Diversification of Islamic Financial Insturments
175
enterprises.156 Tamkeen, the agency tasked with supporting SMEs and entrepreneurship in
Bahrain, acts as guarantor for 50% of any financing made to a start-up or SME and upholds the
Shariah-compliance of the product involved.
According to the most recent Financial Stability Report by the CBB, the Capital Adequacy Ratio
(CAR) for Islamic retail banks stood at 17.1% in September 2016157 . This compares to 19.6%
for their conventional counterparts and 19.1% for Islamic wholesale banks158 . The ratio of
non-performing facilities (NPF) was 12.1% in Islamic retail banks, as of end of September
2016, well beyond the ratios of 4.7% in conventional retail banks and 2.9% in Islamic
wholesale banks 159. Despite showing signs of improvement, Islamic retail NPF remains high.
The highest impairment was recorded in the construction sector (29.4%) followed by
manufacturing (26.1%) and commercial real estate financing (20.2%)160.
The return on assets (ROA) for Islamic retail banks was 0.2% in September 2016161 , which is
lower than the conventional retail banks’ average of 1.1% during the same period162. The
contrasting difference can be explained in part with reference to the banks’ operating
expenses. The operating expenses as a proportion of total income stood at 82.9% for Islamic
retail banks in September 2016, while it was only 47.5% in their conventional counterparts163.
Bahrain’s Islamic retail and wholesale banks are characterized by high asset concentration.
The top recipient of Islamic retail financing in September 2016 was personal / consumer
finance (23.6%), followed by commercial real estate financing (15.3%)164. Together, they
accounted for 38.9% of total financings extended in September 2016165. Overall, real estate/
construction exposure stood at 29.4% in September 2016166.
Personal/Consumer Finance was the top recipient of financing from Islamic wholesale banks
as well, at 21.3%. It was followed by manufacturing at 19.2%167. Islamic wholesale banks’
exposure to real estate/ construction sector was at 27.4% in September 2016168.
Concentration renders banks vulnerable to weaknesses in these and increases the risk of
simultaneous delinquencies among several clients for similar reasons.
156 Oxford Business Group (2015). Changing Times for Bahrain’s Takaful Industry. 20 Mar 2015. Available online at
157 Central Bank of Bahrain (2017b). Financial Stability Report- February 2017. Manama, Bahrain. P.55
158 Central Bank of Bahrain (2017b). Financial Stability Report- February 2017. Manama, Bahrain. P. 4
159 Central Bank of Bahrain (2017b). Financial Stability Report- February 2017. Manama, Bahrain. P. 4
160 Central Bank of Bahrain (2017b). Financial Stability Report- February 2017. Manama, Bahrain. P. 47
161 This is the same rate of return-on-assets generated by Islamic wholesale banks in September 2016. Similarly, the two
genres of Islamic banks had Return on equity (ROE) of 1.6% in September 2016.Locally-incorporated conventional retail
banks had a return-on-equity (ROE) of 11.4%.
162 Central Bank of Bahrain (2017b). Financial Stability Report- February 2017. Manama, Bahrain. P. 4
163 Central Bank of Bahrain (2017b). Financial Stability Report- February 2017. Manama, Bahrain. Pp. 50 and 38
164 Central Bank of Bahrain (2017b). Financial Stability Report- February 2017. Manama, Bahrain. P. 49
165 Central Bank of Bahrain (2017b). Financial Stability Report- February 2017. Manama, Bahrain. P. 49
166 Central Bank of Bahrain (2017b). Financial Stability Report- February 2017. Manama, Bahrain. P. 49
167 Central Bank of Bahrain (2017b). Financial Stability Report- February 2017. Manama, Bahrain. P. 52
168 Central Bank of Bahrain (2017b). Financial Stability Report- February 2017. Manama, Bahrain. P. 53