Country focus: Investing in the future of finance

Bahrain has been the financial capital of the Middle East for more than 30 years. But the kingdom realizes it cannot be complacent, and is raising its game further to ensure it maintains and builds upon its leading position. Earlier this year, Bahrain’s Economic Development Board set up the Bahrain Financial Services Development Bureau (BFSDB). Its mission? To champion the cause of the kingdom’s financial sector.

By Jane Dellar, managing director of BFSDB

Bahrain’s current dominance in the Middle East financial services sector is due largely to the strength and quality of its regulation. The Central Bank of Bahrain (formerly the Bahrain Monetary Agency) has built up a reputation across the region – and indeed internationally – as a world-class regulator. Since the 1970s, it has shaped the financial sector in the kingdom by enforcing exacting standards while at the same time being flexible enough to allow the growth of a range of diverse products and services.

As a result, there are now more than 300 licensed financial institutions based in Bahrain. The kingdom leads the region in conventional finance, which continues to enjoy strong growth. More recently, however, it has also established itself as a global center for Islamic finance, and now has more than 40 Islamic financial institutions, with assets worth some $10.2bn in 2006.

But Bahrain realizes it cannot rest on its laurels. With increased focus on the financial sector from other Gulf nations, Bahrain needs to work hard to maintain its lead and continue to be the Middle East center of choice for the international financial world. The BFSDB was set up to do just that.

The role of the BFSDB is to tell the international community not only that Bahrain leads the field, but more importantly why the kingdom holds that position, and how it is going to maintain and build on this.

Attracting investment

Bahrain’s financial sector is bolstered by a strong and steady economy. Over the past two years, the kingdom has seen unprecedented growth rates – with the expected 6.5 per cent rate for 2006 being a new record. There is no doubt that this growth has been fuelled in no small way by the recent increase in oil revenue. But Bahrain is not oil-rich compared with its neighbours, and it is acutely aware that this is a dwindling resource it can’t rely on forever.

As such, the government has sought to diversify its economy over the past few years, to lessen its dependence on oil and to attract more foreign direct investment. This is already paying dividends, with Bahrain attracting a higher proportion of foreign investment than any other Gulf State. The kingdom has the edge on its neighbours in a number of ways – its highly favourable tax environment, low inflation, excellent legal and regulatory systems, skilled local workforce, no restriction on repatriating funds, and a liberal and cosmopolitan lifestyle to name a few. For the last 12 years, the kingdom has also been hailed as the freest economy in the Middle East by the Wall Street Journal and Heritage Foundation.

As part of its diversification drive, Bahrain is focusing on key sectors it has identified as offering particular opportunities for investors. As well as the obvious financial services sector, these include downstream industries; tourism; business services; health; education and training; and logistics. The kingdom is working hard to develop the capabilities, infrastructure and policies that relate to these sectors as well as the overall business environment, and it is already achieving considerable success. Non-oil sectors now provide some 84 per cent of GDP. Of this, financial services contributes around 25 per cent of GDP; and Aluminium Bahrain (ALBA) – one of the world’s leading aluminium producers – adds a further 12 per cent.

So financial services is at the heart of Bahrain’s plans for the future sustainability of its economy. It remains by far the largest of Bahrain’s non-oil sectors and there is huge scope for further expansion and investment.

Securing sustainability – secondary sectors

The BFSDB, for example, is targeting large international and leading regional companies from all realms of the financial services sector that have yet to build a base in Bahrain. But its job is not just about attracting and retaining the big-name banks and insurance companies; it is also about attracting those secondary sector companies that are essential to supporting and enhancing the working practices of the licensed institutions already here, and those it would like to attract. Such sectors include international legal firms, accounting practices, IT companies
and security businesses – all of which offer services that are essential to support the institutions, and whose very presence acts as a siren-call to other institutional investors.

There is also room for growth in sectors that have traditionally flourished in financial centers in other regions, but are yet to reach their potential in the Middle East – the funds market and asset management firms being prime examples. These sectors bring significant benefits. Funds administration, for example, has the added value of a higher than usual ratio of employees for the financial sector, in addition to having the scope to develop almost exponentially.

Of course, the upsurge in petrodollars is one of the factors responsible for the exceptional growth in the Islamic finance sector – and scope for its future development remains enormous. In monetary terms, recent levels of activity are phenomenal. The value of the Sukuk market (Islamic bonds) now stands at $41bn according to Moody’s, the credit rating agency. In the insurance and re-insurance sector, HSBC predicts that Takaful (Islamic insurance) will be worth an estimated $14bn in 2015 – a fivefold increase on its current size. Increasingly, European and US investors understand the opportunities and returns that can be gained from investment in the sector. Between 70 and 80 per cent of sukuks are believed to be held by non-Islamic investors, according to recent research by the European Islamic Investment Bank.

Financing the future

The BFSDB’s role is to identify and target these growth sectors, because by supporting and growing financial services, it is Bahrain that stands to benefit most. Not only does the sector contribute a large proportion of the country’s GDP, it also provides jobs that are well-paid, highly-skilled – and filled by Bahrainis. This is where the kingdom has a real and tangible lead over the rest of the Gulf Cooperation Council (GCC). The workforce here has developed in response to the organic and sustained growth of the financial services sector. This means that the population is geared to meet the demands and high standards required by international financial companies.

Finally, it would be well worth remembering that financial sector growth does not take place in isolation. Why? Because investors in the financial sector will also want to know that the education system is flourishing and capable of providing future employees; that transport infrastructure will allow their staff to get to work on time in the morning; and that during the downtime at the weekend employees will be able to relax and make the most of the sport and leisure opportunities on offer. The success of the sector is intrinsically linked with the success of the nation as a whole. That is why the BFSDB works as an integral part of the Economic Development Board, dovetailing its activities with the wider economic strategy and ensuring that strong links exist with government and private sector agencies.