While low oil price situation becomes very challenging for the GCC (Gulf Cooperation Council) region and for Bahrain, Bahraini banks so far have not witnessed any impact of that with infrastructure projects and construction sector proving to be very good growth drivers for bank credits.
However, according to the Central Bank of Bahrain (CBB), the single integrated regulator of the island kingdom’s financial industry, the banking sector, which had posted handsome growth during the last two years despite high-degree of economic uncertainty, could see lower loan growth and rise in non-performing assets if oil prices continue to fall.
“The matter of fact is that despite the financial crisis, 2014 and 2015 were the best years for our banks. They managed to achieve good growth in net profit and their assets. The growth of banks never stopped even during the financial crisis,” Khalid Hamad, CBB executive director- Banking supervision, told FE.
“But we anticipate if the oil prices continue to drop, then of course we will see impact on the loan growth of banks in the local market. This also could lead to an increase in the non-performing assets,” Hamad pointed out.
Significantly, oil prices have tumbled about 70% since mid-2014 on the back of excess supply and sluggish demand. On the back of lower oil prices, the IMF expects growth in bank credit to the private sector in the GCC as a whole to slow down from an annual 12% in 2014 to 8% in 2015 and 2016, respectively.
Bahrain Economic Development Board (EDB) chief economist Jarmo T Kotilaine said there had been not much impact of sliding oil prices on the banks credit and profitability in the country so far as the lenders were healthy and well capitalised. “Infrastructure projects and construction sectors have become a very good growth drivers for bank credits at a time when oil price situation has very challenging,” Kotilaine said.
Total aggregative value of that infrastructure pipeline is equivalent to more or less to the country’s GDP, which is over $30 billion.
Notably, 80% of Bahrain’s GDP now comes from non-oil sectors, highlighting the transformative impact of the reform efforts to diversify the economy in the past years. It has one of the most developed financial services sector in the GCC region. Financial services contribute one-fifth to the Kingdom’s GDP.
Facing the low oil price environment, the government of Bahrain has taken action basically to improve revenue and reducing expenditure. “The government has managed to reduce subsidy. It has managed to increase the petrol prices for local consumption. All of these steps taken so far have accrued millions of dollars into the government budget,” Hamad explained.
Kotilaine, on the sidelines of Euromoney GCC Financial Forum, said GCC countries were at present looking at ‘fiscal re-engineering exercise’ to ultimately define the role of the government and the economic activities were more and more driven by the private sector and the economic structures of these countries were going to be more diversified.
“Good news in the Bahraini context is that the Kingdom has been the pioneer in diversification area for long time and today it has a very diversified economy in terms of its GDP composition,” he said, adding the Kingdom’s economy was as a ‘resilient economy’ because of very robust structural growth drivers from the non-oil sectors.
Even in the volatile environment, last year the country had achieved the non-oil growth of about 4%.
According to the Central Bank of Bahrain, due to the slowness of the global economy demand for credit is still below the level prior to the financial crisis. There is good credit demand for consumer finances, but demand for corporate credit is still low. On the back of low corporate credit, some banks have already diversified and invented new line of businesses like SME funding.
The Central Bank of Bahrain is currently consulting with the lenders on their liquidity requirements under Basel III international banking standards.
Asked how much of capital Bahraini banks may require under the Basel -III norms, Hamad said, “None of our banks are below the minimum requirement. In Bahrain minimum capital adequacy ratio is much higher than the Basel. Here the minimum ratio is set at 12.5%. Our standard is much higher than the Basel standard. And all our banks are in line with it.”
The Kingdom adopted the Basel-III capital adequacy starting from January, 2014 and norms are fully implemented. “Now, we are working on leverage ratio and liquidity requirement. On leverage ratio requirement we are now in the final stages of issuance of the regulations. On liquidity requirement we will be issuing a consultation paper this year for both Islamic and conventional banks,” the CBB executive director said.
There are currently 113 banks in Bahrain with Indian banks including ICICI Bank, State Bank of India, Bank of Baroda, Canara Bank and HDFC Bank. Overall assets in the banking sector stands at about $189 billion.
(Travel for this report was sponsored by Bahrain Economic Development Board)