62 December 2011 BTM Foreign Direct Investment into the Kingdom has slowed down, but he hopes this is a temporary blip. With the government announcing the biggest-ever budget this year, there’ll be substantial room for infrastructure projects in priority sectors. For all the negative short-term implications, the confidence shown in the Kingdom’s banking sector during the crisis was a positive sign for Abdulkarim. “The corporate and commercial banking sectors have shown growth this year owing to the prudent policies of Bahrain’s banks. Most have posted strong results on the back of a prudent investment portfolio. Our level of deposits is much higher. In fact, I’d say most of the banks are now suffering from excess liquidity,” he notes. The strong institutional interest in Bahrain’s first seven-year Sukuk of US$750 million issued this November has confirmed investors’ confidence in the Kingdom, particularly in view of the volatile market backdrop, he believes. Significant milestones Bahrain benefitted from a head start as the financial centre of the Middle East due to the presence of Eastern Bank, now Standard Chartered Bank, which commenced operations here in the 1920s. The real explosion in the financial services came a few decades later in 1976, when Citigroup moved US$2 billion of its Middle East and offshore assets from Beirut to Bahrain following the civil war in Lebanon. Other banking and investment groups gradually followed, enabling Bahrain to metamorphose as the financial hub of the region. The establishment of Bahrain Monetary Agency in 1973 laid the groundwork for a world-class regulatory regime, which remains the most advanced in the region. As developed economies gear up to comply with Basel III, the new global regulatory standards on bank capital adequacy and liquidity developed in the wake of the global financial crisis, Bahrain is already there, Abdulkarim points out. “The Basel III norms prescribe that institutions maintain a capital adequacy ratio of 8 per cent, whereas in Bahrain, the CBB had long prescribed 12 per cent. We’re ready for Basel III, we just need to provision for some more shock absorbers.” Bahrain’s local talent pool is significant; the financial services sector employs around 14,137 personnel, of which 66 per cent are Bahraini nationals. According to Abdulkarim, the inception of the Bahrain Institute for Banking and Finance in 1981 has been critical to Bahrain’s long-term success as a financial centre. “The wealth of human capital resources in Bahrain is noteworthy. Locals are not only running the banks here, we also export talent to the rest of the GCC,” he points out. As the banking system matures over the years, the diffusion of automation and evolution of the electronic platform has meant that banks are now able to offer an advanced and comprehensive range of products and services, simplifying banking. The strength of the banking sector is also underscored by the ability of Bahrain’s banks to collectively finance megaprojects. Even in the midst of the crisis earlier this year, the proliferation of financial institutions continued. Eleven new licenses were issued this year, including conventional banks, investment firms, representative offices and brokerage firms. Several banks, such as India-based Canara Bank, have expanded their retail network in Bahrain during 2011. New vistas The consumer lending portfolio of most banks shrank during the year as people refrained from borrowing amidst an uncertain political and economic environment. Faced with a stagnant loan portfolio and intense competition in the local market, banks were forced to cut interest rates and come up with attractive offers. Personal loan interest rates were slashed from seven per cent last year to 4.9 per cent, while return on deposits rose to four per cent in some banks compared to 1.5 percent in the past. The difference between interest rates on deposits and loans currently stands at only one per cent, the highest ever in Bahrain’s banking sector. Needless to say, the low rates squeezed profit margins. Business lending remained sluggish during 2011, primarily due to the private sector’s reluctance to invest in new opportunities and expansion. In absence of any opportunity in the local market, banks will need to look at the regional markets to deploy their excess liquidity, believes Abdulkarim. “For a market this small, Bahrain is definitely overbanked. As the banking system matures and reaches saturation point, we will need to concentrate on cross-border opportunities if we’re to maintain this growth momentum,” he asserts. For BBK, a substantial part of its growth will now come from outside Bahrain. The bank will soon announce a joint venture with a major player in Kuwait. During the course of this year, BBK has infused US$45 million of capital into its operations in India and will further expand its branch network there. “People will continue to remain the main asset for banks and we’re no different. Whenever we see the need, we will employ fresh graduates purely based on their merit and qualifications,” he maintains. Perhaps the most significant milestone in Bahrain’s financial sector has been the development of Islamic finance, which has established a strong foothold in the Kingdom. At the moment there are 26 Islamic banks and 19 Islamic insurance companies (takaful) operating in the Kingdom, which represents 12 per cent of the country’s banking assets. Talks are on for a merger between Bahrain Islamic Bank and Al Salam Bank and the deal is expected to be finalised during the coming year. “We have too many Islamic Finance businesses and services, all of which remain fragmented,” notes Abdulkarim. “Consolidation is a healthy sign for the market for it means stronger banks with bigger balance sheets, offering a wider range of products and cheaper services. Bigger institutions benefit from economies of scale while having the capabilities of putting a cap on expenditure.” Quoting a recent report by Deutsche Bank, the global debt crisis may help Islamic finance to nearly double to US$1.8 trillion in assets by 2016 as stagnant corporate lending pushes institutions to seek alternative financing to traditional methods. Retail banking, project finance and Islamic trade finance are also expected to show significant growth as the global Muslim population grows and the GDP of Muslim countries outpaces global GDP. The Islamic Megabank, Istikhlaf, which is backed by the Islamic Development Bank (IDB), is set to launch in the first quarter of 2012. Set to be incorporated with authorised capital of US$10 billion and paid up capital of US$3 billion, Istikhlaf is set to be a ‘game changer’ for Islamic finance since it will compete with global banks for major infrastructure projects and long-term financing. In addition to providing liquidity, it will also act as a clearing bank and a lender of last resort. Crucially, it will also employ at least 600 people in Bahrain, cementing the Kingdom’s status as the hub of Islamic banking in the Gulf. Opportunities in Islamic finance annualreview
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