Diversification of Islamic Financial Instruments
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3.9 CASE STUDY: BAHRAIN
3.9.1 INTRODUCTION
Bahrain128 is the smallest economy in the Gulf Cooperation Council with just over 1 million
inhabitants, half of whom are expatriates. The energy sector remains the key driver of the
kingdom’s economy, generating the bulk of public revenues - albeit at a moderating percentage
of total GDP as the country undertakes restructuring and seeks new income streams. Bahrain’s
economy weathers low oil prices and weakened public finances through its relatively
diversified non-oil resources, resilient construction and tourism sectors and infrastructure
investments by GCC funds.
Bahrain was selected as a case study due to its long standing achievements in Islamic finance
and an unmatched concentration of Islamic banks globally. Despite increasing competition, the
Kingdom was GCC’s leading Islamic finance market and ranked second out of 92 countries
worldwide according to ICD-Thomson Reuters Islamic Finance Development Indicator
2015129. In 2014, it was recognized as having the best governance in Islamic finance in the
world with well-established regulatory framework covering all segments.130 Bahrain marked
another achievement with the recognition of its active role in the global economy in the fifth
Global Islamic Finance Awards (GIFA) in 2015. In addition, the organizers of the 22nd annual
World Islamic Banking Conference revealed that the top the Islamic Banks in the GCC FDI
ranking included banks based in Bahrain131. Bahrain is also home to the reputed international
standard setting body, Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI). All in all, it is a case worthy of investigation.
An Overview of Bahrain’s Financial System
The Bahraini financial sector is fairly developed and diversified. Conventional and Islamic
financial institutions and markets thrive in parallel. The wide spectrum of institutions includes
retail and investment banks, insurance companies, finance companies, money changers and
brokers. The Bahraini financial sector offers a wide array of financial products and services.132
Financial services are key drivers of growth in the country133, contributing around 17.2% of
Bahrain's Gross Domestic Product.134 Overall, banking has played a pivotal role in Bahrain’s
economy135, standing at USD 192.7 billion as of September 2016136 . The sector performance
128 Contributing author Dr. Aala Alabed. Chief Research Officer, Finocracy. Email The author wishes to
thank Ms. Fatima Al Zain for her excellent research assistance
129 ICD-Thomson Reuters, Islamic Finance Development Report 2015: Global Transformation, see
130 ICD-Thomson Reuters, Islamic Finance Development Report 2015: Global Transformation
131 Central Bank of Bahrain, The Review, accessed 13 March 2017, see
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132 Central Bank of Bahrain, Financial sector overview, accessed 27 March 2017, see
133 Central Bank of Bahrain, Financial sector overview, accessed 27 March 2017,
134 Central Bank of Bahrain, Financial sector fact sheet, accessed 28 March 2017,
135eGovernment, Banking and finance, accessed 11 March 2017, se
136 Central Bank of Bahrain, Financial sector fact sheet, accessed 28 March 2017,