At a time when most of the world’s financial services sectors have been shrinking, Bahrain’s have remained resilient. Not only is it the region’s biggest, longest-established financial services center, but you can also find an attitude that welcomes foreign investment here. The Bahrain Association of Banks (BAB) has a key role to promote awareness of Bahrain as a major banking center and hub of financial services, with an investment-friendly jurisdiction, a cost-effective and innovative business environment and a strong and stable regulatory system. BAB’s CEO Dr Waheed Al Qassim provides an in-depth insight into the banking and finance sectors in Bahrain and the wider GCC region.
What is your outlook for the financial sector in the GCC, in terms of consolidation, mergers and/or reorganizations to take place in the near future as a result of stiff competition and increasing pressures on costs?
Mergers are a strongly suggested option in light of a number of factors playing a crucial role in this field, such as new banking standards, the Basel III standards, the need to maintain financial stability in light of deteriorating oil prices, and the desire to protect liquidity, resulting from the overflow of private and public deposits abroad.
In this atmosphere, GCC banking markets may have entered an important stage of merging processes. In the middle of the current year, we have witnessed the unison of two of the largest banks in the United Arab Emirates, the National Bank of Abu Dhabi and the First Gulf Bank, merging to create a national entity and a regional center of banking force, with total assets of $170 billion. In the Sultanate of Oman, talks between Sohar Bank and Bank Dhofar regarding the merger process between them have reached an advanced stage. It is also expected that merging processes will take place in Qatar.
Since the year 2013, Bahrain has continuously witnessed a number of mergers and acquisitions. In March 2013, National Bank of Bahrain, with the Public Authority for Social Insurance Company, bought 25.8% each, of the shares of Bahrain Islamic Bank from Dar Kuwait Investment Company, in a deal with an approximate net worth of $92.6 million. And in September of the same year, Al Salam Bank announced its approval of a merger with BMI Bank, a subsidiary institution of the Omani Bank of Muscat in Bahrain, through the exchange of the shares of the two banks. And just last November, there has been discussions of two merger deals between four local banks in the country. In truth, the trend towards the integration of financial institutions is clearly apparent in Bahrain, and in insurance companies.
These merger processes aim to strengthen Bahrain's banking sector and to enhance its competitiveness on a regional level, especially with the trend of small and medium-sized banks merging as a result of the high cost of commitment to new banking standards. Noteworthy of the Bahraini situation is the large cash liquidity and strong capital reserves possessed by banks operating here.
But I would like to emphasize that it is important for banking mergers not to affect competitiveness, given that sound banking competition enhances the performance of the banking sector, which must be taken into account by regulatory systems in their approach to mergers.
What role does Bahrain’s financial sector play in the region?
To discern the strength of the banking sector in Bahrain, it is enough to point out that the contribution of this sector to the GDP of $31.1 billion, amounted to 17.2%, which places it second directly after oil, according to the latest statistics issued by the Central Bank of Bahrain.
According to those statistics, volume segment assets have reached $192.7 billion in September 2016, and out of 404 operating financial institutions in the sector, there are 113 institutions offering banking services, including 76 inter banks, 28 retail banks, 15 branches of foreign banks, and eight representative offices.
It should be noted here that the total of insurance institutions authorized to work in Bahrain has reached 152 institutions in September 2016, while total premiums amounted to $723.649 million in December 2015, in addition to the financial sector in Bahrain including 51 investment companies, and 19 exchange foundations, and 2 institutions of microfinance. Also the existence of 2,647 collective investment funds last September, of net value $7.48 billion.
Another matter of utmost importance is that local national cadres constitute the majority of the workforce in the financial sector, with 9,049 Bahraini citizens out of 13,887 workers in the sector, representing 65%, while the number of foreigners is 4,838, making up 35%.
As we are talking about an inveterate, vital sector in which hundreds of financial institutions are active and largely dependent on the local cadres, significantly contributing to the national income.
This role played by the banking sector reaches beyond Bahrain to cover the region as a whole, as long as it provides the banking sector in the region, and the Gulf specifically, with qualified, experienced and trained cadres. Many of the financial institutions in Bahrain are directly active in the Gulf market through representative offices, or indirectly through entering into merger deals and acquisitions in partnership with Gulf financial institutions.
I would like to point out something very vital here, which is the importance of facilitation of Bahraini banks entering the markets of the Gulf States, Saudi Arabia, Qatar, Oman, the UAE, Kuwait, in effectiveness of the GCC common commercial agreements, and applying of the principle of reciprocity.
Could you please discuss Bahrain Association of Banks growing role within the kingdom’s financial sector?
The Association has recently unveiled a new brand positioning and identity and a new set of clearly defined objectives which are meant to serve our members better and attract new members from across Bahrain’s financial services sector.
Our role is to promote awareness of Bahrain as a major banking center and hub of financial services, with an investment-friendly jurisdiction, a cost-effective and innovative business environment and a strong and stable regulatory system. We are the voice for the industry, lobbying government, conducting research and promoting the financial services sector as a pillar of Bahrain’s economy.
Going forward we want to go international and create a stronger co-operation with other international banking bodies, associations and forums.
We also want to encourage banks to take a more active role in large project financing, not only in Bahrain but also internationally. One way we have begun to do this is by introducing banking leaders with Ministers at roundtable discussions where they can learn about the country’s key projects and discuss how the private and public sectors can collaborate to drive forward the national economy.
What would your priorities be to open up the communication between national banks and international banks?
15 foreign banks are operating in Bahrain, including international banks such as BNP Paribas, Citibank, HSBC, JP Morgan Chase, State Bank of India, and Standard Chartered – the first foreign bank established in Bahrain about a hundred years ago, in addition to the Middle Eastern banks, including Arab Bank, Arab Banking Corporation, National Bank of Kuwait, commercial Bank and Al Ahli, and Investcorp.
We at the Bahrain Association of Banks are working on including these banks under our umbrella, which would contribute to increasing the networking between them and other local banks. On the other hand, we are interested in seeing more foreign banks in Bahrain, based on our conviction that the entry of foreign banks' branches in the kingdom will raise the financing rates, enhance competitiveness, lead to exchange of experiences, and provide more job opportunities in the sector.
Banking sector growth in Bahrain was at its highest in 2013, and remained resilient and stable for the last 3-4 years. What is the outlook for 2016 and 2017?
At a time when most of the world’s financial services sectors have been shrinking, Bahrain’s have remained resilient. There have been challenges, for example we did have liquidity issues in 2015, like the rest of the region, however if you look at the report for this quarter all banks are making progress. Bahrain remains an attractive investment destination, and it is stable both politically and economically. We believe that if we continue to raise our visibility on the international stage, which is one of BAB’s responsibilities, then the outlook for 2017 is positive.
Economy in Bahrain is the same as the Gulf States, it relies on government funding to finance projects aimed at citizens such as housing projects and monetary support. The Bahraini government has confirmed its commitment constantly to continue major government projects. Of course, this requires the government budget to increase in light of costs increase, with that, it is likely for local banks to be involved in major project deals not just for funding them but also be involved in other projects such as energy projects and others as long as it preserves government funding.
All of this opens opportunism for the banks to work, achieves growth and profit.
BAB had launched a wide-scale promotional campaign on the occasion of the Annual Meetings of the International Monetary Fund and the World Bank Group in a bid to attract more investments to the financial sector in the kingdom. What are those investment opportunities to highlight to the international community – specifically to the UK?
We have banks looking to innovate and grow through merging. So that is one option. Banks are looking at each other’s portfolios and staying with the basic, they are not taking any risks. However, mergers will secure and bring knowledge. Our main objective as we shared at our reception in Washington is to attract more international financial institutions to take Bahrain as a center for their expansion plans. If you look in detail, our record in financial services stands apart in the Middle East. Not only are we the region’s biggest, longest-established financial services center, but you can also find an attitude that welcomes foreign investment here. Moreover, businesses in Bahrain can take advantage of a strategic location, good transport infrastructure and an educated workforce. It’s simply easier and more cost effective to do business here.
As per Ernst & Young’s World Islamic Banking Competitiveness Report 2014-15, international Islamic banking assets walked past the $778-billion mark in 2014 while demonstrating a CAGR of 17% between 2009 and 2013. The global profit pool of Islamic banks is expected triple by 2019. In the seven key markets of the Bahrain, UAE, Qatar, Saudi Arabia, Indonesia, Malaysia and Turkey, Islamic banking assets are expected to hit $1.8 trillion by 2019. How are the Islamic banking institutions improving and innovating to go beyond offering the basic services?
A key dynamic of the Islamic finance industry is the tension between demand and structural constraints that may limit growth. While demographics and customer preferences favor continued demand growth, enhancements to governance, performance and regulations are necessary prerequisites for the industry to realize its potential.
Product innovation has already become imperative for the Islamic finance industry. This is going to be one of the key growth drivers for the industry in the coming years as demand for new products across segments such as Islamic banking, Takaful, sukuk and funds rises thanks to increased understanding and acceptance of Sharia-compliant products. Institutions offering Shariah-compliant products need a dedicated end-to-end Islamic banking system that facilitates and automates Shariah-compliant banking operations and enables banks to scale up their operations to meet global competition, grow market share, retain the loyalty of their customers and enhance their profitability.
How is Bahrain competing and trying to remain ahead of its GCC nations, when it comes to Islamic finance?
I would like to point out that Bahrain has won the first position in the GCC and Middle East region, and second position after Malaysia from 124 countries that contribute with nearly $2 trillion in the Islamic Banking Industry, this is per Islamic finance development indicators, and it is the annual measurement that represents complete development of Islamic finance development in the world.
As for governance mechanism, Bahrain has ranked first on the world in terms of governance due to the environment of regulatory, legislative mechanisms, Islamic finance institutes laws, Islamic asset management and it's the most effective in taking preparations, implementations and governance.
Among the aspects that enhances Bahrain position is the project to be contracted with an independent auditing firm to conduct reviews on compliance with Sharia system, leading to more transparency and reduction of conflict of interest, which in return increases the public confidence in Bahrain Islamic Finance sector as there is a third party.
Among 113 financial institutes operating in the Bahraini banking sector, there are 25 Islamic banks with their total assets reached $25.7 billion, per the Central Bank of Bahrain figures.
I stress that Bahrain is continuing to develop Islamic banking and enhance its contribution to economic development, where the kingdom this year alone, has hosted 20 event in the field of Islamic banking, which included Takaful banks and Islamic Capital Markets, covering 1,582 topics, most of which to discuss falling oil prices and their impact on Islamic banking industry.
It can be noted here that Islamic banks are among the best performing in corporate social responsibility activities, as measured by the banks disclosing corporate social responsibility and recording it in their annual report. In accordance with the Central Bank of Bahrain, Islamic financial institutions contributions to the community has reached about $18.5 million for charity, Zakat Fund Hassan loans in 2015.
To conclude, this year Bahrain and UK is celebrating its 200th anniversary of friendship. The relationship is extensive within the financial sector, where the both nations are considered to be a center for Islamic finance. How can these two countries strengthen the financial sector and where do you see opportunities to work closer?
The financial banking cooperation between the Kingdom of Bahrain and the United Kingdom is result of historical, cultural and civilizational rapprochement between the two sides, no doubt that the 200 years of close ties between Bahrain and Britain carried benefits for both countries and their people.
It must be noted that the British presence in Bahrain has played a positive role in accomplishing social, economic and administrative achievements, especially due to the presence of government adviser Charles Belgrave in the kingdom, which was between 1929 and 1959. As well as cultural interaction achieved by the British Council since 1939, the year in the region and its role in reducing the distance between the people.
There is a great similarity between Britain’s and Bahrain’s constitutional monarchy, political system, and parliamentary life. Here in Bahrain there are a lot of British citizens and with whom we have close friendships and nearly 600 of them carry Bahraini citizenship, and Britain is the first destination to attract Bahraini students to study, a first tourist destination.
The two-way trade between Bahrain and Gulf States has reached $30 billion; we have seen a great rush from Britain towards the Arabian Gulf States. I do not want to go into the military and security details here, but I focus on economic aspects, I see that one of Britain’s objectives is the removal of trade and investment barriers, in this context, the UK would benefit from the negotiations between the European Union on the free trade agreement signing, as they are seeking to sign the agreement free trade agreement with the Gulf states since the late 80s.
This opens the door wide to enhance cooperation between Gulf Nations and Bahrain with Britain, our historical ally, to promote cultural, civilizational and economic relationships. The recent British statements have pointed to speeding up work to transform London into the capital of Islamic finance, and this is a side that can strengthen our cooperation.