Published: March 23, 2015
In an increasingly competitive region for financial services, Bahrain has used Islamic finance to stand apart from the crowd. Rod James looks at how its institutions have helped to create a global framework, the difficulty of enforcing standards and the barriers to growth that remain.
In the smallest country in the Persian Gulf, and the one with the least oil, Bahrain’s authorities realised long ago that the nation would need to box clever to compete with its neighbours.
In 1975, when civil war broke out in Lebanon, many international banks that had regional bases there were compelled to find a new home, and fast. Bahrain was quick to see and seize this opportunity. It passed offshore banking regulations and opened its arms to these uprooted banks – provided that they only did business with non-Bahraini customers, they were welcome.
Such swift action proved incredibly effective. By the early 1980s more than 100 international banks had offshore units in Bahrain. The country provided more than a liberal, well regulated place to do business – it also gave investors an entry point into the lucrative Saudi market, with just a single 16-mile causeway separating the two nations.
This opportunistic spark has proved a useful asset again in recent years. The first financial institution to act in accordance with shariah principles was Mit Ghamr, an Egyptian cooperative finance group, back in 1963, and the early Islamic institutions were generally Egyptian or Emirati. But it is Bahrain that identified the growth potential of Islamic finance, turning it into a strategically important local industry and a growing global market.
The Central Bank of Bahrain (CBB) has played a vital role in the development of Islamic finance. The Prudential Information and Regulatory Framework, introduced by the CBB in 2001, was the first piece of legislation aimed specifically at the Islamic finance sector. In the same year Bahrain, under the auspices of the CBB, became the first sovereign in the world to