Global Compliance

Obtaining Corporate Loans for Foreign Businesses - Bahrain

Introduction

Bahrain is a small and yet highly wealthy nation located in the GCC. With a population of only 1.4 million people, it is the smallest of the GCC nations, with over 50% of its population being expats. The country’s currency, the Bahraini Dinar, is the second most valuable currency in the world. It is distributed and managed by the country’s central bank. 

The country itself is the lowest oil producer in the region, and while it is also the smallest of the Middle Eastern countries, its lack of huge oil reserves has meant that it has had to diversify its sources of income. As such, the country has had to expand its horizons to ensure that it is still able to keep up with its oil-rich neighbors. To achieve this, the country has expanded into the banking and financial services industry, along with substantial investment in the tourism sector.

The country has the freest economy in the MENA region, recognized by the World Bank as a high-income economy. 

Due to these factors, Bahrain is a highly well-known and well-respected business hub, appealing to foreign businesses and investors. It is estimated to have attracted over $700 million in foreign investment in 2017, and the FDI experienced a 160% growth compared to the previous year. 

The financial and banking sectors of the country are managed by the country’s central bank (CBB, Central Bank of Bahrain). The CBB also produces the legislation and circulars that must be followed by all the banks within the country. 

How to Obtain a Loan
Corporate loans are far less regulated than personal loans in Bahrain. The law has far fewer strings attached to the corporate sector; this is due in part, to the fact that providing loans to a business entity is often seen as being more secure than to a single individual. 

Required Documentation:
In order to obtain a corporate loan within Bahrain, one must ensure that they have the required documentation and paperwork in order and available for a bank’s analysis. The general documentation requirements include:

• A business plan
• The businesses paperwork such as trade license, and the documentation of the management (passports and visas etc.)
• The financial records of the business

However, these are only some of the basic requirements and are the type of documentation that one should expect at the minimum. Individual banks themselves may request further items to be presented. This is due to the fact that it is the responsibility of the bank to ensure that they only provide loans to those that will have the ability to repay them.
Interest Rate:
The Legislative Decree Number 7 of 1987 relates to the promulgating of the law of commerce. Article 76 of this law covers the area of loans between parties.

• Under section 2 of Article 76, it is mentioned that the loan shall be interest bearing unless the parties agree to otherwise;
• Section 4 states that the interest rate is whatever is agreed between the parties, though it cannot exceed the legally prescribed limit;
• The rate shall be determined by the Bahrain Monetary Agency as per a notice served to them from time to time; and
• Section 6 mentions that the interest is to be paid at the end of each year that passes of the debt. If a loan is of less than one year in length, the interest is to be payable on the date of maturity. This is unless otherwise agreed by the parties.

Islamic Banks:

Islamic banks are governed under Volume 2 of the CBB Law. These banks generally must follow the Union Law Number 10 of 1980, similar to all conventional banks, as mentioned under Article 2 (2) of the Federal Law Number 6 of 1985. However, this law will not be applied in the matter of interest. Islamic banks do not charge interest, and instead, have their own methods of making profits. 

On top of this, Islamic banks are required to form Sharia compliance boards within their structures. The purpose of these boards is to ensure that the banks are performing to their maximum capacity, and are experiencing maximum growth.

Beyond this, the legislation is largely the same, with few other differences.
The Contract:

Once a bank or other lending entity has been able to look through the requested documentation, they will have to come to a decision as to whether they will provide the loan or not. Once they agree, a contract will be formed. This contract must include the start and end dates of the loan, the total amount of the loan, and the interest rate agreed upon between the parties. Securities for the loan will also have to be agreed upon between the parties. 

There is a practice between some entities of taking a pre-dated cheque as security for loans. This would mean that if a loan cannot be paid, the cheque would be cashed, and since the cheque would then bounce, the bank would be able to open a criminal case against them. However, under the Bahrain Penal Code, this practice is not legal. The CBB has a set list of what can be used as a security for a loan, and only what is mentioned can be used.

Glossary

• Corporate loan: A loan provided to a company in order for it to make business-related purchases. This is as opposed to a personal loan which would be for a private individual to make their own non-business related purchases or cover costs
• Islamic banks: These are banks that follow sharia law. The primary difference is that they do not charge interest on their loans
• Conventional bank: This would include any bank that is not an Islamic bank
• Central Bank of Bahrain (CBB): The Central Bank of Bahrain is the governing bank within the country. It is responsible for managing the financial sector and ensuring positive economic growth, while also producing legislation and circulars for all of the national and foreign banks within the country
• Circulars: These are documents that the central bank sends out to all the other banks of the country outlining new legislation and other updates the banks should be aware of
• Decree Number 64 of 2006: The Central Bank of Bahrain and Financial Institutions Law. This is the law that gave power to the CBB and dictates the actions it may and may not perform, and the powers of the bank
• Sharia Law: Islamic law that forms part of Islamic countries traditions. The rulings are derived from religious sources, and Islamic banks follow sharia law in that they do not charge interest on their loans
• Union Law Number 10 of 1980
• Legislative Decree Number 7 of 1987
• Federal Law Number 6 of 1985