Bahraini.TV

Bahrain looks set to avoid most of the direct fallout from the current international financial crisis caused by the near collapse of the US sub-prime market, though a global economic slowdown will leave its mark.

The greatest bulwark the kingdom’s financial sector has against the effects of the sub-prime crisis is the rising tide of sharia compliant banking, a major force in the international economy.

By avoiding collateral-linked debt instruments associated with sub-prime or mortgage arrangements, sharia compliant financial institutions were protected to a great degree from the economic meltdown, according to Rasheed Mohammed Al Maraj, the governor of the central bank.

“In Islamic banking there is no black box that needs a genius to unwind it,” Al Maraj told the Reuters Islamic Finance Summit in Manama on February 4. “Many of these conventional products that have been under stress lately are very complex and need special risk management tools.”

Indeed, there could be a silver lining for Bahrain in the dark cloud of the global credit crisis. Heavily capitalised Islamic financial institutions could be able to take advantage of buying up or buying into companies that have been caught short.

The ongoing crisis may also serve to encourage more investors to consider Islamic banking as a viable alternative to conventional forms of financing and money management.

“Maybe Islamic banking will be a safe bet for them,” Al Maraj said. “I think opportunities exist in the US and Europe as a result of this financial distress. The high valuation of assets will come down.”

Not all of Bahrain’s institutions have made it through unscathed, however. Releasing its results for 2007 on February 3, Arab Banking Corporation (ABC), which has both conventional and Islamic banking arms, reported a 38% drop in net income for last year, down from the 2006 figure of $202m to $125m.

“The significant change was entirely due to the net provision of $230m resulting from securities write downs that the group was obliged to take in the wake of the global credit squeeze that followed the US sub-prime housing loan crisis,” ABC said in a statement.

However, ABC’s write down was related only to its conventional banking operations, and was not linked to its sharia compliant activities, according to Duncan Smith, the head of the bank’s Islamic banking section.

“The underlying trend of Islamic banking businesses within ABC is very good,” Smith said on February 4.

Other Bahraini banks however, have not directly suffered from the sub-prime crisis. On January 15, the National Bank of Bahrain (NBB) announced its net profit had surged to $110.5m last year, an increase of 12.75% over 2006.

“The results were particularly gratifying considering the turmoil in the global financial markets arising from the sub-prime mortgage crisis and liquidity crunch faced by the banking industry,” said NBB chairman Abdulla Ali Kanoo.

Nonetheless, one area where Bahrain’s banking sector could be affected by the sub-prime crisis is the bond market. Many predict there will be slowdown in the pace of new Islamic bond issues, especially those backed by physical assets such as real estate.

“We are dealing with more suspicious investors,” Ashraf Bseisu, chairman of the Bahrain Insurance Association, told the Reuters summit. “People are going back to the drawing board to make sure that the structure of the securitisation is more palatable and more sellable.”

However, ABC’s Smith was confident the bond market would recover quickly, picking up in the second half of the year.

“The underlying trend in the region is still there. That market will come back, particularly in the Gulf and in North Africa,” Smith said.