Why Bahrain carries so much weight in global Islamic finance

Bahrain is an Islamic finance centre where the central bank licenses Islamic retail and wholesale banks separately, requires a four-part Sharia governance structure and applies by default the standards of AAOIFI, an international body headquartered in Manama.

A financial centre built since the late 1970s

Bahrain Islamic Bank began operating in 1979 as the kingdom's first Islamic bank. Over the following decades the monetary authority attracted regional wholesale banks and then wrote dedicated rules, rather than merely tolerating these institutions inside the conventional regime.

The first prudential framework designed for Islamic banks

The former monetary authority issued a framework covering capital, asset quality and Sharia compliance specific to Islamic banks, often described as the first of its kind. The central bank's current rulebook still devotes an entire volume to these institutions.

Four pillars of Sharia governance required by the regulator

The Sharia governance module, which applies to both retail and wholesale Islamic banks, requires a Sharia supervisory board, a function that coordinates and implements its rulings, an internal Sharia audit and, finally, an independent external compliance audit.

What does the external Sharia audit check?

The external auditor does not issue fatwas. It checks that transactions actually executed follow the Sharia board's decisions, that contracts were signed in the correct sequence and that non-compliant income has been set aside and then paid to charity.

AAOIFI standards as the default reference in Manama

AAOIFI, which drafts accounting, auditing, governance and Sharia standards, is headquartered in Manama. The central bank applies them by default to Islamic banks while keeping the power to depart from them or to supplement them with its own rules.

An ecosystem of international bodies

Besides AAOIFI, the kingdom hosts IIFM, which drafts standard contracts for interbank and hedging markets, the Islamic rating agency IIRA and the General Council for Islamic Banks and Financial Institutions. Lawyers, auditors and Sharia specialists naturally cluster there as a result.

Salam sukuk: a forward sale of gas

Since 2001 the central bank has issued three-month Salam sukuk every month. The state sells a quantity of residual gas in advance, receives the price immediately and undertakes to deliver at maturity, so holders own no interest-bearing claim.

Short and long Ijara sukuk issued by the state

Six-month Ijara sukuk, issued monthly since 2005, rest on the lease of public assets at a rent fixed in advance. Longer tranches of two to ten years are issued as needed in dinars or dollars, with the state promising to buy the assets back.

Liquidity, the weak spot of Islamic banks

An Islamic bank can neither park surplus cash in conventional treasury bills nor borrow overnight against interest. Sovereign sukuk give it a liquid instrument, and the Liquidity Management Centre, operating since 2003, was designed as a secondary market for short-term paper.

Takaful and insurance under the same supervisor

The central bank also supervises insurance. A takaful operator must keep the participants' fund, which pays claims, apart from its own accounts, and is paid through a wakala fee or a share of investment profit depending on the model chosen.

Retail and wholesale banks: two separate licences

An Islamic retail bank serves residents and takes their deposits, whereas an Islamic wholesale bank mainly handles large transactions with institutional or foreign clients. The licence category determines which activities are allowed and how intense the supervision is.

Checks for a foreign client or investor

Look up the licence category in the central bank register, the membership of the Sharia board and whether an external audit report exists. Remember too that the dinar is pegged to the dollar and that a Bahraini product is not automatically authorised in your country.