The Central Bank of Bahrain (CBB) is setto launch a key Islamic financial instru-ment aimed at providing a much-need-

ed liquidity management tool to Islamicfinancial institutions.

The Islamic Sukuk Liquidity Instrument(ISLI) has been jointly developed by the CBBand the Bahrain-based LiquidityManagement Centre (LMC), an organizationwhich provides asset sourcing, structuringand market making capabilities.

ISLI has been designed to enable financialinstitutions, both conventional and Islamic,to access short term liquidity againstGovernment of Bahrain Islamic leasing (Ijara)bonds (sukuk), issued by the CBB.

The new initiative reflects CBB’s continu-ing commitment and contribution to theIslamic finance industry and will furtherenhance Bahrain’s role as a world leader inthe sukuk market.

“The development of the uniquely-struc-tured ISLI represents a major breakthroughfor the Islamic finance industry worldwideand will significantly enhance the sukukmarket,” said Dr Abdul Rahman Saif,Director, Banking Operations, at the CBB.

The availability of instruments such as ISLIwill help create a deeper and more liquidsukuk market, which requires a variety ofshort and long term instruments to enhanceIslamic banks’ ability to efficiently managetheir liquidity. It will also stimulate and pro-mote a more active Islamic financial market.

The tripartite structure developed by theCBB and LMC will enable financial institu-tions holding BD-denominated CBB Ijarasukuk (short, medium or long term) toengage in transactions aimed at accessingshort term liquidity.

“Conventional money markets have awide range of instruments which allowbanks to invest surplus funds or borrowfunds in the short term. ISLI will providesimilar flexibility to Islamic financial institu-tions as well as conventional institutions sub-scribing to CBB sukuk,” said Dr Saif.

The new instrument will complement the

already existing and hugely popular sukukoffered by the CBB.

In 2001, the CBB became the first sovereignin the world to develop and issue sukuk. Sincethen, the CBB has an established calendar ofIslamic debt paper, which comprises shortterm as well as medium to long term sukuk.

A BD5 million issue of Sukuk Al-Ijara, of 6-month tenor, and a BD6 million issue ofSukuk Al-Salam, of three-month tenor, areeach offered once a month.

For the medium and long tenors, the CBBhas offered a total of 14 issues of Ijara sukuk,with a total value of US$2.05 billion, of whichUS$1.27 billion is currently outstanding. Themost recent one, a five-year US$350 millioninternational issue now listed on the LondonStock Exchange, was made in March 2008.

“We expect to bring the ISLI to market laterthis month,” said Dr Saif.

The contract has been endorsed by theShari’a Boards of the CBB and LMC.Members of the CBB Shari’a Board areShaikh Nizam Yaquby, Shaikh Dr AbdulSattar Abu Ghuddah, Shaikh Mohsin AlAsfoor, Shaikh Abdulla Al Manea and JusticeTaqi Usmani, while LMC’s Shari’a Boardcomprises Shaikh Dr Hussain Hamid, ShaikhDr Ajeel Al Nashmi, Shaikh Adnan Al Qattanand Dr Abu Ghuddah.

“In the quest for developing the Islamicfinancial market, we have reviewed thisinstrument and found it to add significantvalue to the sukuk market,” said a CBBShari’a Board statement.

Mr. Ahmed Abbas, Chief Executive Officerof LMC, thanked the CBB for its support instructuring ISLI, which was a groundbreakingdevelopment for the Islamic finance industry.

“The CBB has committed considerableresources, including its real time nationalpayment system (RTGS) and SecuritiesSettlement System (SSS) to make ISLI an oper-ationally efficient product,” said Mr. Abbas.

The CBB and LMC are now working on astructure to extend ISLI to CBB’s dollar-denominated sukuk as well, he said.

Published by the Central Bank of Bahrain (CBB)April 2008 Issue 21

Page 2

Financial sector jobs surge

Risk management critical

Page 3

CBB move on banking fees

Waqf Fund research panel

Page 4

AAOIFI statement on sukuk

Award for AAOIFI

Page 5

Islamic finance leadership

Page 6

IIFM to launch MATP

CBB, MAS hold talks

Page 7

Protecting Consumers

Page 8

CBB seminar on risk

CBB Ijara sukuk calendar

Financial Factsheet

Editor

Indira Chand, CBB

E-mail

islamicbanking@cbb.gov.bh

CBB Contact:

Director

Islamic Financial Institutions

Central Bank of Bahrain

P.O.Box 27, Manama

Kingdom of Bahrain

Tel: +973 17547444

Fax: +973 17537554

Website: www.cbb.gov.bh

Inside

B A H R A I N

CBB develops uniqueliquidity tool

Bahrain’s financial services industry added more than2,200 new jobs during 2007, raising total employment inthe sector to a record 11,960 last year, according to a

Central Bank of Bahrain (CBB) annual survey on employmentin the financial sector.

The 2007 employment was a 22.6% increase over 2006, con-tinuing a recent trend of double-digit growth in financial sec-tor workforce, which has more than doubled since 2000 whenthe CBB began conducting the survey annually.

The Bahrain financial sector employment survey is conduct-ed by the CBB’s Directorate of Financial Stability.

The survey for 2007 found that of the 2,208 new jobs created,1,230 (or 55.7%) went to Bahrainis, raising the number ofBahrainis employed in the financial sector to 8,248 last year,from 7,019 in 2006.

“Bahrain’s growth in financial sector employment in 2007was the strongest in recent years, reflecting the unprecedentedeconomic growth taking place in the region,” said ShaikhSalman bin Isa Al Khalifa, Director, Financial Stability, at theCBB.

Bahrain’s financial services industry has been a major bene-ficiary of the strong economic activity in the country and in theregion.

The financial sector has added 3,742 jobs in the past twoyears alone and 6,729 since 2000.

A key highlight of the 2007 survey is the increase of 22.8% inthe employment of Bahraini women, who accounted for 37.2%of all Bahrainis employed by the financial sector and one-quar-

ter of the total workforce.

The industry, at 2007-end comprised 400 institutions, inaddition to the CBB, BSE and BIBF, is one of the largest con-tributors to Bahrain’s economy, accounting for 25.5% of GDPin 2006.

The banking industry, the bedrock of Bahrain’s financial sec-tor, remained the largest employer within the financial servicesindustry, adding 1,470 new jobs during 2007. This resulted in a20.6% increase in employment in the banking sector to 8,608,which constituted 72% of all financial sector jobs in 2007.

Bahrainis comprised 6,241 (72.5%) of the banking jobs in2007, with Bahraini women, numbering 2,354, accounting for27.3% of the jobs in the banking sector.

The insurance industry also posted a strong increase of25.8% in employment, with insurance firms employing a totalof 1,529 people in 2007, compared with the revised 2006 figureof 1,215. The Bahraini workforce in the insurance sector grew16.6% to 915, from 785 in 2006, with women, totaling 328, rep-resenting 35.8% of the Bahraini workforce in the insurance sec-tor.

“The 2007 employment numbers are a strong demonstrationof Bahrain’s continued development as the leading interna-tional financial centre in the Middle East region,” said ShaikhSalman.

On its part, the CBB continues to ensure that Bahrain’s finan-cial institutions enjoy a transparent and business-friendly reg-ulatory environment and the availability of skilled and profes-sional human resources, he said.

B A H R A I N

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Financial sector jobs surge

Islamic Finance Review Bahrain ● April 2008

Good risk management is the needof the hour for banks, says Mr.Rasheed Mohammed Al Maraj,

Governor of the Central Bank of Bahrain(CBB).

The US subprime crisis underscoresthe importance of good risk manage-ment, he told delegates attending the2nd annual GCC Regulators’ Summit,held in Bahrain on 19 & 20 February2008.

“This conference is taking placeagainst a backdrop of fresh challengesbeing posed by a number of global fac-tors and their interplay with regionaldevelopments,” said Mr. Al Maraj. “TheUS subprime crisis and the ensuing cred-it crunch, as well as the Societe Generaleincident compel us to proceed with cau-tion, despite the boom all around us herein the region.”

In particular, these incidents under-score the need for good risk manage-

ment and effective internal controls byfinancial institutions. Indeed, both theseelements are proving to be critical toensuring the stability of individualfinancial institutions and financial sys-tems.

“The role of the regulator in address-ing these challenges is crucial. We canprovide the guidance and create theappropriate regulatory framework toenable the sound and stable conduct offinancial services and financial institu-tions,” he said.

Improving risk management practicesof banks is an important component ofthe work being done by the CBB.

Moreover, the CBB has introduced aninnovative approach to the applicationof Basel II, Pillar One requirements forIslamic financial institutions. AlthoughIslamic financial products are not explic-itly mentioned in Basel II, the CBB hasintroduced, effective this year, a compre-

hensive Basel II compliant frameworkwhich provides for appropriate capitaltreatment of products such asMurabaha, Ijara, Istisna’a, amongst oth-ers.

This will ensure that regulations ofinternational standards are applied toIslamic financial institutions which willfurther enhance the reputation of whathas become such a prominent segmentof Bahrain’s financial services industry.

The CBB is also addressing the chal-lenges faced by certain investmentsmade by banking institutions, especial-ly banks’ exposure to the real estatemarket, with a view to encouragingbanks to maintain a more balancedportfolio.

In addition, the CBB is focusing muchattention on upgrading and enhancingregulations governing capital markets,which are central to the functioning of amodern, sophisticated financial centre.

Good risk management critical

The Central Bank of Bahrain (CBB)has launched a pioneering initia-tive to disseminate information

related to fees charged for various con-sumer-related banking services by retailbanks operating in Bahrain.

A schedule of such fees charged byindividual banks, as well as interest ratesapplicable for consumer loans, is nowavailable to the public on the CBB web-site at www.cbb.gov.bh

With this, the CBB becomes the firstcentral bank in the region to publish aBanking Services Charges schedule,which will be updated on regular basis.

The Banking Services Charges scheduleprovides, in % terms or BD value asappropriate, the fees related to a widerange of consumer-related banking ser-vices under the following broad headings:

● Account Charges (covering deposits)● Credit Cards● Loans● ATM Cards● Cheque Collection● Cash Withdrawal Charges● Remittance Fees● Other Charges● Investment Funds

“The Banking Services Charges sched-ule is a comprehensive bank-by-banklisting of the charges related to variousconsumer banking services which attracta fee by the banks,” said Mr. KhalidHamad, Executive Director, BankingSupervision, at the CBB.

“We feel there is a need to bring inmore transparency into the consumerbanking market, for the benefit of theconsumer.”

The move to publish such charges fallswithin the CBB’s broader responsibilitiesto protect consumers by enabling themto make informed decisions about theservices offered by banks.

“The initiative, which requires banksto provide the necessary information,also enhances CBB’s efforts to monitorthe consumer banking market. It willalso enhance competition,” said Mr.Hamad.

The Banking Services Charges sched-ule is designed to enable consumers toeasily compare the fees charged or inter-est rate levied by various banks for thesame service or product, said Mr. YousifHassan, Director, Retail bankingSupervision, at the CBB.

The Loans category of the schedule,

for example, lists the Annual PercentageRate (APR) charged by each bank on aconsumer loan, as well as the servicesfees for Administration for ConsumerLoans, Administration for MortgageLoans, Early Settlement, LoanRestructuring, InstallmentPostponement, besides several otherloan-related services.

The Account Charges category liststhe Minimum Balance required for sav-ings and current accounts and thebank’s charge in case of failure to main-tain that balance. Other informationincluded in this category relates to fixeddeposit accounts and the charge forbreaking such a deposit, cheque bookissuance fees.

“We advise consumers to visit theCBB website and use this new facility,which will help them to be betterinformed about the fees and interestrates prevailing in the market,” said Mr.Hassan.

The Banking Services Charges sched-ule can be accessed through the mainmenu bar on the CBB website(www.cbb.gov.bh), under ConsumerInformation.

B A H R A I N

3

CBB move on banking fees

Islamic Finance Review Bahrain ● April 2008

Waqf Fund research panelWaqf Fund, a Bahrain-based special fund to support

Islamic finance research, education and training, hascreated a high level panel to advance a robust pro-

gramme of research that would benefit the global Islamicbanking and finance industry.

The panel of leading practitioners, academics and scholarswould oversee the research activities sponsored by the WaqfFund, which was established in 2006, with capital contribu-tions and commitments now standing at approximately US$7million, by the Central Bank of Bahrain (CBB) in partnershipwith 16 leading Islamic financial institutions (IFIs).

The Fund’s mission is to advance Islamic finance training,education and research through a broad range of activities.

The Fund will pursue an active agenda of sponsoring andfinancing research on topics relevant to the Islamic financeindustry, by inviting research proposals, selecting them,extending finance and providing the necessary mentorship,through the research panel, said Mr. Khalid Hamad, ExecutiveDirector, Banking Supervision, at the CBB, who is alsoChairman of the Waqf Fund.

The research panel comprises well-known practitioners,scholars and academics responsible for overseeing and review-ing the researchers’ work. Each researcher will be assigned to

a panelist based on the panelist’s area of expertise, relevance tothe research topic, and availability. The panelist will oversee,guide, and review the work of the researcher, which should becompleted in approximately six months.

Leading academics, practitioners and scholars who havealready committed to join the research panel include SheikhDr. Abdul Sattar Abu Guddah, Sheikh Muhammad TaqiUsmani, Shaikh Dr. Mohammad El-Gari, Prof. Dr. AbdelHamid Ei-Baaly, Dr. Daud Baker, Prof. Rifaat Abdel Karim,Adnan Yousif, Abdul Hakeem Al-Khayat, Mosa Shahateh,Prof. Simon Archer, Prof. Rodney Wilson, and Prof. MahmoodFaruqui, said Mr. Hamad.

Upon completion of each research project, the Fund wouldpublish and disseminate the findings of the research for thebenefit of the Islamic finance industry.

“The Fund was established with the aim of addressing thecritical needs of the Islamic finance industry, which today cen-tre around the shortage of appropriately qualified humanresources and lack of research to support the development ofproducts and market practices,” said Mr. Hamad.

“The Fund is addressing both of these issues with new ini-tiatives, which will act as major stimuli to the sound advance-ment of contemporary Islamic finance.”

B A H R A I N

4Islamic Finance Review Bahrain ● April 2008

Bahrain-based Accounting andAuditing Organization for IslamicFinancial Institutions (AAOIFI) has

issued a statement on sukuk, providingguidelines for sukuk issuers.

The statement follows widespread con-cerns by leading Islamic scholars that amajority of sukuk being issued may notbe fully compliant with Islamic Shari’aprinciples.

The issue was highlighted at the annu-al AAOIFI-World Bank Conference, heldin Bahrain on 18 & 19 November 2007.

“The sukuk mechanisms adopted todayhave many faults,” said prominent Islamicscholar Shaikh Dr. Abdul Sattar Abu-Ghuddah, who was seconded by otherscholars who attended the conference.

Today’s structures violate the principleof risk-and-profit-sharing by promisingto pay back capital, he explained.

The statement of AAOIFI’s Shari’aCommittee has been issued in view of theexpanding application of sukuk world-wide, the public interest in them, and theobservations and questions raised aboutthem.

The Shari’a Committee advises Islamicfinancial institutions and Shari’a supervi-sory boards to adhere to the followingwhen issuing Sukuk:

First: Tradable Sukuk must representownership for Sukuk holders, with all ofthe rights and obligations that accompa-ny ownership, in real assets, whether tan-gible or usufructs or services, that may bepossessed and disposed of legally and inaccordance with the Shari’a. All of thisshould be in accordance with AAOIFI

Shari’a Standard (17) on the subject ofInvestment Sukuk, articles (2) and(2/1/5). The manager of a Sukukissuance must establish the transfer ofownership of such assets in its books, andmust not retain them as its own assets.

Second: It is not permissible for trad-able Sukuk to represent either revenuestreams or debt except in the case of atrading or financial entity that is sellingall of its assets, or a portfolio whichincludes a standing financial obligationsuch that debt was incurred indirectly,incidental to a physical asset or a usufructin accordance with the guidelines men-tioned in Shari’a Standard (21) on thesubject of Financial Paper.

Third: It is not permissible for the man-ager of Sukuk, regardless of whether themanager acts as a mudarib (investmentmanager), or a sharik (partner), or a wakil(an investment agent), to undertake tooffer loans to Sukuk holders when actualearnings fall short of expected earnings. Itis permissible, however, to establish areserve for the purpose of covering suchshortfalls to the extent possible, on condi-tion that the same be mentioned in theprospectus. There is no impediment to thedistribution of expected earnings onaccount, in accordance with Shari’aStandard (13) on the subject of Mudaraba,article (8/8), or to obtaining project financ-ing on the account of the Sukuk holders.

Fourth: It is not permissible for themudarib (investment manager), sharik(partner), or wakil (investment agent) toagree to purchase assets from Sukukholders or from whoever represents themfor a nominal value of those assets at thetime the Sukuk are extinguished at the

end of their tenors. It is permissible, how-ever, to agree to purchase the assets fortheir net value, or market value, or fairmarket value, or for a price agreed to atthe time of their purchase, in accordancewith Shari’a Standard (12) on the subjectof partnership and modern partnerships,Article (2/6/1/3) and with Shari’aStandard (5) on the subject of Guarantees,Articles (1/2/2) and (2/2/2). It should beunderstood that the Sukuk manager actsas guarantor of [investor] capital at itsnominal value in cases of negligence ormalafides or non-compliance with statedconditions, regardless of whether themanager is a sharik (partner), wakil(agent), or mudarib (investment manag-er). If, however, the assets of a Sukuk al-Musharaka, or Mudaraba, or Wakala, areof lesser value than assets leased bymeans of a lease ending in possession(Ijara muntahiya bi’t-tamlik), then it willbe permissible for the Sukuk manager toagree to purchase those assets at the timethe Sukuk are extinguished for theremaining lease payments on the assets,by considering these payments to be thenet value of those assets.

Fifth: It is permissible for the lessee in aSukuk al-Ijara to agree to purchase theleased assets when the Sukuk areredeemed for their nominal value, as longas the lessee is not also an investmentpartner, mudarib, or agent.

Sixth: Shari’a supervisory boards mustnot consider their responsibility to beover when they issue a fatwa on thestructure of Sukuk. Rather, they mustreview all contracts and documentationrelated to the actual transaction, and thenoversee the ways that these are imple-

AAOIFI statement on sukuk

Award for AAOIFImented in order to be certain that theoperation complies at every stage withShari’a guidelines and requirements asspecified in the Shari’a Standards, andthat the investment of Sukuk proceedsand what those proceeds are converted totakes place in accordance with one [oranother] of the approved Shari’a methodsof investment as stated in Shari’aStandard (17) on the subject ofInvestment Sukuk, Article (5/1/8/5).

In addition to all this, the Shari’aCommittee advises Islamic FinancialInstitutions to decrease their exposure todebt-related operations and to increasetheir operations based on true partner-ships and the sharing of risk and rewardand thereby achieve the higher purposesof the Shari’a.

The Accounting and AuditingOrganization for Islamic Financial

Institutions (AAOIFI) has been awardedthe prestigious Award for ContinuingContribution in Promoting Islamic Financeat the International Islamic Finance Forum,held in Dubai from 13 to 17 April 2008.

Receiving the award at the event, DrMohamed Nedal Alchaar, SecretaryGeneral of AAOIFI, said the award was atestimony of AAOIFI’s significant achieve-ment in formulating international Islamicstandards that have introduced greaterharmonization of Islamic finance practicesand transparency in financial reports ofIslamic financial institutions.

AAOIFI is the international organiza-tion responsible for development andissuance of standards on accounting,auditing, ethics, governance, and Shari’a.It has issued a total of 68 standards cover-ing the whole range of Islamic financepractices that are accepted globally.

AAOIFI standards ensure Islamic finan-cial institutions comply with theShari’a. The standards also introduce greaterclarity to the financial reporting of Islamicfinancial institutions, said Dr Alchaar.

Meanwhile, AAOIFI’s next AnnualIslamic Banking and Finance Conferencewill be held on 10 & 11 November 2008 inBahrain.

B A H R A I N

5 Islamic Finance Review Bahrain ● April 2008

‘It is a pleasure to have this opportu-nity to enhance awareness aboutBahrain’s growing role as the

world’s leading hub for Islamic financialservices, both banking and insurance, aswell as a host of industry-support ser-vices.

To put a little perspective on the Islamicfinance industry, allow me to first give youa brief overview of Bahrain’s financial sec-tor, which the Government of Bahrainbegan nurturing in the 1970s as part of aforward-looking policy of economic diver-sification.

During these past 35 years, Bahrain hasfirmly established and, indeed, continuesto enhance its credentials as a safe andsound jurisdiction for financial services.The financial services sector has, in fact,become Bahrain’s flagship industry and isnow the largest contributor to the nationaleconomy, representing a quarter ofBahrain’s GDP.

As the single regulator of the financialservices industry, the Central Bank ofBahrain currently oversees over 400licensees, by far the largest concentrationof financial firms in the Middle East region.

Our licensees carry out a wide range ofactivities covering banking, which hasexpanded by 75% over the past two years,insurance, which is growing by over 20%,and an active capital market.

Within this rather vibrant financial ser-vices fabric, the Islamic finance segment isseeing significant growth.

In Bahrain, the Islamic finance indus-try first emerged exactly three decadesago, with the establishment of a com-mercial bank in 1978. Following a fairlyquiet decade, Islamic banking activitybegan gathering momentum in the 1990sand there has been no turning backsince.

Today, Islamic banking has become anintegral part of the financial landscape notjust in Bahrain and the Middle East but inAsia and Europe as well. In the Westernhemisphere, London is becoming a base forIslamic banks.

Bahrain has attracted the largest criticalmass of Islamic banks, currently number-ing 29, as well as Islamic insurance compa-nies, which currently total 15.

As a mature financial centre for con-ventional finance, Bahrain has drawn onall its experience in regulating and super-vising the nascent Islamic finance indus-try. However, in doing so, we have notlost sight of our guiding principle of

implementing inter-national best prac-tice in all aspects of

regulation and supervision.

High StandardsI can assure you that Bahrain does not

afford a free pass to Islamic financial insti-tutions.

In fact, Bahrain was the first country todevelop and implement in 2001 a compre-hensive regulatory framework for Islamicbanks. This was followed in 2005 by a reg-ulatory framework specific to Islamicinsurance (takaful) and reinsurance(retakaful) companies.

And, from the start of 2008, the CBB hasnotched up another first by implementingBasel II requirements for both convention-al and Islamic banks.

While requiring Islamic financial institu-tions to adhere to international standards,the CBB does take into account the uniquecharacteristics of Islamic finance, which hasto conform to certain Islamic principles. Inaddition, all Islamic finance deals must betransacted on profit-and-loss sharing basisand they must be backed by tangible assets.Speculation is also not permitted.

The latter requirement could be the rea-son why Islamic banks have come outunscathed from the sub-prime crisis, whichcontinues to unfold and which has affectedfinancial institutions the world over. Themulti-layering of financial products, whichthe current crisis has exposed, is notallowed in Islamic finance.

However, the growing internationaliza-tion of Islamic finance inevitably exposesIslamic financial institutions to a numberof risks, similar to those of their conven-tional counterparts.

As a regulator, the CBB cannot shieldIslamic or conventional banks from risk.However, what we can do is provide a reg-ulatory environment that enables thesound and stable conduct of financial ser-vices and financial institutions.

CBB InnovationsI would like to add that the CBB itself

has been an innovator in Islamic productdevelopment. In 2001, we were the firstcentral bank in the world to develop and

issue sukuk, an Islamic debt market instru-ment which can be likened to the conven-tional bond. Since then, the CBB has had inplace a rolling programme of regularissuance of sukuk of short, medium andlong term.

Recently, the CBB has issued its secondinternational sukuk, worth US$350 million,which has been listed on the London StockExchange, along with our first internation-al issue of US$250 million.

We are also engaged in a host of otherinitiatives to stimulate the Islamic financemarket, including the development of anIslamic version of the RepurchaseAgreement (Repo).

Due to Bahrain’s primary place in theglobal Islamic financial industry, we playhost to a number of industry-support orga-nizations, which are working on a numberof market development initiatives with theactive support of the CBB.

These include the International IslamicFinancial Market (IIFM), an internationalinstitution focused on the development ofthe global Islamic capital and money mar-kets, which is working on developing anumber of standardized Islamic financecontracts.

In addition, the Bahrain-basedAccounting and Auditing Organisation forIslamic Financial Institutions (AAOIFI) reg-ularly issues accounting, auditing, gover-nance, ethics and Shari’a standards for theIslamic finance industry, while the IslamicInternational Rating Agency (IIRA), havingsuccessfully developed a unique methodol-ogy for the rating of Islamic financial insti-tutions, offers both credit rating and Shari’aquality rating services.

The CBB’s holistic approach to the longterm development of the Islamic financeindustry also includes the human resourcecomponent. Thus it is that the BahrainInstitute of Banking & Finance (BIBF), awell-reputed training centre focused on thefinancial services industry, offers a compre-hensive range of training and educationprograms in Islamic finance.

Together with the market participants,these organizations form a fairly compre-hensive complement of Islamic financialservices available from Bahrain.

Islamic finance leadershipMr. Rasheed Mohammed Al Maraj, Governor of the Central Bank ofBahrain, highlighted Bahrain’s leading role in the development ofIslamic finance, as well as the Kingdom’s status as the global hub forIslamic banking and takaful. He was speaking at a seminar at the USChamber of Commerce in Washington DC on 14 April 2008. Theevent was organized by the US-Bahrain Business Council.

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B A H R A I N

6Islamic Finance Review Bahrain ● April 2008

IIFM set for MATP launchThe International Islamic Financial Market (IIFM) is in the

final stages of developing the first-ever standardizedMaster Agreement, which can be used by Islamic financial

institutions across the globe.

The Master Agreement for Treasury Placement (MATP) is abenchmark document, which is currently undergoing a finalreview by leading Islamic financial institutions and convention-al institutions offering Islamic finance, to be followed shortly bya final Shari’a review by prominent scholars.

The MATP will significantly facilitate the Islamic bankingindustry’s commodity Murabaha transactions, which form thebulk of Islamic money market transactions, said Mr. Ijlal Alvi,Chief Executive Officer of the IIFM, an international marketdevelopment institution focused on the development of theglobal Islamic capital and money markets.

According to some market estimates, the commodityMurabaha market is worth about US$100 billion at present. Dueto the shortage of other Shari’a compliant instruments, com-modity Murabaha is the main and most widely used Islamicmoney market product for liquidity management purposes byIslamic financial institutions.

“The IIFM is delighted to have spearheaded such a project todevelop a contract which will cover over 90% of commodityMurabaha transactions in numerous jurisdictions across theworld. In addition, the utilization of a standardized agreementwill enable more transparency, robustness and consistency inIslamic financial transactions,” said Mr. Khalid Hamad, IIFMChairman and Executive Director, Banking Supervision, at theCentral Bank of Bahrain (CBB).

“The standardization of such a contract will have significantpositive ramifications for the Islamic banking industry world-wide.”

The MATP will carry wide acceptability, given the activeinvolvement of many prominent market players and prominentShari’a scholars throughout the process of developing the agree-ment. The development process has benefited considerably fromthe regulatory expertise provided by IIFM’s founding and per-manent members, namely Bahrain, Brunei, Indonesia, Malaysia,Pakistan and Sudan, besides the Islamic Development Bank.

A leading global legal firm and accounting and auditing firmhave also been involved in the development of the MasterAgreement.

“The MATP, once it comes to market in a short while, will bethe first Islamic finance contract to be harmonized across the dif-ferent geographic regions where Islamic banking is practised,”said Mr. Alvi.

The IIFM is also working on several other market developmentinitiatives, which are aimed at the development of a truly globalisedIslamic finance industry and Islamic capital markets. All of the IIFMprojects are being undertaken following detailed consultations withIslamic financial institutions, to identify the needs of the industry.

“We are gratified by the support we have received fromIslamic financial institutions and other market players, especial-ly IIFM members and Shari’a scholars, in developing the MATPand for their active participation throughout the developmentprocess,” said Mr. Alvi.

“We are also grateful to the Central Bank of Bahrain for itsstrong support and continued guidance.”

CBB receives MAS teamMr. Rasheed Mohammed Al

Maraj, Governor of the CentralBank of Bahrain (CBB) held

talks recently with Mr. Heng Swee Keat,Managing Director of the MonetaryAuthority of Singapore (MAS), and hisaccompanying delegation.

The two sides discussed issues of mutu-al interest, particularly the developmentand growth of the banking and financialsectors of Bahrain and Singapore.

Areas of interest to the MAS teamincluded CBB’s experience and knowl-edge of Islamic finance, in view of MAS’srecently announced intention to issuesovereign-rated sukuk to meet the needsof Islamic financial institutions.

Mr. Al Maraj extended CBB coopera-tion to MAS in its efforts to develop theinfrastructure for Islamic finance.

“The development of Islamic bankingis something we are proud of in Bahrain,”said Mr. Al Maraj.

As a well-established financial centre,Bahrain has played a key role in innovat-

Seen during the meeting are Mr. Al Maraj, centre, and Mr. Keat, third from left, withother CBB and MAS officials.

ing the development of Islamic banking,which is one of the fastest growing seg-ments of Bahrain’s financial servicesindustry.

More recently, with the development ofa comprehensive regulatory frameworkfor Islamic insurance (takaful), severalglobal insurance firms have establishedtakaful operations in Bahrain.

In addition to Islamic finance, the CBBalso sees good prospects of growth for thefund management industry, trust admin-

istration business and insurance.“These are all areas where we see a good

potential for a homegrown industry, notjust for foreign players,” said Mr. Al Maraj.

He pointed to the long-standing coop-eration between Bahrain and Singaporeon several fronts, including educationand training.

“Singapore has been a role model formany developing countries and we lookforward to strengthening our bilateralcooperation,” said Mr. Al Maraj.

B A H R A I N

7

Protecting ConsumersIslamic banks must be aware of con-

sumer protection legislation in themarkets where they operate, primari-

ly for reputational reasons. Consumerprotection refers to the array of laws,regulations and best practice codes thatare designed to protect retail consumersfrom unscrupulous or negligent bankers.Failure by banks to be aware of andimplement consumer protection legisla-tion may result in fines from the CBB, orother enforcement actions such asforcible repayment of fees or commis-sions to customers. In extreme cases(such as usury) financing facilities maybe declared null and void, or the bankmay not be allowed to enforce collateral.

Consumer protection also extends toprotection of confidentiality, so that cus-tomer information is not lost or compro-mised through inadequate security; or toavoid the bank suffering loss throughfraud.

In all societies, the majority of con-sumers are relatively financially unso-phisticated: they are the customer cat-egory that is most easily dominated,dictated to or bullied; they are theleast price-sensitive category of cus-tomer; they are the cheapest source offunds, and the category of customer towhom banks charge the highest fees ormargins.

So consumer protection starts out asmeasures to protect consumers. Thisprotection is afforded by such means asdisclosure requirements to show the“true” cost of credit, and may includemeasures to set maximum fees or financ-ing charges, or to allow early repaymentof facilities without undue cost.

However consumer protection mea-sures also work to protect banks fromfraud, and to enforce and encouragegood financing practices by not allow-ing “unscrupulous” banks to providecredit on terms whereby it cannot berepaid.

The most obvious such consumer pro-tection measure in the Kingdom ofBahrain and other GCC countries suchas Kuwait or Saudi Arabia is the exis-tence of Credit Reference Bureaux. It iscompulsory in Bahrain for all retailbanks to be members of the CreditReference Bureau. This means that forall financing facilities, credit card orother requests for credit from non-com-

mercial residents ofBahrain, the bankmust approach theCredit ReferenceBureau to verify the

amount of credit that the concerned per-son has outstanding and the amount offinancing instalments that the consumeris making per month.

The CBB’s two headline limits on con-sumer credit are as follows:

● Total monthly instalments for creditmay not exceed 50% of a consumer’sincome; and

● Instalment consumer finance maynot have an original maturity of over 7years.

This means if a person is already mak-ing instalments of 45% of his monthlyincome, only instalments amounting toan extra 5% of monthly income may bepermitted.

This 50% limit is there to protect boththe consumer and the bank. For theconsumer, it is to ensure that he has suf-ficient residual income after his monthlycredit instalments to meet his otherobligations such as housing, food, elec-tricity, water, clothing etc. For the bank,it is to ensure that customers are notentering into monthly commitmentsthat they cannot fulfil. There are twoqualifications to this 50% limit.

First, it only applies to persons withsalaries of BD3,000 per month or less.Second, revolving lines of credit (theform most commonly used is creditcards) are given a notional 5% of totallimit as part of monthly income.So a BD1,000 credit card limit wouldtranslate to a notional BD50 per monthinstalment for the purpose of the 50% ofincome limit.

The CBB has imposed the 7-year max-imum limit on consumer credit to pre-vent a consumer paying for a 2-weekholiday over 10 years, for example.

There is a third limit or restriction thatapplies. This is the so-called “top-up”limit. In short, a customer may onlyextend an instalment consumer financefacility twice during the term of an

agreement. The objective with the top-up limit is to seek to ensure that con-sumers will ultimately pay off theirconsumer finance facilities and not belocked into paying off instalments for-ever.

“Consumer Protection” also hasanother aspect. The CBB is responsiblefor investigating consumer complaints.Complaints normally centre aroundincreases in the cost of credit whereinterest rate increases result in increas-es in the monthly instalment payable oran extension to the term of a financefacility.

Generally, the CBB is more sympathet-ic to the complainant than to the bank.This is not a matter of policy, but due tothe fact that by the time a customer com-plains to the CBB, he has exhaustedavenues at the concerned bank, andachieved no satisfaction. Most com-plaints show a lack of communicationbetween the borrower and the bank.The Consumer Code of Best Practice thatwas introduced in 2007 outlines arrange-ments (for banks and consumers)for dealing with complaints.

So, what may we say in conclusionabout consumer protection as part ofrisk management? First, existing regula-tions in Bahrain are put there for thebenefit of both the borrowers and thelenders by aiming only to allow credit toconsumers that is affordable and medi-um-term.

Second, in the event of disputes, theCBB has the legal authority to imposepenalties on banks if they fail to followthe CBB’s rules on consumer finance.

Lastly, Consumer Protection alsoextends through the use of the CreditReference Bureau to allow banks greateruse of credit information on consumersto assist in their due diligence ofprospective customers. At present inBahrain consumer protection is compar-atively light, however as we are seeingwith the unfolding subprime fiasco inthe US, unregulated consumer creditmarkets may ultimately be highly harm-ful to society, the economy and the finan-cial system.

Islamic Finance Review Bahrain ● April 2008

Mr. Richard Ellis, Advisor, Banking Supervision, at the CentralBank of Bahrain, highlights the importance of consumer protectionmeasures and how they work as part of good risk management prac-tices by banks.

B A H R A I N

Issue Issue Date Issue Size Maturity Date Rating Issue Price Listing

no.

1 4-9-2001 US$100m 4-9-2006 - 5.25% Bahrain StockExchange (BSE)

2 27-2-2002 US$70m 27-2-2005 - 4.25% BSE

3 29-8-2002 US$80m 29-8-2007 - 4% BSE

4 19-11-2002 US$50m 19-11-2005 A- 3% “

5 27-2-2003 US$80m 27-2-2007 A- 3% “

6 2-4-2003 US$100m 2-4-2008 A- 3.75% “

7 27-5-2003 US$250m 27-5-2008 A- 60 basis points

over six-month Libor “

8 15-12-2003 US$50m 15-12-2006 A- 30 basis points

over six-month Libor “

9 30-6-2004 US$250m 30-6-2009 A- 45 basis points BSE, Luxem-

over six-month Libor bourg, Labuan

10 20-7-2004 BD40m 20-7-2014 A 5.125% BSE

11 28-2-2005 BD30m 28-2-2010 A 4.5% BSE

12 21-11-2005 US$230m 21-11-2011 A- 5.6% BSE

13 3-10-2007 BD95m 3-10-2012 A 30 basis points

over six-month Libor BSE

14 3-4-2008 US$350m 3-4-2013 A 75 basis points London Stock

over 6-month Libor Exchange

CBB’S IJARA SUKUK PROGRAMMEMedium to long term issuance

CBB holds seminaron reputation risk

The Central Bank of Bahrain(CBB) held a seminar on riskmanagement for senior

bankers and supervision officialsfrom the CBB.

The Reputation and StrategicRisk Management seminar wasaimed at promoting and facilitatinga greater understanding of variousrisks faced by banks.

The seminar provided an insightinto two specific risk types, reputa-tion risk and strategic risk, andhighlighted the need for integrat-ing these risks in the enterprise-wide risk management systems inbanks.

Mr. Yousif Hassan, Director,Retail Banking Supervision, atthe CBB welcomed the partici-pants and emphasized the impor-tance of enhancing understand-ing of the two risks. He urged thebanking community to take

informed decisions to mitigatesuch risks by methodically iden-tifying, assessing and respondingto them.

Banks are required do so underCBB Basel II Pillar Two regulations,which have come into effect fromJanuary 2008.

Participants concurred that man-agement of both reputation andstrategic risk is pivotal to banks’future growth and, therefore,should be systematicallyaddressed.

The seminar, which was held atthe Bahrain Institute of Bankingand Finance (BIBF), was conductedby India-based AptivaaConsulting.

It was attended senior bankersfrom locally-incorporated conven-tional and Islamic banks, as well assenior banking supervision officialsfrom the CBB.

Islamic Finance Review Bahrain ● April 2008

● In addition to CBB’s medium and long term Ijara sukuk issuance, a rolling pro-gramme of monthly issuance of short term Islamic Sukuk Al-Salam has been inplace since June 2001. By April 2008, CBB had offered 84 issues of Sukuk Al-Salam.The value of each issue is BD6 million.

● In August 2005, the CBB introduced a separate rolling programme of monthlyissuance of short-term Sukuk Al-Ijara. By April 2008, CBB had offered 32 issues ofSukuk Al-Ijara. The value of each issue is BD5 million.

Regulator: Central Bank of Bahrain

Financial institutions: 410 (Apr 2008)

Financial sector workforce: 9,753 (2006)Bahraini nationals 7,019 (72%)Foreign nationals 2,734 (28%)

Key economic indicators:GDP US$10.9 billion (2006)

Growth 6.5%Financial sector contribution to GDP 25.5%

Sovereign rating A (S&P 2007)A (Fitch 2007)

Population 742,500 (2006)

Banking Sector:Assets US$252.4 billion (Mar 2008)No. of institutions 150 (Apr 2008)Retail banks 29

Locally incorporated 14Branches of foreign banks 15

Wholesale banks 86Representative Offices 36Islamic Banks (included in above):No. of banks 29

Assets US$18.5 billion (Mar 2008)

Insurance Sector:No. of firms 166Domestic market

Gross premiums US$308 million (2006)No. of firms 35 (Apr 2008)

Locally incorporated 24Branches of foreign firms 11

Firms operating outside Bahrain 41Representative Offices 5Captives 1Brokers 43Loss adjusters 10Actuaries 19Others 12Takaful Firms (included in above)No. of firms 18

Onshore 9Firms operating outside Bahrain 9

Retakaful firms 1

Investment Business Sector:No. of firms 41

Capital market:Market capitalization US$29.4 billion (Apr 2008)Brokers 13Listings

Companies 51Mutual funds 33Bonds 17

Specialised LicenseesNo. of firms 40

Money Changers 19Others 21

Funds IndustryAuthorized Funds 2,584 (Mar 2008)NAV US$16.1 billionLocal Funds 123

NAV US$4.5 billionConventional 73Islamic 50

Foreign Funds 2,461

Factfile