Bahrain’s capital markets are being revitalised as the kingdom and the broader Middle East emerge from the Covid-19 pandemic-induced downturn. New regulations, partnerships with neighbouring countries and a national plan to boost the economy are all set to help drive growth in capital markets.
Structure & Oversight
The Central Bank of Bahrain (CBB) is the single regulator of securities trading in the kingdom, and its Capital Markets Supervision Directorate (CMSD) is responsible for supervising and regulating capital markets. The CBB rulebook includes a separate section that covers the activities undertaken on Bahrain Bourse (BHB).
The CMSD abides by global standards, including those of the International Organisation of Securities Commissions (IOSCO), and it is a signatory to the IOSCO multilateral memorandum of understanding concerning consultation, cooperation and the exchange of information. In July 2021 BHB adopted the Global Industry Classification Standard (GICS) for listed companies to be in line with international best practices and provide greater transparency.
Established in 2010 to replace the Bahrain Stock Exchange that initially launched in 1987, BHB is a self-regulated, multi-asset marketplace operator and shareholding company. Trading on the bourse is conducted via nine licensed members through an automated trading system. The bourse has two indices, the Bahrain All Share Index (BHBX) and the Bahrain Islamic Index. The larger BHBX is divided into seven sectors, in alignment with the GICS: communications services, with three companies listed as of May 2023; consumer discretionary, with five companies listed; consumer staples, with four companies listed; financials, with 21 companies listed; industrials, with three companies listed; materials, with one company listed; and real estate, with two companies and one real estate investment trust (REIT) listed. In addition, two non-Bahraini companies – Bank Muscat and Kuwait Finance House (KFH) – are listed, as is Bahrain-based asset manager SICO as a closed company.
Bahrain Clear, a fully owned subsidiary of BHB, is the exchange’s clearing, settlement and central securities depository system, using automated solutions to ensure trading is quick and efficient. It also maintains delivery versus payment on a T+2 basis, meaning that payments are settled by brokers no later than two business days after the execution of a trade. Bahrain Clear was admitted as a full member of the Arab Federation of Capital Markets (AFCM) in April 2023 after having met all of the membership criteria. More recently, in June of that year it was re-elected as the president of the Africa and Middle East Depositories Association and elected as vice-chair of the World Forum of Central Depositories.
Efforts to diversify products on the bourse include the 2015 listing of the Middle East’s first tradeable sukuk (Islamic bond); the 2016 launch of the Treasury bills market; and the 2017 listing of the first – and as of May 2023 only – REIT, Eskan Bank Realty Income Trust.
BHB continues to tighten its regulatory regime. In January 2023 a framework for penalising issuers that violate listing rules came into effect. Penalties for non-compliance vary from the suspension of trading to fines ranging from BD500 ($1330) to BD10,000 ($26,500) for each violation, or up to BD100,000 ($265,000) for cross-listed companies that have more than 30% of their share capital traded outside their primary market. A new violations committee established by the bourse will review cases and determine penalties, while a new disciplinary board will be responsible for hearing related appeals.
International Recognition
BHB assumed the presidency of the AFCM in 2022, with an eye to enhance regional market connectivity as a crucial source of financing for regional economic and social development plans in the Middle East. BHB hosted the federation’s annual conference virtually in March 2022, which focused on topics including environmental, social and governance (ESG) practices, green financing, regulatory technology, the monetisation of market data and the digitalisation of capital markets.
BHB is opening up its services to new investors by hosting digital trading offerings. In April 2023 Al Salam Bank upgraded its sharia-compliant digital investment platform, Al Salam Invest, by launching Bahrain Trade, which enables retail clients to trade securities listed on BHB through the bank’s mobile app. The app provides information in both Arabic and English.
In November 2023 BHB is set to host the 2023 Middle East Investor Relations Association Annual Conference and Awards, the largest investor relations event in the broader MENA region. The event is expected to help expand BHB’s role in attracting investment, as well as highlight the importance of transparency and corporate governance.
Priorities & Plans
BHB is a major component of the financial services sector, which is a priority of Bahrain Economic Vision 2030, the kingdom’s longterm socio-economic development plan. In October 2021 Bahrain launched the Economic Recovery Plan (ERP) to boost growth and improve its fiscal balance. The plan is based around launching strategic projects, simplifying business procedures and creating jobs.
Part of the ERP is the Financial Sector Services Development Strategy 2022-26, which aims to keep the share of financial services in the kingdom’s GDP in the range of 20% up to the end of 2026, and increase to 25% afterwards. The strategy also aims to create 3000 job training opportunities per year through the end of 2024, which should support the development of capital markets. A July 2022 Boston Consulting Group report forecast that Bahrain’s private financial wealth – cash, deposits, bonds, equities, investment funds, life insurance and pensions, but not real assets – would grow by around 4% every year to nearly $99bn by 2026.
Various aspects of the financial services sector are aligning with the national plan, raising the chances of success. For example, the Bahrain Chamber of Commerce and Industry is advocating for a new law to help attract foreign capital and promote technological advances in key sectors. Another example is the Golden Licence scheme launched in April 2023 to provide incentives and streamline services for local and foreign companies overseeing projects that are expected to create more than 500 jobs or have an investment value greater than $50m.
The ERP is supported by the Financial Services Sector Development Strategy 2022-26, the goals of which include an increase of 20% in the participation of individuals and institutions in public debt primary issuance, and the listing of five companies on the Bahrain Investment Market (BIM). It also includes broader objectives, such as encouraging initial public offerings (IPOs) on BHB’s main board; upgrading the equity market classification on MSCI & FTSE to Emerging Markets status; coordinating more closely with other GCC exchanges for cross-listings; establishing regional and international links between clearance, settlement and central depository systems; further automating investor services; and creating a direct trading system for government securities on the secondary market.
BIM
The BIM is Bahrain’s equity market for newer companies seeking growth capital, offering issuers relaxed disclosure requirements and fewer admissions requirements, as well as fast-track access for international investors to Bahrain’s most dynamic companies.
Launched in March 2017, the BIM – envisaged to help drive innovation in strategic sectors under Vision 2030, including ICT, logistics, manufacturing, tourism and real estate, among others – initially had limited success in meeting its objective of bridging the funding gap for companies with high growth potential that had yet to meet the criteria for an IPO. For example, Sprinkle Holdings, a financial technology (fintech) firm that was the first company to list on the BIM, had to contend with a constrained investment environment due to the pandemic, leading to it delisting from the BIM in October 2022. However, recent reforms have breathed new life into the market.
Companies do not need any share capital, which refers to all funds raised in exchange for shares, to be listed on the BIM. However, companies must have a minimum paid-up capital – meaning the amount of money received from shareholders in exchange for stock – of BD250,000 ($663,100) or its equivalent in other currencies to be listed. Although BIM registration fees are BD1650 ($4380), sponsor fees run to BD2200 ($5840) per year, undermining the market’s core objective of funnelling growth capital to companies operating on tight margins.
Recognising this challenge, in April 2023 BHB revised its rules for the BIM, removing a provision that required companies to appoint a sponsor to manage their listing and allowing them to apply directly through the bourse. This is expected to lower the cost of listing on the BIM and streamline oversight. The move made an immediate impact, with one company being listed on the BIM in April 2023. More companies are expected to follow suit, as the economic outlook for the kingdom continues to look favourable.
Trading Activity
The BHBX recorded solid annual growth in 2022, up almost 5.5% and closing at over 1895 points, marking its second consecutive year of gains after ending 2021 at more than 1797 points. Market capitalisation was BD11.4bn ($30.2bn), up from BD10.8bn ($28.6bn) at the end of 2021. In March 2022 the benchmark index reached a 14-year high of 2122.51 points, although its performance moderated as the year progressed. The Bahrain Islamic Index, which tracks sharia-compliant equities, was down 11.8% for the year, closing 2022 at just over 663 points after finishing 2021 at nearly 752 points. Notably, financial services companies comprised almost three-quarters of the total volume of shares traded in 2022. Bahraini investors accounted for about twothirds of the total value of shares traded that year, with overseas investors accounting for the remainder.
The market’s overall trading value declined by 13.2% to BD170m ($450m) in 2022, while the overall volume fell by 47.3% from over 1bn shares in 2021 to 540m shares in 2022. This was followed by a notable increase on the BHBX in the first quarter of 2023, as the value of shares traded reached BD65m ($172.4m) and their volume reached 247.2m, compared to BD30.7m ($81.4m) and 102.4m, respectively, in the first quarter of 2022. The split between Bahraini and non-Bahraini investors participating in the market was nearly even during the quarter. As of the end of April 2023 the BHBX was at just over 1904 points, while the Bahrain Islamic Index was at over 682 points.
ESG Rules
In October 2022 consultancy PwC predicted that institutional investment in ESG would increase by 84% globally to $33.9trn by 2026, up from $18.4trn in 2021. This expansion would give ESG a share of more than one-fifth of global institutional investment. Stock exchanges in the Gulf, including BHB, hope to attract significant proportions of these capital flows by improving disclosure frameworks.
In January 2023 the GCC Exchanges Committee, which comprises five national exchanges plus the bourses from Abu Dhabi and Dubai, launched a set of voluntary disclosure metrics featuring 29 standards. They are aligned with the World Federation of Exchanges and the Sustainable Stock Exchanges Initiative, covering categories such as greenhouse gas emissions, energy and water usage, gender pay, employee turnover, data privacy and ethics.
While the standards are voluntary, they are expected to allow institutional investors and exchange-traded funds to assess which Bahrain-listed companies qualify for ESG investment and allocate their portfolios accordingly. This development builds on the progress made by BHB to enhance ESG adoption and reporting, including the launch of its own voluntary reporting guidelines for listed companies in June 2020, which were then updated in December 2022.
Partnerships
Following the signing of a cross-border cooperation agreement in November 2021, BHB and the Abu Dhabi Securities Exchange launched Tabadul, the first digital exchange hub in the region, in July 2022. Based on a mutual market access model, Tabadul is a form of capital market connection that permits investment across participating bourses, allowing investors to trade directly on both exchanges through licensed brokers. The Muscat Stock Exchange joined Tabadul in January 2023, further enhancing the cross-tradeable pool of liquidity in the region. Tabadul is indicative of a regional focus on deepening the liquidity pools available in each individual market, an effort that could boost cross-listed investment.
Between 2016 and August 2022 GCC stock exchanges witnessed 90 IPOs, the largest number of new IPOs globally for that period, raising a total of nearly $56bn, according to the Kuwait Financial Centre. This illustrates the GCC’s positive trajectory, driven by a combination of relatively high energy prices, a commitment to reforms aligning local capital markets with global regulatory standards, and a spirit of cooperation spawning new exchange connections akin to those linking Shanghai, Hong Kong and Singapore.
IPOS & Planned Listings
In October 2022 KFH shares began trading on BHB. “The cross-listing will enhance liquidity in the market, and contribute to the positive activity of both markets, allowing access to more potential investors and more capital-raising opportunities given that shares are being traded in more than one market worldwide,” Hamad Abdulmohsen Al Marzouq, chairman of KFH, told local media at the time of the cross-listing. KFH was the only listing BHB attracted in 2022, but there is significant optimism around the potential for new companies to debut in 2023, particularly since the GCC saw 48 IPOs in total in 2022, raising nearly $23bn in the process.
Sheikh Khalifa bin Ebrahim Al Khalifa, CEO of BHB, said at the AFCM virtual conference in March 2022 that Bahrain aimed to list five government-owned companies that year. Although the listings had yet to take place as of mid-2023, the statement is a clear indication of the direction the kingdom wishes to go, opening up previously closed sectors to broader public ownership and transparency. One sector to watch is energy, which is undergoing a wide-ranging restructuring process that could lead to the privatisation of non-core assets (see Energy & Utilities chapter).
Debt Markets
Bahrain has struggled to balance its public finances in the wake of a slump in oil prices in 2014 and the pandemic, which limited the effect of a $10bn regional fiscal support package pledged to Bahrain in October 2018 by its neighbours in the Gulf.
Despite high global oil and gas prices in 2022, Bahrain posted a fiscal shortfall, albeit a reduced one. Trade credit insurance company Allianz Trade forecasts that a moderate fiscal deficit will persist in the medium term and notes that Mumtalakat is a relatively small sovereign wealth fund, with about $18bn in assets under management. This limits the kingdom’s ability to use its investment returns to pay down public debt, which was nearly 118% of GDP in 2022.
As of November 2021 Mumtalakat had a long-term issuer default rating and senior unsecured credit rating of “B+” with a stable outlook, according to Fitch Ratings, which puts the fund’s rating on par with the country’s sovereign rating. In support of its largely positive ratings, Fitch notes that Aluminium Bahrain, of which Mumtalakat owns 69.4%, has become one of the largest and most advanced aluminium smelters in the world, and that Mumtalakat’s key portfolio companies together employ about 12,000 workers.
In April 2023 Bahrain attracted over $7.8bn in combined orders for sovereign sukuk and conventional bonds, prompting the CBB to tighten its guidance to around 6.5% for the seven-year sukuk and 7.75%- 7.875% for the 12-year notes. The successful sale represented the first time Bahrain had tapped public debt markets since 2021, following a reduction in the kingdom’s credit risk. Standard & Poor’s Global Ratings in November 2022 raised the outlook on Bahrain’s sovereign debt to positive in light of continued efforts to reduce the budget deficit and high oil prices, as hydrocarbons account for about three-quarters of government revenue. In February 2023 some legislators introduced a bill to prevent public debt increasing beyond a notional 60% of GDP and enact a stipulation that the CBB provides more transparency about the holders of government development bonds (GDBs).
BHB allows both Bahraini and international investors to trade GDBs – which the government uses to secure project financing – on the secondary market. For example, in July 2022 the CBB issued a five-year, BD200m ($531m) GDB with an annual fixed return of 6.2%. At the close of 2022 BHB had 18 listed bonds and sukuk, as well as 34 Treasury bills.
As for corporate debt, in May 2023 Bapco Energies, Bahrain’s national oil and gas company, returned to international capital markets with a 10-year murabaha (cost-plus financing) trust certificate that is set to mature in May 2033, as well as offered a tender for cash on $750m in notes that are set to mature in 2024.
Outlook
Although Bahrain’s capital markets have yet to enjoy the same wave of listings seen on neighbouring exchanges, the bourse has taken steps to update regulations and boost investor confidence. How quickly the kingdom can meet its target of catalysing $30bn in strategic infrastructure projects will be key to galvanising investor interest in local companies, as they tap into the opportunities that major capital expenditure creates for both those already on the bourse and potential new IPO applicants.
Bahrain’s banks are emerging from the pandemic in good health, and investors are likely to be attracted by possible higher returns as interest rate spreads expand due to the global push to cap inflation by implementing rate hikes. Interested parties should keep a close eye on whether Bahrain can translate its thriving fintech scene – illustrated by some 20 companies currently operating in its regulatory sandbox – into new listings on the BIM. Tabadul is also a new addition to the region’s capital market offerings.
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