As the foremost financial services center in the Gulf, Bahrain has proved to be resilient in the face of liquidity challenges posed by low oil prices and austerity. Already an international leader in Islamic finance, the kingdom is now firmly focused on nurturing a globally competitive financial technology (fintech) industry.
Bahrain is accustomed to punching above its weight. With a population of just 1.3 million, this tiny nation of islands in the Persian Gulf has played a pivotal role in trade and commerce since antiquity. Today, Bahrain stands out as the main banking hub in the Gulf and a regional pioneer in financial services.
“Bahrain has a very sophisticated and mature financial sector,” explains Khalid Abdulla, Managing Director of Eskan Bank. “It is the oldest in the region and has been widely recognized as the Gulf’s financial capital for more than 40 years. We have led the Middle East in a range of sectors – from banking, to asset management, to Islamic finance.”
Currently there are 403 licensed financial institutions in Bahrain, of which 79 are conventional banks and 24 are Islamic banks. Conventional commercial banks are dominant in almost all facets.
“The banking industry in Bahrain has come a long way over the last few decades,” says Khalid Hamad Abdul-Rahman Hamad, Executive Director of Banking Supervision at the Central Bank of Bahrain (CBB). “Segments such as commercial, retail, investments and Islamic banking have made great inroads in the industry.”
Banking institutions and financial firms across the GCC have faced challenges in recent years due to the sustained slump in oil prices and the subsequent austerity measures that have been imposed by governments throughout the region to varying degrees.
“There have been challenges. For example, we had liquidity issues in 2015, like the rest of the region,” acknowledges Waheed Al Qassim, CEO of the Bahrain Association of Banks.
“However, if you look at the reports for the most recent financial quarter, all banks are making progress,” Dr Al Qassim adds.
In its first GCC listed bank results report published in April 2016, KPMG indicated that the regional banking sector had entered a new paradigm characterized by margin compression, tightening liquidity, moderate asset and profit growth, limited capital market activity, greater focus on cost reduction and a widespread need for greater capital and funding. However, the outlook for the coming years remained relatively positive, thanks to the expectation of continued government support for the sector and committed infrastructure investment.
During a meeting with the board of Ahli United Bank in November 2016, Bahrain’s Prime Minister, Prince Khalifa bin Salman Al Khalifa, affirmed the government’s commitment to introducing unspecified economic measures to help finance and banking firms expand their operations in the kingdom.
According to Moody’s most recent report on Bahrain’s banking sector, published in June 2016, low oil prices and reduced government expenditure over the next 12-18 months are likely to be partly mitigated by the diversity of the non-oil economy and a GCC-funded economic support package.
The ratings agency was also optimistic about the positive impact of Bahraini banks' ongoing initiatives to recover and write off legacy problem loans, while the recent rebound in tourism and construction activity will also help to offset pressure on loan quality.
Despite forecasting challenging funding conditions due to a slowdown in deposit inflows, Moody's expects Bahraini banks' funding and liquidity positions to remain resilient overall, supported by high liquidity buffers and loan growth of around 4% in 2016.
The International Monetary Fund (IMF) also issued an upbeat assessment of the sector in 2016, stating: “Bahraini banks’ strong capitalization and liquidity will help them weather a slowing in the pace of economic growth. The CBB continues to strengthen its regulations and supervision of the financial sector, which will support the continued development and stability of the financial system.”
The IMF noted that the exchange rate peg to the US dollar continues to serve Bahrain well.
“One of the attributes of Bahrain is the fact that we have a small population and things can be done more easily than elsewhere. By this, I mean that we have more flexibility in our financial sector which is a great advantage in comparison to some of our neighbors,” says Abdulhakeem Y. Alkhayyat, Managing Director & CEO of Kuwait Finance House (KFH) – Bahrain.
The resilience of Bahrain’s financial services is evidenced by 2015’s Central Bank figures, which showed that employment in the sector increased by 2.8% year-on-year despite the stiff economic headwinds that buffeted the industry.
Regulatory changes to foster fintech revolution
Consummate with its status as a regional pioneer in financial services, Bahrain is also embracing the revolution in financial technology, known as fintech.
Whilst some traditional banks and finance institutions view the emergence of fintech as a threat to their hegemony, others see it as an opportunity.
“It is clear that fintech presents a sizeable opening to modernize, internationalize and democratize financial services in the region,” says Dr Al Qassim.
At present, over 1,000 companies, boasting $105 billion in funding and $870 billion in market capitalization, are engaged in fintech activities globally. Major trends unleashed by fintech include digital payments, crowdfunding, robo-advisory and blockchain.
Not to be left behind, Bahrain’s key financial players began a series of roundtable discussions in October 2016 on the development of the kingdom’s payment infrastructure through the implementation of regulations that support innovation.
Two months later, during the World Islamic Banking Conference (WIBC) held in Bahrain, Central Bank Governor Rasheed Mohammed Al Maraj hinted that the CBB would soon issue regulations to facilitate fintech solutions.
“One of the key priorities at the Central Bank is to work with all stakeholders to introduce the right regulatory framework that can attract international fintech companies to base themselves in Bahrain with a view to expanding in the region,” says Khalid Hamad Abdul-Rahman Hamad.