LONDON, 17 November 2003 — Perhaps the Saudi Arabian Monetary Agency (SAMA) and the Dubai International Financial Center (DIFC) should take a leaf out of the book of the Bahrain Monetary Agency (BMA), the regulatory authority of the tiny emirate with the big ambitions of becoming the regional financial and capital market hub, and the international Islamic financial center.
Bahrain has been contemplating its own version of “a future without oil” for the last decade or so, and has identified financial services, tourism, and specialist industries such as aluminum.
Bahrain Aluminum (Alba) and the downstream extrusion entities such Balexco have been spectacularly successful. Alba is now perhaps the world’s leading aluminum smelter, and certainly one of the largest.
Tourism has taken off, though not to the extent Bahrain hoped. Saudis from the Eastern Province coming for the weekend over the causeway have been both a boon and a social burden. The truth is that Bahrain will find it hard to become a mass tourism destination.
Which leaves financial services. And here the policy changes and implementation have taken on a new-found urgency over the last year. Perhaps slow changes in Saudi Arabia have contributed to this.
The styles could not be more different. Bahrain has a headstart of over a decade and its approach is market-oriented. Underpinning this is the establishment of a single financial regulatory body, the BMA, which is now responsible for the integrated regulation of the whole financial sector.
The BMA is consolidating in stages. PriceWaterhouseCoopers, the international auditors, according to Khalid Abdullah Al-Bassam, deputy governor of the BMA, are finalizing a comprehensive framework for reporting standards and prudential requirements for insurance companies. Bahrain is also eyeing the underdeveloped insurance market in the region, where premium and per capita income and market penetration are woefully low. Even before the new insurance framework is in place, it is already licensing insurance companies including two Islamic insurance (Takaful) entities — one an offshore captive insurance firm being set up by Gulf Finance House, and the other a joint venture between Dar Al-Maal Al-Islami (DMI) Trust and Overland Capital from the US. DIFC seems to be throwing money at everything — outsourcing through senior non-national recruitment of virtually its regulatory council, marketing and promotion. It has even commissioned Hollywood Director Ridley Scott of “Gladiator” fame to do its promotion video. Now it is even going into the index business, joining forces with Dow Jones Indexes and Shuaa capital to launch the proposed Dow Jones DIFC Arabia Titans 50 Index. Never mind conflicts of interest, or the danger of confusing your key constituency of what you really are.
Bahrain is way ahead in terms of political change in the GCC, although the decisions taken in earlier referenda have yet to be fully institutionalized.
It is in the financial services area that rapid change is happening. In terms of capital markets, the Bahrain Stock Exchange (BSE) is the most important one in the region. The Malaysian international sovereign bond, the $600 million Malaysia Global Sukuk Inc., was listed on the BSE in September 2003, and not on the TASI or Kuwait Stock Exchange, or the Dubai Financial Market.
No sooner had Malaysia and Qatar launched their debut international sovereign Islamic sukuks, than the BMA mandated Citigroup to arrange a similar $250 million issue — its first international sukuk. The BMA has issued a series of Sukuk Bai Salam and Sukuk Al-Ijara, worth over $1 billion, but these are domestic issues. The BMA believes that a critical mass of $10 billion of sukuks is needed for secondary trading in earnest to start.
Secondary trading is the Achilles heel of the nascent Islamic capital market . Only in Malaysia, with its 40 billion ringgit or so Islamic capital market, is secondary trading institutionalized and well-established. Unfortunately most of the Malaysian issues are not acceptable to Gulf institutions over differences in Shariah-compliance.
The BMA recently signed an MOU with the London Metal Exchange (LME) whereby the LME will help structure internationally standardized documentation for Shariah-compliant commodity transactions on the exchange, enabling Islamic and conventional financial institutions to finance global commodity transactions. The BMA is also pioneering a repo (repurchase) facility for Islamic financial institutions, allowing these institutions to discount, by selling their sukuk holdings to the BMA, against which the BMA would lend to the institutions for specific periods of time.
The other major development is the surfeit of licenses given to banks, finance companies and insurance operators especially in the Islamic finance sector. The aim is obviously to add depth to the market in terms of pool of players. Recent licenses include one to International Investment Bank, whose largest shareholder is the Al-Fahim Group in the UAE; and one to National Bank of Bahrain to set up an Islamic banking subsidiary.
Other banks with licenses include Addax International Bank BSC, which will specialize in investment advisory and brokerage services, and third part distribution on both conventional and Islamic finance sides; Kuwait Finance House to set up a wholly-owned investment consultancy firm. Baytik Investment Advisory, the first such service to be established by an Islamic bank in Bahrain; an onshore banking license to Kuwait Finance House; a banking license to Kuwait Turk Evkaf Finance House; and an investment banking license to Rushd Bank, promoted by Saudi investors.
“In the past Islamic financial institutions have generally preferred to locate their investment consultancy operations outside the Middle East. We do hope this move will encourage other institutions to consider Bahrain as their location of choice,” stresses Ahmed Al-Bassam, director of Licensing and Policy at the BMA.