| Search  | Old Web Site  | Newsletter  
Business Solutions
ipr in the Press
Country Guides
Printable Version   

Political & Economic Overview Growth Prospects
Sectors Legal Review

Political & Economic Overview

In recent years Bahrain has been characterized by a serious effort to modernize its economy and political system and has enjoyed particular success in positioning itself into becoming a major financial center, particularly in the field of Islamic banking. The offshore financial sector at the beginning of 2004 has assets of some US$70 billion and the daily foreign exchange turnover of all Bahrain's financial institutions totals some US$4 billion.

Partly because of the fact that it has limited oil production, Bahrain has developed a more diversified economy than the other Gulf states. It refines a large quantity of Saudi oil and possesses the largest aluminium smelter in the Middle East.  Bahrain also has a large shipbuilding and repair yard and one of the area's busiest airports. Nevertheless, wholly or partially government enterprises still dominate the economy. The most far reaching recent political reform was the February 2001 referendum on the National Action Charter - the centerpiece of the Amir's political liberalization program. In October 2002, Bahrainis elected members of the lower house of Bahrain's reconstituted bicameral legislature, the National Assembly. There are few judicial checks on the actions of the Amir and his Government, and the courts are subject to government pressure.


Population: 0.672 million (2002)
Religions: Religions 85% Muslim, 15% Christians, Bahais, Hindus and Zoroastrians
Government: Emirate, limited monarchy
Languages: Arabic (English is widely spoken)
Work Week: Saturday - Wednesday
(Some offices are open half days on Thursdays)
Monetary Unit: Bahraini Dinar (BD)
Exchange Rate: 0.37/US

Growth Prospects

On the one hand, Bahrain is facing stiff competition as the financial capital of the Middle East. It hopes that its new financial harbor and the its increased profile as a result of hosting the 2004 Grand Prix will enable it to entrench its position. On the other hand, its diversification campaign has established it as the largest concentration of manufacturing industries and international banks. Together with its high standards of financial regulations, political stability and bilateral investment treaty with the United States and no taxation or restrictions on capital repatriation, growth prospects are very positive. The government also recently liberalized land and other laws to allow 100 percent foreign ownership of many types of companies.


The Supreme Privatization Council is also more serious than other such bodies in the Middle East but growth rests in export-oriented industries that received a boost with new regulations allowing 100% foreign ownership of new industrial ventures or service companies and the same investment incentives available to Bahraini companies, including personal corporate tax exemption, no restriction on capital and profit repatriation, and duty-free access to GCC member states for products manufactured in Bahrain.



Bahrain is a net importer of food and its heavily subsidized agricultural industry is limited to a three-mile strip of land on the northern coast producing fruit, vegetables, some dairy products, shrimp, and poultry. As in the whole of the Gulf region, the food processing industry is expanding for semi-processed agricultural products.



Oil and gas still dominate the country's economy and oil production stands at almost 50,000 bpd, two thirds the level of production in the early 1970s. With only 148 million barrels, Bahrain has very limited oil reserves. In addition to what is produced in its territory, Bahrain receives free oil via a subsea pipeline from Saudi Arabia, mainly from the Abu Saafa offshore field, which lies in Saudi Arabian waters. The Saudi petroleum company Aramco is developing Abu Saafa's production capacity to as much as 300,000 bbl/d by 2004. Bahrain purchases the remainder of its oil from Saudi Arabia. Bahrain also imports around 210,000 bpd from Saudi Arabia for refining. In Bahrain, petroleum production and processing account for about 60 percent of export receipts, 60 percent of government revenues and 30 percent of GDP.

There is hope for exploration potential in the Hawar island area where ten international companies are seeking exploration rights. Offshore licenses have already been awarded to Texaco and Malaysia's state company Petronas. The French firm Compagnie Générale de Géophysique commenced an offshore survey for Petronas in August 2002. 



Bahrain uses most of its gas for domestic use, but also exports some liquefied petroleum gas (LPG) and gas-derived petrochemicals. The government has allocated $16.2 million to the state-owned BAPCO in order to convert Bahrain's only oil refinery into a producer of unleaded fuel. Bahrain has been working on a major $650 million financing package for this upgrade and modernization, and US engineering giant Bechtel is completing the refinery upgrade's front-end engineering and design with tenders possible in the next year.



Bahrain's electrical capability is currently 1.5 GW and demand is growing at about 5% per annum. The Swiss-Swedish group Asea Brown Bovary (ABB) is leading an international consortium to build a power and desalination plant near Hidd. The Dutch firm Tebodin Middle East Company has already been hired to perform an engineering study to verify the feasibility of extending pipelines to the Hidd location.



The Bahrain Petroleum Company, BAPCO, is working on a number of infrastructure improvement programs, many with the help of US firms. Chicago's United Oil Products (UOP) won the contract for a new 70,000 bpd diesel hydro-treater, and Kinetics Technology International, also of the US, won the contract for a new 60 million cubic feet per day (cfpd) hydrogen plant. The American company, Foster Wheeler Corporation, is carrying a $15 million front-end engineering and design contract with BAPCO, while Caltex has provided technological advisory services for the installation of new computer systems for the company. In addition, a contract worth $500 million for the expansion of BAPCO's refinery in the Awali Field was issued.


Finance and Banking

Bahrain sees itself as Beirut's successor as the banking and finance hub of the Middle East. It is already the second largest sector of the Bahraini economy, covering investment services, commercial and specialized banks, offshore banking units, and currency trading. The government has promised a major regulatory review and has already instituted more rigorous regulations for the insurance sector.


Islamic Banking

Bahrain hosted the World Islamic Banking Conference in December 2003 and is keen to cultivate Islamic banking as a major growth area. In March 2001, BNP Paribas Asset Management unit established Bahrain as its regional hub with an intention of using Bahrain as its base for penetrating the private Islamic banking businesses. It gave initial approval for the first virtual Islamic bank, 4iBank, providing banking and long-term sharia-compliant investment services via the Internet. Bahrain also hosted the  a new Islamic Financial Services Organization set up in November 2001 and including Malaysia, Indonesia, Sudan and the Islamic Development Bank as founding members.


At the same time, the Bahrain Monetary Agency tightened the rules for Islamic banking to improve the sector and attract further investment. Bahrain also saw the entry of Citibank into the local Visa card market where strong growth potential is seen. Salomon Smith Barney brokerage also opened a branch at Citibank's new regional headquarters in Manama.


Industry and Manufacturing

On a proportional basis, Bahrain has the largest concentration of manufacturing industries in the Gulf, particularly in the fields of aluminum smelting, petrochemicals, and ship repair. Bahrain's aluminum smelter is controlled by Aluminum Bahrain (ALBA), a joint venture in which the Bahraini government holds a 77% stake; Saudi Arabia's Public Investment Fund and Bretons Investment of Germany also own significant stakes. As the biggest aluminum producer in the Middle East, ALBA represents the major portion of non-oil exports out of Bahrain. ALBA continues to expand with plans after it instated a $250 million calcined coke plant, which came on line in early 2002, that allows Bahrain to produce its own calcined coke rather than rely on imports.


ALBA has selected ICF Kaiser of the US to carry out the feasibility study and master plan for an ambitious $1 billion expansion program. The goal is to increase capacity by 50 percent to 750,000 tons/year in line with growing global demands for the metal. Kaiser's initial study was completed in late 2001 and gave a green-light to the project, with an aim is to have production online by the second quarter 2004. Incremental increases are ongoing due to a series of modifications and upgrading work in 2001 as well as work on a major new facility upgrade commenced in late December 2001. Other important industrial diversification developments include a large petrochemical complex at Sitra, a sulfur derivative plant, and the expansion of the Arabian Ship Repair Yard (ASRY), already the Gulf's largest.



Bahrain's industrial sector is supported by an excellent transport infrastructure, including a 25 km causeway to Saudi Arabia facilitating transhipment. Qatar and Bahrain have also been collaborating on a proposed "friendship bridge" to link the two nations.



Bahrain is hoping to expand its tourist industry, already 15% of GDP. It has easened its visa process for tourists, and has also proposed a multiple-country visa, allowing visitors into every country in the region on a single visa. There are world class exhibition facilities, an ice rink, golf courses, and other recreation centers. The government hopes that tourism will grow from its current level of 15 percent of GDP.


Bahrain is hoping to expand into the insurance market in the region, where premium and per capita income and market penetration are low. The BMA is already licensing insurance companies including two Islamic insurance (Takaful) entities — one an offshore captive insurance firm being set up by Gulf Finance House, and the other a joint venture between Dar Al-Maal Al-Islami (DMI) Trust and Overland Capital from the US.


Stock Exchange

The Bahrain Stock Exchange (BSE) is among the most important in the region. The BMA mandated Citigroup to arrange a similar $250 million issue — its first international sukuk. The BMA recently signed an MOU with the London Metal Exchange (LME) whereby the LME will help structure internationally standardized documentation for Shariah-compliant commodity transactions on the exchange, enabling Islamic and conventional financial institutions to finance global commodity transactions. The BMA is also pioneering a repurchase facility for Islamic financial institutions, allowing these institutions to discount, by selling their sukuk holdings to the BMA, against which the BMA would lend to the institutions for specific periods of time.


Other banks with licenses include Addax International Bank BSC, which will specialize in investment advisory and brokerage services, and third part distribution on both conventional and Islamic finance sides; Kuwait Finance House to set up a wholly-owned investment consultancy firm. Baytik Investment Advisory, the first such service to be established by an Islamic bank in Bahrain; an onshore banking license to Kuwait Finance House; a banking license to Kuwait Turk Evkaf Finance House; and an investment banking license to Rushd Bank, promoted by Saudi investors.


Legal Review


The legal system of the UAE is based on its constitution which has finally been approved by the Federal National Council in 1996, replacing the provisional documents which had been renewed every five years since the country's creation in 1971. The Constitution establishes the principal instruments of Federal authority as follows:

The Supreme Council of the Federation, composed of the seven sheikhs of the seven Emirates, has the power to enact legislation, establish policy, appoint persons to office and to assume supreme supervision of the Federation's affairs. Decisions should be approved by a majority of five, which must include the votes of the sheikhs of Abu-Dhabi and Dubai.

The President and Vice President of the Federation are elected by the Supreme Council from among its members and have overall responsibility for the administration of federal laws and affairs.

The constitution provides a rather detailed list of citizens rights and liberties and lays down the rules of priority between federal and Emirate legislation. Under Article 151 of the constitution, federal law has precedence over legislation of the




The Federal judicial system in the UAE consists of Federal Courts of First Instance, two Federal Courts of Appeal in Sharjah and Abu Dhabi and a Federal Supreme Court in Abu Dhabi, the latter composed of five judges including a President of the Court. The Supreme Court has both appellate and original jurisdiction. The individual Emirates retained their own Islamic Shari'a courts which exist parallel to the Federal Courts. Dubai, however, has not merged its courts with the federal judiciary and the rules for admission to the Dubai bar are different than those for admission to the federal bar.


Whereas the majority of advocates in the UAE were, and to a large extent still are expatriates, the UAE has now started to enforce Law No. 21 of 1991 under which only UAE nationals will be allowed to represent clients in local courts, and expatriate lawyers may only continue to serve as legal consultants.


Further, it is notable that the Federal Cabinet in the UAE has approved a draft treaty that would provide for the mutual enforcement of judgments as well as judicial corporation in other areas among the GCC member states. Under the treaty, judgments issued by a court in one of the GCC states in civil, commercial administrative or personal status matters would be enforceable in all other GCC countries.


Alternative Dispute Resolution and Arbitration

UAE courts usually enforce the intention of the parties to arbitrate disputes as expressed in a contractual arbitration clause. The courts, however, sometimes substitute clauses providing for arbitration outside of the UAE for local venue. UAE courts will often not enforce foreign judgments or honor contractual choice of law provisions.


Arbitration proceedings are usually carried out by the individual Emirates though their respective Chambers of Commerce and Industry which are quasi-state organizations. The Dubai Chamber of Commerce has published Rules of Commercial Conciliation and Arbitration which are used by its Commercial Conciliation and Arbitration Center.


In this context, it should also be noted that according to Dubai Law No.4 of 1997 (amending and clarifying a 1996 law), the government of Dubai must consent to being sued. According to a July 1992 Directive, however, no such consent is required if an arbitration clause in any contract to which the government is a party is invoked.


  Top of Page Printable Version