The first quarter of 2020 brought unexpected challenges onto the global economic stage, with the coronavirus pandemic causing systematic risk globally which caused a significant economic meltdown and social and healthcare challenges everywhere. This was further exacerbated by the drop in oil prices which similarly caused an economic slowdown in the GCC region including Bahrain. The country’s economy is expected to show slow growth in 2020, and a budget deficit is projected during 2021-22 given the lower oil revenues.
Review of 2020
The country’s GDP contracted by 8.9% in the second quarter of 2020 (Q2 2020) year-on-year (YoY), and 19.5% in nominal terms, as a result of COVID-19 market disruptions. The oil sector posted a 3.2% real YoY increase in Q2 2020, but declined by 47.9% in nominal terms, as global oil prices dropped to their lowest level in more than two decades in April 2020. Table 1 shows the impact on the economy.
|Table 1: Bahrain’s economic outlook|
|Real GDP growth||1.8%||2.2%||2.1%||2.7%|
|Nominal GDP growth||6.1%||6.5%||3.1%||5%|
|Inflation (CPI %)||2.1%||2.1%||1%||2.5%|
|Current account (% of GDP)||-6.5%||-5.9%||-3.2%||-2%|
|Source: Bahrain Ministry of Finance and National Economy, Bahrain Economic Quarterly Report Q2, issued in September 2020|
|Table 2: Key economic indicators|
|GDP (current)||US$37.5 billion (2019)|
|Financial sector contribution to GDP||16.1% (2019)|
|No of financial institutions||376 (January 2020)|
|Source: Central Bank of Bahrain (CBB), fact sheet|
|Table 3: Bahrain banking sector highlights|
|Assets||US$212.6 billion (July 2020)|
|Number of institutions||376 (September 2020)|
|Total number of banks||93 (September 2020)|
|Retail banks||31 (September 2020)|
|Islamic banks||19 (September 2020)|
|Islamic banks’ assets||US$32.7 billion (July 2020)|
|Source: CBB, fact sheet|
The financial sector remains a key economic driver in Bahrain and ranked as the largest non-oil contributor to GDP, representing 16.1% of real GDP as of 2019. The total banking assets continued growing to reach US$212.6 billion in July 2020 with Islamic banking assets at US$32.7 billion, as reported by the CBB Financial Stability Report, March 2020.
Bahrain fund industry
As at the end of October 2020, the number of mutual funds stood at 2,010 funds, of which 75 funds were Bahrain-domiciled, compared with 2,136 funds as of October 2019. The number of Shariah compliant funds stood at 84 as of October 2020, as reported by the Central Bank of Bahrain (CBB).
As of September 2019, the insurance sector represented 5.5% of the real GDP. Total assets in Takaful firms in September 2019 experienced an annual growth of 5.6%, reaching BHD202.4 million (US$533.87 million) compared with BHD191.6 million (US$505.38 million) in September 2018, according to the CBB Financial Stability Report, March 2020.
Regulatory changes and market trends
Islamic banks in Bahrain and elsewhere in the region have been focusing on the best opportunities that consolidate shareholders’ sustainable business and continuity and looking out for possible mergers and acquisitions such as the consolidation strategy announced by Bank of Bahrain and Kuwait and Ithmaar Holding, the parent of Ithmaar Bank.
On the product development front, the new Sukuk Murabahah services offered through a digital platform provided by the Bahrain Bourse and the Central Bank of Bahrain stand out as a new innovative tool for liquidity management.
The Bahrain Bourse also introduced new guidelines and regulations to support its liquidity platforms by allowing the listing of the government’s treasury bills and the short-term Sukuk Ijarah issued by the CBB on behalf of the government of the Kingdom of Bahrain.
Preview of 2021
The announcement of a vaccine for COVID-19 has resulted in positive sentiments around the world for improvement in the economy, albeit there is a long wait needed due to the rigorous and lengthy vaccine regulatory approvals. Bahrain, which has a vibrant services sector, will benefit from the ease in travel restrictions. The economy will continue to consolidate changes in digital strategies and guide businesses.
The Kingdom has been leading a digitalization change in the region, and has developed ecosystem pillars such the regulatory fintech sandbox and established Bahrain Fintech Bay to drive the digital transformation of businesses. The CBB and other government agencies have taken several awareness initiatives to support digitization transformation in businesses. These strategic initiatives make up a solid technology base for the current new economy practice that will require social distancing and travel restrictions. It will help the country guide and drive businesses to a more sustainable future, adapting to the new normal.
Dr Hatim El Tahir is the director of the Islamic Finance Group and the leader of the Deloitte Middle East Islamic Finance Knowledge Center at Deloitte & Touche — Middle East. He can be contacted at [email protected]