Consolidation and diversification of investment portfolios in Bahrain's Islamic finance sector

With one of the world’s longest traditions in Islamic banking and a diverse offering of retail and wholesale shariacompliant lenders, Bahrain is seen as a leading centre of one of the fastest-growing global financial phenomena. A number of international institutions providing guidance, ratings, standards and education in Islamic finance have their international headquarters in the kingdom. Among the Islamic banks based in Bahrain, there are institutions with hundreds of branches in Muslim and non-Muslim countries that specialise in creating sharia-compliant instruments to finance everything from real estate to oil exploration, from aircraft leasing to petrochemicals production.

Reference Centre

EY, in its “World Islamic Banking Competitiveness Report 2013”, recognised Bahrain and the six QISMUT countries of Qatar, Indonesia, Saudi Arabia, Malaysia, the UAE and Turkey as “the driving factors behind the next big wave in Islamic finance”. The report also identified Bahrain and Malaysia as the world’s most influential “reference centres” and said the two countries will be expected to provide leadership in the next phase of the Islamic financial services (IFS) industry’s development. “IFS are still limited to a few countries and markets,” Abdulkarim A Bucheery, chief executive of BBK (formerly Bank of Bahrain and Kuwait), told OBG. “What the sector needs are globally competitive mega Islamic banks with high levels of capitalisation that can lead, promote and engineer new products and take it mainstream.”

With an anticipated compound annual growth rate (CAGR) of 19.7% from 2013 to 2018, Islamic banking assets in the QISMUT countries are expected to grow from $567bn in 2012 to $1.6trn by 2018, according to the report’s forecasts. EY also estimates there are currently 38m IFS customers globally.

Meanwhile, the 2013 “State of the Global Islamic Economy Report” put out by Thomson Reuters suggested the potential universe of Islamic banking assets in its core markets could be $4.1trn based on an optimal scenario for the year. Among the immediate challenges faced by the sector internationally, the Thomson Reuters report identifies issues of standardisation and compliance, rising demand for skilled human capital and concerns about operational excellence. Institutions set up to provide education, guidance on standards, assessments and enforcement of regulations for Islamic finance are all present in Bahrain, with many providing international services from the kingdom.

World Islamic Banking Conference

In December 2013 the minister of transportation and telecommunications and acting chief executive of the Bahrain Economic Development Board (EDB), Kamal bin Ahmed, underlined the kingdom’s global role as the World Islamic Banking Conference (WIBC) met in Bahrain for the 20th consecutive year. “Bahrain has always strived to be at the forefront of thinking for the Islamic finance industry. This year’s WIBC comes at a particularly crucial time for the industry as it is poised to take an even bigger role on the world stage,” he said. Rasheed Mohammed Al Maraj, governor of the Central Bank of Bahrain (CBB), said the event reaffirmed Bahrain’s role in the sector: “With the largest concentration of Islamic financial institutions globally, Bahrain offers some of the most robust regulation in the finance sector today.” Close to 1300 delegates from 50 countries attended.

Focal Point

Bahrain’s position in the world of Islamic finance has been underscored by the number of international bodies for the sector that are based in the country. The Accounting and Auditing Organisation for Islamic Financial Institutions, the International Islamic Financial Market, the General Council for Islamic Banks and Financial Institutions, the Islamic International Rating Agency, the Thomson Reuters Global Islamic Finance Hub and Deloitte’s Islamic Finance Knowledge Centre are all located in the kingdom.

In April 2014 the then UK senior minister of state at the Foreign and Commonwealth Office, Sayeeda Warsi, and Governor Al Maraj of the CBB announced a joint framework to boost cooperation through an education programme and the formation of a working group to develop Islamic finance-driven trade and investment between the two countries. The UK government estimated that Islamic finance is growing 50% faster than conventional banking and is worth some $2.18trn internationally. On June 25, 2014 the UK became the first non-Muslim nation to issue a sukuk, receiving strong demand for its £200m, five-year bond.

In a speech announcing the memorandum of understanding (MoU), Warsi said, “Bahrain is considered an established innovator in Islamic finance. It issued the first international sovereign sukuk [Islamic bond] in 2001, which drove the GCC’s Islamic capital market, and with the largest concentration of Islamic finance institutions in the region, Bahrain is one of the pre-eminent Islamic finance centres in the Gulf. We have much to share about how to grow the industry successfully.”

As part of the MoU, the two countries will look at ways to build on existing educational links, such as that between the Bahrain Institute of Banking and Finance (BIBF) and Bangor University in Wales. BIBF offers a range of degree courses and professional qualifications in Islamic finance. This type of educational partnership is key to sector growth. “IFS are misunderstood globally; very few in Europe know or would be able to explain how the Islamic finance model works. Critical mass will not be realised until this happens,” Bucheery told OBG.

Another key contributor to Islamic financial education and thinking in Bahrain is the Waqf Fund, which was established in November 2006 under the auspices of the CBB and in partnership with key Islamic financial institutions in the kingdom. It pays for training for graduates and sector staff on Islamic aspects of finance, including banking, accounting, auditing and corporate governance, risk management and commercial jurisprudence, and has joined forces with the University of Bahrain to offer a four-year degree course in Islamic finance. The Waqf Fund also hosts regular roundtable discussions for sharia scholars where innovations in sharia compliance can be debated.

Regulatory Environment

The CBB is the regulator for all of Bahrain’s banks and financial institutions and has a directorate focusing on the Islamic banking sector within the country. It monitors the performance of individual institutions and also offers advice and guidance to the sector. The CBB has been pushing a consolidation agenda for banks across both the conventional and Islamic sectors and has recently called on Islamic banks to have their institutions and services rated to provide customers and clients with a greater sense of trust and transparency.

Retail Banks

The CBB Register lists all the Islamic financial institutions licensed to practise in the kingdom. It lists six retail licensees and 18 wholesale licensees. Among these, Al Baraka Bank operates as a wholesale bank with retail banking subsidiaries. All of these institutions are incorporated in Bahrain, with the exception of the Kuwait Turkish Participation Bank, which was incorporated in Turkey in 2002. Consolidation moves across Bahrain’s banking sector have resulted in some changes in ownership and equity for the six Islamic retail banks incorporated in the kingdom. At the time of writing there were 67 branches of Islamic retail banks in Bahrain, with one lender also providing two additional open-plan “banking malls”.

Al Salam

The most extensive retail banking network, of 17 branches, resulted from the merger of Al Salam Islamic bank with the conventional lender BMI in February 2014. Though only incorporated in 2006, this was Al Salam Bank’s second merger, the first being with Bahrain Saudi Bank in April 2012. Al Salam’s acquisition of BMI made it the country’s fourth-largest commercial bank. Al Salam has seven branches and BMI, which operates as a wholly owned subsidiary, has a further 10. BMI is in the process of becoming an Islamic bank. According to the Bahrain Bourse, Al Salam’s market capitalisation in June 2014 was BD479.57m ($1.27bn), making it the most highly valued retail Islamic bank in the kingdom. Al Salam also had a profitable year in 2013, with net profits of BD12.37m ($32.78m) up 20% from BD10.31m ($27.32m) in 2012.


With 16 branches in Bahrain, Ithmaar has operated in the kingdom since 2010. It also owns 66.6% of Faysal Bank in Pakistan, which has 269 branches across the country, making it one of Pakistan’s top 10 banks. In 2013 Ithmaar, which has assets of BD2.79bn ($7.39bn), reported a loss of BD29.9m ($79.24m) and cited three reasons for this 196% year-on-year fall compared to 2012: a one-off profit-share with an associate in 2012; regulatory pressure on profits in Pakistan; and a decline in income from investments.

Ithmaar is listed on the Bahrain Bourse, which in June 2014 reported the lender had a market capitalisation of BD154.25m ($408.76m). Its financial statements for December 2013 were upbeat and pointed to a 35% increase in the bank’s share price that year. Its wholly owned subsidiary, Ithmaar Development Company, had success with two property developments in 2013, including a 1.25m-sq-metre man-made island with holiday villas called Dilmunia. It sold all 32 villas in the Sea Villa development within three days in July 2013 and two-thirds of the properties in its Temara development on the day they went on sale in August 2013. Another of the bank’s subsidiaries is Naseej, a developer specialising in infrastructure and affordable housing.

Ithmaar’s chairman is Prince Amr Mohammed Al Faisal, grandson of the late King Faisal of Saudi Arabia. The chairman’s ownership of the bank is divided between two Bahamas-based entities, which collectively own 45.69% of Ithmaar. Ithmaar itself owns a 25.38% stake in BBK, Bahrain’s third-largest conventional retail bank.

Bahrain Islamic Bank

The third-largest footprint in the retail segment belongs to Bahrain Islamic Bank (BisB), with a network of 13 branches and two banking malls. Founded in 1978, it is also the country’s oldest Islamic lender and was the world’s third Islamic bank. However, in March 2013 a combined majority stake in the institution was bought by the conventional retail bank National Bank of Bahrain, with 25.76%, and Social Insurance Organisation Asset Management Company, one of Bahrain’s state pension funds, with 25.78%. Their shares were acquired from The Investment Dar of Kuwait. Saudi Arabia’s Islamic Development Bank retains a 17.66% stake. The involvement of a conventional lender in the bank has not affected its sharia-compliant services, but has allowed its new partner to acquire an interest in this growing area of financial services. According to Bahrain Bourse records, BisB had a market capitalisation of BD152.23m ($403.41m) as of June 2014. Its December financial statements show that in 2013 the bank returned to profitability, with a net profit of BD6.11m ($16.19m) for the year, following a loss of BD36.1m ($95.67m) in 2012. During 2013, customer deposits rose by 9.5% and it set up a BD35m ($92.75m) enterprise finance scheme in association with the government agency Tamkeen that helped 150 small and medium-sized enterprises (SMEs).

Khaleeji Commercial Bank

With eight branches, Khaleeji Commercial Bank has a more modest presence in Bahrain. According to Bahrain Bourse it had a market capitalisation of BD57.71m ($152.93m) in June 2014. At the end of 2013 Khaleeji reported a loss of BD19.2m ($50.88m) compared to a profit of BD751,000 ($1.99m) in 2012. However, in the first half of 2014 the lender’s profits rebounded; it made a profit of BD1.2m ($3.18m) in the first six months of 2014, compared to BD450,000 ($1.19m) in the same period a year before. For several months in 2013 and 2014, two of Bahrain’s Islamic wholesale banks were locked in negotiations over a 47% stake in Khaleeji. In the end Gulf Finance House, which had earlier announced it wished to divest its share, was unable to agree on a price with Bank Alkhair.

Kuwait Finance House

Retail lender Kuwait Finance House (KFH) also operates a chain of eight branches in the kingdom, though its parent company has a retail banking network of 310 branches across the GCC and Europe. KFH began operating in Bahrain in 2002. It reported a fall in net income in the kingdom in 2013 to BD7.39m ($19.58m) from BD10.04m ($26.61m) in 2012, and the company’s annual report for 2013 showed a decline of BD5m ($13.25m) in income from investments over the year.

Al Baraka Islamic Bank

The remaining Islamic retail bank in Bahrain is Al Baraka Islamic Bank, which operates five retail branches. A subsidiary of the wholesale Al Baraka Banking Group, which owns retail Islamic banks in 12 countries, the Bahrain Bourse recorded a market capitalisation for Al Baraka Islamic Bank of BD346.4m ($917.96m) in June 2014.

Like Ithmaar, Al Baraka Islamic Bank’s major shareholders are from Saudi Arabia. Sheikh Saleh Abdullah Kamel owns 30.11%, while his Dallah Albaraka Holding Company has 26.4%. Abdulla Abdulaziz Saleh Al Rajhi from Saudi Arabia owns a 6.95% stake. Al Baraka turned a BD4m ($10.56m) loss in 2012 into a BD345,000 ($914,250) profit in 2013.

Growing Popularity

The global rise of IFS is fuelled in part by the popularity of its products with customers and institutions. In Bahrain, an example of this can be found at Tamkeen, the agency tasked with supporting SMEs and entrepreneurial activity by young Bahrainis. It acts as guarantor for 50% of any loan made to a start-up or small company and has arrangements with seven commercial banks as well as the Bahrain Development Bank. “All of our lending deals are compliant with Islamic financial rules,” Mohammed Ali Bucheery, Tamkeen’s vice-president of private sector support, told OBG. “That doesn’t mean we only deal with Islamic finance institutions, but although the bank doesn’t have to be sharia-compliant, the product has to be.”

Wholesale Changes

There are 18 wholesale Islamic banks licensed on the CBB register. However, there have been changes to the status of some of these institutions in 2013 and 2014. The Arab Islamic Bank, which was founded in 1999, is no longer operating, while Capinnova Investment Bank, also established in 1999, was absorbed into its parent company BBK and ceased operating as a separate entity in September 2013. Investors Bank is still operating, but has not published any financial reports since September 2013. In 2012 the bank reported net losses of $1.5m compared to net losses of $4.9m in 2011, leaving it with accumulated losses of $57.6m at the end of 2012. Its unaudited September 2013 results showed that for the first nine months of 2013 it made a net profit of $189,407 compared to a loss of $1.05m for the same period in 2012.

Ibdar Bank

A new wholesale sharia-compliant bank, Ibdar Bank, was launched from the merger of CAPIVEST, Elaf Bank and Capital Management House in December 2013. The combined bank posted a profit for 2013, reversing a collective loss of $12.4m in the previous year. Ibdar Bank’s 2013 annual report explains that $8.5m in merger and redundancy costs were accounted for in the 2012 financial year, partially explaining the bank’s reversal of fortunes in 2013.

Investment Portfolio

The investment portfolios of the other Islamic wholesale banks in the kingdom demonstrate global reach and ambition, and offer some evidence of diversification away from property and real estate. New real estate investments in recent times have generally been on a relatively modest scale, in London or the US, while banks with ongoing commitments to large-scale mega-projects are looking for early exits where possible for their investors.

This change in emphasis has been welcomed by regulatory officials. “We have been advising the banks for a long time that they need to diversify their loan portfolios,” the CBB’s director of Islamic financial institutions supervision directorate, Hussain Ali Sharaf, told OBG. “For some of them, 35-40% of their portfolio has been in real estate. We are advising them to look at something different. Some are looking at industry and energy, for instance First Energy. Other banks have truly diversified and have changed to the food sector, to education and health. Some are still stuck with projects, but those numbers are very small.”

ABC Islamic Bank

Bahrain-headquartered Arab Banking Corporation, which operates as ABC Islamic Bank, saw a 48% increase in profits, from BD3.12m ($8.27m) in 2012 to BD4.6m ($12.19m) in 2013 from its network of subsidiaries and offices across the Middle East, Europe, Brazil, the US, Russia and Singapore.

First Energy Bank

Profits at First Energy Bank rose by 8.4% from BD13.9m ($36.84m) to BD15.11m ($40.04m). Its investments include two jack-up rigs leased to Mexico’s national oil and gas company Pemex, a joint venture with a Bulgarian fertiliser manufacturer and a €25m murabaha (cost-plus financing) agreement with Kore Coal Finance of the Netherlands. The bank also has stakes in the Al Dur combined water and power plant in Bahrain; ADWOC, which drills for oil in Libya; and Al Izz Islamic Bank in Oman. It is also leasing an Airbus A330-300 to Malaysia Airlines.

International Investment Bank

International Investment Bank has been cautious about new investments since the financial crisis, but in 2013 it put $25.7m into a development of multi-family rental properties in Texas. Profits fell by 27% from BD3.09m ($8.19m) in 2012 to BD2.26m ($5.99m) in 2013. The bank also announced it had negotiated a partial exit from an investment in a group of companies in Azerbaijan.

Seera Investment Bank

Seera Investment Bank has used its Falak Aviation Fund to lease narrow- and wide-bodied jets to British Airways, Cathay Pacific, Jet Airways and other airlines. It also backs Kosan Crisplant, a Danish company that specialises in filling liquefied petroleum gas cylinders, and in 2012 it invested in a 346-room student residence in London. The residence was completed in 2013, with most of the rooms leased from October 2013. Seera has also negotiated a lease for the property with an international educational institution and plans to exit the project in 2015. It made profits of BD1.54m ($4.08m) in 2013, down from BD2.49m ($6.60m) in 2012, a fall of around 38%.

Venture Capital Bank

Among Venture Capital Bank’s portfolio are some investments in London’s luxury property market. It is backing Mayfair Chambers, a £30m complex comprising six properties, and says it is at an advanced stage with planning authorities in for a £355m redevelopment of Park Crescent West in the city’s Regents Park. The bank is also involved in three residential developments in Bahrain, including two on Reef Island and a project to build accommodation for 4360 expatriate workers in Dubai at Jebel Ali. It also has private equity investments in Greek and Cypriot shipping, a Turkish food company and a Libyan oil company, as well as venture capital involvement in a range of health care, finance and real estate enterprises.

Bank Alkhair

After abandoning a merger with the retail Khaleeji Commercial Bank, Bank Alkhair returned to profitability in 2013, with net profits of BD1.77m ($4.69m) after losses of BD15m ($39.75m) in 2012. During 2013 the company launched t’azur as a licensed takaful (Islamic insurance) company in Oman.

Gilf Finance House

Gulf Finance House still owns a 47% stake in Khaleeji Commercial Bank, but sold its 75% stake in UK second-tier football club Leeds United, investing instead in a property comprising five flats overlooking a square in London’s Kensington neighbourhood. The bank also signed partnerships with an Indian company and a Turkish firm to develop two of its legacy developments at Mumbai Economic Zone and Tunis Harbour, respectively.

Global Banking Corporation

Global Banking Corporation turned in a BD5.59m ($14.81m) profit in 2013 thanks to the successful completion of the Makkah Hills scheme in Saudi Arabia, but it is still looking for exits for its investors on the Marsa Al Seef waterfront city project in the north of Bahrain.


The licensed wholesale bank that has undergone the greatest change is Arcapita, which found itself breaking new ground for an Islamic institution as it emerged from Chapter 11 bankruptcy proceedings in the US with a plan to create two new companies. One of the companies will hold the investment bank’s remaining assets, thought to be worth about $3bn, and the other will administer the disposal of those assets and the repayment of creditors and investors over the next five years. This transfer of assets made a sizeable dent in the total assets of the Islamic banking sector published in March 2014. The CBB figures showed a 23% drop in the total assets of the sector from $12.7bn in 2012 to $9.8bn in 2013, with most of this fall taking place between August and September 2013. The result is that total assets of the sector have hit their lowest value since 2007, representing the smallest proportion of total bank assets (5.11%) since 2008.


The Islamic banking sector in Bahrain today may be a leaner and more risk-averse collection of institutions than was seen back in 2009, but through consolidation and prudent investment strategies among banks and continued innovation in standards and education, the kingdom is poised to reap the benefits of the global economic upturn and play a pivotal role in the ongoing expansion of IFS around the world.

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Bahrain 2015

Islamic Financial Services chapter from The Report: Bahrain 2015

Cover of The Report: Bahrain 2015

The Report

This article is from the Islamic Financial Services chapter of The Report: Bahrain 2015. Explore other chapters from this report.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart