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Monday, 27 August 2007

Indicators sign a bright future for Bahrain


The latest report from the Central Bank of Bahrain (CBB) has left the pessimists spluttering and bereft of ammunition for the slightest tale of woe. Oil revenues are up. Inflation is minimal (something Dubai and Qatar would love to be able to claim). Exports are up. The trade surplus is up. The heart and homeland of banking in the Gulf and beyond is riding the crest of a wave and - perhaps best of all - the vast majority of the new jobs that have been created in the past 12 months are in the private sector. The report, a first of its kind issued on August 16, showed that the kingdom's gross domestic product (GDP) increased by 7.1% in 2006, driven by strong local and foreign investment, a record high current accounts surplus and an expanding private sector. Though the rate of GDP growth was slightly down on the 2005 figure of 7.8%, it still compares well with other Gulf countries, most of which are much better supplied with energy resources. With inflation coming in at just 2.1% for the year, and price rises tipped by the bank to stay at around 3% for 2007, Bahrain is at the lower end of the scale on that front, rating well against the 10% predicted for nearby Qatar. For the 12 months ending December 31, Bahrain accumulated a current account surplus of $1.9bn for 2006, while the trade surplus increased from $2.5bn to $3.8bn year-on-year. "The current account surplus for 2006 is the highest surplus in the history of the Bahrain economy," the report said. Overall, exports rose by 15.3% for the year, with oil accounting for 77.7% of the total revenue of $11.4bn, with non-oil exports increasing by a more modest 4.6%. To some extent, the growth in export earnings was offset by a 12.6% increase in imports, with oil being the single biggest ticket item, accounting for $4.8bn of the $8.9bn spent overseas. Another sector that the government has pinned a lot of hopes on to drive the economy is banking, which had a boom year according to the CBB report. Bahrain's banks recorded a 33.5% increase on their consolidated balance sheets in 2006, rising to $187.4bn. There was also a strong flow of foreign direct investment into Bahrain in 2006, with $2.9bn of overseas capital entering the country's economy. According to Rasheed Al Maraj, CBB governor, this figure reflects the openness of the kingdom's economy and the success of the policies put in place by the state to attract foreign direct investments. According to the CBB's report, more than 15,300 new jobs were created in 2006, boosting employment levels by 4.6%, with the total number of people in the workforce rising to 351,862. Most satisfying for a government that has been actively encouraging the expansion of the Bahraini private sector is that only 1300 of these positions were added to the state's payroll. The 38,800 public servants accounted for 11% of the country's workforce in 2006, slightly down on the percentage for the previous year, in line with the government's policy of reducing the role of the state in the economy. By contrast, almost 14,000 of the jobs created were in the private sector, with the workforce growing from 299,080 in 2005 to 313,039 in 2006, representing 89% of those employed in the kingdom. Looking to the future, there are a few concerns for the government, most notably the fact that much of the success of last year was built on strong energy prices. Though there is no immediate prospect of these falling dramatically, fluctuations could eat into Bahrain's revenue in the coming years.Bahrain's financial sector is well-developed and diversified, consisting of a wide range of conventional and Islamic financial institutions and markets, including retail and wholesale banks, specialized banks, insurance companies, finance companies, investment advisors, money changers, insurance brokers, securities brokers and mutual funds. There is also a stock exchange, listing and trading both conventional and Islamic financial instruments. The sector is therefore well-positioned to offer a wide range of financial products and services, making it the leading financial centre in the Gulf region.The financial sector is the largest single employer in Bahrain, with Bahrainis representing over 80% of the work-force. Overall, the sector contributes 27% of Bahrain's Gross Domestic Product (GDP), making it one of the key drivers of growth in the country. The sector is regulated and supervised by the Central Bank of Bahrain (CBB) (formerly Bahrain Monetary Agency), which since 2002 has functioned as the single regulator for the entire financial system. The CBB's regulatory requirements are contained in the CBB Rulebook, divided into six Volumes, each covering a different segment of the financial system. Bahrain's banking system consists of both conventional and Islamic banks and is the largest component of the financial system, accounting for over 85% of total financial assets. The conventional segment includes 19 retail banks, 69 wholesale banks, 2 specialized banks as well as 36 representative offices of overseas banks. The Islamic segment, offering a host of Sharia compliant products and services include 6 retail banks and 18 wholesale banks. The banking sector has played a pivotal role in the emergence of Bahrain as a leading financial centre in the region. As at December 2006, banking sector assets stood at over US$180 billion, more than twelve times annual Gross Domestic Product. Industry growth has been supported by an open market economy; stable and prudent macro-economic and fiscal policies; a credible regulatory framework in line with international standards; and a notably strong and well qualified local workforce. All these factors have combined to cement Bahrain's position as a regional banking hub, successfully attracting numerous foreign banking organizations to establish a physical presence in the country.Recent growth in the sector has been backed by the good fortunes of the oil industry and the corresponding increases in liquidity. Banks are thus playing a central role in reinvesting surplus oil earnings as well as serving financing opportunities in other segments of the economy.In recent years, Bahrain has rapidly become a global leader in Islamic finance, playing host to the largest concentration of Islamic financial institutions in the Middle East. Presently, there are 24 Islamic banks and 11 Islamic insurance companies (takaful) operating in the Kingdom. In addition, Bahrain is at the forefront in the market for Islamic securities (sukuk), including short-term government sukuk as well as leasing securities. The Central Bank has played a leading role in the introduction of these innovative products. The growth of Islamic banking in particular has been remarkable, with total assets in this segment jumping from US$1.9 billion in 2000 to US$ 10.3 billion by July 2006, an increase of over 400%. The market share of Islamic banks correspondingly increased from 1.8% of total banking assets in 2000 to 6.2% in 2006. Islamic banks provide a variety of products, including murabaha, ijara, mudaraba, musharaka, al salam and istitsna'a, restricted and unrestricted investment accounts, syndications and other structures used in conventional finance, which have been appropriately modified to comply with Sharia principles. The Central Bank of Bahrain has installed a comprehensive prudential and reporting framework, tailor-made for the specific concepts and needs of Islamic banking and insurance. The rulebook for Islamic banks covers areas such as licensing requirements, capital adequacy, risk management, business conduct, financial crime and disclosure/reporting requirements. Similarly, the insurance rulebook addresses the specific features of takaful and re-takaful firms. Both rulebooks were the first comprehensive regulatory frameworks that dealt with the Islamic finance industry.In addition to the numerous Islamic financial institutions active in its financial sector, Bahrain also plays host to a number of organizations central to the development of Islamic finance, including: i) the Accounting and Auditing Organisation for Islamic Financial Institutions ('AAOIFI'); ii) Liquidity Management Centre ('LMC'); and iii) the International Islamic Financial Market ('IIFM').The Central Bank of Bahrain has also recently established a special fund to finance research, education and training in Islamic finance (the Waqf Fund); and is active in working with the industry and stakeholders in developing industry standards and the standardization of market practices.Bahrain's insurance industry consists of conventional and Islamic (takaful) companies which serve both the onshore and offshore insurance markets, primarily Saudi Arabia. The conventional onshore segment consists of 10 locally-incorporated firms, 8 full branches and 6 representative offices of foreign insurance companies. The takaful segment has 2 companies. In addition, there is a substantial number of firms with licenses limiting their business to the off-shore market, including 39 conventional firms and 9 takaful companies. These companies serve other regional markets in the Gulf, capitalizing on Bahrain's leadership role as a regional financial centre. The insurance industry is well served by a number of ancillary service providers such as brokers (33), actuaries (10), insurance consultants and loss adjusters, whose presence in the industry further supports Bahrain's position as a regional insurance centre.The industry has been growing steadily in recent years, mirroring the growth of Bahrain's financial sector - the increased access to financial services and products has led to demand for insurance services. A notable development in recent years has been international insurers developing their regional operations, many of whom have chosen Bahrain as their regional base.Industry growth has also been fostered by the presence of a robust framework for regulation and supervision of insurance. The Central Bank of Bahrain's predecessor organisation, the Bahrain Monetary Agency, undertook a major project during 2003-04 to develop a comprehensive insurance rulebook, in line with IAIS core principles, following the BMA's assumption of responsibility for regulating and supervising the insurance sector. This rulebook was launched in April 2005, and put in place the most comprehensive regulatory framework in the region for insurance activities.Capital MarketsThe Bahrain Stock Exchange (BSE) is the focus of capital market activities in Bahrain. The exchange has grown in the number of listed securities with 50 equities, 19 bonds (both conventional and Islamic) and 35 mutual funds currently listed. As at end December 2006, market capitalization stood at US$21.2 billion, representing roughly 160% of GDP. Trading is carried out through 14 securities brokers active in the market and day-to-day trading takes place through the Automated Trading System (ATS). There is also a Clearing, Settlement and Central Depository System (CDS), which is likewise automated. These two systems have combined to ensure a fast and efficient trading process, ensuring delivery versus payment on a T+2 basis.The capital market is under the regulatory and supervisory oversight of the Central Bank's Capital Market Supervision Directorate, which oversees both the primary and secondary markets. Following the enactment of the Central Bank of Bahrain and Financial Institutions Law 2006, a new and comprehensive set of regulations based on international best practices is being introduced. The capital markets rulebook (which will comprise Volume 6 of the CBB Rulebook) will provide a market and disclosure based system of regulation that promotes transparency and fairness in capital market transactions. It will upgrade and bring together into a single publication the various regulations that currently apply to capital markets activity.Bahrain is host to a thriving mutual funds industry. The first overseas mutual funds started being marketed in Bahrain during the 1980s, and the first Bahrain domiciled scheme was launched in 1984. Since 1992, when the first formal regulations were issued, the industry has grown exponentially.As of December 2006, over 2,100 funds (both off shore and locally domiciled) were registered in Bahrain, representing a 17% growth over the previous year. Of these, 97 were Bahrain domiciled schemes, and 80 were Islamic schemes (including both overseas and Bahrain domiciled schemes). Total assets under management were some $9.3bn (up nearly 40% on the previous year's total).Collective investment schemes are regulated and supervised by the Financial Institutions Directorate of the Central Bank. Regulatory frameworks have kept pace with the changes in the industry. In 2006, CBB initiated discussions to update the existing framework and allow for expert schemes (including hedge funds) aimed at expert investors. The new regulations were issued in May 2007.A key objective of the Central Bank of Bahrain (CBB) is to ensure the continued soundness and stability of financial institutions and markets.The CBB defines financial stability as a situation where there is continuous and prudent provision of financial services, even in the face of adverse shocks. It believes that financial stability is critical for maintaining Bahrain's position as an international financial center and for ensuring that the sector continues to contribute significantly to growth, employment and development in Bahrain.The pursuit of this objective is the primary responsibility of CBB's Financial Stability Directorate (FSD), which conducts regular surveillance of the financial system to identify areas of concern and undertakes research and analysis on issues relating to financial stability. The Directorate prepares Financial Stability Reports (FSRs) for CBB management, reviewing recent trends and identifying areas of concern which require supervisory and policy attention. FSD is also developing relevant Financial Soundness Indicators, with the aim of creating a "Dashboard" for monitoring financial sector risks on a continuous basis. - (AA, 26 Aug 07)



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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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