Bahrain has worked hard over the years to position itself as a global financial services centre. The financial sector is the highest contributor to GDP by sector, and its development is integral to the success of national strategies such as Bahrain Economic Vision 2030 and the Economic Recovery Plan (ERP). Bahrain is also a globally competitive market in Islamic banking, with the segment witnessing significant consolidation and investment in recent years.
The kingdom’s banks have remained profitable despite a challenging global economic backdrop, while the country’s advanced financial technology (fintech) infrastructure and services are broadening banking access for previously underserved demographics. With the global economy on the cusp of the next wave of digital advancement, Bahrain’s financial services authorities are implementing policies that should see the kingdom remain a significant force in international banking sector development.
Structure & Oversight
The Central Bank of Bahrain (CBB) operates as a public corporate entity and is the sole regulator of banking and insurance activities, as well as capital markets and investment business. The CBB assumed its regulatory authorities from the now defunct Bahrain Monetary Agency as per the CBB and Financial Institutions Law of 2006. That law was amended in 2015, 2016 and 2020 for purposes including better defining terminologies used in the original document, tightening regulations and protections, and expanding and augmenting the CBB’s legal authorities and independence.
The CBB manages monetary and credit policies, foreign exchange rates and reserves, government reserves, and national payment and settlement systems and policy. It also works to ensure the stability of the Bahraini dinar and oversees its issuance. CBB regulations align with international standards, with frameworks in place to streamline operational procedures and minimise costs for financial entities operating within its jurisdiction. A capital adequacy ratio of 12.5% of risk-weighted assets, as well as a Tier-1 ratio of 10.5%, are mandated for banks – both rates that exceed Basel III requirements. Additionally, locally incorporated banks are required to report Basel III ratios for leverage and liquidity on a quarterly basis. The year 2024 marks the final year of the phased implementation of Basel III regulations, which will be enforced in full during 2025.
The global Islamic finance industry is undergoing expansion and was valued at around $4trn as of May 2023. In recognition of the segment’s importance to Bahrain’s population and economy – domestic Islamic banking assets were valued at $61.9bn in April 2024 – and to the country’s status as a global financial centre, the CBB established its Sharia Supervisory Board (SSB) in February 2015 to oversee Islamic banking activities and entities, with the SSB launching a dedicated governance framework in 2018.
Fintech
Bahrain is well established as a global centre for fintech and financial services innovation. In December 2023 the CBB was re-elected as a member of the Global Financial Innovation Network’s Coordination Group for a 3rd term, alongside 11 other regulators. The segment boasts regulatory frameworks covering open banking, payment systems, crowdfunding and crypto-assets. The guidelines for the latter were updated in February 2024 to tighten regulation in areas including licensing, governance, risk management and a range of security-related factors. The Fintech and Innovation Unit operates under the CBB umbrella and coordinates its activities with the sector’s strategic goals, helping to ensure that a high level of service is provided by sector operators to both individual and corporate customers.
The country’s digital financial infrastructure, particularly point of sales and ATM networks, is developed and maintained by Benefit, which was established in 1997 by 17 commercial banks. Benefit’s Electronic Fund Transfer System (EFTS) is central to its service provision and comprises three core services, Fawri+, Fawri and Fawateer, which were launched in that order beginning in December 2015. Fawri+ enables the rapid transfer of funds up to BD1000 ($2650) per account, per day for retail banking customers. Fawri facilitates the transfer of unlimited sums, which can be broken down and paid automatically in scheduled instalments – making it a widely used salary payment system. This tool caters to both retail banking and corporate customers. Fawateer, meanwhile, is a digital bill payment aggregator, enabling retail banking customers to view and pay multiple bills through a single interface.
In June 2017 the CBB launched its regulatory sandbox for fintech start-ups, enabling eligible companies to test their products free from regulatory constraints in the virtual space provided by the CBB. The sandbox’s aim is to harness innovation to advance the provision of financial services, with applicants required to prove a product’s disruptive potential in order to access its facilities. A term of nine months is granted to successful companies, with a three-month extension also possible. As of June 2024 a total of 17 companies were registered in the sandbox.
Investment Strategy
Other important entities playing an enabling role in the country’s financial services sector include the Bahrain Development Bank (BDB), a policy bank established in 1992 to develop the country’s small and medium-sized enterprise (SME) sector – which, as of the end of 2023, accounted for 93% of companies operating in Bahrain. The BDB offers financing programmes for SMEs, and also partners with other bodies crucial to the development of the private sector. This includes the Labour Fund (Tamkeen), which is responsible for private sector development (see Economy chapter).
Meanwhile, the Bahrain Economic Development Board (Bahrain EDB) is tasked with attracting foreign investment into the country, with the financial services sector the main recipient. The Bahrain EDB has enjoyed success in drawing multinational corporations, such as US firms Citi and American Express and the UK’s Standard Chartered, to Bahrain, in addition to top local and international start-ups. In 2023 Bahrain secured $1.7bn of foreign direct investment inflows, with financial services receiving the largest single-sector share of that sum, at 17.5% of GDP.
In implementing strategic initiatives, the CBB also works closely with the Ministry of Finance and National Economy and the Ministry of Social Development. The CBB’s collaboration with the latter is an important partnership in driving progress towards the country’s multidimensional sustainability targets, with sustainable financial services and facilities pivotal in that regard (see Sustainability chapter). In November 2023 the CBB issued a new environmental, social and governance (ESG) reporting framework that requires all financial services institutions and listed companies to make annual ESG disclosures by the end of 2024 (see Capital Markets chapter).
The main strategic driver for the banking industry is the Financial Services Sector Development Strategy 2022-26, which forms part of the kingdom’s postCovid-19-pandemic Economic Recovery Plan. Key targets of the strategy include increasing the share of financing allocated to SMEs from the domestic financing portfolio to 20% by 2025; decreasing the volume of currency in circulation by 25% as the country seeks to expand the use of digital payments; maintaining 10% annual growth in electronic fund transfers; and setting the target of the financial services sector’s GDP contribution at 20% through to 2026, before rising to 25% thereafter.
Monetary & Exchange Rate Policy
Bahrain’s currency is anchored at a fixed exchange rate against the US dollar in order to provide stability for the national currency. In comparison, pegs at different exchange rates are in operation in four of the other five GCC economies, with Kuwait opting to peg its currency against a basket of international currencies.
Despite the global economic pressures experienced since 2020, GCC economies have largely managed to avoid the prolonged inflation experienced in many other countries. This is due in part to political models that allow technocratic approaches to setting monetary policy, as well as their status as energy producers – which enables subsidised energy costs. These factors, coupled with the CBB’s farsighted policy-making, have allowed Bahrain to avoid elevated price increases and maintain a stable and profitable business environment. Between 2022 and 2024 average inflation in the kingdom was 1.7%, compared to a global average of 7% during that period.
CBB standing facilities comprise deposit and lending rates for retail banks, which include the conventional overnight, one-week and four-week deposit facilities, as well as overnight and one-week wakala (agency) deposit rates available to Islamic banking customers. The one-week deposit rate is the CBB key policy rate. Conventional overnight lending facilities are measured against Bahraini dinar deposits and overnight repurchase facilities are measured against government securities, whereas one-week wakala facilities are measured against government ijara sukuk (leasing Islamic bonds).
Bahrain followed the US Federal Reserve in raising interest rates throughout 2023, reaching 6.25% by July of that year. Easing began in September, when the CBB cut the rate in September, and again in November, to 5.5%. Meanwhile, the overnight deposit rate and four-week deposit rates were 5.25% and 6%, respectively, while the overnight repo rate was 6.25%.
Size & Performance
According to the CBB, as of April 2024 there were 367 financial institutions in Bahrain, with 20 new licences issued since January 2023. Of those institutions, 84 were banks, comprising 29 retail banks – 13 of which were locally incorporated retail banks, and 16 of which were branches of foreign retail banks – and 55 wholesale banks. Within these figure there were 15 Islamic banks, seven representative offices and one bank society.
The financial sector is the largest sectoral contributor to Bahrain’s economy, accounting for 17.8% of GDP in 2023. Annual growth of 5.7% made it the third-fastest-growing non-oil sector behind hotels and restaurants, and government services in 2023. Such high growth in a well-developed market is a testament to the sound sector oversight implemented by the CBB and driven by rapidly developing segments such as Islamic finance and fintech. The total value of transactions carried out over the EFTS reached BD29.4bn ($78bn) in 2023, representing 15.6% expansion from the previous year.
Bahrain boasted a total workforce of 610,427 at the end of 2023, with financial services contributing 14,362, or 2.4%, of that figure. The financial services labour force grew by 1.7% between 2022 and 2023, with the localisation rate rising from 68.7% to 69.6%.
The CBB’s net assets rose by close to 25% between the last quarter of 2022 and the last quarter of 2023, from BD4.8bn ($12.7bn) to BD6bn ($15.9bn). Meanwhile, money supply across the M2 – currency in circulation plus demand, time and savings deposits – and M3 – M2 plus general government deposits – categories rose during that same timeframe by 2.2% and 1.9%, respectively, amounting to a combined total of around BD30.7bn ($81.4bn).
The banking system’s total foreign and domestic assets underwent growth of 6.7% in 2023, from $224bn to around $239bn. Wholesale banks accounted for the largest proportion of that sum, with 55.2%, while retail banks accounted for the remaining 44.8%. Islamic banks are incorporated across those two categories and carried total assets of $38bn, an annual increase of 6%. Islamic banking accounted for 16% of the total banking sector balance in both 2022 and 2023, according to the CBB.
Total domestic assets grew 9.3% from $81.4bn in the last quarter of 2022 to close to $89bn at the end of 2023. Meanwhile, total banking system domestic liabilities rose from $72.3bn in 2022 to $73.8bn in 2023, while foreign liabilities rose by 8.6% over the same period, from $151.7bn to $164.7bn. Bahrain’s banking system carried a total equity of $28.2bn at the close of 2023, which was around 5% lower than at then end of 2022 and equal to 11.8% of total liabilities. The total value of non-banking enterprises’ deposits grew by 6.3% in 2023, reaching BD20.2bn ($53.6bn), while the loan-to-deposit and loan-to-asset ratios were 58.3% and 29.3%, respectively – both very slightly lower than in 2022.
The banking sector recorded strong year-on-year performance across most key metrics in early 2024. Between the first quarter of 2023 and the first quarter of 2024, total assets in the banking sector rose by 7% to $240bn, or approximately 556% of GDP. Meanwhile, the banking system’s total equity increased by 14.6% over the same period to $27.6bn, while total outstanding loans to residents as a percentage of GDP rose from just over 71% to nearly 75%. Total local deposits decreased by 0.3% during that same period to just under BD15.1bn ($40.1bn).
Loans & Interest
As of April 2024 total outstanding loans and advances to non-bank residents came to approximately BD12.1bn ($32.1bn) – up from just below BD11.3bn ($30bn) in January 2023. The business sector accounted for the highest proportion, at approximately BD5.3bn ($14.1bn). Manufacturing represented the bulk of business loans in April 2024, with BD1.3bn ($3.4bn), while real estate and retail and wholesale trades followed with BD931m ($2.5bn) and BD742m ($2bn), respectively.
Meanwhile, loans to SMEs amounted to BD664m ($1.8bn) in April 2024, with construction companies accounting for the highest value, at BD189m ($501m). Wholesale and retail SMEs contributed the next highest value with BD141m ($374m), followed by real estate operators with BD72m ($191m). The average interest rate on business loans (excluding overdraft approvals) was 8% in the first quarter of 2024, compared to 8.2% a year earlier. Average interest on loans to construction and real estate sector operators was 8.6% as of April 2024, with loans to manufacturing and trade-related businesses carrying average interest of 7.2% and 8.3%, respectively.
In terms of personal loans, mortgages accounted for the highest value in April 2024, at around BD2.9bn ($7.7bn), while salary assignments followed with BD1.8bn ($4.8bn). Average interest on mortgages was 5.5%, while on salary assignments it was 5.9%. In contrast to business loan interest, the average rate on personal loans dropped between April 2023 and April 2024 from 7% to 5.8%. Meanwhile the average interest rate on deposits over a period of six to 12 months dropped from 2.7% in the first quarter of 2023 to just over 2.5% in the first quarter of 2024.
Interest is forbidden in Islamic finance, with lenders and borrowers instead agreeing upon specific terms that will see the lender turn a fixed profit. Common frameworks include murabaha (cost-plus financing) and ijara. These both see lenders purchase goods required by the borrower, who then repays a higher price than the original cost, usually in instalments. In April 2024 the average rates of profit on business loans by Islamic retail banks to companies in the construction and real estate, manufacturing and trade sectors was 8.6%, 4.1% and 8.5%, respectively.
Major Banks
A high-interest-rate environment is helping to boost profitability in Bahrain’s major banks. According to annual disclosures, Gulf International Bank (GIB) overtook Ahli United Bank (AUB) to become the largest bank in Bahrain by asset size during 2023, with total assets growing from $32.6bn in 2022 to $47bn the following year. In 2023 GIB posted net profit of $169m, an increase of 76% from $96m in 2022. AUB is the country’s second-largest bank by asset size and in 2023 it posted net profit of $667m, up 22% from $546m in 2022. AUB’s total assets carried a value of $42bn in 2023. Majority stake of AUB was purchased by Kuwaiti Islamic bank Kuwait Finance House (KFH) for $11.6bn in July 2022, with KFH purchasing the remaining 4.9% stake in July 2023. As of June 2024 KFH was in the process of converting AUB into a dedicated Islamic bank.
Meanwhile, Bank ABC saw net profit attributable to shareholders increase by 53% between 2022 and 2023 to $235m, while its operating income also grew by 16% for that period. The National Bank of Bahrain, which was established in 1957 and was the first locally owned bank in Bahrain, posted net profit of $216m in 2023, representing an increase of 15% from $188m in 2022. Total assets increased by 12.6% over the same period, from $12.7bn to $14.3bn, with a total equity of $1.5bn. Meanwhile, Al Baraka Bank’s net income underwent an increase of 18.4% from $239m to $283m, while total assets grew from $24.9bn to $25.3bn in the same period.
Amid the high-interest environment, net interest margins (NIMs) for a selection of the country’s largest lenders rose to 2.9% in the first nine months of 2023, from just below 2.7% for the same period of 2022. In spite of that upward trend, Bahrain’s NIMs rank among the lowest in the GCC – due in large part to the competitive banking environment placing downward pressure on margins. Sustained high policy rates from the CBB are also contributing to high yields on government securities for Bahrain’s banks.
The country’s solid macroeconomic fundamentals should see the positive trends related to profitability, asset growth and widening NIMs continue throughout 2024; however, sustained high interest rates could eventually place small and medium-sized borrowers under pressure, potentially disrupting the national economy at its foundation. Nevertheless, asset quality remains strong. The first nine months of 2023 returned a non-performing loan ratio of 3.1%, which is low in the context of the previous decade, with ratings agency Fitch forecasting that it would remain around that level during 2024.
Trends
Many of the financial sector-related goals of the ERP revolve around deeper implementation of fintech systems. Reforms and initiatives such as the CBB sandbox, the introduction of an open banking framework in October 2020 and the April 2022 launch of new privacy guidelines for the 2019 personal data protection law enable an innovation-centric environment for fintech development. This helps to attract top local and international talent, as well as robust inflows of foreign investment, into the country’s top fintech companies, start-ups and scale-ups.
Such conditions encourage partnerships between major domestic and international financial companies. In May 2024 Bahraini credit card issuer CrediMax and US firm Mastercard collaborated to launch a new payment system called “Click to Pay”, which utilises Mastercard’s digital gateway. Meanwhile, in September 2023 Bank ABC joined JP Morgan and CBB to launch a cross-border payment system over the JP Morgan Onyx blockchain system, enabling Bank ABC clients to make high-value Bahrain-to-US payments. Furthermore, Bank ABC-owned mobile-only ILA Bank allows customers to set up accounts by scanning ID cards and providing minimal personal details.
Innovative products such as digital lending platform Flooss broaden access to credit by utilising Tarabut’s income verification systems to streamline application processes. Tarabut was the first company to graduate from the CBB’s sandbox and is now MENA’s largest open banking platform. Meanwhile, a range of payment tools are providing solutions for lower-income sections of the population – a section of the economy that offers significant growth potential, given the fact that expatriate labourers account for around 75% of the workforce in GCC economies.
Fintech can deepen financial inclusion, and Bahrain boasts bank account penetration of close to 100% – compared to a global average of 76%. Indeed, the 2022 Global Islamic Fintech Report placed Bahrain third in MENA and sixth globally for its concentration of Islamic fintech products and facilities.
Outlook
Bahrain’s banking system continues to develop apace, with farsighted policy-making facilitating the regulatory agility required to maintain safe and secure banking systems, as well as high levels of consumer and investor confidence. The kingdom’s sustained high cost of borrowing may begin to put pressure on smaller businesses. Continued timely interventions will be required from the CBB to ensure the stability of the country’s SME segment, which is a focal point of the government’s economic development agenda. Although the global outlook remains uncertain, improving macroeconomic conditions saw the CBB cut interest rates during the second half of 2024, which is expected to provide a boost to borrowers. Additional factors such as increasing collaboration between fintech start-ups, banking companies and other service providers suggest a continuing upward trajectory for this dynamic sector.
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