The ABC’s of the CBB

The Central Bank of Bahrain’s Regulatory Framework



Regulation in Bahrain


The Central Bank of Bahrain (“CBB”) is the sole regulator of Bahrain's financial services sector, covering the full range of banking, insurance, investment business and capital markets activities, and has the responsibility to promote its growth and ensure its soundness. It is also responsible for conducting monetary policy and foreign exchange rate policies to maintain monetary and financial stability. CBB acts as a banker to the government of Bahrain, manages the country’s reserve and debt issuance and issues the national currency.


The CBB was established in September 2006 pursuant to the promulgated Central Bank of Bahrain and Financial Institutions Law. Prior to the creation of the CBB, the Bahrain Monetary Agency had previously acted as the sole regulatory authority since its establishment in 1973 for regulating Bahrain's banking sector, and was subsequently given responsibility in August 2002 for regulating Bahrain’s insurance sector and capital markets.


The main regulatory objectives of CBB are as follow:


  1. Provide effective central banking services to financial services sector;
  2. Develop the financial sector and enhance confidence therein; and
  3. Protect the interests of depositors and customers of financial institutions, and enhance Bahrain's credibility as an international financial center (Central Bank of Bahrain, 2013).


Regulatory Model of Bahrain


Bahrain has adopted the single regulator approach to regulate the financial services sector, which is under the CBB. Furthermore, the CBB’s approach could be divided into three main categories:


  • Institutional Regulation: each type of license such as (Wholesale banking, Retail banking, Islamic banking, Insurance, Investment Business) is supervised by different directorate. The supervision includes conducting of business and prudential reporting. However, the existence of separate directorates does not prevent financial institutions to have more than one type of license, such as Standard Chartered Bank, which has conventional and Islamic operations in Bahrain.
  • Functional Regulation: the CBB has different directorates that supervise specific functions within the financial service sectors. As an example, the Capital Market Supervision Directorate is responsible for the supervision of Bahrain’s capital market, licensed exchange houses and authorization of capital market products. Another examples, the Compliance Directorate which is responsible for anti-money laundering and combating terrorist financing and is responsible for handling different types of complaints.
  • Regulation by objective: the government has assigned all objectives in relation to the financial system under the control of CBB. As an example, CBB is the sole entity responsible of maintaining monetary and financial stability, regulating financial institutions, managing country’s reserves and issuance of debts (Bowdler & Baker Platt, 2012).


Is the CBB the sole Regulator?


There are other regulatory bodies in which their rules and regulations affect the way financial institutions operate in Bahrain, and CBB has to refer and consult with such bodies in deciding or supervising certain issues.

There are a few overlaps between those bodies and CBB which might lead to the duplication of work and double standards. Absence of co-ordination between those bodies and the lack of integration between their systems, are the main gaps of the regulatory framework.


  • Ministry of Industry and Commerce (MOIC): it is the regulatory body responsible for the creation and implantation of companies’ law and Bahrain Corporate Governance Code. Financial institutions shall seek the approval of both the CBB and MOIC in certain matters, such as approval on type of activities, names of financial institutions, declaration of dividends, establishment of corporate governance guidelines etc.
  • Bahrain Bourse: although Bahrain Bourse is under the supervision of CBB, financial institutions shall comply with rules and regulation of both bodies in term of listing, trading, etc.
  • Ministries of Labor and Justice: financial institutions shall comply with rules and regulations of the aforementioned ministries, such as contract law, pension funds law, authentications of legal documents etc.
  • Ministry of Interior: instructions and guidelines of matters related to financial crimes come from both the Financial Intelligence unit at Ministry of Interior and CBB.
  • Ministry of Finance: accordance to CBB Law, the Minister of Finance has oversight responsibilities with respect to CBB’s activities, and is to be questioned in the parliament regarding those activities.


Role of Regulator


The CBB’s followed the approach of Authorization, Supervision, Standards, Enforcement “ASSE”, with which each function is carried by different directorate within the CBB. The CBB Rulebook comprises all the requirements of the above-mentioned functions; the rulebook is divided into various volumes in which each volume covers particular type of license or activity:


·         Volume 1: Conventional Banks

·         Volume 2: Retail Banks

·         Volume 3: Insurance

·         Volume 4: Investment Business

·         Volume 5: Specialized Licensees

·         Volume 6: Capital Markets

·         Volume 7: Collective Investment Undertakings


A.      Authorization


To conduct or offer any regulated financial service from Bahrain, a license must be obtained from the CBB. However, overseas regulated entities in other jurisdictions who wish to establish regulated products from Bahrain, such as mutual funds, bonds, sukuk, shall seek the authorization from CBB only for such products without applying for a license.


Each volume specifies the requirements of licensing or authorization of its particular type of license or activity. For example, to apply for a license for an Investment Business, the applicant shall comply with requirements of volume 4 of CBB rulebook. The volume covers all the requirements such as, licensing conditions (legal status, mind and management, systems and book and records), fit and proper conditions of approved persons, applicable financial activities and financial instruments, applicable fees, etc.

B.      Supervision


As per CBB’s website, the applicable regulatory requirements are risk focused and principles-based, and are tailored to different categories of licensee and the variable nature of supervisory risks that they pose. However, it is believed that the requirements of CBB are both principle-based and rule-based. For example, some of the requirements for investment business must be exactly applied, such as complaints handling procedures, frequency of Board of Directors’ committees meetings, while other requirements such as clients’ notification are principle-based.


The applied supervision is a mixture of:


·         Offsite supervision which includes reviewing and approving of various reports and requests filed by licensees and prudential meetings;

·         Onsite supervision which is conducted by CBB’s own inspectors and examiners and includes assessment on the quality of systems and control and books and records; and

·         External auditors’ assessments which test and assess the quality and robustness of controls applied by financial institutions on certain areas, such as clients’ assets, financial crimes. Those assessments are reported to CBB for their review and consideration.


C.      Standards


The Central Bank of Bahrain and Financial Institutions Law places an obligation on the CBB to consult formally before issuing any regulations, unless the regulation in question is urgently required. No such obligation exists in the case of Directives. However, CBB has a general policy of involving the industry and other stakeholders in developing all its requirements, and publicly consulting on these, wherever possible.


The CBB's policy development plans are outlined at the start of each year in a policy statement. These plans may also be supplemented, from time to time, by occasional newsletters on key areas of policy under development, such as Basel III.


D.      Enforcement


Enforcement measures include formal warnings, directions (e.g. to cease or desist from an activity), formal requests for information, adverse fit and proper findings, financial penalties or investigations. Extreme violations of the CBB's regulatory requirements may entail cancellation of a license, administration or criminal sanctions (Central Bank of Bahrain, 2013).


Examples of Best Practices Implemented by CBB


Listed below are examples of best practices that have been implemented by the CBB:


1.       Enforcement of Corporate Governance Code for all type of licenses which covers whole aspects of governance such as self-evaluation of Board of Directors, annual Board of Directors review and certification;

2.       Quick adoption of international standards such as Basel III and FATCA;

3.       Integrated regulatory system, unlike USA, which is considered ideal for small country. However, availability of 410 institutions under one roof is relatively difficult to manage and supervise

4.       Introduction of penalties for date sensitive requirements;

5.       Consultation with industry on proposed regulations, in addition to regular and fast updates on existing regulation that reflects changes in industry; and

6.       Pre-submission meeting with new applicant to provide guidance in addition to availability of transparent user-friendly website.


The CBB has been successful in introducing high quality regulation and able to amalgamate its local regulation with the international regulatory standards. Moreover, with its track record and well established regulation, Bahrain has been able to attract regional and international organizations to have their headquarters based in Bahrain such as MENA FATF, Thomson Reuters Global Islamic Finance Hub, The Accounting and Auditing Organization for Islamic Financial Institutions.


About Abdulla Marhoon


Abdulla Marhoon is currently the Compliance Officer, Money Laundering Reporting Officer and in charge of the Risk Management of J Equity Partners since May 2012. Prior to that, he was a Senior Analyst at the Central Bank of Bahrain.

Abdulla Holds a BSc in Banking and Finance from the University of Bahrain and an International Diploma in Compliance (ICA - IDC) from the University of Manchester in association with the International Compliance Association (ICA). He passed the Certified Public Accountant examinations from New Hampshire Board of Accountancy (CPA). He is also a Certified Islamic Professional Accountant (CIPA) from the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Certified Anti-Money Laundering Specialist (CAMS) from the Association of Certified Anti-Money Laundering Specialists (ACAMS) and Associate Professional Risk Manager (APRM) from Professional Risk Managers’ International Association (PRMIA).



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