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Bahrain

Bahrain
Score Rank
Financial Standards Index 40.00 out of 100 49
Business Indicator Index 9.65 out of 12 42

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Overall Standards Summary

Bahrain achieves medium overall compliance with international standards and codes, with a score of 40 out of 100 in our Standards Compliance Index. Bahrain receives an Enacted level of compliance, implying that the country has most of the legal requirements for the standards in place, for five of the twelve standards. On the standard relating to insurance supervision, the country receives an even higher rating, Compliance in Progress, implying successful implementation. In 2006, the International Monetary Fund published a detailed assessment of Bahrain's compliance with the supervision standards and concluded that in the cases of Banking and Securities supervision the country's then existing legal framework was slightly inadequate, however, an expected law (which was passed after the IMF assessment) would in effect remedy these gaps and bring the country's legal framework on par with international standards. Bahrain achieves an Intent Declared compliance level for the standards on Anti-Money Laundering and Combating the Financing of Terrorism, and Systemically Important Payment Systems. This implies that the authorities have indicated strong intent to comply with international best practices in these areas. Listed and unlisted companies in Bahrain are required to prepare annual financial statements in full compliance with International Financial Reporting Standards and this is reflected in the country's rating for this standard. Finally with regards to two standards, one on fiscal transparency and the other on insolvency and creditor rights, Bahrain lacks sufficient and adequate information and can therefore not be assessed against these standards.

Choose a standard for a detailed compliance report:
12 Key Standards for Sound Financial Systems

Compliance Level
Special Data Dissemination Standard
NC
Code of Good Practices on Transparency in Monetary Policy
EN
Code of Good Practices on Transparency in Fiscal Policy
II
Effective Insolvency and Creditor Rights Systems
II
International Financial Reporting Standards
EN
Principles of Corporate Governance
ID
International Standards on Auditing
EN
Anti-Money Laundering/Combating Terrorist Financing Standard
ID
Core Principles for Systemically Important Payment Systems
ID
Core Principles for Effective Banking Supervision
EN
Objectives and Principles of Securities Regulation
EN
Insurance Core Principles
CP
II = Insufficient Information | NC = No Compliance | ID = Intent Declared | EN = Enacted | CP = Compliance in Process | FC = Full Compliance

Macroeconomic Policy and Data Transparency

NCSpecial Data Dissemination Standard

The Kingdom of Bahrain is not yet a subscriber to the International Monetary Fund's (IMF) Special Data Dissemination Standard but the IMF announced in August of 2007 that Bahrain had become a participant in the General Data Dissemination System (GDDS). The GDDS website discloses that although Bahrain does not yet provide all the recommended datasets for posting on the GDDS website, and some of what it posts does not yet meet recommendations for coverage, timeliness, or periodicity, most of the provided data does meet those recommendations. Legislation provides guarantees of confidentiality, but there is as yet no legal requirement for simultaneous release of data to all interested parties, nor are advance release calendars disseminated to the public. The press release announcing Bahrain's GDDS participation noted that the information provided by the Kingdome regarding its data production and dissemination practices is comprehensive. Plans for future improvements include formalizing the coordination and communication among the statistics-producing agencies; publication of the Central Bank of Bahrain's terms and conditions for compiling and disseminating data; providing advance notice of methodological, technical, or source data changes; and several other efforts intended to enhance the quality, capacity, and efficiency of Bahrain's statistical regime.

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ENCode of Good Practices on Transparency in Monetary Policy

The Central Bank of Bahrain (CBB) was created by the September 2006 enactment of the Central Bank of Bahrain Law, replacing its predecessor institution, the Bahrain Monetary Agency (BMA). It inherited the BMA's reputation as a consultative, transparent, and accountable body, and the new legislation further enhanced this reputation by making the CBB's autonomy and accountability more explicit in law. According to the International Monetary Fund's 2006 Financial System Stability Assessment, which was published prior to the CBB's creation, the BMA enjoyed broad discretion with regard to the use of monetary policy instruments, but these tended to lie dormant because the central bank operated in the context of a virtual currency board regime. Bahrain recently joined with three other Gulf Cooperation Council (GCC) states (Saudi Arabia, Qatar, and Kuwait), to sign a preliminary agreement to the formation of a proposed GCC Monetary Union. The formation of this Union, long in the planning and originally targeted for 2010, has run into some problems, including Oman's decision not to participate and the UAE's withdrawal from the agreement when it was decided that the Union would be headquartered in Saudi Arabia (in Riyadh) rather than in the UAE. Bahrain does not subscribe to the IMF's Special Data Dissemination Standard but began participating in the less stringent General Data Dissemination System in August of 2008.

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IICode of Good Practices on Transparency in Fiscal Policy

There is very little publicly available information regarding Bahrain's performance with regard to fiscal policy transparency. The IMF has yet to produce a Report on the Observance of Standards and Codes covering this subject, and only Public Information Notices (PINs) are available for the two Article IV Consultations completed thus far for the country. Neither of these PINs offers much by way of detail on the subject. Information posted on the IMF's General Data Dissemination System website does note that Bahrain's Constitution and Law Regarding the State Budget lay out the roles and responsibilities of the Ministry of Finance (MoF) and other government entities within the budget process, and discloses that public access to fiscal policy information is broadly disseminated through the MoF website, circulars, and MoF publications. Public disclosure of accounting practice, as well as the circulation of government finance data to relevant ministries for verification and reconciliation suggest that there are mechanisms in place to help ensure the reliability of fiscal data and the integrity of the process. According to the transparency index produced by the independent Sovereign Wealth Fund Institute (SWFI), Bahrain's sovereign wealth fund scores 7 out of a possible 10, making it one of the highest scoring sovereign wealth funds in the Gulf region. While the Bahrain fund enjoys a high relative score, regionally, the SWFI cautions that a country should achieve a minimum score of 8 to consider itself adequately transparent.

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Institutional and Market Infrastructure

IIEffective Insolvency and Creditor Rights Systems

The Kingdom of Bahrain is a nation within the Middle East and North Africa (MENA) region and, as such, exhibits some of the same shortcomings in its insolvency regime as its neighbor states. According to the Working Group on Corporate Governance, in a report published following meetings organized by the MENA-Organization for Economic Cooperation and Development (OECD) Investment Program and the Hawkamah Institute of Corporate Governance, these shortcomings include inadequacies in both the legislative and institutional frameworks of MENA states, a need to better balance creditor and debtor interests, the lack of a formal, professional class of insolvency practitioners to serve as trustees or advisors in insolvency procedures, and the need to create out-of-court alternatives to resolution of insolvency issues, including rescue and restructuring. Bahrain was cited as having recently passed legislation that addressed issues of judicial independence, which should have a positive impact on the overall insolvency regime. However, there is insufficient publicly available information that directly addresses Bahrain's compliance with the World Bank's Principles of Effective Insolvency and Creditor Rights Systems.

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ENInternational Financial Reporting Standards

According to a 2007 self-assessment performed by the Bahrain Accountants Association (BAA), under the Commercial Companies Law, listed and unlisted companies in Bahrain are required to prepare annual financial statements in full compliance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB). To promote the implementation of IFRSs, the BAA holds periodical seminars and discussions with regulatory authorities. The BAA develops its own ethical requirements; however, the 2007 BAA self-assessment points out that the Association is working towards amending its ethical requirements to bring it in line with the revised International Federation of Chartered Accountants Code effective June 30, 2006.

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IDPrinciples of Corporate Governance

According to a 2009 survey of corporate governance practices, conducted by the Center for International Private Enterprise (CIPE) (in collaboration with BAA), concepts relating to transparency, ethics, integrity and accountability are not well understood in Bahrain. Furthermore, the survey finds that private companies look forward to improvements in corporate governance practices, however, they are not open to the idea of being exposed to public scrutiny. The Bahraini corporate sector is dominated by family owned businesses and reluctance to full and complete disclosure poses a problem with regard to effective implementation of corporate governance measures. Overall, the survey anticipates resistance from the private sector particularly with regard to disclosure related to remuneration. Bahrain has, however, been making efforts to strengthen its corporate governance practices. For instance, in 2006, a National Committee on Corporate Governance, a collaborative initiative of the public and private sectors to improve corporate governance in Bahrain, began its work to create a corporate governance code. The draft code was presented at a public conference on May 6, 2008. The National Committee is currently seeking inputs from key stakeholders and the final draft will be a collaborative effort with the business community. Along with the creation of the code, the National Committee, the BAA and the CIPE also launched a two-year initiative to assist the steering committee in the finalization and implementation of the new code. Already, a new website providing information and resources on corporate governance in Bahrain was launched in May 2009 and an index to measure companies’ governance performance is expected to follow. In addition, a National Steering Committee was created under the Ministry of Industry and Commerce and the Central Bank of Bahrain to develop a new Company Law to bring Bahrain into compliance with international best practices. The new Company Law, as of June 2009 is pending approval in Parliament.

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ENInternational Standards on Auditing

According to a 2007 self-assessment conducted by the BAA, all listed and unlisted companies, as mandated by the Bahrain Audit law, Decree No. 26 of 1996 are required to perform an annual audit in compliance with International Standards on Auditing (ISAs) issued by the International Federation of Accountants (IFAC). The BAA organizes periodic seminars for dissemination and promotion of the IFAC pronouncements in order to keep members updated with the latest developments. Furthermore, the BAA develops its own ethical requirements, however, the 2007 BAA self-assessment points out that the Association is working towards amending its ethical requirements to bring it in line with the revised IFAC Code effective June 30, 2006.

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IDAnti-Money Laundering/Combating Terrorist Financing Standard

The IMF conducted a detailed assessment of Bahrain’s Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regime against the Financial Action Task Force’s (FATF) 40+9 recommendations and special recommendations in 2005 and published its findings in a 2007 report. In its assessment, the IMF concludes that Bahrain is fully compliant with 7, largely complaint with 16, partially compliant with 22, and non-compliant with 3 recommendations and special recommendations. Overall, a 2006 IMF report notes that Bahrain has a new and “relatively comprehensive” anti-money laundering legal framework centered on AML Decree Law 4 of 2001. However, one of the key weaknesses identified was with regard to lack of legislation criminalizing the financing of terrorism. A 2007 Central Bank of Bahrain progress report notes that in August 2006, the 2001 law was amended by Decree Law No. 54 providing for the criminalization of terrorist financing. According to the information provided in a 2009 United States Department of State (DoS) report, although Law 54 takes terrorist financing into account, the Article 2 provision which defines the act of terrorism is described as “controversial.” The 2001 AML law established the Anti-Money Laundering Unit (AMLU), the country's financial intelligence unit (FIU). The IMF points out that Bahrain’s FIU does not have a high profile with all reporting entities, and the government must take measures to address this weakness. In 2004, Bahrain ratified the UN International Convention for the Suppression of the Financing of Terrorism, and implemented it in its legal framework with the passing of Decree No. 58 on the Protection of Society from Terrorism Acts in 2006. The FATF's 2007-2008 Annual Report names Bahrain as one of the jurisdictions that have undertaken to implement the FATF's 40+9 recommendations.

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IDCore Principles for Systemically Important Payment Systems

The Fund Transfer System (FTS), which no longer exists, was identified as the main payment system in Bahrain and considered “reliable and efficient” by the IMF in its 2006 Financial System Stability Assessment. Operated by the BMA, the FTS settled transactions on a multilateral net basis through participants’ clearing accounts at the BMA. However, the IMF in its 2006 report did not directly address the FTS’s overall compliance with the Committee on Payments and Settlement Systems' Core Principles for Systemically Important Payment Systems (CPSIPS). The IMF did recommend that the independence and powers of the central bank be strengthened, gaps in legal framework be closed, and provisions on payments and settlements be refined. In lieu of the IMF recommendations, the Central Bank of Bahrain and Financial Institutions Law was ratified in September 2006, enhancing the CBB's enforcement powers and operational independence. In August 2007, a Real Time Gross Settlement (RTGS) system was launched by the Central Bank of Bahrain. The system is defined as a systemically important payment system and settles large-value, inter-bank payments with finality and irrevocability. It is also processes small-value retail payments for bank customers. Launch of the new system “has reduced significantly the risks associated with payments and settlement transactions,” according to a 2008 CBB Financial Stability report. The report also notes that the CBB is finalizing a Payment System Roadmap to further strengthen the system and improve compliance with the CPSIPS. In its efforts, the CBB has advocated for a Payments Systems Act to provide a statutory legal foundation and further reduce legal risks.

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Financial Regulation and Supervision

ENCore Principles for Effective Banking Supervision

In 2006, the IMF published a Financial System Stability Assessment (FSSA) and Report on the Observance of Standards and Codes (ROSC) on Bahrain's financial regulatory and supervisory framework, including the country's banking supervision. The FSSA found the supervisory framework effective and of high standards and the prudential regulations comprehensive and modern. It also attested to strong compliance by Bahrain with the Basel Core Principles (BCP) for Effective Banking Supervision. However, it assessed the BMA, the then unified financial regulator and supervisor. The BMA was replaced by the CBB in September 2006, when the Central Bank of Bahrain and Financial Institutions Law (CBBL) was enacted. The FSSA had found certain weaknesses in the regulatory regime under the 1973 BMA Law, especially pertaining to the licensing framework and the BMA's enforcement powers. However, it had observed at the time, that the enactment of its replacement, the CBBL, would address the shortcomings and enhance the regulator's authorities in most respects. In the light of this observation, the enactment of the new law (the Central Bank of Bahrain and Financial Institutions Law No. 64 of 2006) and the establishment of the CBB as the unified financial regulator can be perceived as an improvement over the previous supervisory regime. Further, the CBB website asserts that the CBB practices supervision in accordance with the BCPs. The website and the 2007 annual report of the CBB also indicate that the licensing framework and enforcement powers of the CBB are an improvement over the BMA's powers as assessed by the IMF in 2006.

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ENObjectives and Principles of Securities Regulation

In 2005, when the IMF conducted its FSSA for Bahrain, the financial sector and capital markets were regulated by the BMA. However, in 2006, Bahrain enacted the CBBL that created the CBB and vested in it all authority and responsibilities of financial sector supervision, and the BMA thenceforth ceased to exist. In 2005, the FSSA had concluded that the standard of securities market regulation and supervision was "generally high" and that Bahrain had in place almost all the preconditions for effective securities regulation in place. The IMF did point out several areas of weakness, chiefly the BMA's lack of operational independence, its inadequate investigation and enforcement powers, shortcomings in supervisory information exchange, and absence of the offence of insider trading in the law, but acknowledged that the (then) draft CBBL had provisions that would close these regulatory gaps. The CBB website asserts that the CBB practices supervision in accordance with the Objectives and Principles of Securities Regulation developed by the International Organization of Securities Commissions (IOSCO). It further states that the CBBL provides enhanced enforcement powers to the CBB and reinforces its operational independence, and also spells out insider trading as an offence. The 2008 annual report of the CBB adds that the review and development of the regulatory framework related to the capital markets are based on the IMF FSAP recommendations as well as the IOSCO Principles. The CBB became a signatory to the IOSCO Multilateral Memorandum of Understanding in 2008 signifying that it has the legal capacity to share supervisory information with other regulators.

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CPInsurance Core Principles

In 2005, insurance sector supervision in Bahrain was assessed by the IMF against the revised Insurance Core Principles (ICPs) of 2003 as part of a FSSA, which concluded that Bahrain's regulatory and supervisory framework largely observed ICPs. At the time of the assessment, the financial sector was supervised by the BMA, operational independence and preventive or corrective powers of which were mentioned by the IMF as areas of particular concern. In September 2006, however, the CBBL, that was in the works during the IMF mission, was enacted, thereby establishing the CBB as the unified regulator of the financial sector, and vesting in it all authority and responsibilities of the BMA. As noted in a 2006 report by the IMF summarizing the results of the FSSA, with the enactment of the CBBL and the full implementation of the Insurance Rulebook, the degree of observance of the ICPs in Bahrain was expected to be higher. In this regard, the CBB’s website and its 2007 Annual Report note that the CBB practices supervision in accordance with the ICPs and constantly updates its regulations to keep its regulatory framework in line with international standards.

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Business Indicators

With an overall score of 9.65/12, Bahrain is at standard for the economic, legal, and political indictors that make up our Business Index. Bahrain is a market-based but statist economy, with the state maintaining substantial ownership in many sectors of the economy, including manufacturing. Bahrain's economy is predominantly supported by oil sector revenues but the authorities have been actively working toward diversification, most notably in its efforts to become an important international financial center. There are no capital or exchange controls in Bahrain and the country has established an adequate foreign investment law. Import controls are negligible but there are protective tariffs on imports in Bahrain. The tax regime in the country is progressive and the tax rates are very low. Corruption is not a concern in Bahrain and neither is political instability. There is a strong commitment to globalism within the current political establishment. Overall the country fairs well in its business climate, the only major concern observed was its non adherence to international labor standards. This is a concern observed in several of the countries that comprise the Gulf Cooperation Council.

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Global Indices & Quick Facts

Bahrain ranks in the 1st or 2nd quintile of global indices measuring economic, business, and human development, earning particularly high marks for its economic freedom and ease of doing business. Low taxes, openness to trade, increasingly developed financial markets, and a low dependence on oil all contribute to Bahrain being at or near the top of business rankings in the Middle East. A well-educated and healthy populace that enjoys a high GDP per capita places Bahrain in the 1st quintile of human development surveys. The major exception to Bahrain’s solid performance in best practices is in the area of personal freedom. Freedom House gives Bahrain a score of 5 (on a scale of 1 to 7 with 1 being the highest rating) for political rights and civil liberties in 2009, and notes a downward trend in this category. Criticism of the ruling family is not tolerated, internet use is restricted, and allegations of torture against political opponents have surfaced. The king holds power over the executive, legislative, and judicial branches of government. Bahrain is in the 2nd quintile of Transparency International’s Corruption Index, indicating that corruption is not a major concern.

Name Year Rank Score Quintile
Bertelsmann Transformation Status Index 2010 51/128 6.05/10 2
Heritage Foundation Economic Freedom Index 2010 13/179 76.3% 1
Economic Freedom of the World Index 2009 20/141 7.56/10 1
World Economic Forum Global Competitiveness Index 2009 38/133 4.54/7 2
Milken Institute Capital Access Index 2009
World Bank Ease of Doing Business Index 2009 20/183 N/A 1
UNDP Human Development Index 2009 39/177 0.90/1 2
Transparency International Corruption Perceptions Index 2009 46/180 5.1/12 2
Freedom House Index 2009 Partly Free 5/7

Credit Ratings

A/Stable Fitch

A2/Negative Moody's

A/Stable Standard & Poor's

Macroeconomic Data

2009 GDP (Current Prices): 19.4 billion USD (IMF)

2009 GDP (Per Capita): 24,355 USD (IMF)

2010 GDP (Growth Forecast): 3.7% (IMF)


2009 Inflation (CPI): 3% (IMF)

2008 Unemployment: 15% (CIA)


2008 Foreign Direct Investment

FDI (Inward): 1.8 billion USD (UNCTAD)

FDI (Outward): 1.60 billion USD (UNCTAD)


2007 Official Development Assistance

ODA (Received): N/A million USD (OECD)

ODA (Disbursed): N/A million USD (OECD)

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