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Islamic banks in Bahrain
Thirty years ago, the Organization of Islamic Conference recommended establishing an Islamic economic system in the Muslim world. Today, most of the Islamic financial institutions are less than 20 years old, but they are considered an emerging power in international finance.
Islamic banks, which follow instructions given in the Koran, cannot charge interest on their loans at pre-determined rates.
Unlike ordinary commercial banks whose operations are based on interest, Islamic banks operate an interest-free system, and are guided by the common principle that depositors, instead of receiving a fixed return in the form of interest, share the risk of investment and take part of the resulting profits or bear part of the losses.
As the leading regional financial hub and a major player in the global banking and financial markets, Bahrain easily had what was necessary for it to become a natural and convenient location for Islamic banks and other Islamic financial institutions.
"Islamic banking started as offshore banking, but when the banks became more efficient and loopholes closed, there was no need for offshore banks. Bahrain spearheaded Islamic banking, and it is replacing a temporary phenomenon with a permanent phenomenon," said El-Kuwaiz.
To date, because of the active assistance and encouragement of the authorities, Bahrain is the host of the largest concentration of Islamic banks and other financial institutions in the Middle East.
"The Islamic financial institutions are here mainly because they deal with the Islamic world and no other country has created the atmosphere, or the legal framework, for them to operate under. Bahrain is the only one who managed to do that, and therefore they use Bahrain to become established and do business with Pakistan, Sudan, Iran, etc.," said Jamal Al-Hazeem, office managing partner for Arthur Andersen.
"An Islamic offshore bank and a commercial offshore bank have the same license, but one operates under the Shari'a principle, or Islamic principles, and the other one operates under commercial principles. The license is either called an OBU, an offshore banking unit; or an IBL, an Islamic Banking License, and they are more or less the same," said Al-Hazeem.
"Bahrain is one of the few countries that allows dual banking," said Al-Hazeem. "If you look at Sudan, all the banks are Islamic, and in Pakistan and Iran, banks there also are all Islamic. But Saudi Arabia has no Islamic banks, which is interesting. The only exception is Al-Rajhi, which is not considered as a bank, and there is a fatwah for that from one of their Islamic scholars.
"The Bahraini Monetary Agency decided there was room for both types of financial institutions; conventional and Islamic," said Al-Hazeem. "So a lot of Islamic banks have chosen Bahrain as their base or have their offices here, although most of them operate offshore.
'The reason why there aren't any more Islamic banks operating onshore is the fact is that the Bahrain Monetary Agency believes that there is a saturation of the market as far as commercial banks are concerned," said Al-Hazeem.
Bahrain's Islamic banks complement the activities and operations of some 173 traditional banks and other financial institutions in Bahrain - both domestic and foreign - that are licensed by the BMA.
In addition, there are 12 Islamic investment banks and two Islamic offshore banking units. In December 1999, the aggregate assets of all Islamic banks in Bahrain amounted to $4.9 billion.
Citibank in Bahrain decided to establish its own Islamic investment bank in the country. This was considered a major step, both regionally and internationally, in the development of Islamic banking by otherwise traditional banking institutions.
"The Islamic bank is a locally incorporated bank that has separate capital, and a separate board of directors. It has its own Shari'a group with four Shari'a scholars that work with the bank," said Mohammed Al-Shroogi, Citibank's regional director for the Middle East.
"The mandate for the bank is a global mandate, and it covers the whole world, not just the Middle East. So our scope is bigger than just the Islamic countries,"
"That's the reason why we made the decision -- being an American bank, a foreign bank - to do the job. We created a separate vehicle, and put separate capital into it," said Al-Shroogi.
And Citibank's success here as an Islamic bank, has Al-Shroogi looking west. "There isn't an Islamic Citibank in the United States, just here and in London, but I am considering it because there are about 5 million Muslims in America."
But not everyone believes Citibank's decision was a wise move: "Citibank was very successful in providing products and services to family banks and Islamic communities," said Mahmoud Difrawy, managing director, Middle East Region, of Chase Manhattan Bank.
"They decided to go head on and compete with them on the retail side. They set up their own Islamic bank. We do not think that was the right strategy on their side. Chase will continue to provide products and services to the Islamic community and Islamic banks.
"The difference between Citibank and Chase Manhattan is that Citibank has a branch in every country where they compete with the local banks and do local business. We look at every country and find a local partner to join with, and do the business we want to do locally, if we need local support. So we are viewed as bankers for banks - for products and services that they cannot develop themselves," said Difrawy.
Other banks in Bahrain manage to satisfy the needs of American customers without opening their own branches in the States.
"Arab Banking Corporation is the biggest bank in the Arab world. And, as Bahrain is becoming the hub for Islamic financial institutions, we decided to create an Islamic bank at ABC," said Adnan Yousif, former chairman of ABC Islamic Bank. "There is no other difference, except this is an Islamic bank and ABC is a commercial bank. But it's the same bank.
"We're very active in the U.S. market -- ABC is the largest Arab bank, as far as I know, in the United States. So if anyone wants to deal with ABC Islamic Bank in New York, they will be helped because the branch there is in close coordination with us.
"In this part of the world we talk about 'Islamic' as a product. And some of our customers like to have commercial activities along with what we call 'Islamic principles.'"
In general, the Bahrain Monetary Agency's supervisory requirements on Islamic banks are similar to those of traditional banks, which include appropriately qualified and experienced management, adequate capital, liquidity and internal monitoring systems, and the proper assessment and control of risk.
However, in the case of Islamic banks, BMA tends to direct particular focus on liquidity and risk largely because of the less liquid and longer-term nature of many of the Islamic banks' assets.
The BMA feels satisfied that it has succeeded in ensuring that its supervisory and regulatory approach toward Islamic banks is fair, prudent and not unnecessarily restrictive.
Recently, the BMA became the first central bank to approve a set of guidelines on reporting and accounting practices that would bring about a measure of standardization for the Islamic banking industry as a whole.
The guidelines were produced by the Accounting and Auditing Organization for Islamic Financial Institutions, an organization set up in Bahrain under an agreement signed by a number of Islamic banks and other financial institutions worldwide for the purpose of setting international accounting and auditing standards in the area of Islamic financing, and are designed to help introduce more transparency and accountability to Islamic banks than currently exists.
Establishing an international regulatory system for Islamic banks
As with commercial banks, Islamic financial institutions need to establish an internationally accepted regulatory system to ensure continued growth, said Bahrain's banking chief.
BMA's Governor Shaikh Abdulla bin Khalifa Al Khalifa recently urged the Islamic financial community in Bahrain to accept that its institutions must be regulated and supervised to international standards.
"Ultimately, their ability to grow and compete will be dependent on international acceptance of the regulatory regime under which they operate," he said.
"Not only would it deprive those institutions of the very real financial and commercial advantages that accrue from being an integral part of an internationally approved regulatory environment, but also the existence of a secondary, unregulated market would obviously lessen the present international high regard with which Bahrain is held.
"The strengthening and development of Islamic banking has been, and remains, an important aspect in the government's policy of maintaining and enhancing Bahrain's status as the region's pre-eminent international financial center," said Shaikh Abdulla.
"It has been estimated that the asset growth of these institutions over the last five years has been around 15 percent, with an expected growth rate of 10 percent over the next five years," he said.
Transparency vital
While looking for increased foreign participation, Bahrain also wants to maintain its squeaky clean image: "Transparency is vital in an Islamic banking industry estimated to be worth $200 billion worldwide," said Shaikh Ebrahim bin Khalifa Al Khalifa, finance and national economy ministry undersecretary and chairman of the Accounting and Auditing
Organization for Islamic Financial Institutions.
The Islamic banking industry has been expanding at an annual rate of 15 percent over the past five years, with 48 developing and emerging market countries now involved, Shaikh Ebrahim said recently.
"In the light of such industry globalization, with both its benefits and challenges, the need for the development of a cohesive, uniform regulatory strategy, which can be harnessed by the industry worldwide, has never been greater.
"The current market size of the Islamic banking industry is estimated to be $200 billion this year," said Shaikh Ebrahim.
The AAOIFI has played a crucial role in improving the transparency and the level of disclosure in the financial statements of Islamic financial institutions, he said.
Islamic banking is definitely viewed as a very serious market with great potential. Minister of Finance and National Economy Abdullah Hassan Saif, earlier this year spoke on the need to formulate regulations for the Islamic banking institutions with an aim to assist the potential investors in making choices that are funded on transparency and clarity.
Regarding Bahrain's special circumstances as the Gulf's major international financial center, regulation is essential and must embrace the whole market, Saif said. Islamic institutions can't operate in a vacuum; they must become a bigger part of the wider financial world, he said. Their growing influence in their targeted markets is best illustrated by the increasing interest taken in their operations by the regulators of those markets.
"The Gulf region has more than 30 Islamic financial institutions of which more than 15 are based in Bahrain. It has been estimated that the asset growth of these institutions over the last five years have been around 15 percent, with an expected growth rate of over 10 percent in the next five years. The framework and international recognition of the BMA's professionalism as a regulator, provides the essential underpinning of Bahrain's reputation as a major international financial center," he said.
The governor said that a key issue for the regulator is the question of capital adequacy and the basis of its circulation. The international accepted view is that banks should be subjected to a common standard of circulation.
"Liquidity is another area of concern for the financial well-being of the institution. There are a number of issues to be resolved, but the basic issue is of a standard measurement of how liquidity should be managed for the funds held off the balance sheet," he added.
Secretary General of AAOIFI Professor Riffaat Abdul Karim stressed the importance of the conference, its key mission and the relevance of its launch at the commencement of the new millennium.
"At this pivotal stage of their development, Islamic financial institutions are looking forward to being perceived as an industry in the process of becoming mature. The implementation of a cohesive, harmonizing regulatory strategy is important, indeed imperative, for the Islamic banking industry in order to support its future growth and enhance its credibility and competitiveness in a global market place. By conducting such an international, high profile conference, we hope to encourage the world's leading Islamic banking industry representatives to proactively engage in meaningful debate and discussion on this most crucial topic and to disseminate the resulting information and recommendations for the benefit of the industry as a whole," he said.
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Table of Contents The Al Khalifa Dynasty - Ruling Bahrain Since 1783 |
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"Islamic banks are a totally new venture," said Dr. Abdullah El-Kuwaiz, general manager of Gulf International Bank, "where you have fast-growing number of investors looking to invest their money in acceptable Shari'a methods. Banks should be loyal to customers, and therefore should find ways to hear their needs and create new investment projects for them. This is bringing new dynamism to the region, and especially to Bahrain.
In recent years, a number of these banks have successfully developed a range of specialized Islamic financial products, for example, in the areas of collective investment schemes, leasing and syndicated lending.
The strong growth of Islamic banking and its impact on financial markets has prompted a number of traditional local and international banks to seek stronger relationships and joint project financing arrangements with their Islamic counterparts.