Q&A Bahrain Banks 2020
1. What are the main laws regulating the banking sector in this jurisdiction and what do they cover?
Laws relevant to the Banking sector in the Kingdom of Saudi Arabia include –
- The Central Bank of Bahrain and Financial Institutions Law 2006
- Bahrain Stock Exchange Law 1987;
- Commercial Companies Law 2001;
- Bahrain Anti-Money Laundering Law in 2001;
- CBB Regulations and Resolutions.
2. What is the name of the main regulators responsible for regulating the banking sector and which areas do they cover?
The Central Bank of Bahrain (CBB) is a public body established by the Government under the Financial Institutions Law 2006 (the 2006 Law). It is responsible for maintaining monetary and financial stability in Bahrain and is also the single, integrated regulator of Bahrain's financial services sector. It succeeded the Bahrain Monetary Agency, which was established in 1973 soon after independence and which had previously carried out the Kingdom's central banking and regulatory functions.
Article 40 of the 2006 Law provides no one may undertake a ‘Regulated Service' in Bahrain unless licensed by the CBB. Regulated Services are defined as financial services provided by financial institutions, including those governed by Islamic Sharia principles. The 2006 Law also provides the CBB will issue regulations specifying the Regulated Services and organizing the provision of these services and it will supervise and control any licensees providing them.
3. What is the definition of a bank in this jurisdiction?
4. Are the same institutions able to provide regular and Islamic banking services?
Bahrain's banking system consists of both conventional and Islamic Banks and is the largest component of the financial system, accounting for over 85% of the total financial assets. The conventional segment includes 19 retail banks, 69 wholesale banks, two specialist banks as well as 36 representative offices of overseas banks. The Islamic segment, offering a host of Sharia-compliant products and services include six retail banks and 18 wholesale banks and the numbers are increasing continuously.
5. Are there any special regulatory requirements for those providing Islamic banking services?
Regulated Islamic banking services consist of three activities. These are accepting Sharia money placements or deposits, managing Sharia profit-sharing investment accounts and offering Sharia financing contracts. If an institution has the requisite licence, it may be able to offer all three regulated activities alongside various supplementary activities. Islamic bank licensees must operate in compliance with Sharia economic principles and only Islamic bank licensees may hold themselves out to be fully Sharia-compliant institutions.
Every individual Islamic bank in Bahrain has its own internal Sharia board, which determines the Sharia compliance of its products. In December 2018, there were 382 institutions and 98 retail banks registered in the banking sector, of which 21 were Islamic banks licensed by the CBB. The CBB does not interfere with this internal process but is usually very helpful and facilitates discussions about new ideas and concepts. Islamic bank licensees are divided into Islamic retail banks and Islamic wholesale banks. Specific regulatory requirements may differ between these two subcategories where appropriate to address their risk profiles.
6. Does banking regulation operate in a different way in any freezone jurisdiction?
7. What are the main steps a bank needs to take if it wishes to provide banking services in this jurisdiction?
Chapter 2 of the Financial Institutions Law sets out the intricacies of the procedure for licensing and Article 44 lays out the application process to obtain a license.
- Any person who wishes to provide a Regulated Service must apply for a license from the Central Bank.
- An application must contain such particulars and information and accompanied by such documents as specified by the Central Bank.
- Subject to the Commercial Companies Law, the Central Bank shall issue regulations specifying the requirements for offering a license to provide Regulated Services. Such requirements may include the legal form of the applicant, the location of its head office, the minimum capital and reserve requirements and the limits of capital adequacy requirements.
- The Central Bank shall verify the application for a license to ensure that it satisfies all the conditions required, and it may ask for amendments or any additional information that it requires to assist with reaching its decision regarding the application. Such request shall be made within thirty days from the date of submission.
- The Central Bank shall decide on the application within sixty days from the date of receiving the application complete with all the required information and documents.
- The applicant may, at any time before a decision has been made about the application, withdraw his application or
- make amendments to any errors therein or in the supporting documents in accordance with the Regulations issued by the Central Bank in this respect.
If all these conditions are met, the Central Bank will grant a license to the applicant. The Central Bank will keep a Register of Licensed Financial Intuitions on which all applications and supporting documents for licenses and any actions taken on them will be recorded.
8. Are there any special passporting rules or exemptions for banks which already operate in other jurisdictions?
If the bank licensee is a branch of an overseas bank, in deciding whether to grant a license, the CBB will pay very close regard to its activities elsewhere and examine how these activities are regulated. If the bank licensee is not regulated elsewhere, or in a jurisdiction which is not compliant with Basel Core Principles or FATF standards, then, a licensing application can only be considered after thorough, exhaustive enquiries into the bank's shareholders, management structure and financial position.
9. Are there any particular laws or rules governing lending to consumers or businesses?
10. Are there any particular laws or rules on guarantees?
11. Are there any specific laws governing customer protection of banking clients?
One of the primary objectives of the Central Bank, as stated in Article 3 of the Financial Institutions Law, is to protect the interests of depositors and the customers of the financial institutions and enhance the Kingdom's credibility as an
international financial center.
12. Who do rules on capital adequacy operate and how are they enforced?
When a licensee is applying for a license, the requirements postulated by the Central Bank for authorization include the minimum capital and reserve requirements and the limits of capital adequacy requirements. Islamic bank licensees are required to maintain a minimum daily cash reserve balance with the CBB, which is set as a ratio of their total non-bank Dinar funds. This could be placed either by way of call, by unrestricted investment, as well as through the issuing of Dinar denominated Islamic investment certificates. The current mandated ratio is 5% and certainly may be varied by the CBB at its discretion.
13. In the event a bank goes bankrupt does the state provide any guarantees to consumers?
If the licensee is considered to be insolvent, the Central Bank may, under a justified resolution, assume the administration of a licensee, or appoint another person (the Administrator). Article 140 of the Law delineates the powers of the administrator. The Administrator is empowered to carry out the following without prejudice; discharge obligations of the licensee to certain creditors in preference to other creditors, if this is in the advantage of the licensee and undertake any necessary actions in the interest of the licensee and protect the interests of its customers and creditors.
14. Are there any rules or regulations on application of interest?
15. Are there laws or rules governing transactions between related parties in the banking sector?
In Bahrain, wholesale banks have the liberty to undertake transactions without restriction, while dealing with the Government of Bahrain and its agencies, fellow Central Bank of Bahrain licensees and non-residents. For the sake of clarity, wholesale transactions may be defined in terms of transaction size (broadly, seven million Dinars or more for the activities of accepting Sharia money placements or deposits and offering Sharia financing contracts and $100,000 or more for any of the other activities which fall under the remit of regulated Islamic banking services). Islamic wholesale banks are allowed to transact in Dinars, or any other currency for any amount with the Government of Bahrain, public sector entities in the country and the Central Bank of Bahrain licensees.
The Financial Institutions law sets out the transactions the CBB is permitted to engage in, in Article 29 of Chapter 6 on Central Bank's Transactions and Investments. The article states the Central Bank is permitted to act as agent or correspondent bank for foreign central banks, similar monetary institutions, foreign governments or their bodies or international financial institutions.
16. Are there any activities banks are prohibited from undertaking?
Article 42 of the Financial Institutions Law states the Central Bank is authorised to issue regulations to prohibit or restrict the marketing of, or investing in the regulated services by any unlicensed person. With regard to the prohibitions levied by this Law on the Central Bank of Bahrain, Article 31 states the Central Bank will not engage in trade or participate in any financial, commercial, agricultural, industrial or other undertakings; purchase, or retain title to real estate, except for that required for the conducting of the Central Bank's business and for the housing of its employees; advance unsecured loans accept shares or convertible public debt instruments as collateral, among others.
17. What supervisory powers do the banking regulators have over banking activities?
As previously established, the Central Bank of Bahrain is the single, integrated regulator of Bahrain's financial services sector. Article 39 of the Financial Institutions Law delineates the extent of the regulated services to be provided by the Central Bank, and formally authorizes the Central Bank as the supervisor of all licensees which provide the same services.
If the powers conferred to the Central Bank prove to be insufficient for it to practice its supervision tasks over the business of the licensee, the Central Bank may seek a court order on a petition to enable the authorized investigators to enter and inspect specific premises and obtain the pertinent information, by using compelling force if it is considered necessary.
18. What are the main penalties the banking regulators have at their disposal?
Under the Financial Institutions Law, penalties which banking regulators can impose have five incarnations. These are the imposition of restrictions, the imposition of administrative fines, administrative proceedings, the suspension of the licensee from providing the service and public censure.
Under Article 128 detailing the imposition of restrictions, the Central Bank may impose restrictions on the licensees and the listed companies to secure the compliance to the law, along with the terms and conditions of the issued license.
Under Article 129 detailing the imposition of administrative fines, the Central Bank may levy on the Licensee an administrative fine not exceeding 20,000 Dinars, if the licensee breeches the law.
Under Article 130 detailing administrative proceedings, the Central Bank may appoint an observer member on the board of directors of the licensee for a period specified by the Central Bank. This member will have the authority to participate in the deliberations of the board of directors and to give opinions on any resolutions passed by the board.
Under Article 131 detailing the suspension of the licensee from providing the service, the Central Bank may suspend a licensee who contravenes the law from carrying out any regulated services for a period not exceeding twelve months.
Under Article 132 detailing public censure, the Central Bank may issue a public statement setting out the breach which occurred to the law, whether this breach has been committed by the licensee, the listed company or any official of both. It is mentioned the publication should be carried out in a way proportionate to the nature and the magnitude of the violation.
19. What happens when a bank becomes under capitalised?
Undercapitalisation is guarded against. This is shown for the existence of the contingency reserve and the revaluation reserve. A percentage of the net profits of the Central Bank will be credited at the end of each financial year to a special Contingency Reserve account. The sums standing in the credit of the Contingency Reserve can be used for the purposes which serve the objectives of the Central Bank.
The Revaluation Reserve has also been constructed to hold all profits resulting from the revaluation of the Central Bank's assets or liabilities in gold or foreign currencies as a result of any change in the parity-rate of the Dinar.
20. Are there any rules on bank ownership?
In Bahrain, finance transactions typically involve no actual movement of legal ownership and only the economic or beneficial value or ownership is transferred, which is not subject to any taxes.
21. What are the most frequent type of enforcement actions taken in this jurisdiction?
If a licensee fails to satisfy the Central Bank's regulatory requirements, the measures outlined in question 18 may be applied. Enforcement measures in the region have frequently included formal warnings, directions (e.g. to cease or desist from an activity), formal requests for information, adverse fit and proper findings, financial penalties or investigations. Explicit violations of the Central Bank's regulatory requirements may invite the revocation of a license and administrative or criminal sanctions.
22. What are the rights and duties of an individual who controls a bank either as a director or for a business which owns a bank in this jurisdiction?
23. Who can be legally liable if a bank fails?
If a bank fails to fails to satisfy any of the license conditions, violates the terms of the law, fails to start business within six months from the date of the license, or ceases to carry out the licensed activity in the Kingdom, the Central Bank may amend or revoke their license. The licensee is legally liable in all of these cases.
24. Are there any taxes levied over common banking services?
Bahrain does not currently levy income tax, corporation tax (with the exception of oil, gas and petroleum companies who are engaged in exploration, production or refining, regardless of their place of incorporation) or capital gains tax. It also imposes no estate duty, inheritance tax or gift tax. However, it must be noted Islamic Finance transactions involving real estate may be subject to taxes. For instance, if the legal ownership of the land were to be transferred or registered, registration fees could be owed. Also notable is the fact that, on all property purchases, a registration fee of 2% is levied, which is reduced to 1.7% if registration and payment are completed within 60 days of the relevant transaction. If an Islamic financial transaction involves payments under an Ijarah, this will generally not be subject to taxation.
Under existing Bahraini laws, payments under the bonds, Sukuk or notes will not be subject to taxation in Bahrain. No
withholding will be required on these payments to any holder of notes and gains derived from the sale of notes will not be subject to Bahraini income, corporation or capital gains tax, While Islamic financial transactions are generally exempt from VAT if the income earned by the supplier is by way of interest, fees, commissions or commercial discounts received by Islamic Finance providers are not exempt (subject to VAT at 5%).
25. What steps need to be taken by an individual or company which wishes to purchase a bank in this jurisdiction?
26. What constitutes having control over a bank and what are the implications of having this?
Control, with the Central Bank's approval, refers to the control established over a licensee, or taking any action which may lead to control. The notice of control shall contain the particulars and information and be accompanied by all documents which the Central Bank might specify.
If any one acquires shares in breach of the provisions of Chapter 3 of the Financial Institutions Law on Control they will carry out the instructions issued to them by the Central Bank to transfer the shares, or refrain from exercising voting rights in respect of the shares under the procedures prescribed in these instructions.
27. What are the main differences between banking regulation in this jurisdiction and other
major jurisdictions such as the US and Europe?
In Bahrain, the Central Bank of Bahrain regulates both the conduct of the financial services business in Bahrain as well as the financial institutions which provide those services. It has adopted the unitary approach. The CBB believes this approach creates a consistent and coherent regulatory model which can be applied across the board in Bahrain.
Elsewhere, the US has adopted a dual banking system which means US banks can be chartered by one of the fifty states, or at the federal level. Most banks in the States are owned by bank holding companies, which are prohibited from controlling entities other than banks. Some bank holding companies may elect to be treated as financial holding companies, embracing a standard of activities which are financial in nature, or complementary to a financial activity. The US has a labyrinthine regulatory framework, with a myriad of regulatory agencies. The Federal Reserve is one the most critical and is supported by the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, among others.
28. Are there any special rules of client confidentiality and banking secrecy? If so what is their impact?
Article 116 of the Financial Institutions Law elucidates on confidentiality and sets out the definition of confidential information. It refers to any information on the private affairs of any of the licensee's customers.
Article 117 states confidential information must not be disclosed by a licensee unless the disclosure is done with an unequivocal approval issued by the person to who the information relates to together with the law, are in the process of executing an order issued by a competent court or, for the purpose of implementing an instruction given by the Central Bank.
29. What is the typical time scale for becoming registered to provide banking services in this jurisdiction?
After the license application has been given to the Central Bank, it will decide on the application within sixty days from the date of receiving the application complete with all the required information and documents. If they satisfy all of the conditions set out in the law, the licensee will become officially registered to provide banking services.
30. What is the typical time scale for registration of a change of ownership in this jurisdiction?
As the registration fees which accompany the transfer of ownership will be reduced to 1.7% (from 2%) if registration and payment are completed within sixty days of the transaction, it seems a fair approximation to state two months is the typical time frame for this.
31. Are there any special rules on banking set off?
While there is not a concrete set-off clause, the Central Bank may accept movable assets, real estate or other property as security for payment, if the ability of a debtor to repay any debt due to the Central Bank is doubtful. The Central Bank will sell the property, possessed as a result of the debtor's failure to pay the debt, as soon as market conditions permit (Article 31).
32. Are there any special rules on closure of a bank account?
33. What are the main rules on cheque issuing and bounced cheques?
One of the critical functions of the Central Bank is to issue regulations regarding the settlement and clearing systems of cheques and other securities.
34. What are the main rules on provision of safe deposits by banks?
Article 4 of the Financial Institutions Law includes as one of the duties and powers of the Central Bank, the safeguarding of the the legitimate interests of licensees' customers against the risks associated with the financial services industry.
Article 177 is devoted to the protection of deposits and other related rights. The Council may issue regulations to protect deposits of the customers of the licensee. The regulations will provide for compensating customers in cases where the licensee is unable, or appears likely to be unable to meet claims made against them.
The regulation may provide for the formation of one or more funds and the funds are to constitute a separate corporate body, having an independent balance sheet and special regulations to be approved by a resolution issued by the Central Bank.
35. What are the main rules on the provision of letters of credit, promissory notes or bills of exchange by banks?
The Central Bank Buy is allowed to sell, discount and re-discount bills of exchange and promissory notes to other financial institutions.
The Central Bank also maintains a foreign reserve which bears bills of exchange and promissory notes payable outside the Kingdom in convertible currencies.