Business Forum Bahrain outlines sustainable future for Kingdom’s finance sector

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Building a sustainable future

Swift was honoured to be holding the Business Forum under the patronage of the Central Bank of Bahrain (CBB) and for Khalid Hamad, Executive Director, Banking Supervision, at the Central Bank of Bahrain, to deliver the keynote address. Mr Hamad outlined the steps being taken to continue Bahrain’s path towards sustainable growth for its financial industry and the Bank’s four-part strategy to maintain the rigour and growth of Bahrain’s important Islamic Finance sector.

Some of the industry’s plans have emerged after the global financial crisis. Unsurprisingly, said Mr Hamad, the ferocity of the crisis led every financial centre and regulator around the world to re-evaluate the strength and stability of their financial institutions, and to ensure the efficacy of policies and regulatory frameworks. Bahrain’s banking sector emerged in better shape than most, he said, but it did lead the Central Bank to think about what shape and size the banking sector needed to be in order to guarantee a successful future.

“Despite all the painful consequences of the global crisis, Bahrain’s major retail banks continued their operations successfully and managed to distribute dividends throughout the crisis. Nonetheless, the CBB took the proactive initiative to encourage consolidation [amongst Bahraini banks] in order to enhance financial stability and the sustainability of the banking sector.”

As a leading centre for Islamic finance – Bahrain is the home of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), for example – maintaining the health and vitality of this important business segment is major focus for Bahrain’s policy makers and financers. Here too, the CBB is looking to ensure the industry’s future role. Mr Hamad laid out the four key elements of its Islamic Finance strategy: consolidation, enhancement of the regulatory framework, human capital development and market practice enhancement. “We believe that a focus on these four areas will enable the industry to adapt and flourish in the future,” he said.

Bank consolidation underway

The opening plenary session addressed in more detail the vital topic of industry consolidation introduced by Mr Hamad in the keynote speech. Mr Hamad was joined on the stage by Robert Ainey, CEO of the Bahrain Association of Banks (BAB), and Christian Sarafidis, Head of Western Europe, Middle East & Africa, who moderated the session.

[The region’s] potential is reflected in our commitment to the GCC countries and in our investment here and across the Middle East and North Africa.

With a total of 104 banks, both Islamic and conventional, for a population of about 1.3 million, it has been recognised by the regulator and others in the industry that the sector needed to consolidate.

Mr Hamad said: “In 2008, we realised that there were too many small banks – especially Islamic and especially in the retail sector – and that this was having an impact in terms of pricing, competition and human resources. [Merged banks] will be better able to attract skilled staff and high quality assets. A larger capital base will also enable them to better compete for business with bigger banks from across the region. Many of the schemes looking to be funded are big infrastructure projects, so a larger capital base will enable banks to take a greater exposure.”

So far, there have been about 10 mergers or acquisitions. Mr Hamad pointed out, however, that the CBB is not trying to artificially create a regional champion through the consolidation process. “We are trying to achieve good-sized, well managed, stable banks that can provide high quality service, build a solid business model, and achieve a good return for shareholders.”

BAB’s Mr Ainey agreed that this strategy will enable Bahrain to adapt to an evolving environment. “Bahrain’s financial sector has shown in the past that it can be nimble and quick in adapting to changes in the business landscape; the pace of change globally and in the region will demand those attributes again. But, given the quality of the workforce and the regulatory environment here, I think Bahrain is well placed to be the middle and back office for the entire region.”

Pace and scale of regulation

Regulation is also a major topic in the region, from FATCA, Basel III, to Know Your Customer. Mr Ainey noted that, globally, there is a sense of regulatory fatigue in the industry. “A balance needs to be struck by regulators, as financial institutions seek to cope with the speed and scope of new regulations as well as the cost of implementation and impact on the bottom line,” he said.

Mr Hamad acknowledged the regulatory burden – with still more to come, he said – but emphasised Bahrain’s responsibilities as an international financial centre, to ensure that the country maintains and enhances its reputation by adhering to the highest global standards. That said, he said that the CBB is taking a measured approach to try to limit the impact on Bahrain institutions. “For example, we asked banks to begin measuring the impact of Basel III regulations in 2013, but will not implement until 2015, so that banks have plenty of time to ensure they are ready for the changes.”

Corporate automation: value and challenges

Just as Bahrain’s banks are increasingly competing on a regional scale, so too are the Kingdom’s corporates growing, expanding and diversifying. This positive trend brings its own challenges. On the corporate panel, Hani al Maskati, Publisher and Editorial Director of Cash & Trade magazine, and editor of the session, asked Mohammed Fakhro, founder and managing director of Fakhro Group, what is his biggest challenge. His answer was clear: lack of visibility of cash.

“Our major problem is the inability to know how much money there is in each of our accounts. This can create challenges around forecasting and liquidity management,” said Mr Fakhro.

Prakash Mohan, Group Head, Corporate Banking, Ahli United Bank, understood the concern, but said that there is no one-size-fits-all solution. “Everything depends on the corporate’s operating model. Does it have only domestic operations or is it international? What is its cash versus electronic transfer usage? How automated are its internal processes and systems? If a client is relatively automated, we can generally provide an updated cash position within 30 minutes of a payment being made. This is very hard if it relies on manual processes,” he said.

The adoption of automated solutions that increase straight-through processing has so far been slow in the region, added Mr Mohan. “Bigger corporates are more willing to invest in the kind of back-end enterprise resource planning systems that are able to create a workflow which incorporates automated reconciliation and other operational efficiencies. Investment in these systems is sometimes more difficult to justify for a family business. Banks therefore need to come up with innovative ideas about how to provide faster reconciliation, improved cash visibility and other benefits.”

Bassam Khalifa, Country Head for Bahrain, Swift, said that Swift’s corporate solution can support many of these benefits. “Swift for Corporates enables businesses to access financial services from all of their financial institutions through a single, secure and standardised communication platform, as opposed to managing multiple connections, in proprietary formats. This helps corporates to reduce cost and risk, increase funds visibility and improve automation,” he said. “And it does not have to be an expensive option. We have shaped our solutions to address a variety of corporate needs, so that we have an appropriate offering for every size of business. Corporates will soon see return on investment in terms of the efficiencies and cost savings it will generate.”

Security concerns & Cybercrime

Adoption of online banking or cloud services in the region is held back by concerns about online security. Roger Nasr, Managing Partner, Deloitte & Touche, said the region’s banks need to extend corporates’ understanding about what products and services are available, and to address their concerns. “Corporates in the region use only a tiny proportion of the functionality that is available – for example, there is little use of electronic transfer payments because of a general mistrust about making online payments. Concerns about online security and cybercrime are high. The industry needs to address this,” said Mr Nasr.

In 2008, we realised that there were too many small banks – especially Islamic and especially in the retail sector – and that this was having an impact in terms of pricing, competition and human resources. [Merged banks] will be better able to attract skilled staff and high quality assets.

Mr Fakhro, who is also a board member of the Bahrain Chamber of Commerce, agreed that this is a particular concern for family businesses such as his. “I’m certainly not convinced. I don’t think the username and password system is secure enough; perhaps if an additional layer of biometric security was added, it would give me greater confidence,” he said.

Ahli Bank’s Mr Mohan agreed that banks must do more to demonstrate that increasing automation provides significant operational benefits and that use of electronic and online processing does not have to compromise security. “The cheque book is not entirely secure either,” he countered. “Certainly, the region’s bigger corporates are beginning to see the advantages in terms operational efficiency and better working capital management. These are slowly breaking down the barriers and encouraging corporates to look at new processes and practices.”

Islamic finance: a global market

On the Islamic finance panel, moderator Ali Adnan Ibrahim, First Vice President, Al Baraka Banking Group, was joined by Ananthakrishnan TC, Senior Manager, Audit & Advisory at KPMG, and Sohaib Umar, Advisor, Islamic Financial Services Development at the CBB for a discussion about Bahrain’s role as a centre of Islamic finance excellence. In December 2013, more than 1,300 Islamic finance leaders headed to Bahrain for the 20th anniversary of the World Islamic Banking Conference. The even brought together thought leaders, key regulators and leading industry players to discuss the global growth of the international Islamic finance industry, and demonstrated Bahrain’s relevance to the industry. But as other financial centres, including Dubai, compete to become Islamic finance hubs, what is Bahrain’s role amidst global competition and where is its competitive advantage?

If success is a function of one’s own attributes, not of another’s strength or weakness, then Bahrain remains well placed to face future challenges, said Mr Umar. “Bahrain stands up in terms of its openness, flexibility, strong regulatory track record and accessibility. It offers an excellent environment and a strong pool of highly educated, well trained human resources. These are inherent strengths that help to differentiate the Kingdom from competitors,” said Mr Umar.

Mr Ananthakrishnan TC stressed the key role of the regulator in any financial centre. “The regulatory environment is paramount and Bahrain is one of the most well regulated environments in the world. The CBB is ranked as the 7th best regulatory globally, and has been an early mover in terms of adopting global standards such as Basel III etc. Equally, standards are crucial, and as Bahrain is home to the AAOIFI, this ensures that the Kingdom will play an important role in Islamic finance’s future development.”

Dr. Ibrahim acknowledged Bahrain’s advantages, but stressed that the wider environment is also very important, particularly as the battle for Islamic finance business intensifies globally. “Success in Islamic finance – as in other areas of finance – is based on a variety of skills, people and organisations. It is not just about the regulatory environment; markets play an equally important role. If you look at successful international financial centres like London and New York, they have a highly skilled pool of professional services firms, market intermediaries, academics etc. Ensuring that this whole ecosystem is in place – and keeping it refreshed – is as important to the health of Islamic finance as it is to others disciplines.”