Bahrain is well on the way to becoming the Islamic banking hub of the Middle East, but the small Gulf island faces stiff competition from Dubai, Saudi Arabia and Qatar, who are all jostling for pole position as the region’s financial services hub.
Bahrain, lacking the energy resources and business clout of its neighbors, is pulling out all the stops to re-position itself as a banking hub after numerous international players left in recent years to the Dubai International Financial Centre and the Qatar Financial Center (QFC).
“We spoke to a lot of banks and people are shifting to Dubai, but Bahrain is making a lot of effort to retain those companies,” said Burhan Ali, a financial analyst at Kuwait’s Global Investment House.
At the forefront of this drive is the launch last month of the $1.5 billion Bahrain Financial Harbour (BFH), offering 60,000 square meters of office space, and the near completion of the World Trade Center towers in downtown Manama.
The competition is tough, however, with some 600 companies moving into the QFC in less than two years, and Dubai continually attracting new institutions on the back of its construction boom and soaring economic growth.
Saudi Arabia is also giving Manama a run for its money, doubling the number of banks and licensing more than 50 investment banks and brokerages in the last few years, according to The Financial Times.
Accentuating the positive
On Bahrain’s side, and what the BFH hopes to capitalize on, is the kingdom’s prime geographical positioning in-between Kuwait to the one side and Qatar and the Emirates to the other, while a causeway links the island to Saudi Arabia.
Dubai’s rising inflation and rental costs are also a factor.
“The cost of an office in Bahrain is a lot less than in Dubai, and its easy to travel around,” remarked Ali.
These factors aside, what is of primary importance to international institutions moving into Bahrain is the country’s regulatory environment. The Central Bank is actively implementing regulations to attract firms and is looking to build a framework for capital markets. Manama is also home to the region’s Middle East-North Africa Financial Action Task Force (MENA-FATF), which has been instrumental in rolling out anti-money laundering and counter-terrorist financing regulations in the region since its launch in 2004.
In the Islamic banking field, Bahrain was the first country in the region to implement regulations specifically for the sector and the first to start sukkuks in 2001. The insurance sector is also taking off.
These factors made Bahrain an attractive destination for the European Islamic Investment Bank (EIIB), which opened a representative office last December and recently signed an MoU with Bahrain Islamic Bank to cooperate in the treasury capitals area as well as corporate finance and assets management.
“To us it is an important hub. There were a number of driving forces. Bahrain is the home of Islamic finance in the GCC, it has a very well regulated and mature environment to operate in not totally dissimilar to the regulatory environment in the UK. It is more mature at this moment in time in the regulatory environment than other places in the GCC,” said John Weguelin, Managing Director of the EIIB in London.
The Royal Bank of Scotland has also reportedly decided upon Bahrain as its new regional base over offices in two other Gulf countries.
There are 391 licensed financial firms in Bahrain, of which some 50 are Islamic.
“If you look at the number of Islamic institutions already registered in Bahrain, you will find more than in Qatar or Dubai,” said Weguelin.
The Islamic sector is certainly paying dividends, registering 43.2% growth from 2003 to 2006. The kingdom’s first Islamic bank, the Bahrain Islamic Bank (BIsB) saw profits surge last year by 77% to $34.7 million net from $19.6 million in 2005, with total assets growing 36% over 2005 to $1.1 billion.
Promising initiatives
Conventional banking still accounts for the lion’s share of the banking market, however, with the leading banks actively seeking new markets, such as Ahli United Bank into Kuwait, Iraq, Qatar and Egypt. But the internal consolidation that has taken place in Dubai over the past year has not yet happened in Bahrain.
“At some point there will have to be consolidation. Internally this is not happening but should see it at some point. Consolidation is going to be the trend now,” said Ali.
In anticipation of consolidation and the regional competition in traditional financing, the government is proactively encouraging the sector to become an Islamic financial hub.
“The increase in liquidity in the economy coupled with Bahrain’s leading role in the emerging Islamic banking sector has spurred the development in the country. Bahrain hosts 34 out of 78 Islamic funds and can thus really claim itself as the hub for this growing industry,” Bahrain’s Minister of Works and Housing, Fahmi bin Ali Al Jowder was quoted as saying at a recent conference.
Ali however thinks Bahrain is not an Islamic banking hub just yet, faced with competition from Malaysia and newcomers to the sector London, Singapore, Japan and India. “The initiatives are there and sometime soon will be seen as an Islamic financial hub,” he said.
On the regional level, Bahrain is arguably already there, with promising advantages over regional markets.
“I think the focus for Bahrain now is to position themselves as the Islamic financial center within the GCC,” said Weguelin.
