As in many other GCC countries, the mortgage market in Bahrain was once almost exclusively the domain of the state-owned housing bank. However, this has changed over the last decade, following the 2001 constitutional amendment that allows for foreign freehold ownership of certain types of real estate. Today, more than a dozen retail banks, including both conventional and sharia-compliant institutions, offer mortgages to Bahrainis and expatriate residents.

MARKET SIZE: As of November 2011, the total value of outstanding mortgages in Bahrain stood at BD680.5m ($1.8bn), according to data from the Central Bank of Bahrain. However, according to R Lakshmanan, the CEO of Sakana Holistic Housing Solutions, an Islamic financing company that specialises in mortgages, this figure could well understate the size of the market as personal loans are often taken in lieu of, or in addition to, mortgages to finance the purchase of homes. This phenomenon can partly be explained by the fact that the largest player in the mortgage market – state-owned Eskan Bank – can only legally lend up to BD60,000 ($158,412). In a market where it can be difficult to purchase a home for less than BD85,000 ($224,417), borrowers often turn to other sources, including personal loans, to make up the difference.

Of the total outstanding value of mortgages in Bahrain, Lakshmanan estimates that sharia-compliant loans account for around 30%. Major players in this segment include Kuwait Finance House, Bahrain Islamic Bank and Sakana, founded in 2007 as a joint venture between BBK (formerly the Bank of Bahrain and Kuwait) and Ithmaar Bank. One factor that has contributed to growth in Islamic mortgages in the Kingdom is the relatively advantageous regulatory framework.

While some customers for Islamic loans may be motivated by religious reasons, many borrowers are willing to consider both conventional and Islamic financing options, making their decision based on pricing and other factors, such as convenience. According to Lakshmanan, only about 10-15% of mortgages in Bahrain are determined solely by religious considerations. The fact that 30% of mortgages in the current market are Islamic suggests that sharia-compliant banks have already had success in attracting customers from the conventional segment of the market.

CHALLENGES: One factor that could slow growth in the Islamic mortgage market is access to funding, which in turn affects loan pricing. This is, in part, a global challenge for the entire banking sector. As the eurozone crisis continues to unfold, European banks are pulling out of emerging markets to meet their capital requirements. Islamic banks, however, are feeling the pinch for some additional reasons, including the fact that, at least in Bahrain, they are generally younger institutions. Lacking a track record, they may find it more difficult and expensive to access funds. Sharia-compliant institutions also tend to hold more assets in the real estate sector, for the simple reason that it is easier to structure transactions when a real asset is at issue. Given the downturn in this sector, the market may be less willing to provide funding to Islamic lenders.

These challenges are not insurmountable, however, as evidenced by the recent success that Sakana had in securing a four-year murabaha (cost-plus financing) facility from Khaleeji Commercial Bank (KCB) for BD4m ($10.56m). The funds made available by this agreement, which was signed in August 2011, will be used to meet Sakana’s working capital requirements. According to Lakshmanan, the KCB facility is important for the mortgage lender, as it will help to alleviate the bank’s asset-liability mismatch.

OPPORTUNITIES: A growing general acceptance of Islamic financing by non-Muslims will likely boost the growth of Bahrain’s Islamic mortgage market. Indeed, already about 40% of Sakana’s customers are non-Muslim. Moreover, the amount of affordable housing stock coming to the market is expected to increase in the next several years (see analysis). More supply on the market means additional customers for all mortgage lenders, including the country’s sharia-compliant banks.