His Majesty King Hamad bin Isa Al Khalifa has a vision for the nation: Vision 2030. The government is looking to the future with the goal of transforming the Kingdom into a world-class, competitive, sustainable, diversified and knowledge-driven economy. What is the banking sector’s role within the framework of V-2030?
The vision as expressed by His Majesty the King in relation to the banking sector is very clear – Bahrain will remain a major financial hub. The financial industry will continue to contribute a significant proportion of the GDP for Bahrain. The CBB’s role is to provide a regulatory framework which implements best practice for the benefit of all stakeholders. By doing so we will continue to be a financial regulator of choice. This will be achieved through continuous consultation and communication with licencees; and the adoption of rules and guidelines that are both easily understood and consistent with the changing demands of the industry.
Bahrain is the main banking hub for the Gulf and a major centre for Islamic finance. The financial system has been largely resilient to the global crisis, and the further expansion of the Islamic sector, the development of housing finance, retail banking and the deepening of insurance markets are important for the future growth of the financial system. What have been the strategies and success stories of the sector in mitigating the pain of the global financial crisis?
Bahrain’s banks were always well insulated from the recent financial crisis. The business models implemented by the locally incorporated banks were conservatively based. The retail banks were very careful in terms of their lending practices, and the availability of timely, accurate credit data held by the Bahrain Credit Reference Bureau provided an excellent base for ensuring that individual customers were unlikely to be over-committed through debt.
The investment banks did not rush to the party to invest in sub-prime mortgage products, and therefore they were not exposed to the financial meltdown that others experienced when the market turned. In addition, shareholder and investor support remained strong due to the relationships that our banks had strenuously worked to establish and maintain. Investors trusted the banks, and therefore supported them as the global economy worsened.
The CBB regulatory framework is extremely robust, and this allows the CBB was able to work with the banks, monitor trends, and to consult as to how problems could and should be tackled. One specific example of the benefit of the CBB approach is that the CBB requires banks to have a minimum capital adequacy ratio of 12.5%, significantly higher than most other jurisdictions. Related party exposures limits are also conservative, and carefully monitored.
Bahrain has not entered into a ‘regulation crackdown’. We did not need to do so, as we have a programme of continuous improvement and on-going consultation with the industry.
Bahrain will implement the Basel 3 framework, which emphasises the need for liquidity. Our required minimum capital adequacy ratio will be in excess of the global norm, as we have always done. This helps the local industry when a crisis arises, as it provides an extra buffer in times of financial stress.
Our strategy in respect of raising standards has always been one of analysing the market, assessing and evaluating how best to regulate the local market in order to provide a robust regulatory framework, and implementing best practice regulation that allows our banks to operate seamlessly in the regional and global marketplace. That strategy will continue.
The Bahrain Dinar is pegged to the US Dollar, and that has assisted Bahrain in many ways in terms of monetary policy.
In terms of sukuk issuance, Bahrain undertakes extensive market testing before issuing these instruments. The significant and increasing interest in Islamic finance, and the fundamentals of this industry, has assisted Bahrain to overcome the challenges faced by others when they were seeking to raise capital. Similarly, our conventional bond issues have been thoroughly researched before investing time, money and effort to issue these instruments. In essence, Bahrain has followed a conservative, well considered, and effectively executed strategy.
The Central Bank a number of objectives, including ensuring that the currency is always stable, and that the financial sector is in good health. After a strong performance during times of shaky global financial grounds, thanks to the leadership of the CBB, the country has remained a frontrunner. In regards to the Governor’s plan to encourage mergers between different banking institutions, what has been the immediate result that the Central Bank has perceived?
We have witnessed a number of mergers during the recent past, all of which have been successfully completed. This has resulted in stronger, financially more robust banks. This has in turn improved liquidity, sustainability of profits, and provided the merged entitles with greater opportunities in the market. Going forward, the CBB’s strategy will remain one of encouraging meaningful, beneficial, consolidation.
The expectations for newly merged banks are that they shall be well capitalised, and able to withstand exogenous shocks. The steps we have taken to strengthen the internal audit, risk management, and compliance functions has facilitated a focused, well planned and practical application of funds, therefore allowing these banks to compete at previously unattainable levels in the market.
What are the challenges to standardising the Islamic banking sector both regionally and worldwide?
The largest challenge is to inform and educate people as to why Islamic finance is beneficial to them. The benefits of the Islamic finance proposition are not restricted to Muslims; they are available to all.
We need to emphasis the way in which corporate social responsibility lies at the heart of Islamic finance. This provides a fair and equitable structure for all stakeholders in a manner that cannot exist in the conventional model. Ethical behaviour is a fundamental principle of Islamic finance. In the world in which we live this is a critical principle that most people wish to have as a fundamental part of the service provided to them.
Transparency of transactions and ethics, underpinned by a business model that incorporates revenue generating assets, as well as properly evaluated real estate projects, will enhance the Islamic finance proposition.
There are also a number of initiatives in progress to further standardise the documentation that underpins Islamic financial transactions. This is essential if the industry is to demonstrate a globally consistent approach in respect of the legal framework for these transactions. The IIFM (International Islamic Financial Market) and other standard-setting bodies continues to work very hard to inform a wide-ranging debate that embraces all stakeholders. By its nature, these things take time, and whilst there has been significant progress, we remain alert to the pressures to finalise the consultation process for each Shari’a-compliant instrument.
In addition, the industry needs to have a consistent interpretation of Shari’a Law. That is not an easy or quick fix; Shari’a Law is complex. Shari’a Scholars recognise the challenges which exist, and they recognise the weight of responsibility they are encountering. One of the challenges in this respect is that we need more trained Shari’a Scholars; there are simply not enough to satisfy the demands of this burgeoning, rapidly expanding industry.
We also need more trained and experienced professionals. This is being addressed in Bahrain through the Waqf Fund, and it has already produced a large pool of skilled professionals. That in itself brings challenges as other jurisdictions which do not have this expertise routinely recruit many of these professionals. Conversely the benefits which accrue from our experts moving to other jurisdictions significantly enhances the reputation of Bahrain on an international platform.
Other standard-setting bodies, for example AAOIFI, are becoming more widely understood and respected. Consequently an increasing number of jurisdictions are identifying the need for, and the benefits which arise from, the adoption of Shari’a-compliant standards.
In conclusion, there are a number of challenges, but the frameworks required to successfully overcome these are already in place. The Islamic finance industry is relatively new – about 60 years old in a meaningful form. When compared to the centuries which conventional banks have enjoyed, the Islamic industry has come a very long way is a short space of time. Further developments will see a transformation of the Islamic sector. It has the resources to meet the challenges and deliver a successful transformation which provides a mutually beneficial banking experience to all stakeholders.
What is the role of the Waqf Fund, which was established in November 2006 under the auspices of the Central Bank in partnership with Islamic Financial Institutions (IFIs) in Bahrain, in educating, creating consensus and facilitating work in the Islamic sector?
The Waqf Fund has been a major success in terms of providing an avenue for training and developing Bahrainis, and it has provided many accredited certifications that have built a large pool of trained specialists in the financial industry. This has in turn proved to be very attractive to institutions that seek to invest in Bahrain. Selected specific examples of the activities of the Waqf Fund include:
The Graduate Sponsorship Programme (GSP): Now in its fifth year, the GSP provides young Bahraini graduates and junior staff of Waqf Fund member institutions with an orientation in Islamic finance along with practical experience in Islamic Financial Institutions (IFIs). 20 to 25 graduates and bank employees are selected every year for a six-month diploma programme with BIBF (Bahrain Institute of Banking and Finance.)
They study the following courses: (1) Islamic Commercial Jurisprudence, (2) Islamic Banking Operations, (3) Islamic Treasury and Capital Markets, (4) Islamic Accounting, (5) Islamic Insurance, and (6) Banking, Business and Trust Law. The success rate to date has been exceptional.
The Shari’a Reviewer Development Programme: The aim of this programme is to provide a basic orientation of Islamic and conventional finance/banking to Internal Shari’a Reviewers of Islamic Financial Institutions, plus identifying and addressing any knowledge gaps the Shari’a reviewers may have. These programmes are designed as short courses of 10-30 hour duration.
The topics covered include: (1) Understanding Financial Statements for IFIs, (2) Business, Banking and Trust Law, (3) Islamic Treasury and Capital Markets, (4) Risk Management for IFIs, (5) Shari’a Auditing & Corporate Governance for IFIs, and (6) Introduction to AAOIFI and IFSB Standards.
The Advance Diploma in Islamic Commercial Jurisprudence: This diploma programme provides more depth in specific topics to the Internal Shari’a Reviewers of IFIs. It is undertaken over a one-year period and conducted in Arabic.
The diploma consists of eight modules: (1) the theory of contracts and the related legal maxims; (2) the objectives of Shari’a and jurisprudential law (Usul Al Fiqh); (3) the principles of Fatwa and applied jurisprudence; (4) Islamic financial transactions; (5) Fiqh of Zakat and Waqf; (6) Fiqh of Takaful; (7) Shari’a auditing and compliance for Islamic Financial Institutions; and (8) the research component that concludes the programme. The research component has been added for greater depth and quality and to ensure that the programme’s learning outcomes are thoroughly achieved by all participants.
Roundtable Discussions: The Waqf Fund arranges roundtable discussions from time to time that address topics of high importance to the industry. In these sessions, industry professionals, regulators, and Shari’a scholars converge to discuss the relevant aspects in detail. A total of six roundtables have taken place since the inception of the Waqf Fund. Most of these discussions were subsequently followed up through specific action plans by either the Central Bank or the Waqf Fund.
Preparation of an “Islamic Banking Ethics for Bankers” course for junior staff of Islamic banks: The Waqf Fund provided financial assistance to draft an ethics course with a target market of junior staff of Islamic banks, in order to make staff aware of the ethical foundations of Islamic banking. The Central Bank has now made it mandatory training for Islamic banking staff. The course is conducted through the Bahrain Institute for Banking and Finance (BIBF).
Upgrading of Curriculum – BIBF Diploma in Islamic Finance: The Waqf Fund engaged a professional firm to enhance the curriculum of the BIBF Diploma in Islamic Finance. This included preparing six textbooks.
Assisting the University of Bahrain to launch four-year Bachelor of Arts certification in Shari’a for the banking and finance programme: The Waqf Fund collaborated with the University of Bahrain to support the university’s four-year bachelor programme in Islamic finance.
The Waqf Fund provides financial assistance to the programme in addition to the work of curriculum development by providing a practical industry perspective. This is the first year of the programme, which provides a unique perspective linking Shari’a principles and practices with those appropriate to operating a successful business. The graduates of this bilingual programme will be well equipped to work for any Islamic financial institution in Bahrain and globally. They will possess a rare combination of Shari’a, financial, accounting, economics and business knowledge. They will be integrated with the industry through seminars and internships.
Shari’a scholar monthly programme: The Waqf Fund has a monthly session with leading Shari’a scholars in the Islamic finance industry whereby they address the Internal Shari’a Reviewers of IFIs in Bahrain on specific topics, followed by an extensive Q&A session. The purpose of this programme is to provide an opportunity to those who are in the initial stages of becoming a Shari’a scholar. It allows participants to interact with, and learn from, leading Shari’a scholars through dialogue and discussion.
Three very successful sessions have so far been held with scholars of international standing, including Shaikh Essam Ishaq, Shaikh Nizam Yaquby and Shaikh Osama Bahar.
Corporate governance workshop for CEOs and directors of IFIs: Given the increasing importance of corporate governance worldwide and the local Corporate Governance Code introduced by the CBB in Bahrain, there was a pressing need to improve corporate governance standards within IFIs. The Waqf Fund offered two workshops to member institutions, whose enthusiastic participants included CEOs, Board Secretaries, Directors and Chairpersons.
Bahrain has the know-how and the institutional potential to become an insurance hub in the Middle East, especially a takaful and retakaful insurer. How is this sector taking shape within the Central Bank’s strategy?
The Central Bank of Bahrain (CBB) has recently introduced a proposed set of enhanced rules on the operational framework for the takaful and retakaful industry. These rules have been drafted with the objective of enhancing the operational efficiency of the business, safeguarding the interest of all stakeholders, and promoting uniformity of business practices. The enhanced rules will ultimately ensure that the takaful and retakaful firms have a robust operational and solvency framework to effectively compete across the industry.
Since you went to London with the Crown Prince, the Governor and other major leaders of the country to represent Bahrain at the WIEF (World Islamic Economic Forum), what was the outcome of the conference and what new opportunities emerged?
The conference was extremely successful. It brought Islamic finance into a very bright spotlight in a leading financial centre. The feedback so far has been phenomenal, and the interest it has generated is staggering. Islamic finance is now on the world stage, and this conference brought that to the attention of a vast range of stakeholders who had until then acted on the periphery of the industry. That has changed dramatically as many of these stakeholders have gained increased confidence that the Islamic model can be used to the benefit of their clients.
With many years of experience as Chairman of the IIFM and within Central Bank, and having seen some of the most challenging and positive changes both locally and globally, you have surely developed a strong sense of belonging to Bahrain’s most respected and treasured institution. What has been the constant factor that you added to give this Bank the reputation and status that it now has?
Bahrain is my country. I am extremely proud of it, and passionate about it. I strive to serve the nation in the best possible manner, to the full extent of my capabilities. It is always difficult, and frequently unwise, to comment about one’s own contribution. I prefer to have my contribution judged by others.