Islamic Finance In Bahrain: Development And Growth

Bahrain is a global leader in Islamic finance, ranking 2nd in the Middle East and North Africa (MENA) region and 4th globally for Islamic finance development. The country set a benchmark for Islamic banking regulation by establishing the Bahrain Islamic Bank in 1978 and has since nurtured the concepts, rules, and standards of Sharia-compliant banking.

Bahrain's banking system consists of both conventional and Islamic banks, with the latter including 6 retail banks, 13 wholesale banks, 9 Islamic windows of conventional banks, 6 Takaful companies, and 2 Re-Takaful companies. The country is also home to several prominent global Islamic standard-setting organisations, including the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the International Islamic Financial Market (IIFM), the General Council for Islamic Banks and Financial Institutions (CIBAFI), and the Islamic International Rating Agency (IIRA).

The Central Bank of Bahrain (CBB) has played a pivotal role in the development of Islamic finance in the country by introducing innovative products and establishing the Waqf Fund in collaboration with the industry to invest in Islamic finance training, education, and research. As of July 2020, the total assets of Islamic banks in Bahrain were US$32.7 billion, with a market share of 15.3%.

Bahrain's role as a global leader in Islamic finance

Bahrain is recognised as a global leader in Islamic finance, ranking 2nd in the Middle East and North Africa (MENA) and 4th globally for Islamic finance development. The country has the highest concentration of Islamic finance institutions in the region, with 11 wholesale Islamic banks and 6 retail Islamic banks.

Bahrain's journey as a pioneer in Islamic finance began in 1978 with the establishment of the Bahrain Islamic Bank. Since then, the country has been at the forefront of Islamic finance, nurturing the concepts, rules, and standards of Sharia-compliant banking. This has allowed Bahrain to cater to the needs of both mainstream Islamic finance and the new breed of FinTech entrepreneurs offering Sharia-compliant products.

The Central Bank of Bahrain has played a pivotal role in the development of Islamic finance in the country. It introduced a separate regulatory framework and a comprehensive prudential and reporting mechanism specifically tailored to the concepts and needs of Islamic banking and insurance. The Central Bank has also been instrumental in issuing innovative Islamic financial products, such as short-term government Sukuk and long-term instruments.

Bahrain is home to several global organisations that are central to the development of Islamic finance, including:

• The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)
• The International Islamic Financial Market (IIFM)
• The General Council for Islamic Banks and Financial Institutions (CIBAFI)
• The Islamic International Rating Agency (IIRA)
• The Bahrain Institute of Banking and Finance (BIBF) – Centre for Islamic Finance
• The Waqf Fund

Bahrain's Islamic financial institutions offer a wide range of Sharia-compliant products and services, including:

• 6 retail banks
• 13 wholesale banks
• 9 Islamic windows of conventional banks
• 6 Takaful companies
• 2 Re-Takaful companies

The country's dual banking system

The Kingdom of Bahrain has a dual banking system, consisting of both conventional and Islamic banks. The country's banking sector is the largest component of its financial system, accounting for over 85% of total financial assets. As of September 2020, there were 31 retail banks, 62 wholesale banks, 17 branches of foreign banks, and 8 representative offices of banks in the country.

Bahrain has long been recognised as a global leader in Islamic finance, playing host to the largest concentration of Islamic financial institutions in the Middle East. The country's Islamic financial institutions include 6 retail banks, 13 wholesale banks, 9 Islamic windows of conventional banks, 6 Takaful companies, and 2 Re-Takaful companies.

The growth of Islamic banking in Bahrain has been remarkable, with total assets increasing from US$1.9 billion in 2000 to US$32.7 billion as of July 2020, an increase of over 17 times. This growth was made possible by a variety of factors, most notably the clear vision and approach of the Central Bank of Bahrain (CBB). The CBB introduced a separate regulatory framework and a comprehensive prudential and reporting mechanism specifically tailored for the Islamic banking and insurance segments.

The CBB has also played a leading role in the introduction of innovative Islamic financial products, such as short-term government Sukuk and long-term instruments. Additionally, the CBB established the Waqf Fund in collaboration with the industry to develop the market for Islamic finance and invest in capacity building. The Waqf Fund offers various Islamic finance training, education, and research programs to cater to the industry's needs.

The growth of Islamic banking in Bahrain

Bahrain is a global leader in Islamic finance, ranking 2nd in the MENA region and 4th globally for Islamic finance development. The country set the benchmark for Islamic banking regulation by establishing the Bahrain Islamic Bank in 1978 and has since nurtured the concepts, rules, and standards of Sharia-compliant banking. Today, Bahrain has the highest concentration of Islamic finance institutions in the region, with 11 wholesale Islamic banks and 6 retail Islamic banks.

• Clear vision and approach of the Central Bank of Bahrain (CBB)
• Separate regulatory framework and comprehensive prudential and reporting mechanisms tailored to the specific needs of Islamic banking
• Strong Islamic financial institutions offering a range of Sharia-compliant products and services, including retail banks, wholesale banks, Islamic windows of conventional banks, Takaful companies, and Re-Takaful companies
• Issuance of innovative Islamic securities (Sukuk), including short-term and long-term instruments
• Establishment of the Waqf Fund to invest in capacity building and offer programs in Islamic finance training, education, and research
• Hosting of several global organizations central to the development of Islamic finance, including the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the International Islamic Financial Market (IIFM), the General Council for Islamic Banks and Financial Institutions (CIBAFI), and the Islamic International Rating Agency (IIRA)

As a result of these factors, the growth of Islamic banking in Bahrain has been remarkable. Total assets in Islamic banks have increased from US$1.9 billion in 2000 to US$32.7 billion as of July 2020, an over 17-fold increase. The market share of Islamic banks has also grown from 1.8% in 2000 to 15.3% in July 2020.

The future of Islamic banking in Bahrain

To further develop the Islamic finance industry, Bahrain has invested in capacity building and established the Waqf Fund in collaboration with industry partners. The Waqf Fund offers a range of programs, including specialized training for Board members, senior management, Shari'ah resources, and staff of Islamic financial institutions. Additionally, Bahrain has sponsored the development of qualifications and certifications in Islamic finance, such as the Certified Islamic Professional Accountant (CIPA) and the Certified Shari'ah Advisor and Auditor (CSAA) offered by AAOIFI.

Bahrain continues to play a pivotal role in the emergence of Islamic finance, both regionally and globally. The country's open market economy, stable and prudent macroeconomic and fiscal policies, and credible regulatory framework have attracted numerous foreign banking organizations. With its strong foundation and continued focus on innovation, Bahrain is well-positioned to maintain its leadership in the Islamic finance industry.

The role of the Central Bank of Bahrain in the development of Islamic finance

The Central Bank of Bahrain (CBB) has played a key role in the development of Islamic finance in the country. As the single regulator of Bahrain's financial industry, the CBB has pioneered various Islamic financial instruments and products, including sukuk (Islamic securities) and takaful (Islamic insurance). The CBB has also implemented a new Takaful model, which enhances the solvency status assessment of Takaful firms.

Bahrain is recognised as a global leader in Islamic finance, ranking 2nd in the Middle East and North Africa (MENA) and 4th globally for Islamic finance development. The country has set the benchmark for Islamic banking regulation by establishing the Bahrain Islamic Bank in 1978 and has since nurtured the concepts, rules, and standards of Sharia-compliant banking.

The CBB is continuously implementing new initiatives and policy tools to further develop Bahrain's standing in Islamic finance. For example, in addition to the new Takaful model, the CBB has introduced a new Sharia-compliant Wakalah investment tool.

Bahrain has the highest concentration of Islamic finance institutions in the region, with 11 wholesale Islamic banks and 6 retail Islamic banks. The country is also home to 6 Takaful firms and 2 Retakaful firms, making it the ideal jurisdiction for the Takaful industry.

The total Islamic banking assets held in Bahrain stood at USD 34.6 billion as of 2021, making it one of the region's largest Islamic finance and banking markets.

The Waqf Fund

• Advanced Diploma in Islamic Finance: A 9-month diploma program offered in collaboration with BIBF, providing young Bahraini graduates and junior staff of member institutions with an orientation in Islamic finance.
• Advanced Diploma in Islamic Commercial Jurisprudence: A one-year program spread over eight modules, providing in-depth knowledge in specific topics to the Internal Shari'ah Reviewers/Shari'ah Officers of Islamic Financial Institutions (IFIs).
• Advanced Shari'ah Reviewer Development Program: A program aimed at providing basic orientation to Islamic and conventional finance/banking to Internal Shari'ah Reviewers/Shari'ah Officers of IFIs, with additional modules designed as short courses covering various relevant topics.
• Roundtable Discussions: The Fund has held 12 roundtable discussions bringing together leading figures in Islamic finance to focus on key issues and recommend ways forward. The recommendations from these roundtables are compiled and forwarded to the Central Bank of Bahrain for consideration and further action.
• Development of a course on Business Ethics for Islamic Bankers: The Fund sponsored the development of a course on main Shari'ah principles of ethics for junior bankers, now offered by BIBF as a mandatory course.
• Upgrade of the Advanced Diploma in Islamic Finance curriculum: The Fund financed the development of an enhanced curriculum for the Advanced Diploma in Islamic Finance program, engaging a leading consulting firm to assist BIBF in creating reference manuals for the course.
• Collaboration with the University of Bahrain: The Waqf Fund partnered with the University of Bahrain to support the development and launch of a unique four-year bachelor's program in Islamic banking and finance, providing financial assistance and helping in curriculum development.
• Shari'ah Scholar sessions: Regular sessions featuring leading Shari'ah scholars in the industry, addressing Internal Shari'ah Reviewers of IFIs in Bahrain on specific topics, followed by extensive Q&A sessions.
• Corporate Governance workshops: Regular workshops offered since 2011 to member institutions, focusing on enhancing corporate governance standards, with over 250 participants to date.
• Sponsorship of AAOIFI qualifications: The Fund has engaged with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) to sponsor the development and enhancement of its global Islamic accounting qualification, the Certified Islamic Professional Accountant (CIPA).
• Sponsoring Islamic finance training programs: The Waqf Fund has sponsored various training programs, including one for Bahraini judges, lawyers, and prosecutors, to enhance their understanding of Islamic finance and its principles.
• Research project initiative: The Fund has launched a research initiative to financially incentivize Internal Shari'ah Reviewers/Shari'ah Officers to undertake research on specific topics of interest, promoting a culture of research and enhancing their analytical and presentation skills.
• Sponsorship of market standards development: The Fund provided financial assistance to the International Islamic Financial Market (IIFM) to support the development of four new standards, including Islamic cross-currency swap and Sukuk standardization.
• Leadership Grooming Program: A custom-made program launched in collaboration with a leading university in North America, aimed at preparing the next generation of C-suite executives in the Islamic finance industry.
• Various grooming programs: The Waqf Fund has initiated several grooming programs targeting mid to senior-level managers in different functional areas, such as CFO, compliance, risk management, and internal Shari'ah audit, to enhance their skills and knowledge.
• Distinguished Leader series: The Fund occasionally hosts accomplished individuals from the financial sector to share their professional journeys and inspire young bankers through its Distinguished Leader series.
• Sponsorship of master's programs: The Waqf Fund started a sponsorship program in 2020 for employees of member institutions to pursue master's degrees in Islamic Finance/Fintech, reimbursing 75% of the tuition fee.
• Sponsorship of AAOIFI taxonomy project: The Fund is sponsoring a major project by AAOIFI to organize and classify all its standards, making them easily searchable and accessible to users.
• Sponsorship of alternative benchmark research: The Fund is sponsoring IIFM and AAOIFI in their search for an Islamic alternative to the conventional LIBOR benchmark, providing grants to support this initiative.
• Sponsorship of computer lab at the University of Bahrain: The Waqf Fund sponsored the computer lab at the University of Bahrain's College of Business Administration to support their research efforts.
• Islamic banking preferences survey: The Fund collaborated with the University of Bahrain to conduct a market research survey to understand the banking preferences of Bahrain's residents, providing insights to Islamic banks on attracting customers.
• Sponsorship of BIBF initiatives: The Waqf Fund is sponsoring the development of key programs by BIBF, including an Islamic finance qualification in partnership with the CFA Society Bahrain and the establishment of a Sustainable Development Academy.
• Credit Officer Training Program: The Fund has partnered with an international trainer in forensic accounting to deliver a three-day training program to credit officers of its member institutions, enhancing their ability to detect red flags in credit applications.

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