Bahrain bank mergers are good news for the kingdom and the Gulf

Alamy via Reuters

Announcements on bank mergers in Bahrain – one completed and one still being contemplated – are welcome news for the local banking sector and wider Gulf markets. 

Bahrain’s Al Salam Bank announced earlier this month that it would buy the local subsidiary of Kuwait Finance House (KFH). On April 21 the subsidiary’s long-standing CEO, Abdulhakeem al-Khayyat, stepped aside. 

KFH bought Bahrain-based Ahli United Bank in 2022 and has been integrating Ahli’s operations and subsidiaries into its own corporate structure. Al Salam, a sharia-compliant bank, has taken the opportunity to acquire an existing sharia-compliant portfolio, as well as the well-established domestic business of Ahli United. 

The transaction brings further consolidation to Bahrain’s sharia-compliant banking sector. Four years ago, National Bank of Bahrain (NBB) completed its takeover of Bahrain Islamic Bank. 

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Al Salam’s acquisition is important, but the other merger that is being contemplated is potentially more significant.

Earlier this year, NBB and Bank of Bahrain and Kuwait (BBK) announced to the Bahrain Bourse that they were exploring a merger. These two banks have been the pillars of Bahraini domestic banking, both retail and wholesale, for decades. NBB was licensed in 1957 and BBK in 1971. 

The larger Bahraini banks are foreign-owned, so a merger of NBB and BBK would create a single Bahraini national champion that would have the balance sheet size to compete with GCC banks both at home and abroad. 

Ahli United Bank was the largest Bahraini bank, when ranked by equity, before its takeover by KFH, although most of its business was outside Bahrain. The second largest, Bank ABC, is majority owned by the Central Bank of Libya (59 percent), whose governor is the bank’s chairman. The Kuwait Investment Authority also has a 30 percent stake in Bank ABC.

Gulf International Bank (GIB), the third largest, is almost wholly owned by Saudi Arabia’s Public Investment Fund. 

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Bank ABC had equity of $4.8bn at the end of 2023, and GIB had $3.4bn. 

As for the wholly sharia-compliant banks in Bahrain, both Ithmaar Bank and Al-Baraka are closely tied to Saudi investors. Their operations in Bahrain are important, but are part of much wider, international banking networks.

So, what would a combination of NBB and BBK look like? 

Both are among the smaller of the 70 active GCC commercials. It is likely that a merger would take the new bank into the top 30. 

The banks are comparable in size. At the end of 2023, NBB had equity of $1.5bn and BBK $1.7bn. NBB has a loan portfolio of $6.7bn compared with BBK’s $4.3bn. Their customers’ deposits were $9.3bn and $5.8bn respectively. 

BBK has four branches in India and one in Kuwait. NBB has branches in Saudi Arabia and the UAE. 

Bahrain has done well to consolidate its banking system and reduce the number of small institutions that are no longer viable

A merger would also offer opportunities for reducing the duplication of physical branches in Bahrain and other infrastructure in what is a crowded banking market. 

Both banks are effectively controlled by Bahraini government investment funds, so the question of whether to press ahead with a merger is one for the Bahraini government to decide. 

Bahrain has done well in recent years to consolidate its banking system and reduce the number of small institutions that are no longer viable. 

The Central Bank of Bahrain’s Licensing Directory shows 85 authorised institutions although some of these, such as Bank ABC and GIB, hold more than one licence. The Central Bank issues separate licences for retail and wholesale activities and for conventional and Islamic operations.

The 85 include seven Bahraini institutions that are under administration or liquidation. They also include some, such as SICO, that are investment banks rather than commercial banks, and others, such as the housing bank Eskan, that are not focused on purely commercial activities. 

If we exclude Ahli United and KFH, a merger of NBB and BBK would leave nine active commercial banking groups in Bahrain.

Bahrain’s role as a regional platform from which banks could access other, less receptive, countries ended long ago.

Saudi Arabia is encouraging foreign banks to be active in the kingdom (though the Saudi central bank remains sparing in its issuance of new branch licences), and both Abu Dhabi and Dubai have provided easy access to their wholesale markets through international centres that are ringfenced from long-standing – and slow-moving – regulatory and legal systems. 

Yet Bahrain has retained its reputation as having a well-regulated banking system, led by a central bank that stays abreast of international standards, including those relating to financial crime, while encouraging innovation. 

The most recent bank to be authorised, Singapore Gulf Bank, is wholly digital and has Singapore’s Whampoa Group and Bahrain’s sovereign wealth fund as its leading shareholders. 

Bahrain’s economy and its population may be small in relation to others in the region, but it deserves strong, large banks, both conventional and Islamic, that are rooted in domestic business but capable of projecting themselves overseas. 

Let us hope that the NBB-BBK merger moves forward, and that Al Salam is able to make a success of its acquisition of KFH’s Bahrain subsidiary.

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems.