Bahrain: Delivering sustainable value

 

 

Amid widespread political and economic chaos in the Middle East, the Kingdom of Bahrain has remained sane and capitalized on its diversified sectors creating a host of opportunities for investors. In this exclusive interview, Khalid Al Rumaihi, Chief Executive, Bahrain Economic Development Board (EDB) sheds light on the growing economy in Bahrain and explains how the country is at the forefront of the international Islamic Finance industry.

 

How do you assess Bahrain’s economic development in line with the regional turmoil in the Middle East?

Bahrain’s economic performance is underpinned by robust and resilient fundamentals, above all in the form of demographics, diversification, and connectivity. These continued to deliver healthy growth even in the face of a highly unusual economic cycle globally. In 2014, the economy grew by 4.5% overall with the non-oil sector growing by 4.9%. This year growth in Bahrain’s non-oil economy is forecast to be 4.6%.

 

Bahrain has been a regional pioneer of economic diversification and 80% of the country’s GDP now comes from the non-oil sector. Historically led by manufacturing and financial services, the diversification process has continued to evolve within and across sector into areas that better capitalize on the Kingdom’s unique competitive advantages. Growth in Bahrain today comes from a variety of different sectors, which has limited the country’s vulnerability to sector-specific shocks. For example, Financial services now accounts for approximately 17% of GDP while manufacturing represents around 14% of GDP.

 

At the same time, even if the Middle East has experienced turmoil during the global economic crisis, the GCC region has been one of the strongest and most resilient performers of the global economy. Among other things, this reflects the remarkable success of the region in capitalizing on its unique geographic location at the crossroads of three continents. Thanks to substantial investments in infrastructure and regulatory reform, the region has positioned itself as a key nod for global trade, travel, and capital flows and continues to create opportunities for investors worldwide.

 

What are the most appealing sectors for investors at the moment?

We are seeing investment across a wide range of sectors at the moment but interest has been concentrated in areas that benefit most businesses from Bahrain’s key strengths – our skilled bilingual local workforce, the connectivity that provides excellent access to the GCC market, a stable mature regulatory environment, and a liberal and open business culture.

 

Bahrain is expecting to see massive investments in a range of sectors over the coming years, much of it undertaken by private investors. These will range from transportation infrastructure (airport, roads, causeway) to real estate, hospitality, and manufacturing. The recent data on growth highlights the broad-based nature of non-oil sector development. For instance in the second quarter,  the transport and communications sector reported a year-on-year growth rate of 6.7%, whilst the construction sector and the social and personal services sector are strong performers, with year-on-year growth of 6.4%, and 6.2% respectively.

 

A number of major international businesses have recently announced new investments in Bahrain. Mondelez (formerly known as Kraft), which is the world’s second largest food and beverage company, already operates a state-of-the-art factory in Bahrain, manufacturing some of their most popular products. A second facility valued at $90 million is under construction at the Bahrain International Investment Park (BIIP) to enable Mondelez to cater for rising demand from the Middle Eastern and European markets.

 

Bahrain has long been a destination for regional tourism and is seeing investments designed to take advantage of this, as well as attracting international travelers. In view of rising numbers of visitors entering Bahrain, and the supportive demographic and economic factors driving this growth, we are attracting some of the largest names in hospitality, such as The Four Seasons, Fairmont Hotels, and Anantara Hotels, to our shores, enabling us to provide first class accommodation for all visitors.

 

Beyond the larger, more established sector, we have a thriving SME sector with entrepreneurship driving growth and innovation in several areas, including ICT, where Bahrain has a particular opportunity in terms of creating Arabic-language content and services.

 

What are the reforms adopted by Bahrain to rank 39th internationally in the newly released 2015-2016 Global Competitiveness Report?

The reforms have come as part of long established program that recognizes that sustainable economic growth lies in increasing the private sector’s contribution to investment and development, the government has made some key reforms.

 

For example, in 2002 the country’s telecommunications market was liberalized, and since then, the Telecommunications Regulatory Authority (TRA) has issued over 150 licences. In 2006, Bahrain was the first country in the GCC to ratify a Free Trade Agreement (FTA) with the US, allowing for the quicker and easier exchange of technological skills and providing long-term opportunities in the outsourcing of software development. Competition between companies has prompted huge growth in this sector, with revenues reaching BD 423 million in 2013.

 

As a result, Bahrain now boasts the Middle East’s most liberal and advanced information, communications and technology (ICT) infrastructure and policies, with one of the highest mobile and internet penetration rates in the region. 

 

Bahrain has always striven to strike a balance with comprehensive quality regulation and a liberal business environment. While, on the one hand, the country has mature regulators and a unified jurisdiction with a level playing field for all, new initiatives are constantly underway to uphold the country’s competitiveness and to enable business to unleash the true economic potential of this country. Recent reforms have, among other things, targeted start-up business regulations and logistics.

 

What are Bahrain EDB’s latest initiatives in order to attract investments to the country?

As part of its role to support further investment in the Kingdom, the EDB continues to provide consultancy advice and investor support for businesses and new joint ventures. One recently held in the manufacturing sector has been the EDB’s support of a joint venture signed by Bahrain Mumtalakat Holding Company, the Kingdom’s Sovereign Wealth Fund, with Synergies Castings Limited, one of India’s leading aluminium casters and manufacturers of alloy wheels. The agreement provides for the establishment of an aluminium casting and specialty alloy wheel manufacturing facility in Bahrain. The EDB was heavily involved in attracting Synergies to Bahrain, first identifying the opportunity and then getting in touch with the company, before facilitating the partnership with Mumtalakat.

 

The EDB supports the government’s efforts in the development of the country’s business environment and regulations to build on the Kingdom’s economic growth story. One of its efforts is to encourage creative ICT entrepreneurship through incubators and accelerators.

 

More generally, the EDB sponsors events and conducts roadshows to key markets in order to raise awareness about the investment opportunities on offer in the Kingdom of Bahrain. This September we organized a high-level delegation visit to China, building on a successful roadshow held the previous year and the official visit of His Majesty King Hamad bin Isa Al-Khalifa in September 2013. The delegation visited four cities, including major commercial centres Xiamen and Beijing, and attended trade exhibitions, as well as held high-level talks with representatives from the public and private sector.  The visit resulted in the signing of 15 agreements between Bahraini businessmen and their Chinese counterparts. Additionally, the roadshow led to the announcement of renowned China’s East Star Group of its intention to launch Middle East operations from Bahrain, and we look forward to welcoming many more Chinese companies to Bahrain in the near future.

 

What would be your message to investors looking to do business in Bahrain?

The Bahrain opportunity is about delivering sustainable value for the investor and the country. For example, Bahrain’s favorable business environment has earned us a reputation as the ‘Gateway to the Gulf’. According to the Heritage Foundation’s Index of Economic Freedom 2015, Bahrain has the freest economy in the Middle East and North Africa and is 18th freest in the world, the only country in the region to rank in the top 20. Bahrain has a number of competitive advantages, which companies interested in establishing operations in the region can take advantage of, including some of the lowest operating costs in the region, a highly competitive taxation system, and 100% foreign ownership permitted in most sectors.

 

In addition, Bahrain is strategically located at the heart of the Gulf and its excellent transport network facilitating intraregional trade links offers access to the wider GCC market, currently valued at $1.6 trillion and expected to hit $2 trillion by 2020. In particular, Bahrain offers quick and easy access to the region’s largest market, Saudi Arabia, via a 25km causeway. The Kingdom also offers high-quality infrastructure at competitive prices and with a history of price stability.

 

As the first GCC country to introduce a public education system in 1919, Bahrain has long emphasized the importance of education. The government’s commitment to prioritising education and vocational training has produced one of the most skilled workforces in the region. Highly-motivated, bilingual employees are of great value to businesses catering to both English and Arabic-speaking customers.

 

With EDB’s continuous support to the banking industry, how is the economic growth influencing this particular sector?

Bahrain’s more than four decades of experience as a regional financial services hub in the region have resulted in the development of a sophisticated banking industry, set apart by the quality and maturity of its regulation as well as a deep and diverse pool of talent.

 

There are more than 400 licensed financial institutions in Bahrain, which are staffed predominantly by Bahrainis; of the approximately 14,000 people employed in financial services in 2012, more than 9,200 of them (66%) were Bahraini. Educational institutions in the Kingdom have expanded to provide increased financial training in recent years. For example, the Bahrain Institute of Banking and Finance (BIBF) has qualified over 200,000 learners in the last 3 decades.

 

The sector is providing multiple opportunities for growth and economy diversification– from a range of insurance solutions to long-term savings. Within the industry, a number of specialist sectors have developed, catering to the differing needs of Bahrain’s diverse demographic. The international Islamic Finance industry has grown rapidly in recent years due to increased demand for its products and services, and Bahrain has remained at the forefront of this development. The Kingdom is home to the largest concentration of Islamic financial institutions in the world, with 24 Islamic banks in Bahrain, whose assets under management total $25.1 billion (February 2015), up from $1.9 billion in 2000.

 

Can you tell us about the expansion of the Islamic finance industry across the globe and the EDB’s contribution to this development?

Islamic Finance is rapidly gaining popularity as it has established itself not only as a significant but also as a highly dynamic sector within global finance. In 2014, the value of global Islamic finance assets reached $1.8 trillion and this figure is expected to almost double to reach $3.2 trillion by 2020. 

 

Bahrain offers a unique opportunity for institutions in Islamic finance. As a pioneer of this industry, it is still home to one of the largest concentrations of Islamic Financial Institutions (IFIs) globally as well as several internationally significant trend-setting institutions. The CBB has been a proactive advocate of the sector on a number of levels, not least in pioneering comprehensive regulatory frameworks across the sector.

 

At the EDB, we aim to be the first point of contact for any business setting up in Bahrain and we assist throughout the entire process, from initial point of contact, to navigating regulations, and finally to the logistics of setting up their offices in the Kingdom. With regards to Islamic Finance, the EDB worked closely with Turkiye Finans, Turkey’s largest Islamic bank, to assist with the set up of their first international office in Bahrain. The EDB also previously worked with Thomson Reuters to support in establishing their Global Islamic Finance Centre of Excellence here in Bahrain.

 

We also provide support to initiatives of global standard-setting bodies in the Kingdom such as The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), International Islamic Finance Market (IIFM), General Council for Islamic Banks and Financial Institutions (CIBAFI) and the Islamic International Rating Agency (IIRA). The EDB recently sponsored an IIFM Credit Agreement working group event in Bahrain. We also collaborate with organizations to raise awareness about Islamic finance and sponsor key events around the sector, including the World Islamic Banking Conference (WIBC), which has been held annually in the Kingdom since 1994 and continues to attract hundreds of leading experts in the industry. The EDB also sponsored a high level market consultative meeting on credit support arrangement in association with IIFM and its Islamic hedging joint-partner International Swaps & Derivatives Association (ISDA), debating how to manage transactional risk. These events provide the ideal platforms to discuss the reforms needed in order for the industry to expand and evolve.

 

What are the challenges this industry is facing on a global level?

Many of the challenges that the Islamic finance sector is facing are linked to that fact that it is a relatively developing industry that has experienced rapid growth. The supply of trained and experienced professionals has struggled to keep up with the growth of demand. In many cases, the process of developing Shariah-compliant products and solutions to meet clients and investors needs has been slow. In some instances, this has tended to result in a very heavy focus on asset classes such as real estate, developing appropriate technical solutions to enable IFIs to manage their risks and compete successfully, and to operate in different markets that can be a gradual process. Significant efforts are currently underway in areas such as liquidity provision and hedging agreements. Standardization is another important challenge as its absence can entail higher costs and delays, as well as market fragmentation.

 

The sector also faces many of the same challenges that the conventional banking sector faces in those markets where it operates. Much of the Islamic finance sector is concentrated in emerging markets and while the long-term economic fundamentals in these markets remain strong, the shorter-term outlook is more challenging than it has been in the recent past.

 

With Bahrain hosting The World Islamic Banking Conference, what do you expect from the event this year?

WIBC is recognized as one of the largest and most significant annual gatherings of Islamic banking and finance industry leaders anywhere in the world. The conference provides the ideal forum to share experiences and discuss new ideas, paving the way for innovation in the industry.

 

There will be several reports launched at the conference this year, including the WIBC Ernst and Young World Islamic Banking Competitiveness Report 2015, which will provide a comprehensive overview of the sector and highlight important trends.  The results of these reports should provoke some interesting debate amongst the panellists.

 

Additionally, the conference program has been designed to address the major challenges facing the sector, as well as the opportunities for future growth. Its dual focus on two key strands, banking and finance and asset management, allows conference-goers to focus on what most interests them and widens the scope of the forum. 

 

There is an opportunity to continue these critical discussions at other upcoming events, including the 10thannual AAOIFI - World Bank Conference on Islamic Banking and Finance, held on the 6th and 7th of December and hosted by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the World Bank. The conference will focus on the development of international Islamic capital markets and the standardisation of international Islamic financial practices.

 

Where do you see scope of growth in Bahrain in the near future?

We expect near to medium-term growth in Bahrain to maintain the positive trajectory it is currently following, in particular in the non-oil sector. Over the next few years, we should also see increased investment from the private sector, in line with government initiatives. In 2014, Bahrain attracted US$957 million in foreign direct investment, up from US$891 million in 2012, and it is likely that this level will be maintained.

 

There are several large-scale infrastructure projects ongoing in the Kingdom, which will stimulate further growth. Bahrain has committed to investing over US$22 billion in key infrastructure projects, aiming to increase public and private sector participation across a variety of sectors. Projects include the modernization of the Bahrain International Airport, a new road and rail bridge connecting Bahrain to Saudi Arabia, and the expansion of the Aluminium Bahrain (ALBA) smelter, which will increase annual production by 514,000 tons to reach a yearly capacity of 1.45 million metric tons.

 

*Interview conducted by Jenny Kassis, Executive Editor

 

About Khalid Al Rumaihi

 Khalid Al Rumaihi was appointed as Chief Executive of the Bahrain Economic Development Board (EDB) in March 2015. He currently serves as a Board Director of the National Bank of Bahrain and Bahrain Mumtalakat Holding Company. He remains a Board Director of the EDB.

Khalid previously spent more than 10 years at Investcorp as a Managing Director, a member of the Management Committee and Head of the Institutional Placement Team covering Investcorp's clients in the Gulf. Before joining Investcorp, he spent 9 years serving at J.P. Morgan as head of the private client group in the Gulf. He Chaired the Board of Bahrain Airport Company and held previous Board positions at Gulf Air and Securities Investment Company (SICO).

He holds a Master’s degree in Public Policy, specializing in Economic Development, from Harvard University, and a Bachelor of Science degree in Foreign Service from Georgetown University.

 

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