Bahrain's banks are not only set to recover after the negative impact of the Corona pandemic but are embarking on greater digitalisation of its services, writes Ahmed Abdul-Rahman
The Corona pandemic had a significant negative impact on banks around the world, as they witnessed a contraction in their revenues and growth. Although Bahrain's banks also suffered, regulators in the small Gulf kingdom are working to rebuild the banking sector.
The Bahraini banking sector, like its counterparts around the world, has played an important role in supporting the economy over the past two years, both as a partner in government-led coronavirus relief initiatives and as a direct aid to the business community and individuals.
At the same time, banks were able to maintain key growth rates. Total domestic deposits grew by 4.2 per cent to 14.1 billion Bahraini dinars (USD 35.5 billion) in 2021, with outstanding loans to residents increasing by 4.7 per cent to 10.9 billion Bahraini dinars, according to the Central Bank of Bahrain. Meanwhile, return on assets was 1.1 per cent as of December 2021, up from 0.7 per cent at the end of 2020, with return on equity rising to 7.8 percent, up from 2.6 per cent over the same period.
Growth despite the pandemic
According to the latest Financial Stability Report issued by the Central Bank of Bahrain in September 2021, the total assets of the banking sector in Bahrain amounted to USD 213.2 billion at the end of 2021, which is 6.5 times GDP. The share of retail banks amounted to USD 97.3 billion and wholesale banks to USD 115.9 billion. The value of the Islamic banking sector reached USD 32.6 billion, which represents 15.3 per cent of total banking sector assets.
However, while Bahrain's domestic economy grew by 1.5 per cent in the first three quarters of 2021, compared to the same period in 2020, the financial services sector witnessed a contraction of 2.7 per cent, according to Bahrain's Information and eGovernment Authority.
A major role to play
The financial services sector remains Bahrain's largest non-oil sector, accounting for 17.9 per cent of GDP, according to the Information and eGovernment Authority, ahead of manufacturing at 14.1 per cent and government services at 12 per cent.
"Ten per cent of all Bahrainis working in the private sector work in financial services, which is one of the highest paid sectors," said Khalid Humaidan, CEO of the Bahrain Economic Development Board. Humaidan believes that the financial services sector could eventually account for more than 20 per cent of Bahrain's economic activity over the next five years.
Non-performing loans (NPL)
One area of continuing uncertainty is what will happen when the country lifts the loan deferral scheme, which was put in place during the early days of the coronavirus pandemic. Bahrain initially froze bank loan repayments in March 2020, to help businesses and individuals withstand the crisis. The plan has since been extended four times, most recently in December 2021, with loan payment deferrals extended until at least the end of June 2022.
While the NPL ratio decreased from 4.2 per cent in December 2020 to 3.2 per cent in December 2021, there is still a lot of uncertainty about what will happen when the deferral is lifted. In 2020, several banks in Bahrain issued additional capital bonds to boost their capital adequacy ratios, which amounted to 18.3 per cent in 2021 according to the Bahrain Association of Banks.
Towards a digital world
Even though Bahrain has the smallest economy in the Gulf region, it was one of the first countries in the region to adopt fintech (financial technology) solutions and digital assets. The Central Bank of Bahrain has promoted a strategy aimed at strengthening the local fintech industry and encouraging innovation in financial services. For example, Bahrain was the first country in the world to issue open banking guidelines that include Islamic finance.
In December 2021, the Financial Services Authority and i2c, a provider of digital payment and banking technology, launched the joint business identity "Beyon Money", the first premium banking application in Bahrain. In January 2022, Bahrain was the first country in the Middle East to grant approval in principle to a cryptocurrency exchange- known as Binance- establishing itself as the provider of servicing crypto assets within its borders. Last year, the country's monetary authority also granted a
Earlier this year, it was announced that Bahrain Telecommunications Company (Batelco) would became the first telecom provider in the GCC to obtain a licence to engage in open banking services, after obtaining the necessary licenses from the Central Bank. The telecom company will provide consumers and small and medium-sized businesses with services including digital wallets, card issuance services, and bank account aggregation.
It was also announced in January that the central bank had successfully completed a test of instant cross-border digital currency payments, using the JPM Coin system, which saw funds transferred between Bahrain and the US via ABC Bank on behalf of Aluminum Bahrain (Alba).