GCC Insights: Bahrain consolidates its position as centre of Islamic finance

Bahrain is home to the largest concentration of Islamic financial institutions (IFIs) and is keen to maintain the competitive edge.

In 2002 alone, monetary authorities undertook major steps to expand the frontiers of Islamic banking and to consolidate Bahrain's position as a centre for Islamic finance.

Earlier in the year, the Bahrain Monetary Agency (BMA) introduced new regulations for the local Islamic banking industry.

The Prudent Information and Regulatory Framework for Islamic Banks (Piri), which came into effect in the first quarter of 2002, requires IFIs to maintain a capital adequacy ratio of 12 per cent like conventional banks.

Also, IFIs are required to establish an audit committee of which the majority of its members should be non-executives.

Ernst & Young helped BMA develop Piri as part of a two-year project aimed at strengthening public confidence in Islamic banking.

Bahrain has been selected to host the International Islamic Financial Market (IIFM), despite fierce competition from Malaysia.

IIMF will serve as a U.S. dollar-based inter-bank money market for Islamic institutions worldwide.
Building on IIMF, a group of IFIs took the first steps to set up a liquidity management centre (LMC) as a means to help Islamic finance houses manage their day-to-day liquidity requirements.

Also, Bahrain has been selected as the host for a planned $1.5 billion infrastructure fund aimed at financing infrastructure and privatisation prospects in Muslim countries.

Recently, the International Islamic Rating Agency (IIRA) was set up in Bahrain and includes a number of shareholders such as Jeddah-based, Islamic Development Bank, Abu Dhabi Islamic Bank and Cyprus-based Capital Intelligence.

IIRA will be operative during the first quarter of 2003, and rate Islamic banks and their financial instruments and provide them the credibility and the transparency needed to deal with the international market.

The BMA has been pressing the IFIs to develop sophisticated Islamic financial products in order to compete in a mature financial services sector.

The BMA itself has launched Islamic treasury bills and other instruments with the aim of providing a liquidity management alternative for IFIs.

Recently, Shamil Bank of Bahrain has launched Al-Ruban MasterCard as the first Islamic credit card in the Middle East.

Customers are not charged interest but they pay a one-off administrative fee plus fee per transaction.

The card cannot be used for purchase of prohibited goods from an Islamic perspective.
For its part, the BMA granted permission to Overland Leasing Bank, to be capitalised at $50 million.

The firm, in which the Geneva-based Dar Al-Maal Al-Islami (DMI) has a stake, will engage in leasing medical and heavy equipment, making it the Islamic leasing bank in the region.

Monetary officials predict a surge of interest in Islamic insurance (takaful), as the field is not yet developed. Recently, the BMA granted a licence to Solidarity, which is partly owned by DMI, to provide Islamic life insurance products.

Islamic commercial banks such as Bahrain Islamic Bank and Shamil Bank of Bahrain operate alongside other Islamic investment banks.

In mid-1996, Citibank established an Islamic banking unit, Citi Islamic Investment Bank, with $20 million capital.

ABC Islamic Bank, a wholly owned subsidiary of Arab Banking Corp. (ABC), is a major player in the industry.

ABC Islamic Bank is close to launching its interest-free Islamic credit card. Dallah Albaraka, which is owned by Saudi financier Kamal Saleh, has set up its holding company in Bahrain.

Islamic investment bank Gulf Finance House is backing the $1 billion Bahrain Financial Harbour.

The ambitious venture covers an area of 202,272 square metres and aims at consolidating Bahrain's position as the leading financial hub in the region.

There is no precise figure on the size of Islamic banks. But Kamel Saleh told a gathering in Bahrain on November 2 that some $700 billion is circulated by Islamic banks and institutions in 50 countries around the world.

Malaysia continues to challenge Bahrain for supremacy of Islamic banking. In early November, Malaysia hosted a gathering dealing with Islamic financial services while Bahrain was hosting the World Islamic Banking Conference and Exhibition.