Powerful driver of economic growth

Bahrain's banking sector plays an important role in ongoing diversification and development efforts of the nation

Published: Mon 29 Mar 2021, 11:37 AM

Last updated: Mon 29 Mar 2021, 1:58 PM

Bahrain has maintained its status as a regional financial centre, even with increasing competition from its GCC neighbours. With financial technology developing rapidly, and profits, soundness indicators and asset growth remaining healthy, Bahrain's banking system is well-positioned to continue leading non-oil growth and diversification in the country. Assets and profits have risen in recent years, with listed banks recording strong lending growth. The percentages of delinquent and non-performing loans have declined, even though the overall mortgage and credit card lending has increased. 

Bahrain's banking system consists of both conventional and Islamic banks and is the largest component of the financial systems, accounting for over 85 per cent of total financial assets. There are a total of 376 financial sector institutions in the country as of the end of September 2020 including 31 retail banks, 62 wholesale banks, 17 branches of foreign banks and eight representative offices of banks. These also include 34 insurance companies, 53 investment business firms and 86 specialised licensees.

The banking sector has played a pivotal role in the emergence of Bahrain as a leading financial centre in the region. As of July 2020, banking sector assets stood at over $212 billion, more than five times the annual GDP of Bahrain.

Industry growth has been supported by an open market economy, stable and prudent macro-economic and fiscal policies, a credible regulatory framework in line with international standards and a well-qualified local and expat workforce. All these factors have combined to cement Bahrain's position as a regional banking hub, successfully attracting numerous foreign banking organisations to establish their presence in the country.

The importance of financial services for Bahrain's economy goes well beyond Bahrain's Economic Vision 2030, which focuses on shaping the vision of the government, society and the economy, based around three guiding principles; sustainability, fairness and competitiveness. It was the first GCC country to begin diversification efforts, and much of its success in this regard is owed to its thriving financial services sector. The country was able to build one of the region's most dynamic and pioneering fintech ecosystems. It built the region's first onshore fintech regulatory Sandbox, where 32 innovative fintechs from all over the world are testing their technologies today.

Covid-19 has served as a catalyst for digital transformation across a range of sectors, and this is particularly true for financial services and fintech. But it is worth noting that while the pandemic has served as a catalyst for digitisation across the financial services sector, this was a revolution that was already taking place. Banks like Bank ABC launched ila Bank,

Bahrain's fast-growing digital mobile-only bank, which has now introduced ila Premium, a bespoke offering customised to enrich the lifestyles of the experience generation. With the upgrade to ila Premium, customers can unlock a wide array of exciting local and global benefits as well as a customised banking experience, which includes higher interest rates, discounts on transaction fees and charges, over 1,000 airport lounge access worldwide, insurance benefits such as travel, gadget, e-commerce protection and much more. It is the only subscription-based model in the Kingdom of Bahrain and is tailor-made for customers to easily avail of competitive banking benefits such as discounts on fees and charges, preferential interest and foreign exchange rates and higher transaction limits.

Convenience also plays a huge role today. Every generation looks forward to one step less in every process. Arab Financial Services (AFS), the region's leading digital payments and fintech solutions provider, is driven by its customer focus and a commitment to delivering simpler, more secure and convenient payment experiences. AFS exists to empower businesses and individuals by exploring and investing in superior technologies that help shape the future of financial experiences and how they are conducted: anytime, anywhere and anyhow. Anticipating a customer shift to digital payments, in 2019, AFS released the first Android-based NFC point of sale (PoS) terminals in Bahrain which were all-in-one payment solutions that support international and domestic payment schemes and fintech payment options. Their introduction in the market proved highly successful as the Covid-19 pandemic significantly accelerated the shift towards digital payments. Last year, AFS was the first acquirer in Bahrain to introduce local transaction tokenisation on PoS and was the first in Bahrain to accept contactless cards in compliance with the Central Bank mandate on expenditure limits on contactless transactions. Tapping into further opportunities that the pandemic delivered, AFS' eCommerce and eInvoicing acquiring products were launched just as online payments took off that year. They also entered into strategic partnerships with stc Bahrain to rollout the all-in-one fully integrated stc Tajer PoS solution for retail businesses and SMEs.

Islamic Finance

Bahrain has long been recognised as a global leader in Islamic finance, playing host to the largest concentration of Islamic financial institutions in the Middle East and home to a number of pre-eminent global Islamic standard-setting organisations. Islamic financial institutions offering a host of Shari'ah-compliant products and services including six retail banks, 13 wholesale banks, nine Islamic windows of conventional banks, six Takaful companies and two Re-Takaful companies. In addition, Bahrain is at the forefront of issuing Islamic securities (Sukuk), including short-term government Sukuk as well as long term instruments. The Central Bank has played a leading role in the introduction of these innovative products.

The growth of Islamic banking has been remarkable, with total assets increasing from $1.9 billion in 2000 to $32.7 billion as of July 2020, an increase of over 17 times. The market share of Islamic banks correspondingly increased from 1.8 per cent of total banking assets in 2000 to 15.3 per cent in July 2020. This growth was made possible by a variety of factors, most importantly the clear vision and approach of the Central Bank of Bahrain (CBB). The CBB introduced a separate regulatory framework along with a comprehensive prudential and reporting mechanism for the Islamic segment, tailor-made for the specific concepts and needs of Islamic banking and insurance. The rulebook for Islamic banks covers areas such as licensing requirements, capital adequacy, risk management, business conduct, financial crime and disclosure/reporting requirements. Similarly, the insurance rulebook addresses the specific features of Takaful and Re-Takaful firms. Both rulebooks were the first comprehensive regulatory frameworks that dealt with the Islamic finance industry in the region.

Bahrain also plays host to a number of global organisations central to the development of Islamic finance, including:

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)

International Islamic Financial Market (IIFM)

General Council for Islamic Banks and Financial Institutions (CIBAFI)

Islamic International Rating Agency (IIRA)

Bahrain Institute of Banking and Finance (BIBF) - Centre For Islamic Finance

The Waqf Fund

In order to develop the market for Islamic finance and invest in capacity building, the CBB was instrumental in establishing the Waqf Fund in collaboration with the industry. The Waqf Fund was established in November 2006 under the auspices of the CBB in partnership with Islamic Financial Institutions (IFIs) in Bahrain. It has a board of trustees comprising of 13 members, chaired by Khalid Hamad, Executive Director Banking Supervision at the CBB. The board includes representatives from member institutions and three independent members. The board meets regularly to decide, based on industry experience and feedback, which initiatives to launch for the benefit of its member institutions.

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