The Central Bank of Bahrain is preparing to crackdown on banks operating in the kingdom, with a set of tougher regulations the governor expects will lead smaller banks to merge and survivors to reduce profit expectations.
CBB governor Rashid Mohammed Al Maraj said the central bank would target a select group of banks declared “domestically important financial institutions”.
The changes were intended to strengthen the country's crucial financial sector but Al Maraj said he also expected it to lead to consolidation in the market.
There are 405 registered financial institutions in Bahrain and the financial sector contributes 23 percent of Bahrain's GDP compared to 6 percent for the entire GCC.
Al Maraj said the CBB was working on a new concept to classify banks that are domestically important financial institutions, which would face tougher regulation but were more likely to be able to meet them. The details would be announced imminently, he said.
“We have, over the past year and since this issue [of strengthening the finance sector] came about, taken an exercise to identify which ones represent the most domestically important,” he said during a Q and A at a Euromoney conference on Tuesday.
“I think some of the banks will be surprised with what I'm saying now because we're on the verge of issuing those names and communicating with those banks that have been selected as domestically important financial institutions, which will put on them certain requirements.
“Those requirements, because of the nature of the business, the complexity of the business and the size of their market control will necessitate of them to comply with additional requirements.”
The requirements include increasing the level of capital relative to debt, although Al Maraj did not provide details.
Chief executive of BBK, Abdulkarim Ahmed Bucheery said the sector had expected new regulations but he was surprised to learn they would be targeted towards specific institutions.
He expected the “domestically important financial institutions” to be identified according to their market share, suggesting 10 percent could be the benchmark.
Bucheery said those banks would likely be able to easily meet the requirements.
“We are always ready to comply, we have to make our manouvering to comply with them and to benefit from them,” he told Arabian Business.
“In the past banks would just leverage themselves, make returns north of 20 percent. Today, you're very lucky if you make anything upwards of 10 percent return. So it's become very different.”
Al Maraj said while the new regulations would make it more difficult for banks to operate, they were crucial for the sector.
Banks had endured a “sort of stress test” during the “difficult” period since the GFC. However, the positive results of the banks clearly demonstrated the “soundness and the robustness” of the banking system in Bahrain.
“What matters to us is to ensure the soundness of our banking system,” he said.
“The shocks that we have seen as the result of the financial crisis could have catastrophic effect on our banks and if not for measures we have taken and for the collaboration of the banks we could have seen much worse situation during this crisis.”
Banks should no longer expect to see massive growth and the days of large profits are history.
“This is a regulated industry and it should behave like a regulated industry, not as a start-up ... that would expect 20-30 percent [profit],” Al Maraj said.
“I think those days are gone. [The new regulations will] make it even more difficult for these banks to achieve the figures that they've achieved in the past, not only in Bahrain but globally.
“The expectation should be more modest than any other sector.”
The CBB also is continuing to encourage consolidation of the banking industry.
“This has been a policy of the central bank of Bahrain … to encourage further consolidation and we'll continue to do that. As we move with more successful mergers this will be good incentives for others to follow suit. [But] there's no enforcement.
“We're entering a period where there's no room for small banks. The requirement is going to be very challenging, the competition in the market is becoming very forceful and I think this will make it difficult for small banks to survive and to achieve results … that are in line with what's been achieved over the years.”
He expected successful mergers and acquisitions to encourage others to follow.
“Mergers and acquisitions … provide stronger banks, which in turn are more able to … develop a much stronger base to withstand economic downturns,” he said.