Page 137 - Aamir Rehman - Dubai & Co Global Strategies for Doing Business in the Gulf States-McGraw-Hill (2007)

Silicon from Sand: Essential Background on the GCC 121

Some might be surprised to learn that the majority of voters—52
percent—in municipal elections were women. 20
Bahrain was the first GCC country to export oil, building its
first refinery in 1935. The island continues to refine oil from both
domestic and imported sources (principally Saudi Arabia,
whose offshore oil wells are very close). Bahrain’s own oil reserves,
however, are rapidly diminishing and may run out in the next 10 to
15 years. 21 While Bahrain’s diversification efforts include the
massive Aluminum Bahrain (which has the world’s largest smelter
outside Eastern Europe) and major tourism initiatives, such as the
only Formula One racetrack in the GCC states, the most important
sector in the country is clearly financial services.
When the oil boom of the 1970s brought unprecedented wealth
to the GCC, Bahrain was well positioned to be the region’s banking
hub. The country’s human capital pool was strong—Bahrain has
had a public education system since 1932—and the Bahraini dinar
had been introduced in 1965 and was becoming internationally
relevant. In addition, the regulatory environment was favorable
to building banking institutions—14 commercial banks were oper-
22
ating in Bahrain by 1974. In 1975, the Bahrain Monetary Agency
made the environment more attractive by introducing Offshore
Banking Unit (OBU) licenses that allowed foreign banks to
manage international deposits in a very flexible and tax-efficient
manner. Twenty-six OBUs were established in the first year
alone. The banking sector was fueled by the regional oil boom, a
strong regulatory framework, and the migration of regional
banking headquarters from Beirut as Lebanon slid into civil war
in 1975.
By 2006, the number of offshore banks and representative
offices in Bahrain had reached 370. International banks consider a
presence in Bahrain essential to maintaining themselves as truly
global institutions. Bahrain has also established itself as the leading
center for Islamic (Sharia-compliant) finance—hosting organiza-
tions concerned with meeting industry standards, especially in the
areas of accounting and governance—as well as for over 30 Islamic
financial services firms. Perhaps the greatest sign of the success of
Bahrain’s financial services industry is that it has become the largest
sector of the national economy, contributing an astonishing 28 per-
cent of GDP, the same share as in Luxembourg. 23