Trade Financing

Banking System
Bahrain's attraction as a financial center is based upon its established offshore facilities, free foreign exchange movement, tax-free status, stable Bahraini Dinar-USD foreign exchange rate, established insurance sector, modern telecommunications systems, and prime geographical location among the GCC countries.

The Bahrain Monetary Agency (BMA)—the central bank—is responsible for licensing, supervising, and regulating all banks and financial institutions, including information technology operations. The BMA's regulatory regime adheres to international standards.

In March 2002 total domestic assets amounted to USD 11.7 billion. As of June 2002, Bahrain had 22 full commercial banks, two specialized banks, 48 offshore banking units, 34 representative offices, 11 investment advisory and other financial services and providers of ancillary services to the financial sector, 17 moneychangers, and 4 money brokers.

Bahrain is the principal financial services' hub of the Middle East. Legal, regulatory, and accounting systems in the financial sector (onshore and offshore) are transparent and consistent with international norms.

As of June 2002 there were 172 financial institutions operating in Bahrain, including 22 full commercial banks, two specialized banks, 48 offshore banking units, 34 representative offices, 34 investment banks, 11 investment advisors/brokers and providers of ancillary services, 4 money brokers, and 17 money changers registered in Bahrain.

Islamic Banking
The Government of Bahrain has identified Islamic banking as one of the main economic growth areas in the coming five years. Islamic banking has similar principles to conventional banks, with the only exception that they must conform to Sharia, or Islamic law. Islamic finance prohibits charging interest for the use of money, and disallows dealing in certain commodities. Islamic banking falls under four main categories. Murabha is cost-plus financing—i.e., buying a product from a supplier and selling it to a customer for a profit. Musharraka is a profit sharing system that is similar to equity participation. Ijara involves leasing and Istisna is the financing of construction or manufacturing.

Islamic banking is attracting investors due to profit potential as well as religious and ethical considerations. While the sector is still small, it is registering strong growth. The Crown Prince and other government officials have voiced Bahrain's commitment to further developing the sector.

Bahrain has 26 Islamic banks, 5 insurance companies, and eight mutual funds. Bahrain's claim to be the global hub of Islamic banking is supported by the number of governing institutions it has helped develop and locate here. They include the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the newly established General Council for Islamic Banks and Financial Institutions (GCIBFI), the also newly established international Islamic rating agency, and the newly approved International Islamic Financial Market (IIFM). The General Council wants to develop the Islamic banking industry through increased public education, greater co-operation between members, and better compilation of relevant statistics.

Foreign Exchange Controls Affecting Trading
There are no foreign exchange controls or other obstacles to the free movement of funds.

General Financing Availability
Bahrain's banking policies, regulated by the Bahrain Monetary Agency (BMA), facilitate the free flow of financial resources into and out of the country, with credit generally being allocated on market terms. Foreign investors are able to borrow on the local market, and the private sector has access to a variety of credit instruments.

How to Finance Exports/Methods of Payment
Letters of Credit are the preferred method of payment for exports. A Letter of Credit (L/C) is a promise by a bank that it will make clearly stated payments to a named party under certain conditions. The L/C should conform to international guidelines established by the International Chamber of Commerce (ICC), as published in the Uniform Customs and Practice for Documentary Credits, or UCP. L/Cs offer certain advantages to the seller, who through the L/C depends on the creditworthiness of the opening (issuing) bank, rather than the buyer's; other risks are also minimized. For the buyer, the L/C ensures that all of the seller's documents must be correct before the seller will be paid.

Other possible methods of international commercial payments include cash, open credit, and documentary credit sales.