The Bahrain Banker by The Bahrain Banker

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The origins of Islamic Banking The creation of a modern industry

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Al Baraka Islamic Bank Planning rapid growth in Bahrain

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The Bahrain Banker Winter 2014

Contents 6

First word Jarmo T Kotilaine, Chief Economist, Bahrain Economic Development Board

Islamic banking A history of Islamic banking; Africa takes off

18 Mohamed Al Mutaweh Chief Executive, Al Baraka Islamic Bank 24 The learning curve Bahrain's Bankers of the future in London 28 In person Mufeed Rajab, Global Head of Administration at Investcorp 32 Commentary Are 'mega banks' really fit for business? 34 Charity and philanthropy Migrant Workers Protection Society 38 Capital ideas A round-up of markets and economics

44 Read on Bahrain from above â&#x20AC;&#x201C; and more 46 Ancient and modern Shopping in Bahrain 52 Tech talk ATM security worries 56 Life and leisure Bahrain Noor El Ain shopping and culture festival 58 Economic and financial indicators 60 Facts about Bahrain Central Bank of Bahrain (CBB) statistics 61 Whoâ&#x20AC;&#x2122;s who at the Bahrain Association of Banks 62 Last word Risk and the role of the Boardroom

The Bahrain Banker Winter 2014

ISSN 1985-973 2

The Bahrain Banker is published by The Bahrain Association of Banks PO Box 1034 Manama Kingdom of Bahrain www.banksbahrain.org Board of Directors Abdul Razak Al Qassim Chairman Dr Farid A Al Mulla Deputy Chairman Adel El-Labban Adnan Ahmed Yousif Hassan Jarrar Dr Khaled Kawan Khalil Nooruddin Talal Al-Zain Chief Executive Officer Robert Ainey Publisher & Head of External Communications Abdullah J Wallace Editor James Grant-Morris Art Director Premarajan PV Sales and Relationship Advisor Badria Salman Subscriptions Manager Yousif Mashkoor Photographers George Mathew/Thanooj Thampy Subscriptions: +973 1782 3000 subscription@banksbahrain.org Editorial: +973 1782 3000 editor@banksbahrain.org Advertising: +973 1782 3000 advertising@banksbahrain.org Printed by Union Press, Bahrain Editorial Advisory Board Ali Moosa, JP Morgan Dalal Buhejji, EDB David Gibson-Moore, LGT Dr Jarmo T Kotilaine, EDB Maisoon Benshams, AIB Nadera Abuali, Citi Sh Nayla Ali Al Khalifa, CBB Rashad Akbari, BBK Richard Ellis, CBB

Welcome

elcome to the Winter 2014 edition of The Bahrain Banker. This is a special issue for a number of reasons. Firstly the magazine celebrates its fifth anniversary. Twenty one editions have been produced since the Board of the Bahrain Association of Banks decided that there was a genuine need for an intelligent, topical publication that could act as a collective voice for the banking community in Bahrain. The result is a magazine that has featured numerous interviews with senior bankers, regulators, consultants and educators. It has tackled tough subjects ranging from the competitiveness of Bahrain as a financial hub to vital regulatory issues such as the Basel III Capital Adequacy Requirements, innovation in Islamic finance and the growth of new delivery channels such as mobile and internet banking. We have taken an in-depth look at local banks as well as the many foreign institutions based in Bahrain, capital markets, infrastructure finance, real estate, SME banking, wealth management, the oil and gas industry, stock markets and education and training. These articles, features and analytical pieces have always been backed up by our notable commentaries which have a reputation for setting off many vigorous debates. In this edition of The Bahrain Banker we feature Mohamed Al Mutaweh, the Chief Executive of Al Baraka Islamic Bank, on the cover. Charged with growing the bank’s domestic footprint since his appointment in December 2007 he has proved adept at intelligently expanding its range of products and services whilst at the same time sticking to the closely-held Sharia-compliant principles of the Al Baraka Banking Group. We also speak to Mufeed Rajab, the Global Head of Administration at Investcorp about his career which started in Bahrain with Chase Manhattan in the 1970s and then took him to Canada before he was persuaded by the investment firm’s founder and Chief Executive Nemir Kirdar to return to Bahrain in 2002 as “the man who keeps the wheels turning.” Meanwhile in a series of features we take a fascinating look at the origins of Islamic finance in the 1970s when it established itself as a viable force in banking that can now stand up and compete with conventional banks. As Islamic finance grows it is now looking to new markets, and Africa with its double-digit growth is set to become an important player. We take a look at the opportunities for Gulf banks and the potential risks and rewards in entering this exciting market. In The learning curve the magazine follows a trip to London by two banking and finance majors at Bahrain Polytechnic who attended the prestigious summer programme at the Royal London Docks Business School (RLDBS). Ancient and modern once again goes back in time to cast a nostalgic eye on shopping in old Bahrain and contrasts it with the modern malls that dominate the retail landscape today. The brand-new Bahrain Noor El Ain shopping and culture festival kicks off in December for two months. In Life and leisure we take a look at some of the highlights with a couple of suggestions for your diary. I invite you to enjoy these articles and many others in the magazine and, as always, to tell us what you think of them. Abdul Razak Al Qassim Chairman, the Bahrain Association of Banks and CEO and Director, NBB, Bahrain

The Bahrain Banker Winter 2014

FIRST WORD

Serving transformative growth in Islamic banking Dr Jarmo T Kotilaine is Chief Economist at the Bahrain Economic Development Board

he erstwhile existential debates about the role, nature, and potential of Islamic finance have now clearly given way to a conviction that Sharia-compliant finance is not only here to stay. Rather, it can be expected to be one of the most dynamic segments of the broader financial sector worldwide and an increasingly systemically significant element of the financial sectors of a growing number of countries with significant Muslim populations. Starting from a current base of approximately US$1.8 trillion, the annual growth rates of Sharia-compliant assets globally can be expected to remain firmly in the double digits for the foreseeable future. While the scale and sophistication of Shariacompliant finance still pales in comparison to the more established conventional financial industry, rapid forward momentum can be expected from a number of areas of convergence-style growth. Three things in particular stand out about the dynamics of the sector. Firstly, the global footprint of Islamic finance is continuing to expand, typically with active government support. A number of countries are creating the

The Bahrain Banker Winter 2014

regulatory framework for Sharia-compliant financial activities or eliminating hurdles that have historically disadvantaged Islamic products and structures. Significant growth, albeit from a modest base, is already well underway in significant emerging markets such as Turkey and Indonesia. New growth opportunities are taking shape in North Africa, in a growing number of sub-Saharan African countries and in parts of Asia where Malaysia and Pakistan have historically been the two main bastions of Islamic finance. Beyond this, more and more initiatives are underway to serve markets with significant Muslim minorities, including large populations in countries such as China and India, not to mention immigrants in the West. In some of the more established markets, some institutions are converting from a conventional or mixed to a purely Islamic modus operandi. Secondly at the same time, efforts in the area of product and market infrastructure development along with regulatory reform are progressing and even gathering momentum. This is particularly pronounced in the case of the Sharia-compliant capital markets

Considerable efforts are required on a broad front to drive the growth of the industry Thirdly, Islamic finance is increasingly appealing to non-Muslim clienteles. In some cases Sharia-compliant funds enable investors access to new markets. More generally, the unique characteristics of Islamic financial products allow them to be used for portfolio diversification purposes. Finally, the principles-based nature of Islamic finance is finding favor with customers looking for alternatives to mainstream products. The global financial crisis has in many ways served to further enhance the appeal of principles, such as an aversion to leverage and to speculation. As positive as the momentum has been, and few would dispute the obvious and compelling potential going forward, considerable efforts are required on a broad front to support the evolution of the industry. To establish itself as a truly global industry, Islamic finance needs more builders and building blocks! Bahrain, as one of the cradles of Islamic finance, has a particular role to play in this regard and is in a strong position to be a key enabler of the next of stage of development of Sharia-compliant finance. Bahrain today boasts a complete ecosystem for the sector that is characterised

by exceptional maturity, clear regulatory underpinnings and remarkable diversity. The solutions offered by Bahrain-based institutions range from basic banking to training, standard setting and structural innovation. The institutions themselves cover the full gamut from local retail banks to multi-lateral infrastructure entities. The development challenges – and opportunities – going forward are legion. The growing global footprint and sophistication of Islamic finances requires large numbers of suitably qualified practitioners. Training solutions are provided by the Bahrain Institute of Banking and Finance as well as local universities. The expanding global Islamic market place will require efforts to scale and broaden the course offering as well as greater connectivity with institutions and clients in other parts of the world. A central task of the swelling ranks of professionals is to drive the task of product development and innovation. The fundamental objective of Islamic finance – as indeed finance in general – is to pool capital and mobilize it for the purpose of economic development. Performing this task efficiently requires a comprehensive ecosystem, elements of which still remain at best embryonic. Important gaps exist in areas such as long-term savings and institutional investors. Moreover, Islamic finance requires new structures that better address client requirements, reflect Sharia principles, and offer costcompetitive solutions. Existing Bahrain-based entities such as the Accounting and Auditing Organisation for Islamic Financial institutions (AAOIFI), the International Islamic Financial Market (IIFM), and the General Council for Islamic Banks and Financial Institutions (CIBAFI), along with many others, provide a strong foundation for further innovation and creativity which can help propel Islamic finance to a new level. As the Islamic financial industry matures, the discussion about its dynamics is likely to revolve less around regional centers and more around the need for an integrated, worldwide network with meaningful connectivity and harmonisation. Only thus can a global Islamic finance market place with true liquidity and competitive costs finally emerge. Achieving this goal will hinge critically on a truly collaborative posture among the industry pioneers. But these global partnerships must never compromise the creative tension that competition within this broader market place can bring. 

FIRST WORD

where sukuk issuance has gone from strength to strength in recent years. The range of issuers, structure, and tenors is continuing to expand. For instance, the erstwhile de facto tenor ceiling of five years has given way to a full range of options. Platforms have sprung up for secondary trading, although liquidity remains a challenge. Organic growth is continuing across the range of Islamic products, partly in response to the growing preference for Sharia-compliant solutions among customers in many countries. Nonetheless, the menu of products remains relatively narrow and uneven, typically dominated by fairly basic plain vanilla instruments. The ability of Islamic finance to cater to the financial needs of customers in comprehensive, flexible and cost competitive way still falls short of that available in the conventional universe. This is of importance at a time when the number and scale of fully Shariacompliant investors is continuing to grow.

The views expressed in this article are the author’s own and should not be attributed to the Bahrain EDB.

The Bahrain Banker Winter 2014

ISLAMIC BANKING

Islamic banking solutions for Africa’s growth conundrum

HE Ahmed Osman, Governor of the Central Bank of Djibouti, addresses delegates at the 3rd Islamic Banking Summit Africa

he consensus from the 3rd Islamic Banking Summit Africa held in Djibouti in November 2014 seemed to be that while many of the fundamentals needed to drive growth in Africa are already in place, a lot more groundwork must be built to convert interest and goodwill into real opportunities. In other words there needs to be more action and less talking. This was put most succinctly by HE Ahmed Osman, Governor of the Central Bank of Djibouti who pointed out that according to projections seven out of the ten fastest growing economies in the world will be in Africa. However in order attract investment from both conventional and Islamic sources a proper infrastructure needs to be established which eases the costs and efficiencies of business and protects investors whilst at the same time giving them healthy returns. "Africa offers exciting growth prospects. Growth drivers on the continent are becoming increasingly diverse, with resource-based, infrastructure, construction and services sectors taking the lead. Islamic finance has

The Bahrain Banker Winter 2014

tremendous potential to play a more significant role in supporting the funding gaps in Africa while enhancing financial inclusion rates in the region,” argued Osman at the summit which was organised by megaevents which also puts on the annual World Islamic Banking Conference in Bahrain . He notes that the Islamic banking segment in Africa is set to develop because of Africa's large and underserved Muslim population and the increasing awareness of Sharia-compliant products. In fact 42 percent of Africa’s population – or around 440 million people – are Muslim, and a large proportion of these are unbanked. “Islamic finance provides government institutions with an alternative financing mechanism to support capital expenditure needs while its close connections to the real economy will also set the stage for significantly stronger growth of the industry in Africa,” he added. In less than a decade Islamic banks have captured a significant share of the market – individuals and companies now have better access to financing and this should help boost social development. In Djibouti itself

10 million people compared to just two now – Cairo in Egypt and Lagos in Nigeria. Africa has now been re-positioned as the third fastest-growing region in the world, after the Middle East and Asia. Over the last decade, trade between African countries and the rest of the world has grown significantly, with economic linkages with the Middle East in particular strengthening further – and thus positioning Islamic finance as a catalyst to further boost cross-border investment between Africa, the Middle East and beyond. However despite much progress the Islamic finance industry is still in its infancy on the continent. Of the total of more that 600 Islamic financial institutions worldwide, only about 40 to 50 are operating in Africa. To capture this tremendous potential, the regional industry must overcome certain challenges which include a lack of Sharia-compliant investment vehicles, fragile legal and regulatory frameworks and, importantly, the lack of awareness by many end-users and consumers. Most importantly is the demonstrable need for a stronger legal system and the rule of law to protect investors especially if capital markets are to develop.

ISLAMIC BANKING

there are currently four Islamic institutions licensed by the Central Bank including Dahabshil Bank International, Saba Islamic Bank and Salam African Bank. The first Takaful company is also expected to get a licence in 2015. Osman makes the point that while African countries make up 43 percent of the membership of the Islamic Development Bank, they receive only 22 percent of the funding – a disconnect which needs to narrow if Africa is going to achieve its key objectives. This means finding the right funding for the right projects, and Islamic finance should now be considered a mainstream option rather than a niche tool. “Islamic banks are now building up increasinglysophisticated and mature regional networks. This source of investment should be seen as complementary to conventional finance from China and the West and should act as a catalyst to attract investment from the Gulf and Muslim countries in Asia,” says Osman. “It is important that we can say to potential investors from countries such as Saudi Arabia and the United Arab Emirates: “You have seen the growth rates and future projections for the economy and you have seen the need for investment in infrastructure, transport and agriculture. You also have liquid capital that you need to put to work to diversify your investments so we will make it easy for you by putting in place all the regulatory and legal frameworks for you to come here and invest.” That is the key to attracting investment and it is something that we are working on by improving our capacity with more people getting recognised qualifications in Islamic banking,” stresses Osman. This was affirmed by Saudi Arabia’s Minister for Agriculture, Farad Balghunaim, who told delegates at an infrastructure forum in Ethiopia’s capital Addis Ababa earlier this year: "Definitely there will be more (investment) coming to Africa. With the clear vision that in building up African leadership now, there will more and more investors from Saudi Arabia," he said. According to the EY Global Islamic Banking Centre in Bahrain global Islamic banking assets with commercial banks are on course to exceed US$ 3.4 trillion (about BD 1.3 trillion) by 2018, fuelled by growing economic activity in core Islamic finance markets, and Africa is well on its way to becoming a core market. With a GDP of US$ 425 billion Islamic finance can play a crucial role in growing the markets of the African continent. In fact it is estimated that in 30 years’ time there will be ten cities with populations of more than

Islamic banks are now building up increasinglysophisticated and mature regional networks Over the last decade trade between African countries and the rest of the world has grown significantly. Over this time trade with the GCC has grown by 170 percent and increased attention from Gulf investors in terms of agricultural land acquisitions and the mergers and acquisitions of financial institutions, as well as a growing Asian investor base particularly in manufacturing and project finance, is expected to further grow the African economy significantly. According to Wasim Saifi, Global Head of Islamic Consumer Banking at Standard Chartered Saadiq, the Sharia-compliant unit of the UK lender, by the end of this decade it is quite possible that Islamic banking could grow to account for up to 10 percent of banking assets in five or six sub-Saharan African countries, including Kenya and Nigeria. With the first licences granted in Kenya just five 

The Bahrain Banker Winter 2014

ISLAMIC BANKING

years ago that would make Africa’s leap into Islamic banking much faster than markets such as Pakistan and Indonesia, where Islamic financial services have been available for longer. “Behind the buzz is real demand from African domestic consumers for the choice to bank in accordance with their faith – in common with Muslims in much of Asia and the Middle East. Governments and regulators in Africa no longer view Islamic banking as a niche industry, but actively seek to encourage its development,” says Saifi. There is also growing awareness of the significant liquidity pool now available in Islamic finance, particularly across the Middle East, as a source of funding for crucial infrastructure investment.

African governments need to encourage the development of a local Islamic banking talent pool Islamic bonds, or Sukuk, are seen by prominent advocates, such as central bankers, as a potential financing option for governments. Nigeria’s Securities and Exchange Commission recently permitted the issuance of Sukuk, with the first issuance in the country now imminent. Senegal and Africa have already tapped this market, and Djibouti will be looking to follow at some stage. Nigeria, with a Muslim population of around 80 million, issued its first license to a sharia-compliant

bank, Jaiz Bank in 2012, and has also permitted conventional banks to open non-interest windows. Similar developments have occurred in countries such as Uganda and Tanzania. “Above all,” says Saifi, “African governments need to encourage the development of a local Islamic banking talent pool. That means making sure that a sufficient number of Africans have the opportunity to train and build up their Islamic banking expertise in markets where the sector is more advanced, such as Bahrain or Malaysia. Doing so will be crucial for the Islamic banking industry’s ability to prosper in Africa. At Standard Chartered, we see Africa as the next frontier for the industry. It is still early days for Islamic banking in subSaharan Africa, but from where we are standing, the future is looking bright.” Banks with strong track records in Islamic banking are not new to the continent. Bahrain’s Al Baraka Group, as well as its presence in North African countries such as Egypt and Algeria, also has a 25-year history in South Africa and has been in talks with the authorities about launching Islamic bonds. Osman from the Central Bank of Djibouti is confident that Islamic banking will do more than fill gaps in both the retail and wholesale space. “The Islamic banking segment in Africa has plentiful opportunities supported by Africa's large and under-served Muslim population and increasing awareness of Sharia-compliant products,” he says. When the Islamic Banking Summit Africa reconvenes in 2015 he hopes there will be more concrete proof that Islamic banking is the right solution, not only for Africa, but for those that seek to invest there. 

210 180 Million

150 120 90 60 30 0

Northern Western Eastern Middle Southern Africa Africa Africa Africa Africa Muslim population

Source: www.islamicpopulation.com, KFHR

The Bahrain Banker Winter 2014

Share of total population (RHS)

100 90 80 70 60 50 40 30 20 10 0

Africa: Muslim Population (2013)

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ISLAMIC BANKING

A Brief History of Islamic Banking in the modern era

rom the earliest days of the Islamic era commercial and financial transactions have been undertaken by Muslims in accordance with the Sharia. But it was not until well into the second half of the 20th century that Islamic banking began to be adopted in a formalised manner. Since then, in just four decades, Islamic banking has become a major global industry. 1975 is the year most widely regarded as having seen the establishment of the first Islamic commercial bank. However more than a decade earlier, in 1963, the first of nine savings banks based on the principal of profit -sharing was formed in Mit Ghamr in the Delta Region of Egypt, by the economist Dr Ahmed Al Najjar. These small banks maintained a low profile to avoid being proscribed as political organisations but, in the event, prevailed for only a few years before being closed down in 1968 by the Egyptian Government. However the basic thinking behind these banks became integral to the premises for the Nasser Social Bank when it was founded in 1971. Although it too was an interest-free

The Bahrain Banker Winter 2014

institution no mention was made in its founding charter of either Islam or Sharia-compliant principles and so it has never been regarded as an Islamic institution. A similar small, non-interest-paying savings bank was established in Malaysia in 1963 to enable pilgrims intending to participate in the pilgrimage to Makkah to save for the expenses of their journey. This entity subsequently merged with other financial institutions in the country but, like its peers in Egypt, was never regarded as an Islamic bank. Despite this earlier activity in interest-free banking it is to the visionary Haj Saeed Ahmed Lootah of Dubai that credit must be given for formulating the premises of modern-day Islamic commercial banking that complies fully with Sharia principles. Having first approached the then Ruler of Dubai, Shaikh Rashid Al Maktoum, who advocated detailed research on the subject be undertaken, Haj Saeed responded positively by seeking the opinions of religious scholars in Saudi Arabia, including those in the Islamic Development Bank, a developmental institution rather than a commercial bank, as well as the Grand Mufti

1975 is the year most widely regarded as having seen the establishment of the first Islamic commercial bank But Islamic banking subsequently progressed very slowly, largely because of the limited availability of human resources with the required knowledge of the practical application of the basic precepts involved including knowledge of Arabic. The fact that the products offered tended to be based on those available at conventional banks but without what were perceived to be usurious precepts was also another factor in the sloiw pick-up. Nevertheless a few acceptable, non-conventional financial instruments did become available at this time, these being Murabaha (cost plus financing), Mudarabah (profit sharing) and Musharaka (equity participation). In 1978, at an event organised by the Organisation of Islamic Conference (now the Organisation of Islamic Co-operation), a statement was made on “the need for specific economic and financial products and services that enabled Muslims to better adhere to their religious beliefs and principles in ways that they were unable to do with conventional banking.” Islamic banking was deemed to be the solution to this requirement. Doubtless this was a catalyst if not an inspiration for future activities in the sector, albeit it was still some time before there was a meaningful response. Prior to this event there had been some further activity following on from the formation of the Dubai Islamic Bank. Kuwait Finance House was founded in 1977 and Bahrain Islamic Bank came into being in 1978, whilst Prince Mohamed Al Faisal Al Saud, Shaikh Saleh Kamel and two international banks – Citibank and the Londonbased merchant bank Kleinwort Benson – sought to raise the sector’s profile, although not without a few criticisms

along the way. The two Saudi pioneers in the sector formed Sharia-compliant financial institutions but neither was permitted to establish branches in their homeland. As a result they each built their operational bases outside the Saudi Kingdom and the benefit of their efforts are still to be seen today, the Prince’s through the Swiss-based Dar Al Mal Al Islami Trust and its many subsidiaries and Shaikh Saleh’s in the Bahrain-based Al Baraka Banking Group, both of which continue to operate across the globe. As suggested there were some criticisms of the sector in those early days from within Muslim communities. These included the thought that certain activities were not in compliance with the tenets of Islam; that at least one institution was operating what one prominent Saudi family deemed a Ponzi scheme; and that some banks were guilty of the misappropriation of funds. The two foreign banks also faced adverse comment as they were perceived by many to be usurious establishments even though they kept their Sharia-compliant activities quite separate from their conventional banking business. Over time and as the sector increased in sophistication such criticisms diminished although even today there are those who deem some activities unacceptable as evidenced in 2014 as one financial institution that operates predominantly in accordance with the Islamic Sharia sought to become a publicly-quoted company. It is the case also that there have often been disagreements amongst Islamic scholars as to what is acceptable and what is not, depending at least in part with which of the five schools of jurisprudence they are allied to. Inevitably such divisions can arise between the Sharia Supervisory Boards of financial institutions that are seeking to work together and even within the Boards themselves. However it seems such criticisms and disagreements might be less evident today than in years past. Slow though progress was, in the latter half of the 1970s, Bahrain emerged as a prime location for financial services in the Middle East, deriving benefit from the demise of Lebanon as the Middle East’s banking centre because of civil strife there. Recognising the potential of Islamic banking whilst seeking to derive the maximum benefit from the provision of banking services, the Bahrain Monetary Agency (BMA), the forerunner of the Central Bank of Bahrain (CBB), initiated development of what was to be the first comprehensive supervisory and regulatory framework for the sector. Over time this framework was enhanced, ultimately resulting in the production of the first ever Islamic Prudential Rulebook and the introduction of the need for all Islamic banks to comply fully with 

The Bahrain Banker Winter 2014

ISLAMIC BANKING

of Egypt. Impressed by the research undertaken Shaikh Rashid immediately issued a Decree only for the UAE Central Bank to intervene, insisting the proposed entity was actually a ‘trading establishment’ and not a bank. The enterprising Shaikh Rashid, not wishing to be overruled, then suggested “the UAE is an Islamic country and Islam is our religion” and that such a bank should be permitted. This elicited the required response and the Dubai Islamic Bank came into being as the first Islamic commercial bank in 1975.

ISLAMIC BANKING 14

Shaikh Saleh Kamel founded Al Baraka Bank Banking Group

Haj Saeed Ahmed Lootah established Dubai Islamic Bank in 1975

the requirements of the Basel accords in relation to risk, capital adequacy and other legal and regulatory matters alongside their conventional peers. This attention to regulation and supervision ensured Bahrain became the location of choice in the Middle East for Islamic banking. Having attained that status over the succeeding decades a number of other institutions providing support and encouragement to entities in the sector came to be established in the Kingdom including the Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI), the International Islamic Financial Market (IIFB), the General Council for Islamic Banks and Financial Institutions (CIBAFI) and the Islamic International Rating Agency (IIRA). More recently the Thomson Reuters Global Islamic Finance Hub and Deloitte’s Islamic Finance Knowledge Centre established their presence in Bahrain. These are augmented by the Islamic centre at the Bahrain Institute for Banking and Finance (BIBF) which now offers an increasing number of under-graduate and post-graduate courses as well as on-going professional development for employees at financial organisations. The net result of increased knowledge, regulation and supervision has borne fruit in the fact that almost twenty different, Sharia-compliant products and services have now become available. Included amongst these are the original three instruments mentioned earlier to much more sophisticated transactions such as credit sales (bai’ almuajjal), hire purchase (Ijara thumma albai’), Islamic

bonds (Sukuk), project finance and benevolent loans (qard hasan). Furthermore marked growth has been seen in Sharia-compliant microfinance in countries such as Bangladesh, Afghanistan and countries in East and West Africa.

The Bahrain Banker Winter 2014

This attention to regulation and supervision ensured Bahrain became the location of choice in the Middle East for Islamic banking Successful though Bahrain had become as the early hub of Islamic banking it was not until the aftermath of the Gulf War in 1990/1991 that the sector began to see marked global growth. By 1995 there were some 144 Islamic financial institutions worldwide of which half were banks and the remainder investment companies. Yet further growth was then seen in the early years of the 21st century, especially after the dust had settled in the aftermath of the American invasion of Iraq in 2003, so that by 2008 there were reported to be more than 300 Islamic financial institutions operating in over 50 countries, a figure which, according to The Banker magazine, had risen yet further to 500 plus institutions by 2010. 

Al Baraka Banking Group B.S.C has achieved net income amounted to Al Baraka Banking Group B.S.C has achieved net income amounted to US$ Al Baraka Al Baraka Banking Banking Group Group B.S.C B.S.C hasan has achieved achieved net net income income amounted amounted to same to US$ 258 million during 2013, increase of 10% compared to the 207 million during the first nine months of 2014, an increase of 5% US$143 US$143 million million during during the first the first half half of 2014, of 2014, an increase an increase of 2% ofcompared 2% compared period of the year 2012. compared to the same period of the year 2013. to the to same the same period period of the of year the year 2013. 2013. The following tables show some of the performance indicators during the The following tables show some of the performance indicators during the The The following following tables tables showshow somesome of the of performance the performance indicators indicators during during the the year 2013: first nine months of 2014: first first half half of 2014: of 2014: Dec 30 Sep 2013 Jun Jun 2014

In USD Million In USD Million In USD In Million USD Million

Total Assets Total Assets

TotalTotal Assets Assets

Total Financing and Investments Customer Accounts TotalTotal Financing Financing and Investments and Investments Customer Accounts

Customer Customer Accounts Accounts Total Equity

Growth 31Dec Dec Growth 2012 Dec 2013 Dec Growth Growth %%

20142014 20132013 22,545 20,968 20,968 19,055

22,078 22,078 20,968 20,968 61,344 17,744

15,355 16,398 16,150 16,150 15,355 15,355 17,744 671696

130,2

239,,

630,2630,2

339,,339,,

In USD Million In USD Million

Total Operating Income In USD In Million USD Million Net Income Net Operating Income

Net Income Net Income Net Income

Dec 2013

30 Sep 2014 909

Jun Jun 207 20142014 426

143 143 258

Dec 2012

30 Sep 2013 880

18,565 18,565 17,744 17,744

TotalTotal Equity Equity

% 810

, Growth %

Growth %3

Jun Jun Growth Growth 2013197 2013 % 5% 422 1

140 140

235

Al Baraka Banking Group B.S.C P.O. Box 1882, Manama, Kingdom of Bahrain (Licensed as Group an Islamic wholesale bank by CBB) Al Baraka Al Baraka Banking Banking Group B.S.C P.O. B.S.C P.O. Box 1882, Box 1882, Manama, Manama, Kingdom Kingdom of Bahrain of Bahrain

Al Baraka Banking Group B.S.Cby P.O. Box 1882, Manama, Kingdom of Bahrain (Licensed (Licensed as an as Islamic an Islamic wholesale wholesale bank bank CBB) by CBB) (Licensed as an Islamic wholesale bank by CBB)

albaraka.com albaraka.com

The Bahrain Banker Winter 2014

YourYour Partner Partner BankBank

ISLAMIC BANKING

But progress has not always been smooth, as since the global financial crisis of 2008, the Islamic sector has undergone what many people, including bankers, lawyers and regulators, deemed a necessary period of consolidation. Over the past six years since then a number of Islamic banks have been looked upon as too small to be viable on their own in the longer-term or were perceived to have suffered losses in the aftermath of the financial crisis because of their heavy dependence on the real estate sector, which itself underwent a dramatic decline over the same period. The net result of mergers and closures has been a slight decline in the number of pre-existing Islamic banks but a better capitalised sector than was deemed to be the case earlier.

Islamic financial institutions are now reported to be operating in 92 countries Looking back over the past 40 years Islamic banking has undoubtedly seen exceptional growth in terms of products, services and assets. the latter of which, including those of other Islamic financial institutions, are reported to exceed US$ 1.8 trillion. Recently it was announced at the Global Islamic Finance Forum in Kuala Lumpur that Islamic financial institutions are now reported to be operating in 92 countries and, according to the CBBâ&#x20AC;&#x2122;s latest Review, the Kingdom remains home to the largest global

concentration of Islamic institutions, comprising 32 Islamic banks and Takaful and Retakaful firms (insurance and reinsurance firms). Widespread though the proliferation of Islamic banks has been authoritative sources suggest that a substantial proportion of the assets of these institutions, possibly of the order of 90 percent of the total, is held in just seven countries â&#x20AC;&#x201C; Qatar, Indonesia, Saudi Arabia, Malaysia, the United Arab Emirates, Iran and Turkey. Nevertheless EY estimates that there are an estimated 38 million customers who bank with Islamic retail banks globally, but that only a small number of these customers have fully transitioned from a traditional to an Islamic banking relationship. Islamic banking has come a long way since those first vital steps were taken by Haj Saeed Ahmed Lootah, Prince Mohamed Al Faisal Al Saud and Shaikh Saleh Kamal. Today, the sector has become firmly established and an integral element of the global banking community, as those early pioneers would no doubt have hoped. As progress continued to be made in recent years to enhance the regulatory and supervisory regimes for Islamic banks yet more innovators and pioneers have sought to introduce an even wider array of products and services, so Islamic banking now plays an increasingly vital role alongside its conventional peers in international finance both within and beyond the Muslim world. ď Ž

Philip Dew is a Cyprus-based freelance writer and researcher. He is the author of The History of Banking in Bahrain

Global Islamic Assets Growth Trend

4,500 4,000 3,500 US$ bln

3,000 2,500 2,000 1,500 1,000 500 0

1990s 2008 2009 2010 2011 2012 2020F

Source: Zawya, IFIS, Bloomberg, KFHR

The Bahrain Banker Winter 2014

COVER STORY Mohamed Al Mutaweh joined Al Baraka Islamic Bank in 2007 from Al Amin Bank where he was Chief Executive

Al Baraka Islamic Bank – expanding retail coverage in Bahrain

ohamed Al Mutaweh is the first to admit that the retail banking market in Bahrain is “crowded” or “overbanked” to use a term favoured in the industry. He is also adamant that the proposition that Al Baraka Islamic Bank (AIB) offers its customers in the Sharia-compliant banking space is second to none and is confident of increasing its market share through a combination of top-class service and innovative products – driven in fact to a large extent by the competitive environment. “What you have to realise is that despite the fact that Al Baraka Banking Group (ABG) has a 40-year track record, AIB is a relatively new entrant to the retail banking sector in Bahrain,” says Al Mutaweh who has been at the helm of the group’s domestic operations since December 2007. “AIB only celebrated its tenth anniversary in 2013.

The Bahrain Banker Winter 2014

Before that time Al Baraka Islamic Bank held a licence with the Central Bank of Bahrain (CBB) as an offshore bank so dealt with larger corporate clients rather than the consumer and small business customers that are our core and target markets now,” explains Al Mutaweh. “Al Baraka Islamic Bank was established in 1984 as an offshore banking unit until 2004 when the shareholders decided to transfer the licence in order to become a full commercial bank. Over the last ten years we have implemented an ambitious plan to expand in terms of branch, ATM and client networks. We currently have six branches and 20 ATMs distributed in all areas of Bahrain including important shopping complexes,” says Al Mutaweh. In fact, as he makes clear, AIB plans to add a minimum of two branches a year over the next five years. Powering this drive is AIB’s financial position. The bank’s

with another Gulf-owned Islamic bank that wanted to expand. “Being a subsidiary of ABG, the bank enjoys strong ownership and continued support from the parent company. This provides us with confidence, support and diversity with a robust network of banking operations through numerous branches across our estate and a strong source of marketing, financial and technical capabilities,” says Al Mutaweh who notes that in the group’s most recent results total assets increased by 8 percent, investments and financing portfolio by 7 percent, customer accounts by 8 percent and total equity by 2 percent at the end of September 2014 compared with full year results for 2013.

COVER STORY

total shareholders’ equity amounted to US$165 million in 2013 while current assets of US$1.8 billion – the equivalent of 12 percent of ABG’s consolidated assets of around US$20 billion – could be upped to US$4 billion over the same period if the expansion plan bears the expected fruit. AIB is nevertheless in good shape, as results attest, despite the group losing its investment grade from rating agency Standard and Poor’s in 2013 when it was downgraded from BBB- to BB+ mainly due to its exposures in Egypt and Jordan. However this has not affected the bank’s fundamentals. ABG’s Capital Adequacy Ratio is at “a very satisfactory level” of 13.98 percent – well inside the CBB’s Tier 1 CAR limit of 12.5 percent – which provides the bank with a strong capital base for further growth. When AIB expanded in 2008 after a merger with Al Amin Bank it inherited more than just a leading investment bank – it inherited Al Mutaweh, its Chief Executive as well. According to him the merger of the two banks resulted in the creation of an Islamic banking institution that combined commercial banking services, which are now being offered to individuals and corporate clients by AIB, with the investment banking services of Al Amin Bank. “The merger,” says Al Mutaweh, “no doubt resulted in the emergence of a new robust institution that possesses all the elements of success and competitiveness in terms of size, efficiency, expertise and services offered.” As a result of the tie up AIB has realised a lot of business opportunities in particular SMEs and medium-size corporates which today make up 50 percent of its client base. The challenge for Al Mutaweh is to maintain its leverage in the corporate sector whilst at the same time having a major push into the consumer retail market with current and savings accounts, credit cards, auto loans and mortgages all contributing to its revenue base. Although AIB exists as a separate unit within the larger group it clearly benefits from Al Baraka’s global network of subsidiaries in 15 countries with a particularly strong presence in North Africa where there are offices in Egypt, Algeria, Tunisia and Sudan. Other fast-growing markets such as Turkey, South Africa and Pakistan give the bank the opportunity to tap into trade flows by issuing Letters of Credit and Guarantees and this is another area where AIB benefits because it can act as the correspondent bank boosted by Bahrain’s low country risk compared with other countries in the MENA region. AIB also directly runs Al Baraka Bank Pakistan after it went from being a branch to full-service subsidiary three years ago following a merger

We have implemented an ambitious plan to expand branch, ATM and client networks “The group provides us with a highly diverse and extended horizon for development and growth with huge business opportunities in inter-related businesses among ABG units. As a result of this we have successfully launched a number of initiatives in the field of trade finance and correspondent banking leveraging group synergies. These initiatives have helped the bank to increase its fee-based income and we expect that to continue to grow,” explains Al Mutaweh. Al Mutaweh cites the example of Saudi Arabia’s petrochemical giant SABIC which is “very selective in their risk appetite”. In 2013 AIB confirmed US$60 million worth of Letters of Credit with SABIC. This year the bank has processed over US$150 million with the company which Al Mutaweh puts down to the added value that AIB offers through its network. In May 2014 the AIB Board of Directors approved a three-year strategic plan which has defined its path forward with a number of clear targets and incentives to enable them to be met. “When we established the Strategic Planning Committee which holds regular meetings with shareholders the aim was to discuss and launch the initiatives clearly set out in the plan. My management style is to build close relationships with staff and customers by encouraging debate and feedback on initiatives as 

The Bahrain Banker Winter 2014

COVER STORY Al Mutaweh was proud that AIB won an award for Best Islamic bank

well as motivating productivity among staff. As part of this we are now in process of issuing a new incentives policy for the staff as directed by the CBB,” says Al Mutaweh. The year has been busy with new product launches and initiatives. In May AIB joined the majority of Islamic banks in Bahrain by launching its AlBarakat prize draw account to complement its existing savings products and Mudaraba Investment Accounts. It also launched the Taqseet Card, a financing tool that has been especially designed to help individuals to purchase goods at selected stores and pay back on flexible installments over the time period of their choice.

My management style is to build close relationships with staff and customers Both products meet Al Baraka’s ethical standards which was one of the establishing principles of the group’s founder and Chairman HE Shaikh Saleh Abdulla Kamel and maintained by ABG’s President Adnan Yousif. This extends to Al Baraka’s bar on the use of Tawarroq – or commoditybased cash loans – to customers on principle. For the majority of Islamic banks Tawarroq is a mainstay and a very lucrative and popular one at that. However as Al Mutaweh points out: “We should look at the final purpose or use of the funds that we provide and that should be to comply with Sharia principles. We were able to develop alternative innovative products to Tawarroq through our own Ijara and Musharaka products.”

The Bahrain Banker Winter 2014

The AlBarakat Savings Account clearly meets those exacting standards and has proved to be a popular addition to the bank’s suite of investment products. It also offers some of the best prizes on offer. “The AlBarakat account provides its clients with valuable prizes including the grand prize of a luxury villa in Durrat Al Bahrain in the south of the island and quarterly draws where savers can win one of four Mercedes E-Class cars. The account also provides tempting cash prizes on a monthly basis, where there will be an opportunity to win a monthly salary of BD 555 for one year, in addition to a range of instant cash prizes. Since launching, the account has received a wide reception from clients of different segments of the population with two quarterly draws completed,” says Al Mutaweh. Similarly the Taqseet Card is a one-of-a-kind product in Bahrain. “What makes the Taqseet Card so unique,” says Al Mutaweh “is the ability to obtain several finance facilities running on just one card at the same time. One of its features is the ability to settle the purchases in installments up to 60 months. It is available for individuals from employees and businessmen without transferring their salaries and the monthly installments can be paid in any participating merchant in Taqseet Card programme or any AIB branches.” The expansion of the branch and ATM network should increase accessibility and boost its share of the retail banking market in Bahrain in which it currently holds around 5 percent market share. The unveiling of its prestigious new headquarters at Bahrain Bay, where it is one of the anchor tenants, should help to propel this forward as should its embrace of internet and mobile banking. “Since 2013 AIB has launched e-banking and telephone banking services. It has also launched a new electronic service using the ‘Kiosk’ which enables customers to conduct banking transactions electronically via iPad in the main branch of the bank located in the diplomatic area. As for the new headquarters in Bahrain Bay, this will give us 

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batelco.com The Bahrain Banker Winter 2014 21

COVER STORY

Mohamed Al Mutaweh Personal File valuable knowledge, especially in how to manage assets and investments with wisdom and care. When you have lived through market volatility you are in a better position to deal with it rationally when it hits again. Younger bankers that have only seen the good times are less prepared to deal with downturns and that was one of the reasons for the severity of the global financial crisis after years of booming markets.

What inspired you to enter the world of finance? When I was growing up there was no doubt that banking was the career to go into as there were so many offshore banks and Bahrain was the undisputed centre of the industry in the Gulf. By the time I finished secondary school, the National Bank of Bahrain (NBB) was offering students the opportunity to complete their college studies against a contract to work for the bank after graduation. So when I finished my studies I started to work at the bank and remained there for 13 years. Then in the early 1990s I shifted to Islamic banking by joining ABC Islamic Bank as head of marketing and then moved on to Al Amin Bank before finally landing at Al Baraka. Working for both conventional and Islamic banks as well as in the wholesale and retail sectors has given me a very broad understanding of the industry as a whole, and I think that I am a better banker for it. What are the main changes that you have seen since you started your career? Where do you start with a question like this? On a fundamental level things are broadly the same as the principles of banking are universal but of course the technology and processes have radically changed the way the industry operates. The world is a lot smaller now with mobile phones and email and as a result of this both colleagues and clients expect decisions to be made in a shorter time frame. One thing I can say is that there is a lot less tickertape in the office. For me, however, the most important thing that I have benefitted from is the fact that I have experience â&#x20AC;&#x201C; both highs and lows caused by continued economic and political crises since early 1980s. This experience taught my generation a lot of lessons and gave us

The Bahrain Banker Winter 2014

What is the proudest moment in your career? One of the proudest moments in my career was when I received the Global Finance magazine award during the World Bank/IMF meetings in Tokyo in 2012 on behalf of the Group and other ABG units including my own bank. We have since won a range of national and international awards and this is something that affirms the core strengths of everyone who works at the bank for the benefit of our customers. Awards are for the team, but of course it is a great privilege to go up on stage and collect them. What advice would you give a young person looking to go into the banking sector? The most important element is that knowledge should be based on a lifetime of study and experience. As the practices and standards related to banking activities become more and more advanced and complicated and as a result even more strongly linked with developments in the global economy, the need to be well-informed is more important now than ever. So a young person needs to have confidence in their own abilities and a broad knowledge not just of technical issues but of geopolitics, economics and trade. I still consider myself a student as I am always learning so someone that thinks that they know it all is a time bomb waiting to go off and not the sort of person that I would want as colleague. Have you ever spent time living abroad? During my career, but most especially over the last ten years, I have been offered many work opportunities in the Gulf with some very good banks, but I have always preferred to work in Bahrain. This is not just because it is my homeland but also because it is well-known regionally and internationally as a leading financial centre. Of course I have to travel a fair amount on business trips but I am always glad to get back to my family. I do not like living out of a suitcase.

Is there any particular person who has had a lasting influence on your career? Over the past 25 years, but especially since I started my Islamic banking career at ABC Islamic Bank, I have worked very closely with Adnan Yousif. During my time at ABC he was the Executive Chairman of the bank and now he is the Vice Chairman of AIB and the President and Chief Executive of Al Baraka Banking Group. Throughout this long relationship I have gained a lot of in-depth experience and learned many valuable lessons from him. Adnan has wide experience in Islamic banking and is considered one of the pioneers in the industry. In addition he was the President of Union of Arab Banks for two terms and it achieved a lot under his leadership. 

Curriculum Vitae

• University of Bahrain – BSc Business Administration (1982 - 87)

• University of Hull - Executive MBA in Business Administration (2010 - 12)

• NBB, Bahrain - Credit and Marketing (1987 - 91) • NBB, Bahrain - Corporate Banking (1991 - 98) • ABC Islamic Bank, Bahrain Associate Director then Executive Director, marketing and origination (1998 - 04)

• Al Amin Bank, Bahrain – Assistant GM, Acting GM then CEO May 2004 to November 07)

• Al Baraka Islamic bank - CEO (December 2007 to present)

more space and give us opportunities to provide a higher quality service to our clients especially on the first floor of the new headquarters, which will be designed to serve day-by-day customer needs,” explains Al Mutaweh. According to Al Mutaweh, AIB will become much more visible in the next few years. It is certainly attracting the attention of the market at large. In October it won the ‘Best Islamic Bank in Bahrain’ award from the prestigious Global Finance magazine. “In choosing AIB for this prestigious award, Global Finance noted in particular the performance of the bank. This is the direct result of a strategy of innovation and expansion needed to achieve good operating results despite the extraordinary challenges in the regional and international arenas,” says Al Mutaweh. As AIB continues to expand it also continues to hire and promote from within. Again Al Mutaweh is impressed by the pool of staff that the bank has to call upon – boosted by the training facilities at organisations such as BIBF and the business and finance departments of the University of Bahrain and Bahraini Polytechnic. This has resulted in an increasing number of Bahrainis working at the bank, most notably in senior managerial positions. The bank’s management also introduced, as part of its work in serving the community, a programme called Al Ruwad Programme to train Bahraini university graduates. The programme is designed to train graduates to prepare them for filling leading and senior positions in the future, after arming them with the necessary knowledge and skills required for performing such functions. The bank’s management has also focused on providing in-house training courses and on-going professional development to help improve performance and increase awareness of key business and other essential skills. Al Mutaweh is optimistic about the global growth and mainstream acceptance of Islamic banking and is confident that AIB and the group in general is positioning itself well to take advantage of this growth in emerging markets in Africa, Asia and Europe as well as core markets in the MENA region. “Islamic finance is in a great position to establish itself as a viable alternative to conventional banking. It is now building up the scale and liquidity to compete. It has developed the products, systems and support functions to go head-to-head with its conventional peers. This is the time for Islamic finance and we intend to be in the forefront at this vital time,” concludes Al Mutaweh. 

The Bahrain Banker Winter 2014

COVER STORY

Are there any particular hobbies or passions that you are actively involved in? When I was younger I do not think that I would be boasting if I said that I was pretty good at a number of sports. In fact in 1981 I was the under-16 Table Tennis Champion and I was later part of the national team that represented Bahrain in international competitions in 1983. I still love the game but due to my busy work schedule I only get the chance to play when I have some free time, but of course I still find time to watch sport on television. I was also good at squash and volleyball, but again I do not have much of an opportunity to get on the court.

THE LEARNING CURVE Ahmed Omar Al Sharif (second from right) and Hajar Ahmed Sultan (fourth from right) after visiting the London Stock Exchange

Bahrain’s Bankers of the future touch down in London

t is said that experience is worth its weight in gold. So when a group of students working towards degrees in Banking and Finance at Bahrain Polytechnic had the opportunity to spend three weeks on a scholarship in London, one of the world’s pre-eminent financial centres, the impact was significant – not only on their career aspirations but also on their personal development. Here, Ahmed Omar Al Sharif and Hajar Ahmed Sultan, both Banking & Finance Majors at Bahrain Polytechnic give an account of the trip and the impact that it has had on their ambitions to succeed in this competitive but rewarding world. “We were both extremely fortunate and grateful to have been awarded a sponsorship by Bahrain Polytechnic to take part in the prestigious summer programme at the Royal London Docks Business School (RLDBS). It gave us a

The Bahrain Banker Winter 2014

unique opportunity to analyse and experience London as a financial centre and the institutions that make it tick. More importantly we had the privilege of representing Bahrain as part of a diverse group of students from all corners of the world who were also coming together to take part in the programme. The London Financial Markets Programme offered by RLDBS, a part of the University of East London, gave us the opportunity to study the economic functions and efficiency of financial institutions and markets in the United Kingdom. The course was structured in a way that enabled us to experience the financial environment through field trips to world-famous organisations such as the London Stock Exchange and the Bank of England. This was augmented by interactive lectures based on reallife scenarios followed by challenging assessments and of

We had the privilege of representing Bahrain as part of a diverse group of students This sponsorship gave us the opportunity to meet different students from various parts of the world, broadening our horizons and enhancing our creativity through new ideas and beliefs. The Polytechnic had already provided us with an understanding of the Bahraini, Gulf Cooperation Council (GCC) and US financial markets and as a result it was easy for us to compare and contrast them with the financial systems of not only the UK but other countries as well, including China and Brazil. The learning experience itself was structured into four distinct streams: class room lectures, field trips, Bloomberg certification courses and cultural and site-seeing visits. In addition to bringing expert and professional guest speakers who shared their knowledge and experiences, the classroom lectures provided us with inside knowledge of the history, functionality, and dynamics of the financial system in the UK. One of the unique advantages of the programme was that it gave us the opportunity to take classes in Canary Wharf, the ‘modern’ financial hub of London. This enabled us to interact with professionals from different organisations such as news and data providers Thomson Reuters and Bloomberg, insurance broker Lloyd’s of London and the 213-year-old London Stock Exchange. By looking at this breadth of organisations we were able to get a good sense of the interaction between the different

markets and how they are interconnected. A significant part of the programme involved Bloomberg training courses that enabled us to be certified in operating their platform. It was indeed a valuable experience because we got the opportunity to work and learn at the same place where some of the world’s most renowned financial analysts and experts ply their craft. We were granted access to their huge database of stocks, bonds, FX, commodities, derivatives and more. We also got to visit Bloomberg’s European headquarters and get a picture of the working environment as well as meet the people that work there on a daily basis. At the end of this course, we were able to successfully earn four Bloomberg certifications in the following courses: Fixed Income, Foreign Exchange, Equity and Commodities in conjunction with the London Financial Markets certificate. The field visits in turn gave us an understanding of what it’s really like to be working and interacting in such a fast-paced, dynamic environment. For example the time that we spent at Lloyd’s of London helped us to better understand important aspects of risk management, insurance and the impact it has on the various levels of its operations. Our guide who was the Floor Insurance Manager, took us all the way back in time to when Lloyd’s was first established in a coffee house in 1688 emphasising the pivotal role insurance has played since then. We were also told the story of Lutine Bell which stands in the great Underwriting Room of Lloyd's and which was struck when the fate of a ship ‘overdue’ at its destination port became known. If the ship was safe, the bell would be rung twice; if it had sunk, the bell would be rung once. This most famously happened following the sinking of the doomed RMS Titanic in 1912 after it hit an iceberg. Visiting the London Stock Exchange was yet another very insightful visit. Seeing how the stock exchange has transformed over the years, from a noisy pit swarming with gesticulating traders in garish jackets, to a place that is now dominated by computers with around £5 billion (US$ 7.8 billion) a day worth of trades executed electronically was fascinating. Visiting the Bank of England and the British Broadcasting Corporation (BBC) offered yet another insight into how each entity contributes to the market individually and collectively. Our trip also included visits to Buckingham Palace, the Tower of London, the Houses of Parliament, the London Eye, the Emirates Stadium, the West End, Camden Market and Hyde Park. It was great to stand witness to the UK’s history, culture and heritage and to balance it between the old and the new. Of course we had to get around and our favoured method was the London Underground. Riding 

The Bahrain Banker Winter 2014

THE LEARNING CURVE

course a fantastic social and educational programme. Our journey to London actually began in March 2013 prior to arriving in July this year. Following a robust application and selection process, we were chosen from over 20 banking and finance students to represent Bahrain Polytechnic and our country on the programme in the cosmopolitan UK capital. After landing at Heathrow Airport our first impressions of the country were probably typical of most first-time visitors: people speaking at a hundred miles an hour with a multitude of different accents, Brits driving on the wrong side of the road and absolutely everyone religiously queuing on the right hand side of every set of escalators. However as time progressed we came to a fuller understanding of how a culture does not just impact a particular individual but how it affects a whole society on various levels as it becomes part of people’s daily lives, business conduct and general behaviour.

THE LEARNING CURVE Ahmed and Hajar outside the Royal London Docks Business School (RLDBS) in London

the tube, as it is also known, on a daily basis was fun and even though we got lost a few times, the experience itself allowed us to examine, explore and interact with people from all around the world. This serendipitous contact with various individuals spiced up the whole trip, especially when we met people from the Gulf who either studied or worked in London. This gave us useful contacts for the future and allowed us to see London through their own eyes and experiences.

We were extremely honoured to be hosted by the Bahrain Embassy in London over Eid Learning about a culture really comes from interacting with the people, history and, of course, food. Throughout our stay in RLDBS, we had the privilege of meeting with individuals that are leaders in their field, from stock brokers to life coaches and other inspirational individuals. Learning about the life and culture of the British people during that month was a unique experience. We learnt how polite the English people can be; always saying please and thank you which is something we personally liked. Naturally we were in love with good old fish and chips and the ritual of English high tea as well as trying out other classic dishes.

The Bahrain Banker Winter 2014

On the social side as well as bonding with our fellow students at the campus in the Docklands we also made lasting friendships with our tutors from RLDBS who often joined us for lunch. This gave us the chance to understand how the educational system works in the UK and how similar it is to the system at Bahrain Polytechnic. This similarity in academic structure gave us a better understanding about how higher education is structured in the UK and how to go about applying for post-graduate degrees â&#x20AC;&#x201C; as many Bahrainis have done in the past. We were also extremely honoured to be hosted by the Bahrain Embassy in London over Eid. Subah Al Zayani, the Cultural AttachĂŠ, went to great lengths to ensure that our needs were being met during our stay in the country and highlighted the various support tools that the embassy provides for all Bahraini students studying abroad. The warm welcome extended to us made us feel safe and at home despite being abroad. Going through this immersive experience has motivated us to come back and share our experiences with the professors and students at the Bahrain Polytechnic as well as family and friends. We are aware that it can have a genuine impact on the direction of our careers and this was one of the reasons that we were so keen to participate. In fact we were both strongly influenced by Isa Al Samaim and Yara Al Mutawa, who participated in 2013. Isa was able to utilise all that he learned during his stay in London to be

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appreciation to Dr Mohamed Al Aseeri, the Acting CEO of Bahrain Polytechnic, who was instrumental in promoting this initiative. When we returned he said: “The students we have chosen proved themselves as determined candidates and were excellent ambassadors for Bahrain and the Polytechnic. The relationship we have with the University of East London enables our students to get more knowledge, familiarise themselves with different cultures and gain experience abroad. I’m delighted to hear the students returning from London with an abundance of knowledge, and we hope to continue this programme for yet another year, as the Polytechnic strives to meet Bahrain’s 2030 Vision.” Would we like to work in London? Of course if an opportunity came up it would be great although we would be equally happy to work in Bahrain or another GCC country. The programme has given us both a lot of confidence to develop our careers and luckily banking and finance is both international and mobile in nature so a lot of those jobs will be in London. We also know where to get the best fish and chips in London and what side of the escalator to stand on so next time we visit we are sure that we will feel like real Londoners as soon as we touch down  at Heathrow.”

THE LEARNING CURVE

able to compete effectively against others. He told me that it helped to boost his understanding of the financial markets and see things from various perspectives. He also said that by being able to interact with so many individuals from all over the world it widened his horizon in ways that opened him up to new ideas. That is something that we both feel exactly. Most importantly he stressed that during job interviews companies were very impressed with his experiences and that many of the questions he was asked at job interviews revolved around what he had learned as a result of the sponsorship and the impact it had on him personally, educationally and professionally. Yara Al Mutawa also has a great job at Thomson Reuters. She highlighted how the sponsorship enabled her to test herself personally and academically and that the Bloomberg Certificates were such a great addition to her CV, that it helped her in landing her dream job. Both agreed that this sponsorship provided them with the right platform to jump start their careers, and we hope that it will have a similar impact when we apply for jobs in asset management and banking corporate relations respectively. We would of course like to extend our warmest

The Bahrain Banks Annual Review 2014 is a major work of reference which looks in close detail at Bahrain’s registered banks over the fiveyear period ending in 2013. The first edition of The Bahrain Banks Annual Review was published in 2012. With this inaugural edition bahrain scored a first in the GCC by producing a detailed analysis of its domestic banking sector. No other country in the region has undertaken such a huge task. The Bahrain Banks Annual Review 2014 is a joint venture publication by the Bahrain Association of Banks (BAB) and the Centre for Research at Bahrain Institute of Banking & Finance (BIBF). Individual copies cost BD 15.000 and are delivered free in Bahrain. There will be delivery charges at cost for purchases outside Bahrain. To order your copies complete this form and send it to BAB at Fax: +973 1782 0700; or email to: membership@banksbahrain.org or mail to: BAB, PO Box 1034, Manama, Kingdom of Bahrain. I would like to order ____ copies of The Bahrain Banks Annual Review 2014. Please invoice me

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The Bahrain Banker Winter 2014

IN PERSON

Mufeed Rajab, the Global Head of Administration at Investcorp: On how the wheels of the private equity pioneer keep turning.

s a bank with offices in six countries, corporate investments in the US, Europe and the Gulf, real estate investments in the US as well as a suite of global hedge funds, Bahrain-headquartered Investcorp has put down many markers to cement its status as one of the leading investment companies in the Middle East – if not the world. A seemingly constant stream of new investments balanced out by timely exits means that Investcorp is

The Bahrain Banker Winter 2014

rarely out of the financial pages. In fact with over 350 separate investments across the globe and assets under management totaling US$11.4 billion, Mufeed Rajab, who was appointed to the newly-created role of Global Head of Administration in July 2014 describes how Investcorp “keeps the wheels turning.” “Investcorp operates under four different time zones, with different operations in each location. However the culture between the offices does not differ. We have a total

that we have to adhere to in London, New York, Kingdom of Saudi Arabia, and the UAE, Investcorp has been subject to the highest levels of global regulation since its foundation. As a result it is very comfortable working in a regulated environment having had long experience of it. He also notes that it is Investcorp’s own clients that are most keen on being up to speed particularly in the area of anti-money laundering. “As the Money Laundering Reporting Officer (MLRO) for Investcorp Bank Bahrain, I assist in the co-ordination of the different departments which are affected by all new regulations including our operations department, client services team, compliance unit, the management of the firm and our Chief Legal Counsel. This is important as certain decisions taken do affect the relationship managers and their clients. We address all AML/KYC issues and concerns in a very professional manner, bearing in mind the strict regulations that we have to comply with. There are times when we have had to turn business away, which is never easy. However as a global institution it is our responsibility to adhere to the highest standards of global regulation,” says Mufeed. Over the last five years Investcorp has seen an increase in AML/KYC reporting requirements, so it has instituted several internal checks and balances to ensure that it adheres with local and international regulations.

IN PERSON

of 320 talented staff across all geographies and that is what has helped Investcorp build its franchise out to become a global institution,” says Mufeed. In addition to its five current locations (Bahrain, NY, London, KSA, and Abu Dhabi) Investcorp is setting up its new office in Doha, subject to the pending approval of the Qatar Financial Centre Regulatory Authority (QFCRA). However across the geographies where it operates, Investcorp maintains a high-touch model in dealing with its employees, training and inter-office communications. In a career spanning 35 years Mufeed is unusual in one respect – Investcorp is only the second firm that he has worked for. In fact as a veteran of Chase Manhattan/ Chemical Bank and subsequently JP Morgan following the merger of the two US banking giants in 2000, he had no plans to leave the bank where he was Head of Operations & Administration in Toronto, Canada when Investcorp came knocking in 2002. “When my predecessor was retiring in 2002, Investcorp’s management wanted a local national to be the head of HR & Administration in Bahrain, and I was head hunted from my then employer JPMorgan in Canada,” explains Mufeed who admits that it was a meeting with Investcorp’s founder Nemir Kirdar that persuaded him to move after a lot of soul searching. Mufeed describes how Investcorp’s local and regional footprint has grown bigger with the new extension of Investcorp House 2 in Bahrain followed by the new office set up in Riyadh in 2008 and the new office in Abu Dhabi in 2013. The latest edition – the office in Doha which should open in 2015 – is confirmation that Investcorp aims to be present at key locations close to its co-investment partners. “We have the global capacity and vision as any universal bank. The great thing about Investcorp is that we’re still at the size where most people still know one another, so it’s a very different culture to big banks,” says Mufeed. “Administration should be a smooth running operation,” he adds. “When you buy an airline ticket, you don’t want to know how the ticketing process works or how the airline operates: aircraft maintenance, catering, refuelling, landing rights, route of travel and so on and so forth. You just want a ticket and to get from A to B with as little hassle as possible. This is how good administration should run. You’ve got to make the process transparent to both the internal and external clients we serve, to foster buy-in and trust in the process.” One of the key issues – and costs – for any financial institution now is regulation and the international fight against money laundering and terrorism. Mufeed points out that as a Bahrain-based institution, with regulations

The great thing about Investcorp is that we’re still at the size where most people still know one another “We have increased our manpower in the compliance team and the placement and relationship management team. The Deputy MLRO has been delegated with additional responsibilities in monitoring, reporting and investigation. My colleagues in our London, New York and Gulf offices deal with the respective regulators as and when required and our board of directors approves the AML/KYC manual each year,” stresses Mufeed. One aspect of Investcorp’s business model that is not in doubt is its commitment to Bahrain as its headquarters. In fact Mufeed makes the point: “If we were to launch Investcorp again today Bahrain would still be the place to be. The talent pool, the regulations introduced by the Central Bank of Bahrain (CBB), the expatriate-friendly environment and easy connections to all the major cities 

The Bahrain Banker Winter 2014

IN PERSON Mufeed Rajab takes an integral role in recruitment at Investcorp which receives about 60 CVs a month from potential employees

in the region are factors that will endorse commitments in Bahrain in the long-term.” However Mufeed is the first to admit that like any market anywhere in the world competition levels have grown across the region to attract financial institutions and the economic benefits they bring to national economies. He is confident that Bahrain can remain a key regional hub for finance and stresses that the EDB is doing a great job in marketing Bahrain to regional companies with fast track set up programmes for companies and that “we will start to see more financial services companies setting up in Bahrain over time.”

Mufeed is confident that Bahrain can remain a key regional hub for finance The selection process to get a job at Investcorp is famously tough with a series of interviews where candidates have to prove that they can carry out tasks that they claim they have mastered. “We receive an average of 60 CVs a month and review them carefully. We interview some applicants so that we have a clear idea of potential talent should an opportunity arise, although we do advertise new opportunities internally first. We have employed fresh graduates and trained them well,” says Mufeed. “We do not differentiate between male and female

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employees: if you are good and qualify for the open position, Investcorp will produce an offer letter. We have a very rigorous interview process as we want to hire the best we can. We also have female Relationship Managers at different official levels and 35 percent of our staff are now women,” he adds. Mufeed also takes a huge interest in mentoring potential future employees through the Crown Prince International Scholarship Scheme (CPISP) and University of Bahrain/BAB mentoring programme. “Investcorp takes pride in mentoring and developing young Bahraini graduates. Over the past nine years, we have had over 140 students attend our annual two month summer internship programme. Many of the students still keep in touch with us and update us on their employment status. I am pleased to say that 65 percent are employed either in the Gulf or abroad. Investcorp currently employs four of those students as full time employees. We also provide HR interview skills mentoring for graduating CFA students as well as the Royal College for Women,” he says. “I have had two employers in my working career, both in banking: Chase Manhattan/JPMorgan and Investcorp Bank. Having spent 35 years in the financial sector, touching almost all of the support functions, is more than one could hope for. I would like to end my career at Investcorp and successfully train and mentor the next generation to take on the baton,” says Mufeed. “If I were advising myself when I started my career I think I would say: ‘Never fear the unknown….if you are doing the right thing.’” 

The Bahrain Banker Winter 2014

COMMENTARY

Is the global megabank fit for business in the real world?

Richard Ellis, Advisor, Banking Supervision, Central Bank of Bahrain

n January this year I read an article in the Financial Times announcing the opening of the first new bank in the USA in three years. Was this a high-tech telephone or internet-based bank? No. Was this an investment bank? No. Perhaps it was a banking venture by a supermarket chain? Again no. In fact the new bank was a ‘community bank’ based in rural Pennsylvania. I googled ‘community bank’ and found the Independent Community Bankers of America (ICBA) website. It stated the following: “Community banks focus on the needs of local families, businesses and farmers. Unlike many larger banks that may take deposits in one state and lend in others, community banks channel most of their loans to the neighbourhoods where their depositors live and work. Community bank officers are generally accessible to their customers on-site. Community banks offer nimble decision-making on business loans because decisions are made locally. Because community banks are themselves small businesses, they understand the needs of small business owners. Their core concern is lending to small businesses and farms”. This sounded exactly the sort of bank regulators should be encouraging instead of propping up the scandal-ridden megabanks that hog the headlines. The stats on the ICBA website backed up these

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statements. Community banks with less than US$ 10 billion in assets made 56.1 percent of outstanding loans to small businesses in the USA, despite only accounting for only 14 percent of the total banking industry’s assets in the country according to the Federal Deposit Insurance Corporation (FDIC). To me the discrepancy between making 56 percent of loans to small businesses and yet having only 14 percent of total US banking assets is staggering. These statistics imply a massive failure by the ‘Big Five’ banks in the USA to lend to smaller businesses. Looking through various studies, there did not seem to be an obvious reason for this mismatch. The only satisfactory answer I could find came from a study conducted by the Institute of Chartered Accountants of England and Wales (ICAEW). It stated: “In the US the accountants interviewed suggested that the banks do in fact recognise the needs of SMEs but do not choose to meet them.”

Community banks offer nimble decision-making on business loans because decisions are made locally These rather negative comments are backed up by the ICBA which says: “CEOs at megabanks are often headquartered in office suites, away from daily customer dealings. Their core concern is corporate America.” It did not occur to me at the time that the same might be true in the UK. Now let’s move to September 2014. I am in the UK and decide that I need to open a second UK bank relationship because I am fed up with the lousy deposit rate I am getting from the “World’s Favourite Bank”. I visit the other ‘mega banks’ in the local town to be confronted by the fact that it is more or less impossible to open a deposit account with them. Why? Well first of all, the banks have a roving compliance/account officer who visits twice per week. You have to make an appointment in advance with him before you can open a new account. Checking with local businessmen I found widespread

like it. No chance. Instead the UK Competition and Markets Authority (CMA) is about to start an 18-month enquiry into the big banks’ handling of personal current accounts and the SME market. In theory we are told, this inquiry could lead to the break-up of the big banks or impose other ‘behavioural remedies’ (no, I don’t know what that means either). I have no doubt of the good intentions of this enquiry, but I rather feel that the CMA and the Bank of England have been told there is a problem and are looking at it down the wrong end of the telescope.

COMMENTARY

frustration with the big UK banks. “Decision-making is centralised. Nobody in the branch has authority to do anything other than open the doors in the morning and shut them at closing time,” said one gentleman. “They do not care unless you are a listed company,” said another. Speaking to an official who was actually invested with decision-making powers at a UK branch bank was regarded an impossibility. Calling the customer carelines inevitably puts the customer in contact with a person in Mumbai (or in my case Malta when I rang up my ‘local bank’). Furthermore these people do not even work for the bank that you actually bank with. If you put phrases or words such as “misselling”, “fixing LIBOR” or “money laundering” into a search engine, the usual mega-bank suspects appear. Community banks do not. Yet I discovered that few regulators seem to have any real enthusiasm for community banks or their SME customers. The US Federal Reserve for example in its paper titled Do small businesses still prefer community banks? shows immediate bias by referring to small businesses as “informationally opaque” and large firms as “transparent”. Presumably “transparent” large firms such as Google or Amazon are what the Fed mean when they talk in this way. Please look at the corporate structure of these megacorporations and explain to me what is ‘transparent’ about them or their policies when it comes to paying taxes. A 2013 paper from the US Federal Reserve systematically uses skewed data basing its findings on the 2003 Survey of Small Businesses and other 2003 data. If we look at the fall in the number of US banks from 1994 (13,221) to 2007 (8,533) before ending up in 2013 (6,891), then we can conclude that basing a 2013 report on 2003 data to measure the popularity of community banks seems somewhat odd because the former have halved in number since the mid-1990s. It appears that community banks seem to be loved by nobody except their customers. The FDIC and the Fed have tightened requirements since 2009 concerning establishing new banks. The Bank of England fares no better. Only one genuinely new bank, Metro Bank, has been granted a new high street banking licence in the past 100 years. In fact the only new lender currently operating that could conceivably obtain a banking licence in the UK is based in Burnley. Google “Bank on Dave” and see what you get. This is an institution that offers a 5 percent return on savings, that lends to local businesses and personal customers and gives a part of its profits to charity. You would hope that the venerable Bank of England would be falling over itself to licence such an institution and others

Only one genuinely new bank has been granted a UK high street banking licence in the past 100 years According to Paul Pester, CEO of the TSB, "The big four banks have had a stranglehold on the market for far too long”. It would seem the simplest way to break this stranglehold would be to licence new community banks like ‘Bank of Dave’, rather than trying to break up the megabanks. Community banks are small and easy to close or bail out, if they get into difficulties, unlike the megabanks. Above all they are ‘systemically important’ to SMEs and the man in the street in a way that the megabanks have long forgotten. For the man in the street, the megabank is  dead. Long live Dave.

The views expressed in this article are the author’s own and should not be attributed to the CBB.

The Bahrain Banker Winter 2014

CHARITY AND PHILANTHROPY Living conditions for migrant workers in areas of Manama such as Bengali Ghali can be overcrowded, unhygenic and dangerous

The Migrant Worker Protection Society (MWPS) – in at the deep end

t first glance Marietta Dias might not appear to be your typical human rights defender. However the softly spoken Bahraini of Indian origin who is a founding member of the Migrant Workers Protection Society (MWPS) since it was established in 2005 and holds the position of Chairperson since 2011, carries a steely determination to see her work through to the end. The responsibilities are enormous – in effect speaking on behalf of almost half a million low- paid workers in Bahrain – and all the more so because much of what the MWPS does often takes place behind closed doors, unseen and unheard. “The truth is,” says Dias “is that the people that we represent do not generally have a voice and I mean that literally because one of the biggest stumbling blocks is language. Whether they are expatriate labourers or domestic workers they are often isolated and treated unfairly especially if there is a conflict about wages or work conditions. The MWPS came about because there

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was a desperate need for a support system that low-paid workers could turn to and, while we try to do what we can, we have limited resources which restricts our activities.” The MWPS was first established in 2005 under a license from the Ministry of Social Development with a mission statement “to help expatriate workers achieve their basic human rights in accordance with internationally recognised standards”. It is currently the only society in the region to work exclusively in support of the expatriate worker community and can call on a team of more than 40 members from Bahrain, Britain, Canada, Ethiopia, Germany, India, Kenya, New Zealand, Pakistan, Sri Lanka and the US – all of whom work on an entirely voluntary basis. Dias herself arrived in Bahrain with her family in 1964 and since that time has actively been involved in social work among the Indian community, most notably with the Sacred Heart Church, before helping to set up the MWPS. In 2008 she was awarded the Hero Acting to End Modern Day Slavery Award and in 2010 the Pravasi Association of

The main objectives of MWPS are: • To help educate and guide expatriate workers to fully understand their rights and their responsibilities • To create public awareness about the abuse and exploitation of expatriate workers and to explain the community’s role in combating it • To advocate to local authorities and institutions on behalf of the expatriate worker community The MWPS provides support in a number of ways for expatriate workers – both male and female – who have become victims of abuse or exploitation. It provides temporary accommodation at its shelter for women, arranges medical treatment and legal services and finances visa cancellation fees and airline tickets for repatriation. Dias also points out that the MWPS provides expatriate workers with translators and its members are actively engaged in all follow-up work related to their cases which involves frequent, often daily visits, to police stations, manpower agencies, the Ministry of Labour, the Labour Market Regulatory Authority (LMRA), the General Directorate of Nationality, Passport and Residence (GDNPR), embassies, hospitals, the public prosecutor and the courts. In addition the society provides food, clothing, bedding and toiletries for labourers in cases of need and organises safety awareness programmes as well as arranging media coverage for cases and giving presentations to help create public awareness whilst advocating changes in government policy when appropriate. Dias estimates that the MWPS has provided shelter for more than 1,200 women since opening in 2005 and now shelters around 150 women a year – the majority of whom are runaway maids. This problem did not really exist before the construction boom of the early 2000’s. Larger and larger groups of labourers started arriving to work for companies – often without any track record – who took advantage of the need for new houses, shopping facilities and offices to hire workers without proper ethical recruitment policies in place or even checks to ensure that these companies were solvent, responsible employers.

“In many cases there was a frenzied demand to build as land prices rose and the recruitment and pastoral care of labourers was almost an afterthought with no real provision for labour accommodation or rules to enforce the payment of salaries or provision of proper documentation. The result is evident if you visit Bengali Ghali in Old Manama where many people are living in cramped houses that are often unfit for human habitation,” says Dias. The problem is equally acute when it comes to housemaids. This is a relatively new phenomenon as few Bahraini families had foreign help before the economy started expanding ten to fifteen years ago. “One of the main issues,” says Dias “is that to get a visa to bring in a domestic worker a Bahraini family needs to demonstrate that they have an income of over BD 350 (US$ 930) a month. However this does not take into account the wages that need to be paid out of this income which is why there is a problem with non-payment of salaries and workers being forced to carry out backbreaking duties with very little rest or days off for large extended families. Maids are now a status symbol and families expect to have them as a right, which was not the case before.”

CHARITY AND PHILANTHROPY

Angamaly and Nedumbassery Best Social Worker of the Year award for her work.“ We receive referrals for support almost every day, from a variety of sources including from workers themselves, from members of the public, from police stations, from embassies, from officials at the Ministry of Labour and sometimes from detention centres and immigration officials,” explains Dias.

MWPS has provided shelter for more than 1,200 women since opening in 2005 Dias also points out that the people that are recruited are often illiterate girls from the impoverished Indian state of Andhra Pradesh (very few come from Kerala which has one of the highest literacy rates in India) who have never left their village let alone travelled abroad. They are effectively ‘sold’ by their family to agents for an upfront sum of money and arrive in Bahrain ignorant about what they have committed themselves to, unable to communicate and bewildered by a world that is completely alien to them. “What they can face when they arrive is shocking,” says Dias. “In weeks they could have gone from a village with no indoor toilets or modern cooking facilities to a household where they are expected to understand the intricacies of ironing expensive silk blouses and helping the kids with their homework. It is no surprise that there is a breakdown in communication – or no communication at all.” The upshot is that many run away and the MWPS has to try to pick up the pieces as these women have effectively been criminalised even if they haven’t been paid salaries 

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CHARITY AND PHILANTHROPY

for months or issued with identification such as a CPR identification card and are unlikely to get redress because of the way the legal system works. Dias believes that this problem could be alleviated if the minimum income level for Bahrainis to employ foreign maids is lifted above the current BD350 to an appropriate level that is fair to both employer and employee. There also needs to be better screening at airports and more rigorous checks on work permits in the country of origination, as has happened in the Philippines.

To get a visa to bring in a domestic worker a Bahraini family only needs to demonstrate that they have an income of over BD 350

employees and because all members work purely on a voluntary basis we are able to operate on a minimum budget of around BD 40,000 a year which has to include overheads such as a car and driver, rent on the office in Adliya (which is subsidised by the Ministry of Social Affairs), rent for the shelter and other costs,” says Dias. The MWPS is arguing for a fair system for people who come here and are prepared to work hard but who also deserve to be treated fairly. Stop illegal trafficking. Introduce proper safeguards. Establish an appropriate judicial system when it comes to matters concerning migrant workes. Bring in an enforceable minimum wage. These are just a few of the things on Dias’s wish list. “There are so many cases that we have to deal with that we do not get emotional,” says Dias. “The truth is that we cannot afford that luxury.” 

“For the time being the main challenge for the MWPS is raising funds. Banks such as NBB, BBK and other companies have made generous donations but more needs to be done just to maintain our current level of work much less expand what we are doing. We have only three paid

Marietta Dias has worked with the MWPS since it was established in 2005

The Bahrain Banker Winter 2014

To help support the work of the Migrant Workers Protection Society contact Marietta Dias on +973 39452470 or info@mwpsbahrain.com To make a donation: Bank: National Bank of Bahrain (NBB) Account Number: 0099607719 IBAN: BH21 NBOB 0000 0099 6077 19

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www.bbkonline.com 37

CAPITAL IDEAS

Are US FATCA-style tax deals set to spread their wings?

“The hardest thing in the world to understand is income tax” – Einstein

f Albert Einstein were alive today, there is a high probability that he would be bewildered at the raft of tax-related regulations that are mushrooming across the world. Tax authorities seem to be learning from each other. In a bid to increase tax revenues, they have moved their focus from the tax payer to the financial institutions which they consider to be the next best source of information. It started with FATCA ( The US Foreign Account Tax Compliance Act), which extended the extra-territorial jurisdiction of the United States of America. Effective from 1 July, 2014 FATCA paved the way for future revenues to accrue to the US Government, while simultaneously passing on the underlying associated costs to ‘foreign financial institutions’ (FFI). While FATCA garnered a huge amount of publicity, the UK’s International Tax Compliance (Crown Dependencies and Gibraltar) Regulations 2014 (ITC) remains relatively unknown. It can be perceived as a UK version of FATCA and while it is not a ‘universal’ approach it does hint at the possibility of such an approach in the future that could affect UK citizens

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that live and work in the Gulf and elsewhere. ITC was introduced by Her Majesty’s Revenue and Customs (HMRC) in an effort to close a number of tax structures operated by UK resident individuals and entities in Crown Dependencies. Its guidelines were first released in February 2014 and came into effect on 1 July 2014, the same account determination date as US FATCA. The Isle of Man, Jersey, Guernsey and Gibraltar have signed reciprocal agreements with HMRC whereby their financial institutions need to identify and report relevant data on account holders or ‘controlling persons’ who are subject to UK tax residency. The HMRC in turn will be sharing similar financial information with tax authorities in these four jurisdictions. There are also six non-reciprocal agreements between the UK and the Cayman Islands, Bermuda, British Virgin Islands, Montserrat, Turks and Caicos Islands and Anguilla. This requires financial institutions domiciled in these jurisdictions to identify and report on UK interests; however there is

have hence published their own self-certification forms for individuals and entities. Despite the ITC closely mirroring FATCA requirements, there are subtle differences between the two.

Due Diligence Financial institutions in the Crown Dependencies have to conduct due diligence on their account holders and controlling persons of entities. As the W8 BEN, W8 BEN E and W9 are primarily US tax forms, financial institutions are permitted to rely on self-certifications from the account holders and ‘controlling persons’. The Cayman Island Tax Information Authority ( TIA) has released its own set 

CAPITAL IDEAS

no requirement for the HMRC to report on account holders and controlling persons maintaining tax residency in these Crown Dependencies. Similar to FATCA, ITC requires financial institutions to conduct appropriate due diligence on their individual and corporate account holders and on the ‘controlling persons’ of entities. The cutoff date to determine pre-existing accounts versus new accounts was 30 June 2014. New account holders, who are “on-boarded” after 1 July 2014, in these Crown Dependencies and UK, will have to declare all their countries of tax residency and provide their relevant tax identification number. Regulators such as the Tax Information Authority ( TIA) of the Cayman Islands

Comparison between US FATCA and ITC

Source: UGB

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CAPITAL IDEAS

of forms which require obtaining a Tax Identification Number ( TIN) or its equivalent in each country where the customer is resident for tax purposes. It also requires financial institutions to establish the status of ‘controlling persons’ and whether or not they are a resident in a relevant country for tax purposes. Unlike the US FATCA, the ITC focuses on residency and not citizenship.

High-value vs low-value accounts High-value accounts are defined in both cases (FATCA and the UK FATCA) as pre-existing individual and corporate accounts with a balance or value that exceeds US$ 1 million at 30 June 2014 or at 31 December of any subsequent year. If the balance or value exceeds US$ 50,000 for individuals or US$ 250,000 (for entities, cash value insurance contracts and annuity contracts), but is less than US$ 1 million, the accounts are classified as low value.

Reporting Requirements So what is it that has to be reported under the UK FATCA? This is summarised below: Reporting year In Respect of

The electronic review of pre-existing accounts classified as high or low value as at 30 June 2014 must be completed by 30 June 2015 and 30 June 2016 respectively. Financial institutions are expected to identify traces of any of the following indications of UK residence: Identification of the account holder as a UK tax resident Current UK mailing or residence address (including UK PO Box, ‘in care of ’ or ‘hold mail’ address Current effective power of attorney or signatory authority granted to a person with a UK address For accounts that are not depositor accounts, the reporting financial institution is expected to review electronically searchable data maintained by them for standing instructions to transfer funds to an account maintained in the UK.

•

• • •

•

Information to be Reported

Reporting Date

2014 Each Specified UK Person either holding Name l Address anaccount l Date of Birth OR l National Insurance Number a Controlling Person of an Entity l Name and identifying number (GIIN or local tax identification Account number) of the reporting FI l Account Balance or Value

31 May 2016

2015 Each Specified UK Person either holding l Custodial accounts: Total gross amounts of interest, dividends and other income paid or credited to the account a Reportable account l Depository Accounts: Total amount of gross interest paid or OR credited to the account in the calendar year or other reporting As a Controlling Person of an Entity period Account l Cash Value Insurance contracts: Surrender value or Amount calculated by the Specified Insurance Company and Any partial surrenders l All other accounts: The total gross amount paid or credited to the account including the aggregate amount of redemption payments.

31 May 2016 (note : 2014 and 2015 reporting to HMRC are both due on this date)

2016 Each Specified UK Person either holding As 2015 +: l Custodial Accounts Total gross proceeds from the sale of a Reportable account redemption or property paid or credited to the account OR As a Controlling Person of an Entity Account

31 May 2017

2017 Onwards Same as the above

All of the above

End of the reporting year

Source: Guidance Notes on the ITC requirements of the IGA between the Cayman Islands and the US and the UK – 22 July 2014

It is important to realise that while the requirements of FATCA and the ITC are similar, the differences need to be recognised and addressed in order to ensure compliance with the UK FATCA. Needless to say this involves a considerable amount of resources and time to mitigate the underlying operational risk stemming from the onerous due diligence and reporting requirements. While this does not currently affect banks servicing UK citizens outside of the territories covered there is always the possibility that this could

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be expanded and qualifying funds lowered to bring more people into the net as is the case with US FATCA. For financial institutions that look after the interests of UK citizens the message is: “To be forewarned is to be forearmed”. 

Deepa Chandrasekhar is the Senior Vice President, Chief Compliance Officer of United Gulf Bank B.S.C. The views expressed in this article are hers alone and do not necessarily reflect the same as the organisation.

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CAPITAL IDEAS

In short Bahrain's banking sector showcased in Washington DC More than 300 banking industry leaders came together at the Fairmont Hotel in Washington DC to attend the ‘Banks in Bahrain’ reception, organised by the Bahrain Association of Banks (BAB) and Financial Times Business. The event took place on the sidelines of the annual World Bank/International Monetary Fund meetings in October. The Bahrain delegation hosting the reception was led by Finance Minister Shaikh Ahmed bin Mohammed Al Khalifa and CBB Governor Rasheed Al Maraj. Al Baraka Banking Group CEO Adnan Yousif, United Gulf Bank (UGB) CEO Rabih Soukarieh, National Bank of Bahrain (NBB) General Manager Hussain Al Hussaini, Bahrain Institute of Banking and Finance (BIBF) Director Solveig Nicklos and BAB CEO Robert Ainey received guests who included Bahrain's Ambassador to the US Shaikh Abdulla bin Mohammed bin Rashid Al Khalifa, members of the delegation from the embassy in Washington DC, finance ministers, central bank governors, chairmen and chief executives of major banking groups and staff from the World Bank and the IMF. The event was supported by the CBB and the Economic Development Board. Sponsors included Ahli United Bank, ABC, BBK, Investcorp, NBB, United Gulf Bank, Al Baraka, Ithmaar Bank, BIBF and SICO. GFH unveils new identity in major push for growth Gulf Finance House is implementing major changes to its business strategy as it transforms itself from an Islamic investment bank to a broader more diversified financial group with a new brand that will be in line with the coming era. According to the bank the changes are much deeper than just a simple change of the logo, as collectively they also reflect the new owners, the shareholder base and the new management team under a new name of GFH Financial Group. "To reflect this strategy, we changed the brand, the logo and the colours to be in line with the new plan, and to reflect our ambitions," said GFH Chairman Dr Ahmed Al Mutawa who added that the new group will include commercial banks, financial institutions, asset

The Bahrain Banker Winter 2014

management, wealth management, real estate development corporations as well as industrial companies. Based on the new strategy, the bank will enter into short and long-term investment projects and will not exit from such investments unless they are generating high returns for its clients. Investcorp announces succession planning changes Bahrain-based Investcorp, a leading provider and manager of alternative investment products, has appointed Mohammed Al-Shroogi, President, Gulf Business, and Rishi Kapoor, Chief Financial Officer, as Co-CEOs following the decision of Executive Chairman and CEO Nemir Kirdar to retire as at the end of the current fiscal year on 30 June 2015. The Investcorp Board of Directors Nominating Committee and the Board of Directors also appointed nonexecutive Board Director Mohammed Al Ardhi as Executive Chairman. The appointments will be effective from 1 July 2015 and are subject to regulatory approval from the Central Bank of Bahrain. Investcorp has more than US$ 11 billion of assets under management. IIFM launches collateral Murabahah agreement Bahrain-based International Islamic Financial Market (IIFM), a global standard-setting body for Islamic finance, launched an IIFM Master Collateralised Murabahah Agreement in November. The global standard document was accompanied by an operational guidance memorandum. The key features of the agreement is that the fund placing institution will have the comfort of holding the collateral in case of any eventuality, segregated safe keeping and a marginmaintenance mechanism to support risk management. The collateral is taken through a pledge mechanism and envisages that the collateral will be held by a third-party custodian to facilitate getting hold of the collateral in case of default or severe impairment of the collateral-giving institution's credit worthiness. "This much-awaited 6th documentation standard from IIFM is based on Rahn (or collateral) and will provide an alternative avenue to institutions for low risk financing arrangements locally as well as crossborder," said IIFM Chairman Khalid

Hamad Abdul-Rahman Hamad. PineBridge Middle East makes key appointments Bahrain-based PineBridge Investments Middle East, the regional arm of the leading global multi-asset class investment manager, has appointed Sabah Khalil Almoayyed as Independent Chairperson of its Board of Directors and Anthony Mallis as Independent Vice Chairman. Almoayyed, former General Manager and Executive Director of Eskan Bank, and Mallis, former Chief Executive of Securities & Investment Company (SICO), both bring expertise in financial services and extensive experience in the Middle East. PineBridge Investments Middle East focuses on real estate and private equity across the region.

Bahrain 'among top expat destinations' Bahrain has been named as one of the top five destinations for expats, with twothirds of those asked saying they have a better work and life balance than in their home country. In the HSBC 2014 Expat Explorer survey, Bahrain ranks fifth overall in the world for expat satisfaction. It is also second in the world for expat experience, ninth in suitability for raising children and 11th in ‘expat economics’. More than 9,000 expats in 34 countries across the world were surveyed for the HSBC report on their quality of life, financial well-being and the ease of raising a family abroad. At second on the list, Bahrain scored particularly well for quality of life much better than other Middle Eastern countries such as Oman at 19th, the UAE at 21st, Qatar at 28th and Saudi Arabia at 32nd. "Over half (53pc) of expats in Bahrain say they moved to improve their job prospects (compared with a global average of 38pc) and the majority have found that their work-to-life balance has improved since they arrived (62pc compared with a global average of 40pc)," said the report. 

The Bahrain Institute for Banking and Finance (BIBF) has launched its state-of-the-art virtual dealing room. The facility which was launched in October is the first of its kind in the MENA region and a strong statement of BIBF's ambition to maintain its status as the GCC's leading educational facility for banking and finance. BIBF’s virtual dealing room powers technology-enabled experiential learning, which allows students to learn about trading stocks and bonds in a real environment. The facility includes 22 trading stations that are fully equipped with market tools that link with Bloomberg and Thomson Reuters Eikon. In order to provide cutting-edge training expertise and technology, BIBF partnered with specialist training and technology providers in the UK and the US. The dealing room has a live link to the trading floor of their partners in London, providing students with unique exposure to live trading in the global markets.

BIBF collaborated with the Chartered Institute of Securities and Investments (CISI) and the ICMA Centre (Henley Business School) to introduce an Applied Dealing Certificate which combines a theoretical course and exam along with a practical course in the BIBF Dealing Room. BIBF has also partnered with the ICMA Centre and Thomson Reuters to develop The Certificate in Islamic Financial Markets. This certificate also blends a theoretical course and exam with the world’s first simulation of Islamic markets, providing participants with a handson experience to prepare them and enhance their skills to perform in today’s evolving Islamic financial markets. “The BIBF Dealing Room is the very embodiment of our core strategy. By combining thought leadership and innovation, we were able to create the region’s very first functional educational dealing room. This will further

strengthen Bahrain’s position as a hub for financial services and education,” said BIBF Director Solveig Nicklos. “The systems we use are able to capture and analyse the trading behaviour of students, enabling BIBF’s faculty to provide customised coaching. Institutions will also receive detailed reports highlighting employees’ performance and feedback regarding strengths and areas for further improvement,” she added. The new facility, which is prominently sited next to the BIBF’s main lobby, was inaugurated under the Patronage of HE Rasheed Mohammed Al Maraj, Governor of the Central Bank of Bahrain and Chairman of the Specific Council for Vocational Training (Banking Sector). 

CAPITAL IDEAS

BIBF launches first educational dealing room in MENA Region

Inward FDI flows to Arab countries dip Inward flows of foreign direct investment (FDI) to Arab countries decreased by 9 percent from US$ 53.5 billion in 2012 to US$ 48.5 billion in 2013, according to the annual Dhaman FDI Attractiveness Index produced by the Kuwait-based Arab Investment & Export Credit Guarantee Corporation. The flows remained poor compared with the record high of US$ 96.3 billion reached in 2008. Inward FDI to Arab countries represented just 3.3 percent of the overall global amount of US$ 1.45 trillion and 6.2 percent of the inward FDI to developing countries of US$ 778 billion. Throughout 2013 inward FDI continued to be concentrated in a limited number of Arab countries. For the second year in a row, the United Arab Emirates (UAE) and Saudi Arabia accounted for more than 40 percent of this overall inward FDI to Arab countries. The UAE ranked first with

US$ 10.5 billion and a stake of 21.6 percent of the overall FDI in the Arab world, followed by Saudi Arabia in second place with US$ 9.3 billion and a share of 19.2 percent. Egypt was in third place with US$ 5.6 billion and a share of 11.5 percent, followed by Morocco in the fourth place with US$ 3.4 billion and a share of 6.9 percent and Sudan in the fifth place with US$ 3.1 billion and a share of 6.4 percent. According to statistics from the United Nations Conference on Trade and Development (UNCTAD), the total FDI inflows in 92 Arab and foreign countries between 2001 and 2012 amounted to more than US$ 300 billion. The list of top investing countries were France, Kuwait, USA, UAE, UK, Saudi Arabia, Japan, the Netherlands, China and Germany with a total amounting to US$ 211.5 billion representing more than 70 percent of the overall investments.

In 2013, in contrast to FDI flows to the Arab world, global FDI regained its rising trend with a 9 percent jump to reach US$ 1.45 trillion in 2013 matched by a 9 percent rise in FDI stocks around the world to reach US$ 25.5 trillion. According to the latest statistics in the World Investment Report of 2014, FDI inflows to developing economies reached a record high of US$ 778 billion, accounting for 54 percent of global flows. UNCTAD expects global FDI flows to keep rising in the coming three years to reach US$ 1.6 trillion in 2014, US$ 1.75 trillion in 2015 and US$ 1.85 trillion in 2016, with a greater share for developed countries. 

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Bahrain from the sky Above Two Seas – An Aerial view of the Kingdom of Bahrain By Andrew Weaver (Picture Arabia, 2014, BD4 for small size, BD25 for coffee table edition)

Opening with the statement by the legendary aviator Amelia Earhart that “You haven’t seen a tree until you’ve seen its shadow from the sky,” Bahrain’s best-known photographer, Andrew Weaver, introduces his new stunning coffee-table book Above Two Seas. This spectacular 285-page book presents aerial images of Bahrain that few, apart from pilots, can have seen and gives the reader an array of images that show this island nation from a rare perspective. Above Two Seas is a sequel to Weaver’s first best-selling compilation of photographs from two years ago called Between Two Seas. It opens with a chapter showing the island’s capital, Manama, which has been transformed from a traditional pearling town of modest proportions in the early 1900s to a 21st century city punctuated by modern, soaring architecture. Starting with the twin towers of the World Trade Centre mysteriously wreathed in clouds (which also illustrates the front cover) and the Financial Harbour, Weaver takes us on a journey which then peers into

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the fascinating maze of roads of old Manama with its clearly under-planned mass of small apartment blocks and traditional buildings. The next chapter entitled ‘Fishing, Boats, Islands, Watersports & Marine Life’ explores the lowlying archipelago of islands that make up the country. As an island, the sea has always been at the heart of Bahrain and in the hearts of its people. Pearling and sea trading were the original mainstays of Bahrain’s economy, forever underscoring the country’s identity and creating for its men a wide-ranging reputation for daring seamanship. All of Bahrain’s maritime riches are on display here from the wildlife (most notably dolphins, dugongs and an exquisite image of a flight of flamingos taken from above) to the modern coastal developments of Durrat Al Bahrain and Reef Island. Every kind of watersport, sailing and just lazing on the beach is also featured. Above Two Seas concludes with chapters on ‘Communities, Villages, Landscapes, Industry & Coastline’ and ‘Desert, Heritage, Leisure & Wildlife’. Each subject is beautifully illustrated with images that will stay with the reader for a long time after the book has been closed. It would make an excellent corporate gift. Weaver, a Bahrain resident for 14 years, took these images over a decade from helicopter rides provided by the Interior Ministry. His next book, which is a work in progress, is to be

called GLOW – The Sunsets of Bahrain and promises to be another visually stunning treat. As a visitor to Bahrain for almost 50 years and a resident for ten, the image that I carry from Above Two Seas is almost timeless – the fleet of fishing dhows setting out in the late afternoon from Manama harbour – Magic ! (AJW) The Dark Net: ‘Inside the Digital Underworld’ by Jamie Bartlett (William Heinemann, 2014, £13)

When it comes to the Internet most people operate in blissful ignorance, inhabiting an electronic world stretching about as far as Google, Twitter and Facebook. Beyond such narrow confines, however, is a darker realm of hidden network sites where no Google or Yahoo search engine can decode page information. This is where freedom – using the ‘Tor’ browser to provide anonymity – can, more often than not, prove too tempting for those seeking to break legal boundaries. A series of high-profile busts in 2013 and 2014 have shut down sites such as the ‘narcotics supermarket’ Silk Road and subsequent arrests have shown that it is not so anonymous as it might seem. Alternative sites seem to appear within days so clearly it is far too early to predict its demise.

see it as a radical project to overthrow governments – and those who view it as a useful innovation to further promote e-commerce. The jury however is still out. (MM) The Little Red Book of Family Business by David Bork (Samson Press, 2008, US$10)

David Bork is one of the world’s bestknown experts on how to run family businesses. For over forty years he has advised companies across the globe, including here in Bahrain, how to build success over generations and avoid the pitfalls that can come when family and business come together in what can be a combustible mix. Bork’s career as a consultant, author, speaker and all-round business guru has been dedicated to making sure that family firms overcome these obstacles and ultimately succeed and grow. The Little Red Book of Family Business is probably only the second most famous ‘little red book’ after the ubiquitous tome of Chairman Mao’s quotations, jokes Bork in the introduction. But he points out that since more than a billion copies were printed in 38 languages that is not really something to be shy about. The book is essentially a pocketsized collection of wisdom about working and thriving in the complex and rewarding world of family business. The tips and advice contained within were culled from Bork’s many years of

experience working as a family business counsellor and the problems that he faced and helped to overcome. This easy-to-read book contains ideas that are to-the-point, insightful and sometimes humorous. It briefly highlights 27 topics, including boundaries, competencies, competition in the family, being rich, sibling relationships, spouses and more. A little book of expert advice, it is considered "a must-read for family businesses that wish to grow and thrive.” For Aspen, Colorado-based Bork family businesses are a passion. As he says in his foreword: “I wish to convey the respect and admiration I hold for “my families” – the people I have served in my family business consulting practice since 1968. Together we worked, struggled, laughed and cried as we wrestled problems on the ground, resolved them, and got on with professionalising their enterprises. I am humbled by their confidence and trust, inspired by their creativity and commitment to family business.” The Little Red Book of Family Business is full of anecdotes and examples of things that went wrong and things that went right – remarkably similar scenarios in all cultures whether it be a US or Arab business. All the chapters have a little section for jotting down notes which makes it a great book to dip into from time to time. In fact in September Bork shared the stage in Bahrain with his old friend Khalid Kanoo, the Chairman of the Bahrain Family Business Association (BFBA), and delivered a well-received keynote speech on the Challenges of the Rising Generation in Family Business Firms. He also generously left copies of the book which is now available from the BFBA and can be picked up at their office or at their next event. For more details contact Karim Al Aali, Projects & Business Development Manager, Yusuf Bin Ahmed Kanoo on 17360000 or 36438555. (JGM) 

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Nevertheless to conclude that all activities in this nether world – commonly referred to as the Dark Net – are by definition nefarious would be entirely missing the point. Despite the fact that it is by reputation the stomping ground of drug dealers, extremists and purveyors of all kinds of illegal products and services, few people have actually attempted to open it up to scrutiny and separate fact from fiction Until The Dark Net author Jamie Bartlett came along that is. As head of the Violence and Extremism Programme and the Centre for the Analysis of Social Media at think tank Demos – where he has written extensively about radical political parties and how the Internet is changing society – he takes the reader on a journey through a dangerous, disturbing yet ultimately creative world. A world where everyone can be anyone and do anything they want. Bartlett is quick to point out that this invisible web is not a separate realm; it is simply one stretching from social media sites to the deepest darkest corners of the Internet. Paradoxically while it is little understood it is seldom out of the news. Whether its users choose to stay on the right side of the law or not they share a common purpose of freedom, safe in the knowledge they are away from the prying eyes of governments, law enforcement and other authorities. Bright Planet – a consultant specialising in deep web intelligence – estimates the dark net may be as much as 500 times bigger than the searchable or surface web. To put this mindboggling claim in perspective Google has indexed up to 8 billion pages in the visible web alone. Of special interest in The Dark Net is the subject of crypto-currencies such as Bitcoins and cryptography in general. Bartlett explores the war for Bitcoin’s soul – between those who

ANCIENT AND MODERN Some things never change. A busy shopping day on Bab Al Bahrain Road, near the Gold Suq, in the 1970s

Shopping in Bahrain – from ancient suqs to luxury malls

hen you live in a world where you can get twenty flavours of ice cream, numerous brands of Scottish smoked salmon, succulent steaks from Argentina and freshly-made butter croissants – not to mention racks of clothes, appliances and furniture all under one roof –

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it is hard to imagine a world where such items were not just unobtainable but unimaginable. So it is necessary to take a step back and ask: how does all this compare with shopping in Bahrain during much of the last century? A good starting point is to consider the prime function of a market place. In traditional Arab towns a suq (market)

ANCIENT AND MODERN

selling dry food items such as tea, coffee, spices, rice and sugar all had their place, as did goldsmiths, locksmiths, tailors, cloth merchants and other craftsmen. On Wednesdays an open market, Suq Al-Arbaa, functioned in Manama where villagers sold fresh fruits and vegetables transported into town on donkey-carts. One could buy live chickens, rabbits and pigeons, all kinds of second-hand clothes, baskets and mats made from palm fronds, unglazed pottery from A’ali, incense burners from Rifaa, hand-woven cotton material from villages near Budaiya, even home-made ladies’ cosmetics: henna (believed to strengthen hands, hair and feet as well as beautify them), dooram (to redden gums), khol (black eyeliner) and bukhour (perfume balls burnt as incense). The hallmarks of Bahrain’s suq shopping experience were congestion, a cacophony of clatter and chatter, colour, powerful aromas, but also less appealing smells in the areas where meat and fish were sold. Keeping market places clean was a challenge.

The hallmarks of Bahrain’s shopping experience were congestion, a cacophony of clatter and chatter, colour, powerful aromas

also serves as a religious focus for its community whereby mosques are within easy walking distance of traders’ homes, shops and stalls. The suqs in Manama and Muharraq (the present and former capitals of Bahrain) evolved in this way. Along narrow streets and alleys (some too narrow for a vehicle to pass through) homes were interspersed among open-fronted shops, their stock arranged on the floor or stacked on shelves, secured during closing hours by folding wooden shutters. Even after the mid-20th century when modernity began to infiltrate traditional suq life, textile traders, carpet merchants, carpenters, purveyors of domestic items and cooking equipment, tobacco merchants and traders

A few miles south of Manama donkeys and cows were sold at the Thursday livestock market, Suq Al-Khamis, which until the 1960s was an open space on the road to Awali, opposite the oldest mosque in Bahrain which is now a UNESCO heritage site. To place all this activity into context, trade reports, bills of lading and invoices provide a fascinating insight. The year 1901 was the most prosperous “in the annals of Bahrain due to a large volume of rice imports and the largest importation of cotton piece-goods from India”. Tea was popular – and heavily taxed making it a prime target for smuggling. Demand for coffee had also increased with Brazilian brands competing well against their Indian and Ceylonese competitors. Familiar names such as Jacobs Cream Crackers even appeared on bills of lading. By 1914 steamers owned by the Frank C Strick Line and the Persian Gulf Steam Navigation Company regularly anchored offshore from Manama. Small boats then ferried cargo to the jetty from where it was distributed to 

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ANCIENT AND MODERN Supplies for market day in the 1930s were traditionally brought by donkey

wholesalers and retailers. Manifests itemise tins of tallow (for making candles and soap) and ghee; bags of black pepper; capots filled with charcoal (a capot being a straw mat sewn in the shape of a barrel and stitched at both ends); cooking oil stored in drums; twine and turmeric; sail canvas, cutlery, crockery and tea-glasses. Many items came from the Far East via Bombay, such as bales of silk from China and Japan beside bags packed with peppermint and sugar from Java. Barley and other grains grown on the fertile banks of the Tigris and Euphrates rivers were shipped from Basra.

The availability of air con and refrigeration created a new genre of grocery shops: cold stores By the late 1920s shopping habits, at least for some, had become more sophisticated. In 1926 it was estimated that 140 cars and 4 motor lorries were being driven in Bahrain. Khalil Kanoo had established himself as the Ford distributor and an importer of car accessories, such as 24 double-twist car horns and 12 motor spot-lamps (complete with universal fittings and canvas-lined tropical bulbs) ordered in 1928 from Powell and Hanmer (a British

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firm), plus spare tyres sourced from the Dunlop Rubber Company from whom the Fakhro family held the agency and still do. However it was not until 1938 (the year after Bahrain’s refinery started operations) that the nation’s first filling station opened for business on Government Road. Previously Anglo-Persian Oil Company vessels anchored in Suwaifiyah Bay (near to Manama's present Central Market) from which tins of BP Motor Spirit were discharged onto the beach, then transported to central Manama where customers could buy the fuel for their vehicles. By this time Japanese manufacturers were canvassing Bahrain’s merchants with tempting promotions. For instance, 'Ever' electric clocks required only 2 watts of electricity to operate these “refined mechanisms”. Japanese brands of tea, cigarettes and mosquito nets were offered too. The snag was that Japanese perceptions of a minimum order appropriate for Bahrain’s small market tended to be excessively optimistic, as Haji Yusuf Kanoo discovered. In February 1937, having been convinced to order 50 cases of Meiji’s milk caramels, too late he realised that there were 5 pieces in a packet, 200 packets in a tin and 16 tins in a case. All told he had bought 800,000 milk caramels! For many years, WA Robertson (manufacturers’ representative in Batavia, Java, North East Indonesia) had been the largest regional importer of fresh fruits and vegetables. Early in 1939 the company urged Haji Yusuf to buy green Granny Smith and Red Democrat apples from

included the family names of Almoayyed, Al-Sharif, Aujan, Fakhro, Gajaria, Kanoo, Yateem and Zayani. Several premises were located beside Sea Road (now Government Avenue) alongside stores run by Indian families: Dorabjee sold sun-hats, shoes, shirts, Ecko radios and tinned foods; Rochiram were clothing specialists; enterprises owned by the Jashanmal and Ashraf families became small department stores. Along the Bab Al-Bahrain Road which leads to Manama’s suq, general traders Kumar, Behbehani, Khedouri and Trikamadas were well-established. The availability of air-conditioning and refrigeration created a new genre of grocery shops or cold stores. One pioneering enterprise was the Jawad Cold Store, which opened in 1960 on the corner of Al-Khalifa Avenue and AlMuthanna Avenue in the centre of Manama. Claiming to be the largest and most modern grocery store in Bahrain at that time, it stocked UK brand names, and eventually many from all over the world: Weetabix and Kellogg cereals, Libby canned food, MacDougall flour, Heinz baked beans and tomato ketchup, Chivers marmalade, Jacobs biscuits, Nestlé chocolate, Tate & Lyle sugar, Birds Eye custard, HP sauce, Camp coffee, Lipton tea, and many more, plus powdered milk, bread, cakes, butter and cheese. Fresh 

ANCIENT AND MODERN

Australia, together with mandarin oranges. Customers in Bahrain were delighted. More produce was ordered, plus crates of Josephine sweet pears, avocado pears, mangoes, papaya, cabbages, French beans and carrots. Sadly, this supply was short-lived. After the fall of Singapore in 1942 all shipments from the Far East ceased until the end of World War II. Export controls were implemented in India. Huge food shortages in Bahrain caused a steep rise in the cost of living. Rationing was introduced. Rice, wheat, flour and sugar were most affected forcing the British Government to grant a subsidy to help offset the high cost of importing barley from Iraq. Within months of the war ending American airconditioning manufacturers and British export houses clamoured to restore and develop business relationships in Bahrain. One London-based company’s product list makes intriguing reading: blotting paper, table and ceiling fans, pure hide glue in cake form, smoothing-irons, fish-hooks, hair-clippers, hurricane-lamps, insecticides, printing and stencil inks and smoking mixtures. Lever Brothers (India) even started to supply Lifebuoy and Lux toilet soap again after a three year hiatus. By the 1950s the roll-call of trading houses in Manama

The suqs in Bahrain were, and still are, famous for colourful fabrics and material

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ANCIENT AND MODERN

fruits and vegetables were air-freighted from Lebanon and Australia. In addition, a good selection of frozen cuts of meat, portioned and properly packed was sourced from Denmark and the Kenya Meat Corporation. However if meat lovers missed delivery day they often had to wait another month before the next shipment arrived. People therefore made sure that they knew the date and were ready and waiting when new supplies were delivered. The new age of grocery shopping had dawned. By the

late 1970s landmarks included Al-Jazira, Ashraf Safeway and Marhaba supermarkets, even a re-configured commissary in the Awali oil town. With rapid demographic expansion the need for car parking became essential. By the early 1980s a new generation of out-of-town supermarkets had opened. Traffic congestion and inadequate food storage facilities in the suqs had created a need for purpose-built central markets in Manama and Muharraq so that fresh fruit, vegetables, fish and meat could be delivered and sold conveniently in hygienic conditions. With shrewd vision, Hussain Yateem had recognised these trends. But instead of joining the out-flow, he decided to demolish properties he owned in the centre of Manama and build what became in 1981 the first modern glass curtain-walled, air-conditioned, multi-storey shopping mall to open in Bahrain, complete with coffee shops and basement car-parking. This striking edifice raised the bar of consumer expectations in Bahrain, setting a new benchmark for developers. Yet, the point has not been lost that the Yateem Centre’s “anchor” position subtly encourages customers to patronise the suq nearby, thereby helping to preserve its viability and traditions.

The Commisiary, or supermarket, at Awali in the 1960s

Angela Murray is a Bahrain-based freelance writer

Reclaiming land – and modern shopping habits and demand for consumer goods. The answer was ambitious. Reclaim land from the seas of the Arabian Gulf and build a new modern infrastructure with new housing, office buildings and shopping malls. Older Bahrainis and long-time foreign residents love to point out to newcomers the places where the sea once lapped the shore such as Bab Al Bahrain and the Gulf Hotel. They also like to say with a sweep of the arm when pointing at the new districts of Seef and Juffair: “Thirty years ago that was all sea”. Bahrain City Centre , the country's biggest mall, opened in Seef in 2008 And it does seem astonishing when you consider the role that these new glitzy areas play in the life of y the mid-1980s one thing was becoming clear. the people that live and work here – and how quickly the The northern, metropolitan coast of Bahrain was face of the country has changed. running out of space. It also hosted a populaAll this accelerated development and the phoenix-like tion of locals, expatriates and visitors that were emergence of ‘super malls’ – particularly in the Seef disbecoming increasingly demanding in their lifestyle habits

B 50

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mall’s owner the Dubaibased developer Majid Al Futtaim. Other innovations at the mall include the 15,000-square-metre Wahooo! Waterpark on top of its 350 stores, 50 food court outlets and guaranteed parking – once the bane of shoppers. However in a surprising reversal it appears that The 35,000-square-metre Dragon City will be the anchor tenant at Diyar Al Muharraq mega malls might be losing some their appeal. Although Bahrain City Centre has trict – was undoubtedly boosted by the opening of the dominated the retail landscape since its opening in 2008, Bahrain-Saudi Causeway in 1988. This feat of engineering brought, and still continues to bring, a flood of visitors attention has now turned to smaller retail centres, such as from across the border to shop at a huge array of retailers, the The Lagoon a 55,000-square-metre development on watch the latest movies and sample food from around the Amwaj Islands, as part of trend for new residential or comworld. Bahrain Mall, Seef Mall and then Bahrain City Cenmercial schemes. tre literally changed the face of Bahrain. Imagine telling a teenager that he couldn’t hang out at the mall on the weekend! Despite its small size, Bahrain’s retail industry has seen significant changes in recent years, especially when it comes to specialised high-end ‘destination’ venues such as MODA Mall at the World Trade Centre. This has allowed a whole slew of foreign stores to enter the scene including luxury brands such as Gucci, Saks Fifth Avenue, Versace, Another such development is Diyar Al Muharraq’s BD Ralph Lauren and Burberry, alongside mass retailers such 1.2 million mixed use scheme to the north east of Manaas French chains Geant and Carrefour and British stalwarts ma, which is due to be anchored by the US$ 80 million Marks & Spencer and Debenhams. 35,000-square-metre Dragon City, Bahrain’s answer to In 2010 there was around 640,000 square metres of reDubai’s Dragon Mart complex. As the Government moves tail development in Bahrain with around a further 100,000 to foster stronger trade links with China, the new shopping square metres that has now come online – mainly smaller mall intends to target Chinese retailers, while Bahraini and malls in Manama, Muharraq, Riffa and Juffair. While this is Saudi retailers are also expected to have a strong presence. on a smaller scale than developments in other Gulf States “The GCC retail landscape has been totally transformed such as Dubai, for a country of just over one million inhabin the last few decades. Driven by ambitious and innovaitants it is quite some achievement. tive players and supported by favourable government regRetail trade is a significant and growing component ulations, the sector has shown great resilience in the face of GDP and therefore for Bahrain’s economy overall. It also of the economic crisis and going ahead, it faces a period of shows how important it is to keep on innovating in orhealthy growth,” said Rohit Walia, Executive Vice Chairman der to maintain the ‘pull-factor’ for locals and increasingly & CEO of Bank Sarasin Alpen, in the introduction to GCC choosy visitors. In fact more than 300,000 Saudi Arabian Retail Industry, a report by Alpen Capital. tourists visited Bahrain during the Eid al-Adha holiday in So whether you prefer an integrated mega-mall, a 2014 and new developments will keep them coming. The more intimate local shopping centre or the traditional suq, 2011 opening of the Meridien/Westin Hotel (formerly the © private collection Bahrain offers all these options which is testament to the Kempinksi) attached to the 150,000-square metre Bahrain old adage – the customer is always right.  City Centre is an example of the integrated thinking of the

Retail trade is a significant and growing component of GDP and therefore for Bahrain’s economy overall

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TECH TALK

ATM security under the spotlight in Bahrain

New technologies are currently being developed to make ATMs tamper-proof

recent report that more than 170 ATM users in Bahrain had become victims of scammers has highlighted yet again the ongoing battle between financial institutions and those criminals intent upon stealing customer card data for their own profitable ends. Part of the problem is clearly that a number of local and regional banks continue to use older cash machines that lack more modern security features such as chip and pin – hence leaving them vulnerable to tampering by fraudsters. The Bahrain scamming incidents followed a similar attack the previous month in Malaysia where Owen Wild, the Global Marketing Director for security compliance solutions at US banking software firm NCR, noted in an interview for Krebs On Security that while his company’s ATMs had been compromised it happened on the Persona series of ATMs, which are older models. The wider narrative

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is that the Bahrain and Malaysia incidents are symptomatic of a newer trend toward software-based attacks. Jamal Al Sabbagh, Assistant General Manager, Information Technology, BBK, is quick to note skimming is not limited to older ATMs– it can impact any brand or model of machine. “New technologies are currently being reviewed to make machines tamper proof, but like any fraud scenario, the latest technology is only as good as the next successful attack,” says Al Sabbagh He adds that skimming is not limited to card usage locally, so even if all the machines in Bahrain were made tamper proof, the possibility of fraud still exists if the card is used outside the country. He notes, however, that life for the criminal would be made that much more difficult if people changed their Debit Card PINs on a regular basis. While Biometrics could

While the chip in EMV cards generates what is supposed to be an unpredictable number, or nonce, for each transaction to ensure its integrity, it can do quite the opposite because of an implementation flaw, according to the research. The first flaw is that some EMV implementers have merely used counters, timestamps or home-grown algorithms to supply this nonce. This exposes them to a “pre-play” attack which is indistinguishable from card cloning from the standpoint of the logs available to the card-issuing bank, and can be carried out even if it is impossible to clone a card physically.

TECH TALK

be a possible answer, longer term it will only be so if banks worldwide move towards such a solution. If not then the risk of skimming will continue to exist. No ATM manufacturer has been exempt. What is different is the fact that the recent spike in malicious software capable of infecting ATMs marks a shift away from innovative, high-tech skimming devices towards the rapidly aging ATM infrastructure in the US and elsewhere. ATMs proving especially vulnerable are standalone, unattended types of units where it is much easier to access the top of the box than would normally be the case in wallmounted or in-bank models. With the rollout of the EMV standard – in theory a more secure system – yet to be fully implemented globally it should come as no surprise that older ATMs have come under attack in those jurisdictions where it has less presence. If many of the estimated 2.5 million ATMs worldwide offer potentially tempting targets optimists argue the scope of ATM skimming – attacks were up 12 percent last year, resulting in estimated losses globally of $2 billion – will diminish as the migration to EMV technology gathers pace. EMV (Chip and PIN) is a global standard – initiated by Europay, MasterCard and Visa for the inter-operation of integrated circuit cards (IC cards or "chip cards") and IC card capable point of sale (POS) terminals and ATMs for authenticating credit and debit card transactions. It was developed in the mid 1990s to tackle the developing threat of magnetic strip card counterfeiting, where organised crime gangs with access to card manufacturing equipment could produce cloned cards using data from discarded receipts, or skimmed surreptitiously from legitimate cards, first at point-of-sale (POS) and later at ATMs. On the face of it the reported 7 percent fall in skimming attacks in Europe last year where EMV is much more established indicates some measure of success for the technology. However, this pre-supposes criminals will not continue exploiting weak links in the chain elsewhere, either in those countries, such as the US, where EMV has yet to be fully adopted, or in those countries where banks have proven slow in updating their older ATMs. This would appear to have been the case in Bahrain. Moreover, EMV is not without its own security flaws as highlighted in a May 2014 paper from Cambridge University.

ATMs proving especially vulnerable are standalone types of units which are much easier to access The paper said it found flaws in widely-used ATMs from the largest manufacturers, explaining some of the increasing number of frauds in which victims are refused refunds by banks – on the basis EMV cards cannot be cloned. If the random number-generator isn’t quite as random as it would appear it follows that the determined thief with temporary access to a card can theoretically compute the authentication codes needed to draw cash from a specific ATM at some point in the future, if the value of the ‘unpredictable’ number can self-evidently be predicted. The second problem, which came to light after the first issue was found, showed that independent of the random number quality, there is a protocol failure: the actual random number generated by the terminal can simply be replaced by one the attacker used earlier when capturing an authentication code from the card. This variant of the pre-play attack may be carried out by malware in an ATM or POS terminal, or by a man-in-themiddle between the terminal and the acquirer. In the wider sphere, US-based Diebold Incorporated thinks it has cracked the problem of ATM skimming with its ActivEdge card reader. Launched in July 2014 it claims to be the industry’s first complete anti-skimming card reader that prevents all known forms of skimming, as well as other forms of ATM fraud. There are four primary attack options open to 

The Bahrain Banker Winter 2014

TECH TALK

criminals: external skimming, internal skimming, USB sniffing and device substitution. The selling point of ActivEdge is that it approaches skimming from a different angle, literally, by requiring users to insert cards into the reader via the long edge, instead of the traditional short edge. By shifting a card's angle 90 degrees, so the argument goes, this will prevent modern skimming devices from reading the card's full magnetic strip, eliminating the device's ability to steal card data. In addition the product’s encrypted technology inhibits criminal modifications to the card reader. Its encrypted communication to the ATM's central processing unit eliminates the ability to fraudulently capture and track data. Each reader is paired with a specific ATM, precluding the installation of fraudulent readers. Meanwhile to counteract card trapping, there is automatic gate-locking functionality, which prevents fraudsters from freeing trapped cards. Such attacks have surged, with European ATM Security Team (EAST) reporting that card trapping incidents in Europe rose 98 percent from 2,726 attacks in 2012 to 5,394 attacks in 2013. Of course, history will show whether Diebold’s claims have any validity.

In the meantime – and despite EMV migration – it would be wrong to underestimate the ability of ATM scammers to be able to ply their lucrative trade. Banks, whether they have implemented EMV or not, could provide some assistance simply by replacing older ATMs whose vulnerabilities have been well documented, as well as plugging the security issues. “I don’t think ATMs will disappear in the near future. They may evolve to provide the next generation of banking services, however availability of cash will always remain a key aspect of banking services,” says BBK’s Al Sabbagh. “Mobile wallets and other payment mechanisms will certainly pick up sooner or later, however; whether they will replace cash or not is a difficult question to answer,” he adds. The Central Bank of Bahrain (CBB) meanwhile is looking into restricting banks with ATMs from accepting cards with magnetic strips and encouraging them to implement the EMV standard. Although there is no central data regarding “at risk” ATMs it is hoped that any future-proofing of the machines and the cards that they process will stop these  attacks in their tracks.

Martin Morris is a London-based freelance writer

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LIFE AND LEISURE

Get out your wallets and purses for Bahrain Noor El Ain

ahrainis do not usually need an excuse to go shopping in the array of malls and traditional suqs that are scattered across the island. This December however there are even more reasons to indulge in a little bit of retail therapy. Not only does the Kingdom celebrate National Day with a two day holiday from 16 December but it also hosts the first ever Bahrain Noor El Ain shopping festival which kicks off a day earlier and lasts for two whole months. The brand new festival, which has the support of leading shopping centres including luxury retailer MODA Mall and Bahrain City Centre, will also include numerous cultural events featuring artists and musicians from Bahrain and the Gulf. As if that were not enough, festival goers will have the opportunity to whet their taste buds at local-themed bazaars in the Adliya entertainment district, the Budaiya Farmers Market and the Arad Fort Corniche.

Shops and malls will be offering amazing weekly prizes culminating in a highly anticipated Grand Draw This is also probably the first such festival to fully embrace the digital revolution. As well as a website in Arabic and English (www.bahrainnoorelain.com), there are Facebook, Twitter and Youtube pages and an official ‘BNEA’ app for iPhones and iPads which will provide a fully interactive listing of all the events and promotions. It will also stream live feeds of the acts as they perform over the cool winter months when Bahrainis take to the outdoors en masse. Bahrain Noor El Ain literally means “Bahrain the Light of our Eyes” a term of affection which is often used by Bahrainis to describe feelings of pride and patriotism. Shops and malls will be offering customers amazing weekly prizes culminating in the highly anticipated Grand Draw, shopping opportunities, discounts and special offers designed to bring real economic benefit to local and regional visitors.

The Bahrain Banker Winter 2014

Festival Director Abdulla Al Mannai said “We are pleased to say that we have the support of such iconic shopping destinations as MODA Mall, Al A’ali Mall, Riyadat Mall, Yateem Centre, Bahrain Mall, Ramli Mall, Lulu hypermarket locations, The Centre, Jawad Dome, Sultan Mall, Reef Mall and we are in negotiations with many more. This is a wonderful accolade to the support of our outstanding retail sector and we would also like to encourage independent retailers of all sizes to participate.” The nation-wide festival is being led by a committee that is comprised of Tamkeen, Bahrain Chamber of Commerce and Industry, Information Affairs Authority, Ministry of Industry and Commerce, Ministry of Municipal Affairs and Urban Planning, Ministry of Health, Gulf Air, Bahrain Development Bank, Bahrain Mumtalakat Holding Company (Mumtalakat), and Edamah. It is also supported by many private and public sector organisations. Nabeel Al Mahmood, CEO of the Bahrain Chamber of Commerce and Industry (BCCI) commented: “We welcome this opportunity for retailers to showcase their offerings to thousands of local and regional shoppers who will flock to take advantage of the special offers and valuable prizes on offer. The BCCI supports this initiative wholeheartedly and encourages our members to participate”. 

LIFE AND LEISURE The Farmers Market in Budaiya is open every Friday during the winter with fresh food and cooking stalls

Enjoying the great outdoors: A few highlights from Bahrain Noor El Ain The Garden Bazaar, Farmers Market (17 January) This one will tickle every foodie’s fantasy as the concept of ‘Farm to Plate’ will be realised in ‘The Kitchen’ which will play host to some of Bahrain’s and the region’s hottest chefs in business. Culinary events like special cooking classes, sampling platters, cook-offs and competitions will add to the gastronomic delight. Set outdoors in the beautiful botanical gardens of Bahrain, the Farmers Market serves as an idyllic venue and a perfect place for family and friends to picnic on the grass, taste the delectable treats on offer or buy fresh produce. Artists, handicrafts, agriculture and local goods stalls will display their products for sale. Arad Fort Corniche, Muharraq (29 to 31 January) With its stunning sea views, a terraced market area and plenty of parking, the Arad Fort Corniche in Muharraq forms the perfect backdrop to this Old Town market experience. Retailers and Suq traders, both from the high street to the homegrown brands will display their products in front of the timeless landmark of Arad Fort. The Old Town of Muharraq offers a treat for visitors and locals alike as traditional handicrafts and textiles; live cooking stalls vie for their attention in this vibrant market space. Traditional entertainment and music

will be a prime feature with a special performance at 8 pm each night by a popular musician/band/group. Offering a heady mix of the old and new, this Old Town Bazaar will be a fantastic day out for the entire family. The Street Bazaar, Adliya (15 to 17 December) The restaurant hub of Bahrain and home to the iconic Market 338, this venue in Adliya will be transformed into a vibrant art and entrepreneurial space. In collaboration with the Al Riwaq Art Space, the festival will help extend the retailers’ activities through to the National Day weekend. Restaurant offers, retail bargains, shopping delights, music, daytime fun and horse-drawn carriages in the night will add to the festive charm to coincide with National Day. Al Basta Market (19 to 20 December) A purpose built Entertainment Village, the Al Basta market will host an impressive line-up of bands, musicians and artists throughout the duration of the Festival. The market will prove to be a great opportunity for private sector institutions, small enterprises and farmers in the southern governorate to trade their goods and services much to the delight of resident buyers. 

The Bahrain Banker Winter 2014

ECONOMIC AND FINANCIAL INDICATORS 58

Bahrain Money Supply (M2)

Bahrain Bank Assets

Bahrain Bank Lending

Bahrain Deposits

Bahrain Leverage

Bahrain Net Foreign Assets (US$ Billion)

Inflation (Based to Jan 2009=100)

3M Interbank spread over 3M LIBOR (in %)

Bahrain 5-Year Sovereign CDS (in bps)

The Bahrain Banker Winter 2014

International rating agency Moody’s argues in its most as Dubai and Doha. & SUPRANATIONAL recent Government of Bahrain Credit Analysis Report that Bahrain’s total SOVEREIGN bank the Kingdom’s wholesale banks’ reliance on wholesale, assets have fallen to external funding and significant maturity and currency 5.8 times the country’s mismatches place them in a vulnerable position. However, GDP in 2013, down therefore limit risk to the sovereign. Bahrain’s retail banking sector, on the other hand, maintains wholesale banks not benefit from the central bank’s from bank 11.3 times in 2007. assetsdo over twice the size of GDP and benefits from central support, posing contingent liability support and therefore limit risk to the sovereign. Bahrain’s Moody’s recently risks. retail banking sector, on the other hand, maintains assets stabilised its outlook on Bahrain’s retail banking system, financial has from witnessed increased over recent yearssolid fromfunding, regional peers over twice theBahrain’s size of GDP and sector benefits central bank competition reflecting the banks’ liquidity and capital such as Dubai and Doha. Bahrain’s total bank assets have fallen to 5.8 times the country’s GDP in support but is subject to contingent liability risks. positions. Its expectations are that further economic 2013, down from 11.3 times in 2007 (see Exhibit 11). Bahrain’s financial sector has witnessed increased recovery fuelled by higher government spending will competition over years from regional peers such shore up banks’ profitability and asset quality.  EXHIBITrecent 11 Bahrain’s financial sector has decreased in size Total Bank Assets (Domestic and Foreign) Retail Banks

Wholesale Banks

100 90 80

BHD Billions

ECONOMIC AND FINANCIAL INDICATORS

Growth in retail banking limits financial sector decline

60 50 40 30 20 10 0 2007

2008

2009

2010

2011

2012

2013

Source: Central Bank of Bahrain

We recently stabilized our outlook on Bahrain’s retail banking system, reflecting the banks’ solid funding, liquidity and capital positions, and our expectation that further economic recovery fuelled by higher government spending will shore up banks’ profitability and asset quality. We expect stable asset quality for the system, with non-performing loans remaining around 6% of gross loans over the outlook period, as the domestic economy strengthens and banks diversify into higher-growth GCC countries. However, asset quality metrics are unlikely to improve materially, as current non-performing loans are concentrated in a few large, troubled borrowers. External Vulnerability Risk: Moderate

Bahrain’s external position remains reasonably strong, with external debt shrinking to 126% of GDP in 2013, from 152% in 2009. Persistent current account surpluses -- averaging 8.3% of GDP between 2005 and 2013 -- and a relatively low external breakeven oil price, which the IMF projects to be $65.5 per barrel in 2015, also support its external position. Bahrain’s high share of oil imports becomes cheaper during periods of low oil prices and balances the effect from lower oil and gas export revenues. We therefore expect a sustained period of low oil prices to have a manageable effect on Bahrain’s external position. Although the level of official foreign-exchange reserves in Bahrain is low at $5.7 billion at the end of July 2014, these reserves do not include all of the public sector’s foreign assets (as is the case with other GCC states). For its part, the External Vulnerability Indicator has remained very high – at 851% as of end-2013, reflecting large external deposits in Bahrain’s banking sector, which have proved sticky. The government reported a net international investment position equivalent to 76.5% of GDP in 2013.

NOVEMBER 10, 2014

CREDIT ANALYSIS: BAHRAIN, GOVERNMENT OF

The Bahrain Banker Winter 2014

FACTS ABOUT BAHRAIN

Population:

Insurance companies (cont):

2011 1,195,020

Takaful and Retakaful

Number of financial institutions:

Captives

January 2014

404

Number working in financial sector: 2012 14,009 of which: Baharaini nationals

9,253 (66%)

Foreign nationals

4,756 (34%)

Economic indicators: US$ 32.8 billion

Growth (2013)

6.8%

GDP (Constant 2013)

US$ 28.6 billion

Growth (2013)

5.5%

Financial sectorâ&#x20AC;&#x2122;s contribution to GDP

16.8%

Sovereign ratings:

Managers

Representative offices

Loss adjusters

Actuaries

Others

US$ 191.5 billion 116 28

of which: Locally incorporated

Branches of foreign banks

Wholesale banks

Bank Society Representative offices

1 11

Islamic banks: (included in above) Number of banks (September 2014) Assets (May 2014)

23 US$ 24.2 billion

Insurance companies: Number of firms (September 2014)

151

Domestic market Gross premiums (December 2013) Number of firms

Firms

Brokers

Consultants 2 Investment firms: Number of firms (September 2014)

Market capitalisation (September 2014)

Banks:

Retail banks

of which:

62 9

Capital markets:

BBB (Fitch Dec 2013) with stable outlook

Number of institutions (September 2014)

Representative offices

BBB (S&P Dec 2013) with stable outlook

US$ 685 million 36

of which:

US$ 21.5 billion

Number of firms (September 2014)

Licensed Exchanges

Licensed Clearing, Settlement and Central Depository Systems

Licensed Securities Brokers

Licensed Securities Dealers

Licensed Securities Clearing Members

Licensed Securities Broker Dealers

Specialised licencees: Number of firms (April 2014)

Number of money changers

Number of financing companies

Microfinance Institutions

Funds industry: Authorised funds (September 2014) Net asset value (June 2014)

2,847 US$ 7 billion

Local funds (CIUs) Net asset value (June 2014)

91 US$ 4 billion

of which: Conventional (local)

50 41

Locally incorporated

Islamic (local)

Overseas

Foreign funds Offshore (September 2014)

Source: Central Bank of Bahrain, November 2014

Consultants

Restricted licences

GDP (Current 2013)

Assets (May 2014)

Brokers 31

The Bahrain Banker Winter 2014

2,732

Board of Directors

WHO’S WHO

The Bahrain Association of Banks

Robert Ainey CEO The Bahrain Association of Banks (BAB), established by a Ministerial decree in 1979 and re-registered with the Central Bank of Bahrain in 2010, brings together banking institutions of all sizes and charters in the Kingdom of Bahrain and works towards enhancing Bahrain’s image as the financial hub of the Middle East. Collectively providing the full range of financial services, the financial sector represents US$ 191.5 billion in total assets, contributes 16.8 percent towards Bahrain’s US$ 32.8 billion GDP and employs over 14,000 men and women. Of that number fully one-third are female. The Association provides an open forum where banks can come together to collectively discuss and solve their shared problems. BAB is also actively engaged in promoting banking conferences, exhibitions and seminars that bring overseas banking delegations to Bahrain and create business opportunities for all members. Finally, BAB also has the objective of promoting professional development and best practices among the banks’ male and female managers and staff.

Abdul Razak Al Qassim Chairman, CEO & Director of NBB

Dr Farid A Al Mulla Deputy Chairman, CEO of Oasis Capital

Adel El-Labban Group CEO & Managing Director of Ahli United Bank

Adnan Ahmed Yousif President & CEO of Al Baraka Banking Group

Hassan Jarrar CEO of Standard Chartered Bank

Dr Khaled Kawan President and CEO of Arab Banking Corporation

Khalil Nooruddin BAB Treasurer, Managing Partner, Capital Knowledge

Talal Al-Zain Regional CEO of PineBridge Investments

Management Robert Ainey Chief Executive Officer Abdullah J Wallace Publisher & Head of External Communications Wafa Janahi Office Manager Mayan Ghaith Public Relations & Events Officer Bahrain Association of Banks PO Box 1034, Manama Kingdom of Bahrain Physical Address: Office 12, Building 39, Road 33, Block 333, Mahooz Tel: +973 1782 3000, Fax: +973 1782 0700 Email: admin@banksbahrain.org Website: www.banksbahrain.org © 2014 The Bahrain Association of Banks. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Bahrain Association of Banks. While every effort is made to ensure the accuracy of the information reported in The Bahrain Banker, the publisher accepts no responsibility for any errors or omissions, and rejects any claims arising out of any action which a company or individual may take on the basis of information contained herein.

The Bahrain Banker Winter 2014

LAST WORD

Risk and the Boardroom

oards are now under a lot of pressure to oversee and take a more active role in the risk management activities of their companies. Historically the board viewed risk management as a value-protection exercise focusing on insurance and hedging contracts. However, recently, risk management is viewed as means of achieving long-term strategy through balancing risks and rewards. There is diversity in the level of board involvement with regards to risk that does not appear to be connected

to either a particular industry or the company's size. While financial institutions and energy companies have been in the forefront of embracing and developing the risk-oversight abilities of their companies and directors – prompted by either regulatory or safety requirements – a number of companies in other sectors have also been attentive to risk issues. The sense of urgency in improving risk oversight is highly variable and is often driven by the breadth of each director’s experience. So what are best practices that the board should be on

Risks for the board to consider Strategic Risk • Are the strategies appropriate to enable the organisation to meet its objectives? • What are the risks inherent in these strategies? • How much risk is the organisation willing to take? Operational Risk • What are the risks inherent in the processes that have been chosen to implement the above strategies? • How does the organisation identify, quantify, and manage these risks? Reputational Risk • What are the risks to the brand and reputation inherent in how the organization executes these strategies? Regulatory or Contractual Risk • What are the risks related to compliance with these regulations / contractual agreements? Financial Risk • Has the organisation incurred unreasonable liabilities to support its operation? • Has the organisation succeeded in meeting measurable business objectives? Information Risk • Is our data/information timely and reliable? • Are our IT systems reliable? New Risks • What new risks are yet to develop? Source: “ERM - An emerging model for building shareholder value”. A white paper by KPMG – Assurance and Advisory

The Bahrain Banker Winter 2014

1. Do I know what our risks are? 2. Do we understand inter-relationships of our risk? 3. Do I know what our risk appetite is? 4. Do I know who our risk owners are? 5. Do they have systems in place to measure and monitor this risk? 6. What is the perspective of the person/department overseeing risk? 7. How does our incentive system affect risk management? 8. Does each individual understand his or her role and responsibility for managing risk? Source: ERM - An emerging model for building shareholder value. A white paper by KPMG – Assurance and Advisory

the lookout for to improve risk oversight? The above list sets out the key principles for designing a best practice risk management framework. Assigning the responsibility for risk oversight to the whole board and not just one board committee is a start. Risk oversight should be one of the core activities of the board in executing its fiduciary responsibilities. Boards also need to develop a deep understanding of the big risks facing their organisation. However they should also consider the full set of material risks that the company faces and not constrain themselves to a narrow risk focus (financial and operational). Effective boards look at a variety of risks facing the business including risks linked to regulatory, stakeholder, country, HR, reputational, competitive and IT issues. Understanding and assessing risks requires the right experts around the table. This includes both the presence of board members and risk experts that can get to the bottom of issues and can communicate their insights to the rest of the board. Risk should also to be considered in any major decision that the board needs to take. Boards need to engage with management and employees who expose the company to measured risk to understand and get their insights on the risks that they are managing. Talking about risk with the various risk owners creates an environment that can lead to a collaborative approach to risk management, thus bridging the silos, or sharing data from different departments together, within the organisation. Many boards, especially those of financial institutions, are now adopting stress testing as part of their overall risk oversight. Boards should actively engage with management to understand the effects across the business of significant macroeconomic or extreme operational events. Questions

Principles for designing a best practice risk management framework 1. Strong and visible commitment from all members of the top team. 2. Central oversight of risk management across the enterprise. 3. Separation of duties between policy setting, monitoring and control on one hand and risk origination on the other. 4. Clearly defined accountability. 5. Risk appetite and strategy clearly set by top management. 6. Full ownership of risk and risk management at business-unit level. 7. Business units are involved and view risk function as a thought partner. 8. Incentive systems incorporate risk-return considerations.

LAST WORD

Checklist for boards and business leaders

Source: McKinsey Working Paper on Risk. A board perspective on ERM - Feb 2010. Andre Bordeur, Kevin Buehler, Michael PatsalosFox, and Martin Pergler

need to be asked such as: "What could disrupt our plans?" "How vulnerable are we to specific or more general risks?" This in turn can give the board significant insight into the vulnerabilities their companies face. Another best practice that is gaining momentum is for the board, in conjunction with management, to define the company’s risk appetite and the specific areas they are willing to take risks in, based on their capabilities and potential market opportunities. Lastly boards should consider the risk effects of executive compensation. Recent crises have highlighted the linkage between executive compensation and risk culture which is often present in the financial services sector. In conclusion risk oversight is a complex and important element for the corporate director to ensure the execution of his or her fiduciary duties. There is no unique way for the boards to tackle this issue; much depends on the maturity level of the risk-management function within the organisation, board composition and skill sets and the type of industry it is operating in. The best way to start is to put risk as a topic of discussion on the board’s agenda and  spend sufficient time to discuss it.

Lamees Al Baharna is President of CFA Society Bahrain and Presidents Council Representative (PCR) of the CFA societies for East Europe, Middle East and Africa (EMEA) at the CFA Institute.

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