In terms of economic and social development, throughout the mid-twentieth century Bahrain was a decade or two ahead of many of its Gulf neighbours. Bahrain had more sophisticated infrastructure; a long history as a trading centre; and an increasingly well-educated and trained labour force. During the 1950s and 1960s, at a time when locations like Dubai were only just beginning to experience urbanization, Bahrain was already the preferred location for companies seeking to establish themselves across a rapidly changing region. The fact that Bahrain was also the region’s aviation hub made it inevitable that this would be the location of choice for importers and exporters.
It was only natural therefore that the region’s banking sector would grow up around this growing trading and regional commerce community in Manama, which required more sophisticated financial services, in order to be conducting business across the region.
Initially, Bahrain was a long way behind Cairo and Beirut, which throughout the first half of the century were the locations where Arab elites went to deposit money and conduct complex business arrangements. However, Cairo lost out from the 1950s onwards.
The sudden outbreak of the Lebanese civil war in 1975 marked the moment when Bahrain broke ahead as the region’s preeminent financial centre. Many bankers and businessmen fled Beirut and gravitated towards Manama; either opening up their own institutions, or contributing their expertise to Bahraini and Khaleeji enterprises.
Just as importantly, the 1973 oil embargo by Arab states, in the context of the war with Israel, led to a huge surge in oil revenues. Saudi GDP in real terms expanded from SAR 148 billion in 1970, to 540 billion in 1981. Although Saudi banks were rushing ahead to accommodate these breakneck changes; Bahrain was generally seen as a safe, offshore option for internationalized transactions.
The Saudi commercial sector was likewise wholly unprepared for this wealth influx. In 1954, there were only five industrial enterprises in the whole country, primarily based in Jeddah. As of 1971 only 88 Saudi enterprises had more than 100 employees. Trading and services companies based in Manama were thus perfectly positioned to capitalize on these revolutionary changes in fortunes in Saudi Arabia and other nearby Emirates, as well as catering to the rapid demands of urban development in Bahrain itself. Bahrain also led the way in investment banking as a generation of multimillionaires looked for creative ways to deploy their new fortunes.
By the early 1990s Bahrain had also become a global centre for Islamic banking. The presence of 26 Islamic banks (retail and wholesale) today affords Bahrain the largest concentration of Islamic finance institutions in the Middle East. Islamic banking sector assets rose from $1.9bn in 2000 to $25.7bn by 2016, with total banking sector assets amounting to $192.7bn.
Oil comprises 75.6% of Bahrain’s budget revenues and 20% of GDP. However, the financial services sector accounted for 16.5% of GDP in 2016 and constitutes the largest non-oil component of Bahrain’s GDP, while being the Kingdom’s largest employer, representing over 65% of the work-force and constituting a principal driver of national economic growth. Bahrain’s financial sector includes 29 retail banks and 76 wholesale banks. Fourteen of these retail banks are locally incorporated while fifteen are branches of foreign banks.
The financial sector is regulated and supervised by the Central Bank of Bahrain (CBB) (formerly Bahrain Monetary Agency), which since 2002 has functioned as the single regulator for the entire financial system. The most recent growth priority in Bahrain’s financial sector has been in the field of technology and innovation, with Bahrain recently unveiling FinTech Bay, largely catering to financial technology start-ups.
This commitment to innovation and cutting-edge service provision guarantees that Bahrain will remain a central pillar of the region’s financial infrastructure for the foreseeable future.