For decades, Bahrain has stood as a trailblazer in the realm of Islamic finance and regulation. Today, this reputation is once again propelling the sector towards fresh horizons, transcending traditional financial products and embracing the transformative potential of FinTech.
“Over the last 30 years, Islamic finance has evolved into a global industry, valuing $3.37 trillion in 2020 and projected to reach $4.94 trillion by 2025,” reveals the Islamic Finance Development Indicator (IFDI). At the heart of this movement is Bahrain, renowned for hosting the largest concentration of Islamic financial institutions in the Middle East. This impressive tally includes 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 legacy as the preeminent Islamic financial services center in the Middle East traces back to 1979 with the establishment of the Bahrain Islamic Bank, the kingdom’s first Islamic lender. Central to the subsequent growth of Bahrain’s Islamic finance industry was the establishment of robust regulatory frameworks by the Central Bank of Bahrain (CBB).
In 1990, Bahrain’s reputation for regulatory excellence led to its selection as the headquarters of the Accounting and Auditing Organization for Islamic Institutions (AAOFI), the standard-setting body for Islamic finance. With more than 100 standards on Sharia law, accounting, auditing ethics, and governance issues, Bahrain has solidified its status as the world leader in Islamic finance standards.
This reputation drew other global financial organizations to the kingdom, including the International Islamic Financial Market (IIFM), the General Council for Islamic Banks and Financial Institutions (CIBAFI), and the Islamic International Rating Agency (IIRA).
The bedrock of Bahrain’s Islamic financial ecosystem has proven fertile ground. As of 2021, the total Islamic banking assets in Bahrain reached $34.6 billion, establishing the kingdom as one of the Middle East’s largest Islamic finance and banking markets. The IFDI for the past year placed Bahrain fourth globally and second in the MENA region for Islamic finance development.
Bahrain’s regulatory prowess took center stage, leading the globe in Islamic finance regulation and outshining MENA in Islamic banking, corporate governance, knowledge, awareness, and corporate social responsibility.
Undeniably remarkable, these achievements are driving Bahrain’s Islamic finance sector to venture even further. One such stride is evident in Bahrain’s regulatory ecosystem’s evolution, fostering opportunities for FinTech entrepreneurs. At the helm is Bahrain FinTech Bay, MENA’s premier FinTech hub, offering dedicated facilities, advisory services, and collaborative platforms for FinTech firms. Adding to this momentum is FinHub 973, an innovative cross-border digital innovation platform promoting collaboration between financial institutions and FinTech entities under the CBB’s supervision.
Bahrain’s legacy of regulatory pioneering extends to established domains of Islamic finance as well. For instance, the CBB has implemented an enhanced framework for the Takaful and Re-Takaful industry, bolstering solvency, operational efficiency, and stakeholder interests. The wakalah or agency contract, another ingenious financial instrument, empowers Islamic retail banks to manage excess liquidity through a one-week Islamic deposit facility at the CBB. These funds are then invested in an array of assets, including international sukuk (Islamic bonds) and cash.
In 2021, Bahrain’s Islamic banking sector showcased combined assets of an impressive $38.6 billion, akin to the kingdom’s annual GDP. Notably, the assets of Bahrain’s Islamic banks surged at an 8.1% growth rate last year, nearly double the pace of conventional banks (4.2%). Bolstered by decades of Islamic finance excellence and continual regulatory innovation, Bahrain’s upward trajectory is poised to extend into the horizon of 2023 and beyond.