Banking reforms and technology boosts financial inclusion in Bahrain


A powerful driver of economic and non-oil growth, Bahrain’s banking sector plays an important role in ongoing diversification and development efforts. Furthermore, the kingdom has maintained its status as a regional financial centre, even with increasing competition from GCC neighbours. The sector has remained resilient in the face of subdued macroeconomic growth and a series of external and domestic crises that have affected the kingdom since 2008. Assets and profits have risen in recent years, with listed banks recording strong lending growth in 2018, and the percentages of delinquent and non-performing loans (NPL) have declined, even though overall mortgage and credit card lending has increased.

Perhaps most significant to the sector, however, are the efforts of the Central Bank of Bahrain (CBB) to keep the industry at the forefront of financial technology (fintech) innovation. These efforts to transform the kingdom into a regional fintech centre focused on online solutions have resulted in a number of early successes, and an innovative open banking system transitioned from testing and development to commercial deployment in 2019. Furthermore, new regulations permitting crowdfunded lending could help expand credit access, particularly for small and medium-sized enterprises (SMEs). The sector is expected to continue on a steady growth path in 2020, supported by existing strengths like high levels of liquidity and an established track record of stability and soundness.

Structure & Oversight

Modern banking in Bahrain can trace its history to 1957, when the kingdom’s first local bank, the National Bank of Bahrain (NBB), was established. In the 1970s the civil war in Lebanon pushed a number of regional financial institutions to relocate to the capital city of Manama, a move that initiated the kingdom’s evolution into a major financial centre. The transformation was influenced in large part by its proximity to Saudi Arabia, which has a highly educated and experienced workforce, and the CBB’s solid track record of effective and proactive regulatory oversight.

Bahrain’s banking sector is sizeable and diverse. It is the largest non-oil economic sector in the kingdom, with financial services accounting for 16.5% of real GDP in 2018, according to the Ministry of Finance and National Economy. In 2019 the CBB reported 385 financial institutions operating in the kingdom. This figure includes 98 banks, of which 30 are retail banks, 14 are locally incorporated banks, 16 are branches of foreign financial institutions and 68 are wholesale banks with a regional focus. Bahrain is also a regional centre for Islamic finance. Of its 98 banks, 21 are Islamic, with assets of $27.8bn as of November 2018 (see Islamic Financial Services chapter). In mid-2019 the top listed banks in the country by total assets were Ahli United Bank, with assets worth $38bn, the Bank of Bahrain and Kuwait (BBK) with BD4.6bn ($10.5bn), NBB with BD3.2bn ($8.5bn) and Khaleeji Commercial Bank with BD957.1m ($2.5bn). Al Salam Bank had BD1.8bn ($4.9bn) in assets.

Financial Inclusion

Financial inclusion indicators have been steadily improving in recent years, supported by concerted efforts to transform the kingdom into a leading regional centre for fintech. The CBB measures financial inclusion using a variety of indicators, such as the number of bank branches, ATMs, point-of-sale (POS) terminals, bank accounts, online banking users, and debit and credit cards. These indicators have all shown steady growth in recent years. The total number of bank branches serving individuals rose by 25.7% from 136 in 2011 to 171 in 2017, the most recent year for which figures are available, while the number of ATMs rose from 450 to 476 over the same period. Meanwhile, the total number of bank accounts rose by 37.9% from 1.37m to 1.89m. Bank account numbers have outpaced population growth, and the CBB reports that accounts per 1000 people rose from 1149 in 2011 to 1257 by the end of 2017.

The adoption of online banking has also risen, with the percentage of internet-linked accounts jumping by 86.6% from 286,188 in 2011 to 534,033 in 2017. The number of ATM cards in circulation has also grown, climbing by 37% from 1.08m in 2011 to 1.48m in 2017. Furthermore, the number of POS terminals rose from 13,197 in 2011 to 38,457 by mid-2019. According to the CBB, 2018 saw some 60.2m POS transactions, with a total value of $2.15bn. POS credit and debit card transactions went up 13.6% year-on-year (y-o-y) during the first quarter of 2019 to reach BD560.6m ($1.5bn), demonstrating the rapid advancement in digital banking and payment platforms, as well as consumer preferences shifting towards cashless financial services.

Regulatory Reforms

The CBB has established a solid reputation as an effective regulator, working in close collaboration with banking stakeholders and adapting to changes in the sector, while maintaining high regulatory standards. One significant regulatory reform made recently was the CBB’s adoption of the International Accounting Standards Board’s International Financial Reporting Standards (IFRS). IFRS 9 mandates additional provisions for likely losses and impaired loans, with implementation of the reform beginning in early 2018, and full and documented compliance expected in 2020. The CBB provided banks advance notice, with many institutions deciding to enforce the standards ahead of the deadline. BBK and Al Salam Bank, for example, adopted IFRS 9 in 2016 and 2017, respectively.

Safe & Sound

These efforts are reflected in banks’ capital adequacy ratios (CAR), liquidity levels and profitability. Financial services provider KPMG reports that listed banks’ CAR moderated by 0.9% to hit 19.4% in 2018, although this is still well above Basel III CAR requirements of 8% (or 10.5% including a capital conservation buffer). Notably, in 2018 NBB recorded the highest CAR among listed banks in the GCC, at approximately 33.8%.

The CBB reports that the combined CAR of listed and unlisted banks in Bahrain stood at 19% in December 2018, a modest decline from 19.2% in late June of the same year. Conventional retail banks’ CAR was 20.9% in December 2018, while the CAR for wholesale banks stood at 18.1%, down from 18.4% in the first half of the year. According to the central bank’s financial stability report for the first quarter of 2019, liquid assets as a proportion of total assets across the banking sector were healthy at 24.5%, up slightly from 24.1% in mid-2018. In the retail segment, liquid assets as a proportion of total assets fell by 1% between June and December 2018 to hit 32.9%, while the wholesale sector saw liquid assets rise by 0.8% over the same period, to reach 22.6%.

Meanwhile, return on equity (ROE) of listed banks rose by 1.8% to hit 7.6% in 2018, while return on assets (ROA) rose by 0.1% to reach 1.1% at the end of 2018. Across the broader banking sector, ROA stood at 1%, down from 1.1% in December 2017, while ROE stood at 6.7%, down from 7.1%. ROA for conventional banks was flat between June and December 2018 at 1.5%, while ROE also remained steady at 14.3%. ROA for conventional wholesale banks was a modest 0.7% in December 2018, while ROE was 1.3%.

Sector Performance

The banking sector in Bahrain was significantly affected by the global financial crisis of 2007-08, and the sector has yet to return to the highs it experienced prior to that period. However, it has remained resilient in the face of persistent external headwinds and subdued macroeconomic growth. According to the CBB, total banking sector assets fell from a high of $254.2bn in 2008 to $221.8 in 2009, before reaching $197.1bn in 2011 and dipping to a 10-year low of $186.1bn in 2016. While total banking assets amounted to around 9.8 times the kingdom’s GDP in 2008, this ratio fell to 8.6 in 2010, 6.8 in 2011 and 5.3 in 2017.

Nevertheless, recent growth has been promising. Although Bahrain’s macroeconomic growth decelerated in 2018 due to various factors, including volatility in oil prices and a global slowdown, listed banks remained resilient, with credit growth reaching a “strong” 3.8%, according to the June 2019 “GCC listed banks’ results: Embracing Digital” report from KPMG. Retail banks have continued to perform well since 2009, even as tightening liquidity, dynamic regulatory changes and technology disruption challenge lenders in the kingdom. According to the report, listed bank assets in Bahrain – excluding investment banks – rose by 1% in 2018 to hit $96bn, from $95.1bn the year before, while net profits recorded robust growth, rising 17.6% y-o-y to $1.25bn, up from $1.06bn in 2017, the second strongest growth among GCC countries behind Kuwait, whose net profits increased by 19.3% y-o-y, reaching $3.3bn.

The CBB, meanwhile, stated in its first quarter of 2019 “Financial Stability Report” that total sector assets reached $192.6bn in December 2018, up from $187.4bn in 2017 and 5.4 times the kingdom’s GDP. Retail banking assets rose to $86.6bn from $83.5bn in 2017. GCC assets accounted for 24.4% of total retail sector assets, while European and North American assets accounted for 7.6%. Wholesale banking assets also grew in 2018, from $104bn to $106bn. In 2018, 29.8% of assets for the wholesale segment were concentrated in the GCC, while European assets accounted for 34.4% of the total.

In May 2019 credit rating agency Moody’s announced that it had upgraded its outlook for Bahrain’s banking sector from negative to stable, supported by the positive effects the $10bn financing agreement from the GCC will have on the Bahraini economy (see Economy chapter), as well as banks’ strong capital buffers and steady profit growth. Moody’s projected banks’ profitability “will remain sound, fuelled by rising lending volumes and stable profit margins”. Indeed, growth continued during 2019, with the CBB reporting that the banking system’s aggregated balance sheet rose by 5.6% from $192.7bn at the end of December 2018 to $203.4bn at the end of the second quarter of 2019.

Lending & Deposits 

Credit growth among all banks in Bahrain was strong in 2018, rising by 10.7% from BD8.4bn ($22.3bn) in June to BD9.2bn ($24.5bn) in December. Personal lending as a percentage of GDP stood at 29.3%, or BD4.2bn ($11bn), in December, compared to 26.1% of GDP at the end of 2017. Business lending stood at BD5.1bn ($13.5bn), or 35.9% of GDP at the end of 2018, against 32.6% of GDP at the close of the prior year. According to the CBB, the personal loan growth rate improved from 0.2% between June and December 2017 to 0.7% in the same period of 2018, supported by a 4.5% surge in lending during January of that year. Retail banks’ government lending fell to BD261.1m ($692.6m) at the close of 2018, from BD332.2m ($881.2m) at end-2017.

Most personal loan growth is driven by mortgage lending, which rose from BD1.76bn ($4.7bn) in June 2018 to BD1.8bn ($4.8bn) in December 2018, a 2.3% increase. Vehicle lending moderated from BD105.7m ($280.4m) to BD103m ($273.2m) over the same period, while credit card lending rose from BD67.8m ($179.8m) to BD72.5m ($192.3m), up 6.9%. Meanwhile, interest rates for personal loans ranged from 5.04% to 5.19% between January and December 2018.

Following a loosening of restrictions, the microfinance segment has also seen recent growth. “Previously, the CBB stipulated that BD5000 ($13,300) was the maximum loan size,” Khaled Al Gazawi, CEO of Ebdaa Bank, told OBG. “However, they have heard our calls for leniency and now allow 3% of loan portfolio to receive up to BD10,000 ($26,500),” he said.

The main contributor to business loan growth came in the form of loans to the construction and real estate sector. According to the CBB, lending in this area accounted for 36.6% of total loans in 2018, followed by trade at 22.2%, and manufacturing at 18%, with a number of other sectors making up the remaining 23.2%. Meanwhile, average interest rates for business loans varied between 5.36% and 6.62% between December 2017 and November 2018.

Looking ahead, project financing is expected to be a significant driver of growth in the business lending segment, as the kingdom undertakes an ambitious infrastructure development agenda that will see a host of high-profile transportation, industrial and energy projects completed. For example, NBB moved to create a structured finance desk for big-ticket infrastructure projects and finance agreements in 2017. As of mid-2019 the bank’s structured finance assets were valued at approximately $1bn, with plans to double that figure on the back of new utilities and hydrocarbons exploration projects. Over the longer term, the bank intends to focus on financing renewable energy projects, and oil and gas production.

The number of delinquent loans has dropped off in recent years, with the CBB reporting that the banking sector’s NPL ratio fell from 5.8% in June 2018 to 5.5% in December, while specific provisions as a proportion of NPLs rose from 54.3% to 63.7% over the same period. Retail banks’ NPL stayed steady at 4.3% between June and December 2018, while that of overseas retail banks’ stood at 7.9% at the end of the year. Wholesale bank’s NPL ratios jumped from 5.1% in June 2018 to 6.3% in December, although overseas wholesale banks saw NPLs fall to 5.2% from 5.5% during the same period.

Total deposits stood at BD17.9bn ($47.4bn) in December 2018, of which 67.7% were domestic deposits, with the overall loan-to-deposit ratio falling from 73.2% in mid-2018 to 72.6% by the end of the year. The retail segment’s loan-to-deposit ratio remained steady at 69.6% between June and December 2018, while the conventional wholesale segment’s loan-to-deposit ratio was 64.2%.


A key initiative being undertaken by Bahrain’s banks is a push to transform the sector into a leader in fintech. This is expected to be accomplished by proactively adopting and reforming regulations for emerging segments, including open banking, cryptocurrency and crowdfunding. The CBB reports that, in an effort to further improve financial inclusion, reduce operating expenses, boost efficiency and attract additional foreign investment, the kingdom hopes to become a regional centre for conventional and sharia-compliant fintech.

The central bank is working towards this goal with a three-pronged approach that includes expanding the availability of innovative financial solutions, highly qualified national talent in finance and banking, and supportive policies. To this end, it has issued a series of measures aimed at fostering fintech growth, including the creation of a regulatory sandbox that has seen notable early successes.

Concerted efforts to expand fintech offerings began in October 2016 when the CBB announced it had established a dedicated fintech and innovation unit to “ensure an adequate regulatory framework is in place to adapt fintech, which in turn will enhance the services provided to individual and corporate customers in the financial sector”. The unit holds responsibility for monitoring technical and regulatory developments in fintech, with a view of fostering innovation while maintaining financial system soundness and the approval process for companies participating in its flagship regulatory sandbox.

Testing Ground

In June 2017 the CBB launched a regulatory sandbox enabling local and international fintech companies to test new ideas, platforms and products to “create pioneering solutions for the financial services sector”. With the express mandate to entice international companies to expand their business operations in the Gulf and MENA region, the sandbox offers adequate time for approved testing of new fintech services and platforms. Sandbox admission criteria focus on several key indicators, such as: innovation, customer benefit and technical testing. The CBB requires that testing results be made available to the central bank.

A number of companies have been approved to participate in the initiative, with the CBB reporting that tested solutions would include digital banks, open banking platforms and payment services systems. “Banks are increasing their digital footprints and investing in open banking platforms to accommodate the wider digital shift under way in Bahrain,” Mohamed Abdelkhalek, country general manager for Bahrain at Arab Bank, told OBG.

Open Banking

Indeed, one of the most significant fintech solutions to emerge from the CBB’s regulatory sandbox was an open banking platform that has since been adopted by NBB and others, with more expected to follow suit in the near future. In November 2018 the CBB announced it would mandate adoption of an open banking system, in which different banks’ online banking and mobile apps are made interoperable via a third-party platform. Banks were instructed to comply by June 2019.

Shortly after the original announcement was made, the bank stated that regulatory sandbox graduate Almoayed Technologies, which had been working in partnership with technology company and the CBB since April 2018, had received an open banking licence. It has since launched a proprietary open banking application programme interface that connects 11 banks to a single online platform.

Credit Access

The kingdom is also making major inroads in expanding access to credit via new regulations, which enables crowdfunded peer-to-business (P2B) lending platforms to operate in Bahrain. The bank issued regulations for equity and crowdfunding activities, both sharia-compliant and conventional, in September 2017. For the first time SMEs in Bahrain and the region are permitted to raise money using licensed crowdfunding platforms, under regulations stipulating that companies must be CBB-licensed. Other requirements include BD50,000 ($133,000) of mandatory minimum capital for crowdfunding platforms, the restriction of lending solely to P2B and that only SMEs with paid-up capital of BD250,000 ($663,000) or less are able to raise funds through these platforms. Although SMEs may be based in Bahrain or abroad, CBB regulations stipulate that in the case of foreign SMEs, crowdfunding platform operators must acknowledge and publicise cross-border jurisdictional risks to lenders. Platforms must also comply with all existing CBB regulations regarding anti-money laundering, combatting the financing of terrorism and consumer protection.

Furthermore, growth among non-traditional and innovative lenders could help reduce difficulties in accessing credit. According to the World Bank’s “Doing Business 2020” report, Bahrain ranked 94th out of 190 economies globally in the getting access to credit category, and sixth in the MENA region for the same metric. In OBG’s August 2019 CEO Survey for Bahrain, however, 59% of CEOs characterised the ease of access to credit as easy or very easy, placing Bahrain among the highest in the region based on this OBG metric. In addition, in November 2018 the CBB moved to reduce some of its more restrictive crowdfunding platform regulations, including reforming capital limits for business borrowers.


With fintech development progressing rapidly, and profits, soundness indicators and asset growth remaining healthy, Bahrain’s banking system is well positioned to continue leading non-oil growth and diversification in the kingdom.

Access to credit remains a challenge for some segments of the economy, however, and the multiple external and domestic headwinds that have kept macroeconomic growth relatively subdued also present hurdles to expansion. However, ongoing fiscal consolidation reforms, an anticipated surge in infrastructure investment and steady lending growth should result in positive sector performance in 2020.

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The Report: Bahrain 2020

Banking chapter from The Report: Bahrain 2020

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