What is Islamic finance and banking?
Islamic finance, or Shari’a-compliant banking and finance, is a system that follows the principles of Islamic law (Sharia). Islamic finance is based on ethical and moral principles that promote fairness, justice, and social welfare. Islamic finance is considered beneficial for overall economic growth.
By fostering responsible investments, Islamic finance contributes to overall economic growth, with a focus on social welfare, poverty alleviation, and the equitable distribution of wealth. This makes it an appealing alternative for both Muslim and non-Muslim countries seeking a more ethical and sustainable financial system.
Bahrain, a global Islamic finance pioneer
Bahrain is recognized as the global leader in Islamic finance, ranking 3rd in MENA and 6th globally for Islamic finance development (ICD 2023/24). We set the benchmark early for Islamic banking regulation by establishing the Bahrain Islamic Bank in 1978, and have nurtured the concepts, rules, and standards of Shari’a banking compliance in Islamic banks ever since. In this way, we are able to cater to the needs of both mainstream Islamic finance and the new breed of FinTech entrepreneurs who offer Shari’a-compliant products. Our continued focus on innovation and customer service has made Bahrain a top destination for Islamic finance development.
An unrivalled knowledge hub
Bahrain has the highest concentration of Islamic finance institutions in the region: 8 wholesale Islamic banks and 7 retail Islamic banks. A highly connected ecosystem, our expertise spans every area of Islamic financing, from asset management and Sukuk issuance to Shari’a-compliant insurance and reinsurance.
A growing Takaful industry
Bahrain, currently home to 6 Takaful firms and 2 Retakaful firms, is the ideal jurisdiction for the industry. The Central Bank of Bahrain has also implemented the new Takaful model which enhances solvency status assessment of these firms.
Largest Islamic finance market in the region
Total Islamic banking assets held in Bahrain stood at USD 34.6bn as of 2021, making it one of the region’s largest Islamic finance and banking markets.
An innovative government
The Central Bank of Bahrain is continuously implementing new initiatives and policy tools to further develop Bahrain’s standing in Islamic finance, most recently: a new Takaful model and a new Shari’a-compliant Wakalah investment tool.
Bahrain is home to the region’s largest concentration of Islamic finance institutions that deal in almost every area of Islamic finance and Islamic products. We are proud to rank 3rd in MENA and 6th globally for Islamic FinTech, as per the 2023/24 Global Islamic FinTech Report.
Who’s Here:
“When you want to create a bank, first of all you have to think about the law, the regulator, the staff, if the country is open and if I can transfer my profits. All these things are in Bahrain.”
More on Islamic finance and banking
Islamic finance prohibits interest, gambling, uncertainty, and investments in forbidden industries. Instead of interest, it focuses on partnerships and profit-sharing and encourages ethical investments that benefit society, such as healthcare and renewable energy.
Fundamental principles of Islamic finance include:
- Prohibition of Riba (Interest): Islamic finance prohibits charging or paying interest. Instead, it promotes risk-sharing and profit-sharing arrangements. Lending and investment activities must be based on partnerships, profit-sharing, or asset-based transactions.
- Prohibition of Gharar (Uncertainty): Islamic finance discourages transactions involving excessive uncertainty or ambiguity. Contracts must be transparent, and all parties should clearly understand the terms and conditions.
- Prohibition of Haram (Prohibited) Activities: Islamic finance avoids investments in industries that are considered unethical or prohibited in Islam, such as alcohol, pork, gambling, and certain types of entertainment.
- Promotion of Ethical Investments: Islamic finance encourages investments in socially responsible projects and activities that benefit society. Investments in healthcare, education, renewable energy, and infrastructure are considered favorable.
How does Islamic finance and banking work?
Islamic finance and banking operate on principles derived from Shariah law, which prohibits the charging or receiving of interest (riba) and promotes risk-sharing, asset-backed financing, and ethical investments. Unlike conventional finance, transactions in Islamic finance are structured around tangible assets or services, ensuring that all parties share in both risks and rewards. This approach not only fosters a transparent and equitable financial system but also aligns with the values of responsible investing, making it an attractive option for businesses seeking sustainable and ethical financing solutions.
In Bahrain, the financial landscape is built to support these principles, offering a diverse range of Shariah-compliant products and services that cater to the specific needs of businesses and investors. The country’s well-established regulatory framework, combined with its position as a regional financial hub, ensures a stable environment for Islamic finance to thrive. Companies moving to or expanding in Bahrain will find a mature ecosystem that includes Islamic banks, Takaful (Islamic insurance) providers, and investment firms that adhere to these principles, ensuring smooth operations and access to capital for growth and innovation.
For businesses looking to establish operations in Bahrain, the advantage is twofold: access to a sophisticated Islamic finance sector and the opportunity to tap into a growing global market for Shariah-compliant services, which is projected to continue expanding in the coming years. The Kingdom’s supportive policies and commitment to fostering an inclusive financial environment make it a strategic destination for companies looking to align with Shariah values while benefiting from a robust and dynamic financial market.
