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Bahrain Banking and Finance
Bahrain's first commercial bank, a branch of the
Britishowned Eastern Bank, opened in 1921. Two decades passed
before a
second bank, the British Bank of the Middle East, set up
an
office. It was not until 1957 that the first bank wholly
owned by
Bahraini citizens--the private National Bank of Bahrain--
commenced activities. Prior to 1965, when the government
introduced the Bahraini dinar (for value of the
Bahraini dinar-- see Glossary),
the Indian rupee had functioned as the most
commonly accepted currency for local transactions. The
lack of an
indigenous currency probably impeded the development of
the
banking sector. Once the Bahraini dinar replaced the
Indian rupee
and established itself as a strong, internationally
convertible
currency, banks began to find the island a more attractive
location; by 1974 fourteen commercial banks operated in
Bahrain.
The increase in the number of banks after independence
prompted the government to consider creating a central
monetary
authority to regulate banking activities. In 1973 Shaykh
Isa ibn
Salman issued a decree that established the Bahrain
Monetary
Agency (BMA) as a legal entity possessing the powers of a
central
bank. In addition to its regulatory responsibilities, BMA
issues
currency, sets the official exchange rates for the
Bahraini
dinar, serves as a depository for government funds from
petroleum
production and its foreign currency reserves, and manages
thegovernment's investments.
In 1975 BMA promulgated regulations for the creation of
offshore banking units (OBUs) modeled on those operating
in
Singapore. OBUs are branches of international commercial
banks
exempted from foreign-exchange controls, cash reserve
requirements, taxes on interest paid to depositors, and
banking
income taxes that are required of other banks in Bahrain.
In
return for these privileges, OBUs pay the government
annual
license fees, are prohibited from accepting deposits from
citizens and residents of Bahrain, and must refrain from
transactions involving Bahraini dinars. The OBU program
has been
successful; twenty-six OBUs were established during the
first
year. The civil war in Lebanon probably stimulated the OBU
boom
because several international banks based in Beirut
transferred
their Middle East operations to Bahrain after 1975. By the
early
1980s, a total of seventy-five OBUs having assets in
excess of
US$62 billion were operating out of Bahrain.
Beginning in 1985, falling oil prices and a
corresponding
decline in oil revenues dramatically reduced the funds
deposited
in both onshore banks and OBUs. Several banks decided not
to
renew their OBU licenses, resulting in a net loss of OBUs.
Nevertheless, a majority of OBUs, including those that are
branches of leading United States, Arab, European, and
Japanese
banks, continue to operate from Bahrain-based offices. In
1990 a
total of fifty-five OBUs were located on the island.
Despite the
fluctuations in gulf financial markets of the 1980s,
Bahrain is
well established as the principal banking and financial
center of
the gulf region.
Data as of January 1993
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