Why Bahrain is banking on Islamic finance

Bahrain's Islamic financial institutions have made strides in recent months, with the past six weeks seeing a flurry of activity.

In December 2006, the London-based European Islamic Investment Bank (EIIB) signed a co-operation agreement with Bahrain's Liquidity Management Centre (LMC) that will focus on enhancing secondary market liquidity, new issue innovation and appropriate standardisation of market practices.

In addition, one of Bahrain's leading Islamic banks, Al Baraka, has announced plans to float 25% of its unit in Pakistan to bring its capital to $100m, the minimum for a Pakistani bank.

However, arguably the most intriguing development that occurred in December was the creation of an Islamic Finance Investment Company between Bahrain's Kanoo Group and CIMB of Malaysia. The joint venture, which has paid-up capital of $20m, will focus on debt and equity capital markets, corporate banking, asset management and treasury services.

The transition into 2007 has not obstructed further activity in the sector. The Bahraini government recently announced the establishment of a $10m research and training fund to support Islamic financial services in the emirate.

This month Sakana Holistic Housing Solutions, the newly launched 50/50 joint venture between Bank of Bahrain & Kuwait (BBK) and Shamil Bank, signed an agreement with Bahrain-based Solidarity, one of the largest Islamic insurance companies in the world. The agreement will see Solidarity provide Islamic insurance (Takaful) home financing protection and family protection to Sakana's mortgage finance customers.

In light of such developments, it is no coincidence that Bahrain has hosted two major conferences on Islamic finance in recent weeks.

In December 2006, the 13th World Islamic Banking Conference (WIBC) – which centred on assessing the developments in the Islamic banking sector, as well as discussing ways in which the sector can achieve sustainable growth – was attended by 800 delegates from over 30 countries.

And the 6th Sharia Conference for Islamic Banking and Finance Institutions saw discussions on various crucial topics relevant to the Islamic Banking industry and Sharia issues such as comparative study of the banking laws governing Islamic financial institutions, exchange contracts and model forms of contracts to be used as Islamic banking tools.

Long seen as the region's financial centre, it is evident that Bahrain has also emerged as a key player in Islamic finance. According to a recent statement made by Bahrain's Minister of Finance, Shaikh Ahmed bin Mohammed Al-Khalifa, Islamic finance has emerged as one of the most rapidly growing segments of the global economy with total assets of such institutions rising to $200bn. He added that Bahrain would continue to work in order to maintain its status as the global centre of Islamic finance.

At the beginning of 2006, there were 26 licensed Islamic financial institutions operating in the emirate, including six full commercial banks, 17 investment banks, and three offshore banks. The total assets of these institutions was $8.01bn, equal to 63.2% of Bahrain's GDP, and therefore underlines the growing importance of this sector to the country's economy.

Bahrain's Islamic financial institutions have also been making an impression on foreign markets. These institutions have rapidly increased foreign investment in recent years. For example, the foreign assets of Islamic financial institutions reached $4.12bn at the end of 2005, up 42%. The main area of foreign investment was the non-resident private sector-overseas companies and investment bodies, which reached $1.7bn – up 31.3%.

While the sector seems to be booming, there are indications that Bahraini Islamic finance may become a victim of its own success. More specifically, the sector's current rate of expansion is leading to a shortage in Bahrain of skilled Islamic bankers, because of the requirements for individuals who are both skilled in banking and conversant with the fine details of Islamic jurisprudence. Moreover, the fast growth in savings has led to a huge oversupply of deposits, while Sharia-compliant investment opportunities remain limited.

Those involved in the emirate's conventional financial sector share concerns over the future of Bahraini Islamic finance. Subhi Benkhadra, CEO of Esterad Investment Company, recently told the Oxford Business Group that there needs to be a greater focus on the expansion of fund management and support services such as administration and custody for the financial services sector as a whole to continue succeeding. Nevertheless, Benkhadra commended the Bahraini government's involvement in encouraging Islamic finance, which he believes can help the emirate's economy grow long-term.

In spite of the potential hurdles that may face it, Islamic finance in Bahrain has potential for growth. With forecasts indicating that global Islamic capital markets will manage at least 40% of all savings by Muslim individuals and corporations within the next ten years, there is every reason to be optimistic about the sector's long-term viability.

(C) Oxford Business Group - www.oxfordbusinessgroup.com

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