Regulators are encouraging mergers and acquisitions in Bahrain’s Islamic banking industry in a bid to cement the country’s position as one of the world’s leading sharia-compliant financial centres.
In early December the governor of the Central Bank of Bahrain (CBB) repeated calls for the country’s Islamic lenders – of which there are currently six retail and 18 wholesale – to consider engaging in a round of mergers or acquisitions to hone their competitive edge in the market.
Giving a keynote address at the 23rd Annual World Islamic Banking Conference (WICB) in Manama on December 6, CBB governor, Rasheed Mohammed Al Maraj, said the small size of many Islamic banks was a factor that limited their competitiveness, especially in comparison to their conventional rivals.
The conference is not the first time the CBB head has promoted consolidation as a means of strengthening Bahrain’s Islamic banking sector. Al Maraj had previously called for streamlining the number of operators in the segment at the same event in 2015.
The calls from the CBB governor look likely to be taken on board in the medium term, according to a report issued by financial services firm KPMG in 2016. Increased movements in mergers and acquisitions in Bahrain’s banking sector can be expected as lenders seek to strengthen their operational base and reduce their exposure to high-risk sectors of the economy, such as real estate and energy, the report stated.
“Mergers and acquisitions will continue to be explored and small and medium-sized banks are expected to synergise to improve the chances of survival through effective human capital utilisation, liquidity management and capital utilisation,” the report said.
Enhancing competitiveness is set to become increasingly important as Bahrain’s status as a financial centre faces challenges from the development of financial services industries elsewhere in the region that rival those of the kingdom, according to the report.
These challenges could weigh more heavily on the Islamic component of the Bahraini banking sector, given the increased emphasis on this segment in other Gulf states.
Mergers in motion
One bank that has already heard the CBB’s call is Gulf Financial House (GFH), the regional sharia-compliant lender listed on the Bahrain, Dubai and Kuwait exchanges.
GFH is in the process of acquiring Bahraini lending bank Alkhair, according to its chief executive Hisham Al Rayes. The sale should be concluded some time in the first quarter of 2017, he told Reuters on December 6. Negotiations for the Alkhair acquisition opened in October, after GFH announced its interest in the smaller bank in August.
The process of consolidation in the local market could be advanced still further in 2017, with Al Rayes stating that GFH was also looking to conduct a merger with another unnamed Bahrain-based bank in the new year.
Maintaining the edge
While operators in the sector are being encouraged to consider mergers and acquisitions, Bahrain’s Islamic banking segment is already working from a position of considerable strength, according to the newly released “Islamic Finance Development Report 2016”.
The report, prepared by Thomson Reuters and the Islamic Corporation for the Development of the Private Sector and issued on December 8, ranked Bahrain as the leading Islamic finance market in the Gulf and MENA region and second out of 124 economies globally, coming in behind only Malaysia.
The assessment was based on the Islamic Finance Development Indicators (IFDI) – an annual measure of the overall development of the global Islamic finance industry. The IFDI assesses five key pillars of the banking industry: quantitative development, knowledge, governance, corporate social responsibility and awareness.
Ranking highly across all criteria, Bahrain was rated as the global leader in governance due to its strong and well-established regulatory environment.
This environment is set to become even stronger, with the CBB working to further improve accountability and risk management practices, as highlighted by the bank’s governor in his address to the WICB in 2016.
As part of this process, the CBB has proposed implementing the requirement that Islamic banks be subject to annual external sharia audits of their operations. This would replace the generally accepted practice of having sharia compliance audits conducted in-house.
Under the proposal put forward by the CBB, the external sharia experts conducting reviews of Islamic banks would have to be approved by the central bank.
These and other measures, such as tightening up requirements over disclosures of potential conflicts of interest, and reinforcing transparency and accountability, are aimed at maintaining Bahrain’s reputation as having one of the world’s strictest sharia-compliant jurisdictions.
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