6. Financial Sector
Capital Markets and Portfolio Investment
Consistent with the GOB’s liberal approach to foreign investment, government policies facilitate the free flow of financial transactions and portfolio investments. Expatriates and Bahrainis alike have ready access to credit on market terms. Generally, credit terms are variable, but often are limited to 10 years for loans under USD 50 million. For major infrastructure investments, banks often offer to assume a part of the risk, and Bahrain’s wholesale and retail banks have shown extensive cooperation in syndicating loans for larger risks. Commercial credit is available to private organizations in Bahrain but has been increasingly crowded out by the government’s local bond issuances.
In 2016, the GOB launched a new fund designed to inject greater liquidity in the Bahrain Bourse, worth USD 100 million. The Bahrain Liquidity Fund is supported by a number of market participants and will act as a market maker, providing two-way quotes on most of the listed stocks with a reasonable spread to allow investors to actively trade their stocks. Despite these efforts, the market remains relatively small compared to others in the region.
The GOB and the Central Bank of Bahrain are members of the IMF and fully compliant with Article VIII.
Money and Banking System
The Central Bank of Bahrain (CBB) is the single regulator of the entire financial sector, with an integrated regulatory framework covering all financial services provided by conventional and Islamic financial institutions. Bahrain’s banking sector remains quite healthy despite sustained lower global oil prices. Bahrain’s banks remain well capitalized, and there is sufficient liquidity to ensure a healthy rate of investment. Bahrain remains a financial center for the GCC region, though many financial firms have moved their regional headquarters to Dubai over the last decade. The GOB continues to be a driver of innovation and expansion in the Islamic finance sector. In 2018, Bahrain ranked as the GCC’s leading Islamic finance market and second out of 92 countries worldwide, according to the ICD-Thomson Reuters Islamic Finance Development Indicator.
Bahrain has an effective regulatory system that encourages portfolio investment, and the CBB has fully implemented Basel II standards, while attempting to bring Bahraini banks into compliance with Basel III standards. Bahrain’s banking sector includes 98 retail banks, of which 68 are wholesale banks, 16 are branches of foreign banks, and 14 are locally incorporated. Of these, seven are representative offices, and twenty-one are Islamic banks. There are no restrictions on foreigners opening bank accounts or corporate accounts. Bahrain is home to many prominent financial institutions, among them Citi, American Express, and JP Morgan.
Ahli United Bank is Bahrain’s largest bank with total assets estimated at USD 35.5 billion in December 2018.
Bahrain implemented the Real-Time Gross Settlement (RTGS) System and the Scripless Securities Settlement (SSS) System in 2007, to enable banks to carry out their payment and securities-related transactions securely on a real time basis. In 2018, the CBB was in the process of introducing a private network as an alternative communication network for the RTGS-SSS Systems.
In 2017, Bahrain became the first in the GCC to introduce Financial Technology “sandbox” regulations that enabled the launch of cryptocurrency and blockchain startups. In the same year, the CBB released additional regulations for conventional and Sharia-compliant, financing-based crowdfunding businesses. Any firm operating electronic financing/lending platforms must be licensed in Bahrain under the CBB Rulebook Volume 5 – Financing Based Crowdfunding Platform Operator. In February 2019, the CBB also issued regulations.
Foreign Exchange and Remittances
Foreign Exchange Policies
Bahrain has no restrictions on the repatriation of profits or capital and no exchange controls. Bahrain’s currency, the Bahraini Dinar (BD), is fully and freely convertible at the fixed rate of USD 1.00 = BD 0.377 (1 BD = USD 2.659). There is no black market or parallel exchange rate.
There are no restrictions on converting or transferring funds, whether or not associated with an investment.
The Central Bank of Bahrain is responsible for regulating remittances, and its regulations are based on the Central Bank Law ratified in 2006. The majority of the workforce in the Kingdom of Bahrain is comprised of foreign workers, many of whom remit large amounts of money to their countries of origin. Commercial banks and currency exchange houses are licensed to provide remittances services.
The commercial banks and currency exchange houses require two forms of identification before processing a routine remittance request, and any transaction exceeding USD 10,000 must include a documented source of the income.
Bahrain enables foreign investors to remit funds through a legal parallel market, with no limitations on the inflow or outflow of funds for remittances of profits or revenue. The GOB does not engage in currency manipulation tactics.
Bahrain is a member of the Gulf Cooperation Council (GCC), and the GCC is a member of the Financial Action Task Force (FATF). Additionally, Bahrain is a member of the Middle East and North Africa Financial Action Task Force (MENAFATF), whose headquarters are located in Bahrain. Participating countries commit to combat the financing of terrorist groups and activities in all its forms and to implement FATF recommendations. The Government of Bahrain hosted the MENAFATF’s 26th Plenary Meeting Manama in 2017.
Sovereign Wealth Funds
The Kingdom of Bahrain established Mumtalakat, its sovereign wealth fund, in 2006. Mumtalakat, which maintained an investment portfolio valued at roughly USD 15.4 billion as of 2017, conducts its business transparently, issuing an annual report online. The annual report follows international financial reporting standards and is audited by external, internationally recognized auditing firms. By law, state-owned enterprises (SOEs) under Mumtalakat are audited and monitored by the National Audit Office. In 2018, Mumtalakat received the highest-possible ranking in the Linaburg-Maduell Transparency Index, which specializes in ranking the transparency of sovereign wealth funds. However, Bahrain’s sovereign wealth fund does not follow the Santiago Principles.
The sovereign wealth fund holds majority stakes in several firms. Mumtalakat invests 62 percent of its funds in the Middle East, 30 percent in Europe, and eight percent in the United States. The fund is diversified across a variety of business sectors including real estate and tourism, financial services, food & agriculture, and industrial manufacturing.
Mumtalakat often acts more as an active asset management company than a sovereign wealth fund, including by taking an active role in managing SOEs. Most notably, Mumtalakat has been instrumental in helping Gulf Air, Bahrain’s flagship air carrier, restructure and minimize its losses. A significant portion of Mumtalakat’s portfolio is invested in 30 Bahrain-based SOEs.
Through 2016, Mumtalakat had not been directly contributing to the National Budget. Beginning in September 2017, however, Mumtalakat announced it would distribute profits of BD 20 million to the National Budget for two consecutive years, distributed equally for the years 2017 and 2018.