Mergers drive growth in Bahrain’s Islamic finance sector

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• Consolidation tipped to continue
• Sector valued at $77 billion
• Al Salam to buy KFH Bahrain

When Al Salam Bank, one of the largest Islamic banks in Bahrain, became majority shareholder of its Algerian subsidiary last June, CEO Rafik Nayed made clear that the shopping spree was not over.

Mergers and acquisitions “will remain an important pillar of our growth plans”, Nayed said – and last month Al Salam announced a deal to buy KFH Bahrain, a subsidiary of Kuwait Finance House Group. 

Other Islamic banks in the kingdom have been consolidating, too. Analysts expect this to continue, bolstering an industry that had an estimated value of $77 billion at the end of last year.

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Fitch Ratings is predicting growth for the kingdom’s Islamic finance industry this year and in 2025, driven by mergers, “bottom-up demand, sukuk’s growing role in diversifying government funding and meeting fiscal deficits, and increasingly enabling regulations”. 

Saif Shawqi, associate director at Fitch Ratings, told AGBI: “We expect more consolidation in the GCC region.

“Smaller Islamic banks with weaker franchises and pricing power, higher funding costs and thinner capital buffers are most pressured.” 

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He added: “M&A can create new regional leaders, as with the recent Kuwait Finance House acquisition of Ahli United Bank in Bahrain.” 

The Ahli United deal was signed in 2022 and the conversion to an Islamic bank completed in December 2023. The conversion has lifted Islamic banks’ share of the domestic market to 42 percent, from 38 percent in 2022. 

The $77 billion figure is divided between Islamic banking assets, which make up 79 percent of the total, outstanding sukuk at 21 percent and takaful contributions at 0.2 percent.

Sukuk are sharia-compliant bonds that were developed as an alternative to conventional bonds, which are not considered permissible by many Muslims as they pay interest and may finance businesses involved in activities not allowed under Islamic law. Takaful is a form of sharia-compliant insurance.

Islamic banking assets in Bahrain stood at nearly $61 billion at the end of 2023. This was a year-on-year increase of 46 percent, while conventional banking assets fell 2.6 percent over the same period. 

Bahrain’s Islamic banking market is the 10th largest globally by total assets, according to the Islamic Financial Services Board.

Vijay Valecha, chief investment officer at Century Financial, said consolidation would create more efficient Islamic banks in the country. 

“This directly benefits the rising issuance of sukuk by the government, as stronger banks can better handle and promote these sharia-compliant bonds… This positive cycle, alongside anticipated bottom-up demand for sharia-compliant solutions, positions Bahrain’s Islamic finance sector for significant expansion,” he said.

Fitch’s research paper predicts increased sukuk and bond issuances in 2024 and 2025. 

Government debt in Bahrain, a relatively small oil producer compared with its Gulf neighbours, rose to over $40 billion in December. Last month the kingdom raised $2 billion from global debt markets.

The country’s total sukuk market increased by 12.5 percent to more than $16 billion in 2023, according to Fitch. The Bahraini debt capital market is mostly comprised of government issues.

The Islamic finance industry is part of robust non-oil activity in the kingdom. This is expected to drive a rebound in Bahrain’s real GDP growth to 2.5 percent this year, according to analysts at BMI.

Other mergers agreed in 2023 include Esterad Investment Company’s acquisition of Venture Capital Bank. Dallah Al Baraka Holding Company, a majority shareholder of Al Baraka Group, increased its stake in the banking group. 

In the takaful market, Solidarity Bahrain signed an agreement with Ahli United Bank to acquire its stake in the insurer Al Hilal Life and its subsidiary Al Hilal Takaful.