Currency and Banking
Over the past twenty years, Bahrain has developed as a regional financial center for the Gulf region and for much of the Arab world. Bahrain's financial institutions attract funds from the Gulf region since, unlike most other countries in the region, Bahrain does not prohibit the use of interest in banking operations. Law of Commerce No. 7 of 1987, expressly permits interest in transactions; rates agreed to by parties to a contract will be enforced if not exorbitant in opinion of Bahrain courts. No hard and fast rule exists, but based on past cases interest in excess of 15 percent could be viewed as exorbitant.
While other GCC countries like the UAE permit the use of interest, legislative initiatives like offshore banking units continue to attract foreign funds.
In the past few years, however, there has been a rise in the number of Islamic banks operating in Bahrain that do prohibit the use of interest. In 1996 Citibank opened an Islamic bank.
Bahrain has a well-developed commercial banking sector which includes many of the large international banks. A number of offshore banking institutions offer specialized commercial services. There is a housing bank, which provides long term finance for housing and commercial real estate developments. Additionally, there are several Islamic banks and financial institutions that constitute a significant factor in the financial community. The distinctive feature of Islamic banking is that no interest is paid; instead the bank charges fees and shares its profits or losses. In addition, the Bahraini Stock Exchange, established in 1989, has been open to foreign as well as Bahraini investors since 1990.Bahrain has been encouraging the establishment of "offshore" banking units (OBUs) since the mid 1970s. An OBU is not allowed to provide local banking services but is allowed to accept deposits from governments and from large, regional financial organizations and to make medium-term loans for local and regional capital projects. The OBUs serve to channel money from the petroleum-producing region back into world markets.
A license from the BMA is necessary in order to establish an OBU. The OBUs operate under the following conditions: (1) OBUs may be branches or joint ventures; (2) OBUs must be fully staffed and operational at all times; (3) OBUs may transact business with the Government of Bahrain, its agencies, or any licensed bank operating in Bahrain (conducting business with any other entity or individual resident in Bahrain requires the prior permission of the BMA which is normally given only if the transaction is related to a development project); (4) OBUs may provide non-residents of Bahrain with all banking services except checking accounts; (5) OBUs which are branches are not required to maintain any reserves with the BMA; (6) OBUs are required to supply to the BMA such information as may be prescribed by it from time to time; (7) OBUs are required annually to submit to the BMA a balance sheet and profit and loss account audited by auditors; (8) OBUs which are partly or wholly owned by banks or other entities are required annually to file with the BMA a copy of the consolidated accounts of the owners; and (i) OBUs are required to pay to the BMA an annual license fee of an amount as may from time to time be prescribed by the BMA.Foreign banks may open a representative office in Bahrain. This is often done by international banks wishing to establish a presence in Bahrain until such time as they are able to justify the additional cost of setting up an offshore banking unit. Representative offices are prohibited from conducting trade or business in Bahrain and are limited to collecting general financial, economic and commercial information, offering general representation and rendering assistance to customers of the bank. These offices have to be approved by the BMA and pay an annual license fee.
Investment banks, characterized as non-bank financial institutions, operate under a licensing system by the BMA. They may not offer current account services, although deposits can be accepted from non-bank institutions in a minimum value of US$ 50,000 or the equivalent. Deposits may also be accepted from banks inside and outside Bahrain. Investment banks are allowed to grant loans to both residents and non-residents provided they are not in the form of an overdraft. In addition, they may also undertake all forms of business in securities including underwriting, placing and trading in securities, consultancy on issues of investment and the raising of capital. Investment banks may be formed as exempt companies.
© 2000 Mena Report (www.menareport.com)