that Islamic financial institutions have escaped relatively unscathed from the severe downturn which is affecting most conventional financial institutions. The continuing implementation of sound business principles should allow the industry to continue its rapid and successful growth of recent decades, and Bahrain is well-positioned to remain at the forefront of developments through the application of prudent regulatory standards."
© Islamic Business and Finance 2010
