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On the Road to Recovery - Bahrain Learning Lessons

Monday, 24 May 2010 14:22

While Bahrain's economy is well along the road to recovery, rebounding after last year's slowdown, there are growing concerns that this journey may be affected by the rising debt crisis in Europe, with a possible impact on the Kingdom's Islamic financial sector.

Throughout the first half of May, a number of Bahrain's leading sharia-compliant banks and finance houses have been releasing data on their first-quarter results. In many cases the reports make for comforting reading, showing solid performances across the board, rolling back losses or spiking profits as confidence returns.

On May 11, the Al Baraka Banking Group announced it had boosted net profits by 13% compared to the first quarter of last year, the black ink in the ledger amounting to $48.3m, with the bank also increasing assets by 4%, deposits by the same level and total finance and investments by 3%.

Another Islamic lender to remain in positive territory was Khaleeji Commercial Bank (KHCB), though its $1.33m profit for the three months ending March 31 was down on its $10.95m during the same period in 2009.

Gulf Finance House (GFH), which early this year came close to defaulting on a $300m loan before being able to reschedule payment also, appears to be recovering from the downturn of 2009, though it has further to go than many of its competitors in the Bahraini market.

While still in the red, posting $7.5m worth of net loss in the first quarter of the year, this is a significant improvement from the same period in 2009 when GFH lost $37.74m. In a statement issued along with its financial report, the bank said the improved situation was a result of cost cutting and a better performance in some of its core activities, a theme other banks stressed in their quarterly statements.

However, while the position of Bahrain's Islamic banks is improving, there are still some challenges ahead, with one storm front forming over the Aegean, where the Greek crisis has turned many investors off all forms of corporate debt.

According to Nida Raza, the senior vice president for capital markets at Bahrain's Unicorn Investment Bank, uncertainty over how deeply the Greek financial crisis affects Europe and beyond will take the steam out of the sukuk segment until autumn at the earliest, with no large issuances for some time.

"There will be no new jumbos (significant deals) in this region until stability returns. The market will not pick up until after Ramadan," said Raza said in an interview with local press. "People won't concentrate on sukuk right now. What is going on in Europe will take the traction away."

Though Raza believes there will be an upward movement in the international sukuk market, predicting around $8.5bn worth of issuances to be made this year, similar to that in 2009, it is well off the $14bn recorded in 2008 or the $40bn the year before.

The linkage between the conventional and the sharia-compliant financial sectors was also touched upon by Rasheed Al Maraj, the governor of the Central Bank of Bahrain in his address to the seventh Annual Islamic Finance Services Board meeting in Bahrain on May 4.

It was unavoidable that the Islamic banking industry would be affected by the financial crisis that enveloped much of the conventional banking sector in late 2008-09. Determining to what extent the global financial crisis had been a game changer for Islamic finance was necessary, Al Maraj said

Al Maraj also warned that queries posed by recent defaults by issuers of sukuk need to be answered quickly, or else the sector will be overshadowed by uncertainty.

"In the past 12 months, we have seen the first defaults by issuers of sukuk," he said. "These defaults have raised many complex legal questions about the rights of sukuk holders, for example, whether they have the right to take ownership of the underlying assets in the event of the issuers' default."

Further development of this market depends on finding legal certainty and developing mechanisms to deal with issuer defaults, said Al Maraj.

"The issue is not whether the Islamic financial industry needs to learn lessons from the crisis, but what lessons it should learn and how it needs to adapt." he told delegates.

With the economies of Europe again teetering on the edge of recession, and with the debt crisis afflicting Greece potentially spreading to Portugal and Spain, there could well be more lessons to be learnt by Bahrain's Islamic finance sector.

Global Arab Network

This article is published in partnership with Oxford Business Group

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Last Updated on Monday, 24 May 2010 14:30

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