Bahrain, just like any other financial center, provides an environment where domestic and international trade is conducted on large scale. The Bankers’ Society of Bahrain (BSB) (n.d.) states that Bahrain has been known to be a strategic trading point between the East and the West.
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Additionally, Bahrain trading history dates back to the Dilmun Civilization (BSB, n.d.). This is more than 4,000 years ago. Moreover, Bahrain is one of the most recognized financial centers in the Middle East. Bahrain is ranked 38th by the World Bank on the ease of doing business (World Bank, 2012).
As a financial center, some of its major strengths include use of English, sound economic and financial policies and strategic location (United States Department of Commerce (USDC), 2012). On the other hand, some of Bahrain major weaknesses include confusing labour laws, bureaucracy and some incidents of corruption within the government (USDC, 2012). This paper provides an insight into Bahrain as developing financial centre.
Meaning of a Financial Center
According to the businessdictionary.com (n.d.), a financial center is a city or a place within a city that has a lot of financial institutions. In addition, a financial center can be defined as a place with a world class commercial and communication infrastructure (businessdictionary.com, n.d.).
Furthermore, a financial center can be a place where domestic and international trade is conducted on large scale (businessdictionary.com, n.d.). Financial centers also tend to have favourable time zones , are situated on traditional trade routes and have the highest concentration of a region’s or a country’s wealth (Security Industries Association (SIA), n.d.).The need to cater for an increasing global market and the availability of mobile pool of capital are some of the reason as to why financial centers are in existence (SIA, n.d.).
However, financial centers face the same level of competition as corporations and investors they attract. For that reason, investors tend to run their businesses in areas where costs are low, procedures are streamlined and the law protects investments (SIA, n.d.). Therefore, for a financial center to be successful, it must fulfill above requirements.
World-class financial centers provide an investor with necessary business environments (SIA, n.d.). SIA (n.d.) also adds that these environments provide conditions under which financial skills and innovation thrive.
Subsequently, customer needs are efficiently catered for through market driven forces. Studies conducted on the various financial centers also show that these centers share some key characteristics. However, five characteristics stand out from the rest (SIA, n.d.). Firstly, a world-class financial center must have a stable and open economic and political system.
Therefore, most financial centers are from countries that embrace democracy, have an open and fair financial market, encourage free flow of capital and have a convertible currency. Secondly, a financial center’s legal, regulatory and tax regime must be fair, transparent, efficient and reasonable. Thirdly, its labour force must be skilled and flexible. Fourthly, the language used in a financial center must be familiar to most people. Lastly, a financial center’s physical infrastructure must be of high quality.
Reasons and Objectives for the Establishment of Bahrain Financial Center
Bahrain is one of the leading financial centers in the Middle East. To start with, this financial center has efficient regulatory policies. Bahrain, therefore, is a popular place for foreign investment. Bahrain sought to become a financial center in order to reduce its reliance on oil (USDC, 2012). Additionally, due to its small size, Bahrain has focused on becoming an area where exceptional services are offered. For that reason, Bahrain is a hub for quality services.
Bahrain was also transformed into a financial center in order to offer investors a cost-effective business environment. Therefore, Bahrain became a financial center in order to increase the ease of doing business. For that reason, the government of Bahrain strives to boost foreign direct investment (USDC, 2012). Bahrain was also the first country to recognize the need to diversify the economy in the gulf region (BSB, n.d.).
This financial center’s greatest asset is its ability to maintain high levels of financial and economic management in challenging times. This is one of the greatest assets of Bahrain. For that reason, Bahrain deserves respect and recognition. Other regional financial centers have continuously provided stiff competition for investors.
Nonetheless, Bahrain is one of the financial centers to beat in this region. According to Bahrain Economic Development Board (BEDB) (n.d.), in the Middle East region, Bahrain is believed to be among the best regulated financial centers. Additionally, for more than forty years, Bahrain has been the region’s financial capital (BEDB, n.d.). Currently, 27.6% of Bahrain’s gross domestic product is made up of financial services (BEDB, n.d.). Moreover, most Bahraini nationals are experts in financial matters.
For that reason, 67% of the 14,000 people employed in the financial industry are Bahraini citizens (BEDB, n.d.). The financial sector is also supervised by a pool of professionals from the Central Bank of Bahrain. In terms of regulation, originality, license management, non-discriminatory treatment and efficiency in operations, the Central Bank of Bahrain is the most successful in the Arab world (BEDB, n.d.).
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This financial center is, hence, in safe hands. In addition, the award given to Bahrain by the Global investor Magazine came when the global economy was weakening (BEDB, n.d.). Therefore, Bahrain showed that it is ready for its new role as a world or regional financial centre. An ambitious financial center must withstand major financial crisis and shocks. This is exactly what Bahrain did during this period when the world was on the verge of a recession.
Pros and Cons of Bahrain in Becoming a World or Regional Financial Centre
A number of factors favor the establishment of Bahrain as a world or regional financial center. The business culture in Bahrain is about a century old (USDC, 2012). This culture prepares the ground for businesses and visitors. The government of Bahrain has also liberalized Bahrain’s economy (USDC, 2012).
This means that no industry is under government control. Ernst and Young (2012) state that the government of Bahrain is the majority owner of industries connected with infrastructure. Examples of these industries include oil, gas and aluminum. However, most industries are being privatized.
Therefore, all industries are now open to foreign investors (Ernst and Young, 2012). For instance, in 2006, government of Bahrain privatized electricity production and transferred control of parastatals to a quasi-independent holding company (USDC, 2012). This reaffirmed Bahrain’s commitment in running profitable businesses. Moreover, foreign companies receive the same incentives as companies from Bahrain (Ernst and Young, 2012).
Additionally, Bahrain’s commercial and legal laws are consistent with international standards. Commercial laws are also reviewed from time to time to accommodate any changes made internationally (Ernst and Young, 2012). For that reason, Bahrain should be an emerging market of choice for many businesses regardless of their place of origin. Ernst and Young (2012) also add that companies operating in Bahrain are required to present their financial reports using internationally accepted Standards.
In addition, Bahrain’s modern laws provide favourable environments for doing business. Some of the best laws include labour and commercial laws (USDC, 2012). For instance, expatriates can change jobs more easily in Bahrain than in most countries in the Gulf region. This brings about flexibility in the labour market. Workers also have the right to join unions to fight for better terms. In addition, there are laws that protect foreign workers from abuse (USDC, 2012).
According to the USDC (2012), Bahrain’s gross domestic product (GDP) has been on the rise. Recent reports indicate that Bahrain’s has enjoyed an economic growth of between four to five percent yearly. In 2010, Bahrain’s GDP stood at $21.3 billion (USDC, 2012).
Moreover, Bahrain has been able to maintain price inflation at low levels (USDC, 2012). For that reason, this financial center’s currency has remained stable. This is an added advantage to Bahrain as a financial center. English is also spoken widely in Bahrain. This makes easier for most people to express themselves.
However, a few factors discourage investors from investing in Bahrain. For instance, there are no clear differences between the government and the private sector. As a result, there has been conflict of interest (USDC, 2012). The USDC (2012) also adds that the tendering process has not been transparent enough in some cases.
In other cases, the government has been found to favour certain business men (USDC, 2012). This act disadvantages other competitors who are not highly connected with government officials. In addition, foreign investors who do not have local partners are discriminated upon.
There are also few incidents of bureaucracy and poor coordination among ministries (USDC, 2012). Moreover, the government of Bahrain forces a company to employ a certain number of Bahrain citizens (USDC, 2012). Failure to do leads to a fine. Furthermore, the government of Bahrain intentionally makes it difficult for foreign firms to secure work permits and visas for foreign employees (USDC, 2012). This forces these companies to employ Bahraini citizens.
As a result, the firms produce goods and service of low quality. In addition, these firms lack the required experts in various fields. In some cases, companies are forced to relocate from Bahrain. Finally, a few months ago Bahrain was on the international media for the wrong reasons. Bahraini citizen were protesting due to political and economic injustices. Such scenes kept investors away from Bahrain. However, Bahrain has been able to overcome these unrests (Albawaba, 2011)
Degree of Success and Future Prospects
Bahrain is recognized by its prowess in financial management. This makes the central bank of Bahrain one of the most respected financial institutions in the Middle East (Albawaba, 2011). Apart from being the first country to indentify the need to diversify the economy, Bahrain was the first country to discover oil in the Gulf region in the modern era (BSB, n.d.).
Bahrain’s transportation and communication are also in standards that attract and foster investments (USDC, 2012). Likewise, other types of infrastructure are of standards that encourage business development. Therefore, any form of investment will survive in Bahrain.
Compared to eighty three economies, Bahrain is ranked 38th by the World Bank on the ease of doing business (World Bank, 2012). This makes it the 4th best economy in the Middle East. The World Bank report also places Bahrain on 82nd and 126th position on ease of starting a business and getting credit respectively.
Additionally, this financial center is ranked 7th in dealing with construction permits, 18th in paying taxes , 25th in resolving insolvency, 30th in registering property and 49th in trading across borders. Furthermore, Bahrain is ranked 79th in protecting investors, 49th in accessing electricity and 115th in enforcing contracts. This shows that Bahrain fairs well as compared to other countries where doing business is not a complicated matter.
Bahrain has experience a steady increase in the number of financial institutions. Despite fluctuations in oil prices, these institutions have continued to post profits and positive growth (BSB, n.d.). In March 2006, the International Monetary Fund Financial Sector Assessment Programme (FSAP) conducted a review of the financial sector in Bahrain (BSB, n.d.).
The results of this review indicated that Bahrain’s financial regulations were modern and effective. In the same year, Fitch Ratings changed Bahrain’s credit outlook from stable to positive (BSB, n.d.). This rating meant that the world recognized Bahrain’s financial and economic strength. In 2010, The Global investor Magazine named Bahrain as the best financial center (BEDB, 2010).
The Global investor Magazine is a publication associated with the Euromoney (BEDB, 2010). For that reason, this award cannot be disputed. The award was given to Bahrain because of providing excellent financial services for a long time. Additionally, the award recognized the good work done by the Central Bank of Bahrain. This reward, hence, portrayed Bahrain’s leadership in the financial sector.
Bahrain has also been able to establish a transparent business environment (Albawaba, 2011). Its laws are non-discriminatory and the tendering process is not questionable in most cases. Moreover, Bahrain overcame recent unrest brought about by bad economic policies (Albawaba, 2011). This showed that Bahrain has the capability to offer instant solutions to any situation that threatens to disrupt its economic progress.
Bahrain faces stiff competition from other financial centers such as Dubai and Qatar. Therefore, to increase its competitiveness, Bahrain targets to improve six economic sectors” (USDC, 2012).These sectors include “tourism, health care, information and communication technology, education and training, business service and financial services” (USDC, 2012).
Moreover, one of the growing sectors in Bahrain is Islamic banking (Albawaba, 2011). Although Islamic banking has been associated with the Middle East for a long time, Western countries are adopting it. This is something that Bahrain can present to foreign investors who want to diversify.
Throughout history Bahrain has been known to be a strategic trading point between the East and the West (BSD, n.d.). Therefore, Bahrain is one of the most renowned financial centers in the Middle East.
Bahrain future as an economic center looks bright. Bahrain’s economic and financial policies have laid a solid foundation for future investments. Additionally, to increase its competitiveness, Bahrain has prioritized six sectors. These are the sectors that Bahrain wants to improve in order to consolidate its position as a world and regional financial center (USDC, 2012).
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Bahrain Economic Development Board. Bahrain- the center of financial services in the Gulf and Middle East. Web.
Bahrain Economic Development Board. (2010).Bahrain named financial center of the year. Web.
Bankers’ Society of Bahrain. Bahrain an international banking and financial centre. Web.
Business dictionary. Financial center. Web.
Ernst & Young. (2012). Doing business Bahrain 2011. Web.
Security Industries Association. The key building blocks of world class financial centers. Web.
World Bank. (2012). Economy profile: Bahrain. Doing business 2012. Web.