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Bahrain is Back

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Shaking off the turbulence that rocked its economy in 2011, Bahrain is back to business and its Islamic banks look set to profit from it 
Its outlook having been declared ‘stable’ by rating agency Standard & Poor’s, it seems the political unrest that nibbled at the Kingdom’s economy during 2011 hasn’t shaken its financial foundations. Bahrain remains the Middle East’s most comprehensive Islamic finance market, and with its troubles seemingly behind it 2013 looks set to be an active year for Islamic banks operating in the Kingdom.

“This year [2012] has been a turnaround – several of the Islamic banks managed to improve their performance, although a few still have to book more provisions to clean up their balance sheets,” Khalid Hamad, Executive Director of Banking Supervision at the Central Bank of Bahrain (CBB) and Chairman of the International Islamic Financial Market (IIFM) told Islamic Business & Finance.

Hamad also highlighted one of the industry’s most anticipated developments, with Bahrain’s Islamic banks looking at opportunities to merge. “This is because the CBB was pushing for it, and from the other side the banks are realising the need for them to merge, because they are now facing difficulties with assets and balance sheets,” he said, adding that the global economy has aggravated these problems. “Because of the slow economy and low growth, especially with the problems in Europe and the budget issue in the US, things are slow in terms of recovery. I think Islamic banks seriously realise the need for mergers in order for them to move forward with more robust business plans.”

Bahrain began 2013 with the welcome news that three of its Islamic banks, Elaf Bank, Capital Management House and Capivest, would be merging. The combined banks create a financial institution with a total equity of approximately $340 million and total assets in excess of $400 million, spanning the Middle East and North Africa, Europe and Asia.

The same month, Al Salam Bank confirmed it was also in merger talks with a regional bank. Al Salam had been teasing the industry with talk of a tie-up between itself and Bahrain Islamic Bank, however the much-anticipated merger collapsed last year on a disagreement over valuation. Khaleeji Commercial Bank is also said to be studying merger options with other Bahraini banks.
It is a welcome development in an industry frequently criticised for failing to build banks of scale, however Hamad believes this is set to change and more tie-ups are imminent in Bahrain. “Banks are feeling now that it is necessary for them to move forward and merge. So far we’ve seen good mergers, and we are anticipating more in 2013 and 2014. There are currently discussions and assessments being done on this.”
Despite the global economy highlighting the need the mergers, Hamad insists that Bahraini banks are protected from the troubles in the Euro Zone. “We are not concerned about exposure to the EU, because most our banks’ dealings are with the UK and developed economies such as Germany. We have done a lot of assessments and we are not concerned about exposure to the EU. The banks [in Bahrain] took early steps when the problems in the EU arose.”
And Hamad believes that the dust has settled closer to home. “In the beginning of 2011, immediately after the unrest, a small amount of deposits left the country because there was uncertainty,” he explained. “But in a couple of months all these deposits were returned. There was some reduction in the demand for credit, especially in the commercial sector.
“But this year we’ve seen recovery, if you compare last September to this September we have seen a large growth in commercial lending. Of course consumer finance was not affected and continued to grow. Deposits also were growing at nine to 10 per cent; if the deposits are growing and commercial lending is recovering, although not to pre-crisis levels, it’s a good sign. It gives us comfort that things are moving into a recovery stage.”
Islamic Business & Finance| Issue 77