Interview: Usman Ahmed

What are the immediate priorities for local banks to accelerate their sustainability strategies?

USMAN AHMED: Financial institutions are vital to promoting sustainability in the economy. The integration of environmental, social and governance (ESG) frameworks into business and operational practices is relatively new for banks in Bahrain. That said, it is important that an organisation’s highest level of governance sets the agenda in this area to ensure its business strategy is in line with its sustainability goals, such as through oversight by the board of directors. Building a team dedicated to supporting sustainability, while integrating the concept into each division to align business practices with ESG considerations, is also crucial.

Banks could also focus on developing internal ESG capabilities. This should take the country’s goals into consideration, such as Bahrain Economic Vision 2030 and COP26 UN Conference on Climate Change commitments. Even after identifying the priorities and long-term goals, banks can still adopt a phased approach with an initial focus on quick wins to build momentum, eventually scaling up successful initiatives to achieve long-term goals.

By what means can small and medium-sized enterprises (SMEs) be better supported?

AHMED: Local SMEs are facing serious challenges due to interruptions in cash flow cycles. The main reasons for this are the slowdown in government expenditure and the cautious approach to investment from the private sector. Notably, in a high interest rate environment, the cost of investment is extremely high. When larger projects dry up, the SME segment will have fewer opportunities for business, as business flows are created by larger players. SMEs are also still feeling the residual effects of the Covid-19 pandemic.

Banks could be encouraged to support SMEs by entering into ring-fenced cash flow structures. When cash flows from larger entities engaged with SMEs are part of the transaction, banks’ willingness to take the delivery risks with SMEs is higher, helping these businesses gain access to more financing options.

The Labour Fund, a semi-autonomous government entity commonly known as Tamkeen, supports SMEs through financing schemes that involve banks. Such schemes focus on creating new businesses or scaling up existing ones. SMEs are in need of liquidity and working capital support schemes. Banks would be more inclined to enter into short-term or revolving types of funding transactions. The Central Bank of Bahrain is crucial at this point, and the sector would welcome measures to ease the regulatory burden on SME-related asset books. Such temporary actions should boost banks’ appetite to fund SMEs with viable business models.

Where can digital tools be implemented to improve decision-making and risk management?

AHMED: Digital tools allow banks to become more customer-centric by using data-driven insights to inform lending decisions, in addition to current know-yourcustomer data and financial insights. This may include behavioural data on spending, saving patterns and alternative datasets. Banks can leverage existing data to offer eligible customers loan and credit products proactively, and utilise predictive analytics to develop new dynamic credit-scoring models and frameworks. This will ultimately allow banks to reduce their operational costs, introduce competitive rates and faster turnaround times and expand their lending business.

Ongoing advances in big data and data analytics are creating fresh opportunities for banks to improve the credit decisions that underpin the lending process. Data-rich credit-risk models derive most value where volumes drive the lending landscape, particularly in lending to the retail and SME segments. The digital transformation of the banking industry has helped institutions that embraced such tools increase revenue, reduce loss rates and make significant efficiency gains.