Bahrain has always remained among the top destinations for Islamic finance — it was ranked 4th in the world and 2nd in MENA for Islamic finance development according to Refinitiv’s 2021 Islamic Finance Development Indicator. Total Islamic finance assets stood at US$102 billion, ranking 8th globally.
Recovery from the COVID-19 pandemic was swift due to a world leading vaccination program and a comprehensive stimulus package from the government, which enabled the economy to recover quickly. Consolidation remains a key theme in the financial sector along with digitization and fintech.
Review of 2021
The Bahraini economy registered annual nominal growth of 20.7% and real growth of 5.7% in the second quarter (Q2) of 2021 compared with Q2 2020, thanks to the progressive normalization of economic activity at home and externally.
The GDP rebound was significantly driven by a growth in the non-oil sectors, whereas the oil sector witnessed nominal growth of 98.3%, reflecting the increase in global oil prices even though output fell.
Real GDP growth for the full year 2021 is expected to be 3.1% and is expected to maintain at this level for 2022 as per the Financial Stability Report of the Central Bank of Bahrain (CBB) (September 2020).
During this time, the Islamic finance sector witnessed significant moves toward consolidation. Although all transactions did not complete, however, the current state of the financial sector necessitates consolidation and the activity witnessed herein establishes that view:
• Gulf Finance House’s voluntary takeover offer of Khaleeji Commercial Bank (KHCB) — an offer has been made and is being considered by KHCB’s board.
• Esterad’s proposed acquisition of Venture Capital Bank — a non-binding letter of intent has been issued and it would be a key transaction in the country’s Islamic wholesale banking space if successful.
• Al Salam Bank-Bahrain entered into discussions with Ithmaar Holding for the potential acquisition of a group of assets, which likely includes Ithmaar Bank, the Islamic banking arm of the group. This follows on the Bank of Bahrain and Kuwait’s unsuccessful attempt to acquire the same assets earlier in the year.
• Kuwait Finance House’s planned acquisition of Ahli United Bank was delayed due to the pandemic — it officially remains suspended at the moment but has been one of the biggest stories in consolidation for Bahrain for the last few years.
In addition to consolidation, another theme has been Bahrain’s advances in fintech and cryptocurrencies. The first Shariah compliant crypto exchange, CoinMENA, was launched in Bahrain and the Central Bank of Bahrain also announced plans to offer a digital dinar through a digital payment platform which will be available 24/7.
Additionally, the world’s first Shariah compliant cryptocurrency, the Zamzam token, has been launched in Bahrain; this has the potential to change the digital landscape in the Arab world and has attracted eminent scholar Shaykh Nidham Yaquby onto its Shariah board. This token also has a large sustainability component as it is a token where donors can directly support philanthropic projects with transparency, knowing exactly where and how their funds are being deployed with zero fees.
In December 2021, the CBB announced a new and improved Regulatory Sandbox Framework which will allow fintech firms to test their ideas in a more efficient and effective environment. The regulatory sandbox which has been in operation since 2017 currently has 23 sandbox-approved companies.
Bahrain is also making strides in open banking. The CBB issued the second phase of the Bahrain Open Banking Framework, which is to be implemented by the 30th June 2022. Additionally, Tarabut Gateway (the largest open banking platform in MENA) and Zain Bahrain launched telecom-powered open banking payments.
Another significant development during the year has been the announcement by Citigroup which plans to open a global tech hub in Bahrain with the aim of creating 1,000 coding and programming jobs in the country.
Preview of 2022
Bahrain has announced a US$30 billion plan spread over 20 new projects in five new offshore cities. The plan includes creating a new causeway with Saudi Arabia and a 109 km metro system. As part of the new strategy, the private developers will be able to bid for contracts to develop government land. This development bodes well for investors in real estate which is a favored asset class for Shariah compliant investors.
Fintech and digitization will remain the key themes for the coming year, with consolidation also continuing to be in play as financial institutions seek to achieve scale in a competitive environment.
Bahrain’s focus will continue to be on technology going forward with the aim to attract more start-ups to the country and the government will be playing an active role.
Mohammed Fahim Shelot is the director of alternative investments at Ibdar Capital. He can be contacted at [email protected]