Diversification of Islamic Financial Insturments
181
In December 2016, IIFM held its 35th meeting in Bahrain and endorsed a detailed plan to
improve IIFM's main initiatives of standardization of Islamic financial contracts and product
templates193.
Practical Challenges for Islamic Finance in Bahrain and its Relation to
Conventional Finance
Islamic banks face liquidity management challenges because of the lack of Shariah compliant
high quality liquid assets, which pressures its compliance with Basel III liquidity and funding
ratios. The necessity of complying with Basel III, leaves the Islamic banks at a disadvantage to
conventional banks194.
The growth in the Islamic finance sector in Bahrain is partly constrained due to the
fragmentation in Islamic financial products. Furthermore, it needs to have a larger share of the
retail market to continue its provision of retail credit products. In order to further develop the
Islamic finance in Bahrain, it is critical to have more qualified individuals in the market195.
3.9.6 POLICY RECOMMENDATIONS
In light of the discussion above, a number of recommendations are proposed with the aim of
strengthening the Bahraini Islamic financial system and fostering diversification in an overall
environment characterized by increased competition.
 To address the lower profitability of Islamic retail banks, attention must be given to
controlling operating costs, including documentation and legal costs, and unlocking new
investment avenues. It is worth noting the potential of Blockchain in this regard.
Blockchain-enabled solutions are expected to eliminate significant components of banks’
cost base, resulting in meaningful savings of up to 30, 40 and even 50 percent.
 Given the high rate of NPF at Islamic retail banks, policies should be aimed at controlling
the credit risk of banks’ financing portfolios, trying in this respect to adopt more
sophisticated credit scoring and risk management models. Advances in financial
technology allow for assessing risk where banks have not been able to do so, based on non-
traditional data and analyses, such as social media, phone records, satellite data and
psychometric analysis.
 To mitigate the sectorial concentration risk, the regulator may implement sector limits
with reference to market studies and industry’s best practices. Limits should be regularly
reviewed and evaluated to account for changing economic and business conditions.
Precautionary thresholds should also be introduced below the maximum limit; to
necessitate reporting to regulatory authorities before concentration becomes excessively
risky.
193 The International Islamic Financial Market (IIFM) website, News updates, accessed 24 March 2017, see
194 Central Bank of Bahrain, The Review, accessed 13 March 2017, see
195 Dilmun Times website. Islamic finance sector facing key challenges, accessed 25 March 2017, se