Central Bank of Bahrain was established on 6th September 2006 as a Public corporate entity. This entity is governed under the laws of financial institutions (2006) and CBB itself. The current governor of CBB is Rasheed Al Maraj. Later in November 2016, he decided to enhance the insurance sector of Bahrain. In order to deal with this, he recognized the compulsion for the Central Bank to collaborate with the insurance market for supporting insurance sector. Before CBB, the Bahrain Monetary Agency (BMA) controlled the regulations and banking system of Bahrain. So, CBB inherited the responsibilities of BMA, on which they were working from the last 33 years.
BMA was established in 1973 as the Bahrain Monetary Agency. This was after Bahrain gained its independence from the UK. The bank also has an impressive coin/currency museum that is a collection of around 653 AD.
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It generally maintains and regulates the stability of Bahrain in terms of financial and monetary nature. Main functions of CBB include framing the foreign exchange and monetary policies, maintaining and controlling reserves, debts, currency, and other government issues related to various payments and settlements of the country. Further, it’s the sole organization of Bahrain that regulates the entire financial sector. This is done by covering a broad scope of areas related to entire banking, capital markets, insurance, and other investment areas. Moreover, it also acts as a regulatory authority for all the financial service providers of Bahrain.
Various objectives of Bahrain are prescribed in Article 3 of CBB law as:
- Framing policies related to credit, monetary, and other areas of the financial sector
- Delivering efficient banking services financial sector of Bahrain
- Enhance the financial sector by developing confidence in them
- Safeguard the welfare of customers of financial institutions
- Augment the credibility of Bahrain as a powerful international financial center
Duties and Powers of CBB
Under this article, various duties and powers are also mentioned that includes licensing and supervision of investment business, clearinghouses, brokers, advisors, and other financial service companies. It is also responsible for currency issuance and managing the reserves of Bahrain related to Gold and Foreign Currencies. Let’s see each one of the duties:
CBB provides licensing service to the bank of all nature including conventional and Islamic. It also regulates and supervises the general functioning of these banks.
Towards Insurance Companies
CBB has the power to regulate, supervise the insurance service providers, and brokers. It is also their responsibility to issue them with a license.
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Towards Investment Companies
CBB also regulates functionaries of investment firms like consultancies, advisories, clearinghouses, and other related member firms. It supervises these firms and is responsible for the licensing. Further, it is also responsible for licensing, regulating, and supervising other financial service providers like ancillary service providers, representative offices, and money changers.
Towards Capital Market
CBB is the main regulatory authority for Bahrain’s licensed exchanges. It also controls clearinghouse. Further, it acts as the Listing Authority for all the firms and other financial instruments that are listed on the exchange.
Altogether, these provisions make up the vision and missions of CBB.
Approaches of CBB
Generally, CBB covers two approaches of their control that includes regulation and supervision.
These approaches work under certain requirements that can be summarised as follows:
CBB Regulatory Requirements
As part of the regulation, the most important duty of CBB includes licensing. For it, CBB always administers various licenses as per appropriate international standards. This means that CBB essentials report the Core Principles including other standards related to the Basel Committee.
Further, CBB always focuses on risk and principle-based requirements. Also, these requirements are as per the different categories of the licensee and various risks related to them. Moreover, regulatory requirements also cover the conduct of business and provident standards.
All banks were required to put on a minimum of 12% Capital Adequacy Ratio deduced as per the requirements of Basel II. Currently, these regulations are being reviewed. This is being done to fulfill the requirements of Basel III (implemented from 2013 onwards).
For Insurance and Investment Companies
It’s mandatory for insurance companies to maintain solvency margin (as per current European Union requirements). Investment firms are prone to risk-related capital requirements. This includes risks like counterparty, position, and foreign exchange risk. They also have to be in limits of their expenditure requirement.
They have also set regulatory requirements for other license holders that are present in their rulebook. It has a separate volume in the following order:
- Conventional banks
- Islamic banks
- Insurance firms
- Investment business
- Specialized licensees
- Capital markets
- Collective investment undertaking
CBB Supervisory Approach
This is the most crucial approach of CBB as it includes the supervision of the various licenses holders. It is a hybrid of onsite and offsite supervision.
Onsite supervision is undertaken by CBB’s own examiners and special experts like accountants or actuaries. In this type of supervision, it is seen that the quality of systems, controls, and books are maintained.
Offsite supervision includes timely provident meetings in order to discuss on various areas related to performance, planning, and other matters related to compliance like capital adequacy, liquidity, and other strategies. Basically, it includes the analysis of returns, financial statements, and other related public data.
In order to underpin the above mentioned supervisory efforts, for banks, a risk profiling system is developed. It provides a detailed blueprint for determining the impact and risk profile of license holders. They are working towards extending the profiling system to insurance companies too.
If the license holder fails anywhere in these regulatory requirements then various measures are taken against them. These are mentioned in the Enforcement Modules of the rulebook. General enforcement measures include:
- Formal requests for information
- Formal warnings or directions
- Penalties in financial terms
In certain extreme cases, CBB’s regulatory authority has the power to cancel the license or administration or criminal sanctions.
Contribution in Other Areas
As we all know that in this modern era, Bahrain has emerged itself to become a global leader in Islamic finance. Due to this, it houses the largest number of Islamic financial institutions in the entire Middle East. Bahrain leads the market for Islamic securities, short-term government (Sukuk), and other leasing securities. The Central Bank of Bahrain has played a leading role in the advancement of these innovations in Bahrain.
CBB is having an all-around prudential regulatory framework for Islamic insurance and banking. They have also made the changes as per the requirements and needs of Islamic finance. All the areas of their coverage are included in the special rulebook for Islamic banking. It includes areas related to risk management, reporting requirements, capital adequacy, and licensing needs.
The insurance rulebook of Islamic finance includes the functions of takaful and re-takaful firms.
The Waqf Fund
CBB has established a fund for conducting finance research and training people on Islamic finance. This fund was called ‘Waqf Fund’. It was established in November 2006 under the regulations of Central Bank of Bahrain (CBB). It was launched in partnership with IFIs (Islamic Financial Institutions) in Bahrain.
Central Bank of Bahrain has undergone into two of the major recent collaborations with Singapore and Abu Dhabi.
MoU with Monetary Authority of Singapore
On 13th November 2018, CBB signed a memorandum of understanding with the monetary authority of Singapore. This was done to get collaboration on financial services. It will help both countries to exchange information related to recent developments and trends.
Agreement with Abu Dhabi Global Market
On 11 November 2018, CBB signed an agreement with Abu Dhabi Global Market(ADGM). This was to enhance the innovative financial services and bringing in the FinTech.
Thus, the banking sector is playing a major role in the creation of Bahrain as a powerful financial center in the Middle East region. Many factors like industrial growth, the open market economy, and efficient local workforce have contributed towards making Bahrain a banking hub. Due to its strong position, many foreign organizations are attracted to Bahrain. And thus, they are trying to create a physical presence in this country.