Bahrain's Islamic banks begin to adopt digital banking and cryptocurrency

Islamic financial institutions are increasingly interested in utilising financial technologies (fintech), with a survey published in May 2018 by the Bahrain-based General Council for Islamic Banks and Financial Institutions showing that over 70% of managers in the sector regard fintech and digital transformation as highly important factors in making strategic decisions. Against this backdrop Bahrain is seeking to solidify its status as a regional financial hub by becoming a leader in fintech, and with the kingdom already a global centre for Islamic finance, Islamic fintech is among the most promising opportunities in the field. The authorities aim to establish a broad Islamic fintech ecosystem, covering crowdfunding and – despite questions in some circles about their sharia compliance – cryptocurrencies. Established sharia-compliant institutions such as Islamic banks are also increasingly turning to technological solutions, including the rollout of Islamic digital banking.

Cryptocurrencies

Fairly new on the global scene, the acceptability of cryptocurrencies as an Islamic financial tool has been the subject of some controversy. “There is debate as to whether cryptocurrencies are real currencies from a sharia perspective, and the issue has yet to be settled,” Omar Mustafa Ansari, deputy secretary-general of the Accounting and Auditing Organisation for Islamic Financial Institutions, told OBG. He noted that the organisation itself had yet to take a position on the topic, but was investigating it.

Nevertheless, Bahrain appears keen to embrace the technology. In July 2018 Islamic advisory company Shariah Review Bureau, which is licensed by the Central Bank of Bahrain (CBB), provided US-based cryptocurrency platform Stellar with certification for both the platform itself and its blockchain-based cryptocurrency Lumens. Stellar had previously been in discussion with the Economic Development Board regarding possible applications in Bahrain, and has said that it is looking into entering the kingdom’s remittances market. In December 2018 the CBB issued draft rules on the use of cryptocurrencies for consultation, further underscoring Bahrain’s openness to the technology.

New Platforms

Local institutions are seeking to develop other Islamic fintech platforms as well. For example, in December 2017 the Bahraini subsidiary of Kuwait Finance House and the Bahrain Development Bank launched the world’s first Islamic banking consortium for sharia-compliant fintech, called ALGO Bahrain. The consortium’s first initiative was a crowdfunding platform for small and medium-sized enterprises (SMEs). This followed the CBB allowing SMEs to raise funds via both conventional and sharia-compliant crowdfunding in August 2017, making the kingdom the only country with a regulatory framework for the latter.

Such efforts are part of a wider push to create fintech applications, spearheaded by the CBB’s introduction of a regulatory sandbox in June 2017 for firms to test products in the kingdom. February 2018 then saw the launch of incubator and accelerator Bahrain Fintech Bay, which currently houses around 30 start-ups (see Banking chapter). Speaking to regional media in December 2018, Khalid Saad, chief executive of Fintech Bay, argued that fintech represented a major opportunity for Islamic financial institutions to lower costs and facilitate access to unbanked persons.

Digital Banking

Local Islamic institutions are also increasingly keen to provide traditional banking services through digital platforms. In March 2018 Bahrain Islamic Bank launched both a mobile app and a new online portal for its corporate customers. Also in March, conventional Gulf International Bank (GIB) introduced a digital sharia-compliant retail banking service called Meem, following its acquisition of a retail licence in the kingdom in June 2017. The bank previously rolled out a similar service, also called Meem, in Saudi Arabia in 2015, and plans to expand the model to the entire Gulf region. GIB’s initial offer consists of a “One Pack” account, which comes with a debit card and includes aspects of both a current and savings account.