How Bahrain is reshaping Islamic finance 

For decades Bahrain has been a pioneer in Islamic finance and regulation. Now its reputation for excellence and innovation is reshaping the sector once again, from traditional financial products to FinTech.

Over the last 30 years, Islamic finance — which allows individuals and institutions to save, borrow and invest money in compliance with the principles of Sharia law — has flourished to become a truly global industry. According to the Islamic Finance Development Indicator (IFDI), the Islamic finance sector had combined assets of $3.37 trillion in 2020, with this figure projected to rise to $4.94 trillion by 2025. Bahrain has long been at the vanguard of the sector and today the kingdom hosts the largest concentration of Islamic financial institutions in the Middle East. These include six Shari’ah compliant retail banks, 13 wholesale banks, nine Islamic windows of conventional banks, six Takaful (Islamic insurance) companies and two Re-Takaful companies. 

Bahrain’s position as the preeminent Islamic financial services centre in the Middle East can be traced all the way back to 1979 and the foundation of the Bahrain Islamic Bank, the first Islamic lender in the kingdom. The subsequent growth of Bahrain’s Islamic finance industry was supported and enabled by the robust regulatory frameworks then established by the Central Bank of Bahrain (CBB). 

Bahrain’s reputation for regulatory excellence and innovation led to it being chosen in 1990 as the home of Islamic finance’s standard-setting body, the Accounting and Auditing Organization for Islamic Institutions (AAOFI). The AAOFI has since developed more than 100 standards on Sharia law, accounting, auditing ethics and governance issues, while Bahrain’s position as the world leader in Islamic finance standards has been further cemented by the arrival of other global financial organisations in the kingdom. These include the International Islamic Financial Market (IIFM), the General Council for Islamic Banks and Financial Institutions (CIBAFI) and the Islamic International Rating Agency (IIRA).

Built on these sound foundations, Bahrain’s Islamic financial ecosystem has thrived ever since. As of 2021, the total Islamic banking assets held in Bahrain stood at $34.6 billion, making the kingdom one of the region’s largest Islamic finance and banking markets. While last year’s IFDI ranked Bahrain fourth in the world and second in MENA for Islamic finance development. According to the report, Bahrain ranked first globally for Islamic finance regulation and led the MENA region in Islamic banking, corporate governance, knowledge, awareness and corporate social responsibility. 

These are all impressive and hard-won achievements, but far from resting on its laurels, Bahrain’s Islamic financial sector continues to innovate. A good example of its progressive approach is the way the Bahrain’s regulatory ecosystem is now evolving to create opportunities for FinTech entrepreneurs. Bahrain hosts MENA’s leading FinTech hub — Bahrain FinTech Bay — which offers a range of dedicated facilities to FinTech companies including innovation labs, advisory services and collaborative platforms. Bahrain’s position as the region’s leading FinTech destination has been further enhanced by FinHub 973, a pioneering cross-border digital innovation platform that enables collaboration between financial institutions and FinTech companies under the supervision of the CBB. All of these initiatives are supporting both FinTech companies and traditional financial institutions with digital ambitions as they develop new Sharia-compliant products and services.

This pattern — of Bahrain’s pioneering regulatory reforms creating opportunities for investment and growth — is equally in evidence in more well-established areas of Islamic finance. For example, the CBB has implemented a new and enhanced framework for the Takaful and Re-Takaful industry designed to strengthen companies’ solvency, enhance their operational efficiency and safeguard the interests of all stakeholders. Another innovative financial instrument is the wakalah or agency contract, which allows Islamic retail banks to manage excess liquidity by placing it with the CBB in a one-week Islamic deposit facility. The CBB then invests the funds in a portfolio of investments including international sukuk (Islamic bonds) and cash. 

In 2021, the combined assets of Bahrain’s Islamic banking sector reached an impressive $38.6 billion, which is an equivalent sum to the kingdom’s annual GDP. Interestingly, the assets of Bahrain’s Islamic banks grew at 8.1% last year, almost double the rate of asset growth for conventional banks (4.2%). Thanks to Bahrain’s decades of excellence in Islamic finance and ongoing regulatory innovation, this upward curve looks set to continue into 2023 and beyond. 

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