Global Compliance

Regulations concerning Bahrain National Banks

Introduction

Bahrain is a country which has had to grow and adapt in ways that many of its neighboring GCC countries have not had to. With the likes of the UAE and Saudi Arabia being highly oiled rich countries, the drive to diversify and find alternate means of expanding their economies have not been as strong. However, in the case of Bahrain, the country has far fewer natural resources. Due to this factor, economic growth has evolved in a different manner. 

Bahrain has established itself as a global financial hub and is a favorite business destination for foreign entities. With such a strong financial industry, and positive business attitude, the country certainly has its share of banks, and also, is located in the Middle East, the country is very conscious of the demand and need for Islamic Banks.

Although Islamic Banking is a fairly novel and rapidly growing industry, the sector is not as well-known and established as the conventional banking system. However, it most certainly has demanded, and there are many large conventional banks that now provide Islamic banking loans

Within the Kingdom of Bahrain, the financial service and banking industry is managed by the Central Bank of Bahrain (CBB). The Central Bank’s duties include:

• Acting as the government bank
• Ensuring the steady growth of the country’s economy
• Producing the legislation and providing regulation updates that govern entities within the financial services and banking industry

The Central Bank of Bahrain Law of 2006 is an update to the original 1973 banking law. The 2006 Law outlines the duties and responsibilities of the CBB.

Bahraini Banking Regulations

Generally, the regulations governing Islamic banks are the same as those governing conventional banks. There are of course some differences between them, though for the most part, unless otherwise specified, an Islamic bank will have to abide by the same laws and regulations as any other bank would.

Volume 2 of the CBB law
License Requirements:
Volume 2 of the CBB law covers the matters of Islamic banks. To begin with, in order to set up and run an Islamic bank, a license will need to be obtained. The license is a different one to what conventional banks require, and under the Licensing Requirements Module Section A.1.5, it is specified that there are two types of Islamic banking licenses that can be obtained. These are the Islamic Retail Bank License and the Islamic Wholesale Bank License. 

Section A.1.6 concerns Islamic Retail Banks. In order to be eligible to receive this, a bank’s sharia financing contracts must account for a significant amount of their total business. This Article also elaborates on what a ‘significant’ amount is, stating that at least 20% of all business must fall into this category. An Islamic retail bank may perform business in any currency it chooses, and with both Bahraini nationals and foreigners.

Section A.1.7 states that in order to qualify for a wholesale banking license, a bank may only perform business in the national currency (Bahraini Dinar). Additionally, the business must be performed with nationals or residents of the country. Further to this, being wholesale, the transaction size must be above a certain amount, which is also specified in this section. Generally, BD 7 million or more for the activities of accepting Shari’a money placements or deposits is required, or offering Shari’a financing contracts, and the US $100,000 or more for activities that fall under the definition of regulated Islamic banking services.
Beyond this, the license requirement module also covers further requirements and prohibitions for the obtaining of one of the two types of license.
Sharia Compliance:
One of the biggest differences between conventional banks and Islamic banks is the requirement for the Islamic banks to ensure they are Sharia compliant. This matter is covered under the Sharia Governance Module of the CBB law. Section 1.1.2 outlines what exactly is required of an Islamic bank as part of its Sharia governance structure, the following is included:

• Sharia Supervisory Board (SSB)
• Sharia Coordination and Implementation Functions
• Internal Sharia Audit Functions
• Independent External Sharia Compliance Audit

The licensee must ensure that they comply with and implement all of the above-mentioned guidelines.
The SSB is a common feature of Islamic banks throughout the Middle East. In Bahrain, SSB’s consist of 3 members who must be specialists (scholars, as stated in the module); other SSB members must be elected by the bank’s shareholders. It is the job of the SSB to ensure that all of a bank’s activities are in line with Sharia rulings and customs. If there is ever a matter that the bank and SSB are unsure of, it is the responsibility of the SSB to obtain the correct answer through a fatwa.

Interest and Charges:
Interest and charges placed upon loans and other forms of financing is another area that is covered. In the case of interest, it is strictly not allowed. Also, as per the Business and Market Conduct Module B.5.6, there must be total clarity on the charges that are to be applied. Therefore, there can be no hidden costs. Beyond this, not much else is mentioned on the matter of interest, as it is known to be impermissible, and the SSB should be more than aware of this.
The Bahrain Central Bank does assume an in-depth look into Islamic Banking, with an entire volume of the CBB law covering it. However, any points not specifically covered in this volume should be assumed to be the same as conventional bank regulations. Of course, the SSB is always present to scrutinize a bank’s activities and ensure that they align within the parameters of Sharia law.

Glossary

• The central bank of Bahrain (CBB): This is the governing bank in Bahrain, and is responsible for overseeing the financial and banking sector of the country. They also produce and distribute the national currency (the Bahraini Dinar), and beyond this, they also produce the legislation that must be followed by all banking and financial service entities.
• Central Bank of Bahrain Law 2006: This law implemented the CBB as the country’s primary authority in the financial sector. Within it are outlined the duties and responsibilities of the CBB, and also some of the key provisions relating to banking.
• Islamic Banks: Banks that follow sharia principles and guidelines are referred to as Islamic banks. They are required to ensure all of their activities are sharia compliant
• Conventional Banks: Any bank that is not specifically an Islamic bank is a conventional bank
• Sharia Law: These are Islamic based rules, guidelines and customs that an Islamic bank would be required to follow. Sharia laws are based on Islamic practices and customs and are therefore key to the activities performed by an Islamic Bank
• Decree Number 64 of 2006.