August 2019, first published on Thomson Reuters Regulatory Intelligence
Bahrain is an independent Kingdom situated in the Arabian Gulf and is a member of the Gulf Cooperative Council (which comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates). It is governed by a constitution promulgated in 2002. For many years prior to 1971 Bahrain was a British protectorate, but retained its internal laws and legal systems.
Statutes are promulgated by decree of His Majesty Sheikh Hamad Bin Isa Al Khalifa, the King, and are published in the Bahrain Official Gazette. Many decrees contain enabling powers under which various ministers make resolutions and rules which have the force of law.
Much of the legislation is based on Egyptian models, in particular the Egyptian Civil Code, and the legal system is therefore predominantly a civil (as distinct from a common law) system.
The Ministry of Justice administers the courts and the civil courts (established by decree in 1971) have sole jurisdiction in commercial matters and are distinct and separate from the Sharia’h courts. Sharia’h law is one of the sources of law but does not override statute law or customs and is not of great significance in commercial matters.
All matters that relate to banking, insurance, the stock market and other financial activities are regulated by the Central Bank of Bahrain (CBB), pursuant to the Central Bank of Bahrain and Financial Institutions Law (Decree Law No. 64/2006). It is prohibited to carry on any finance-related business in Bahrain without a licence from the CBB, and penalties can be severe.
Banking licences fall into two main categories:
Such banks carry on all recognised banking business except Islamic banking.
These banks conduct all regular banking business but in accordance with Islamic principles and all activities and products must be approved by the bank’s Sharia’h Advisory Board. Within these two main categories, there are:
These are banks which conduct business onshore and offshore and have savings accounts as well as other types of account.
These banks have only a limited right to transact business with Bahrain residents, most of their activities being conducted with offshore clients. Banks in any of the categories described above may be locally incorporated, or may be branches of overseas companies. If locally incorporated they must take the form of a Bahrain shareholding company which in turn may be open (i.e., listed) or closed (with a restricted system of transferring shares). Their head offices must normally guarantee branches’ obligations.
In addition, there is the category of “representative office”. This is basically an information-gathering office, allowed to conduct a limited amount of promotional and research activity but not to conduct any kind of business. All business requirements must be referred to the head office.
The CBB offers the following investment business licence categories:
- Category one investment firm licences.
- Category two investment firm licences.
- Category three investment firm licences.
In summary, category one investment firm licensees are able to undertake all types of regulated investment services, including dealing in financial instruments as principal. In undertaking these activities, they are able to hold client assets. Category two investment firm licensees are authorized to undertake all regulated investment activities, with the exception of dealing in financial instruments as principal.
They are allowed to hold client assets, but are not allowed to act as principal in client transactions or act as market maker. Finally, category three investment firm licensees are limited to undertaking the activities of “arranging deals in financial instruments” and/or “advising on financial instruments”.
They are not allowed to hold client assets. Investment firm licensees may operate on a fully Sharia’h compliant basis, should they wish to, in which case certain specific requirements would apply, such as the need to appoint a Sharia’h supervisory committee. Different capital requirements apply to each category of investment business licence.
Ancillary financial services
The CBB also grants licences to companies (local and foreign) which offer ancillary services (e.g., credit cards, rating agencies, etc.).
The CBB also regulates the insurance industry. Insurance companies may be conventional insurers or may operate on the takaful principles (in effect, Islamic methods). They include reinsurance (and retakaful), and captive insurance companies. Insurance business is divided into long-term insurance (meaning life, personal accident with a term of over one year, and savings and fund accumulation insurance) and general insurance (including fire, marine, accident, motor, business interruption, etc.).
There are specific requirements as to capital adequacy. In the insurance sector there are insurance brokers, insurance consultants, insurance managers (which provide management services to insurers), actuaries and loss adjusters.
Trusts are regulated by the CBB, by the new Trust Law promulgated under Royal Decree No. (23) of 2016. The new law offers innovative forms of structures and financing that complement the range of existing structures available in Bahrain.
The CBB regulates the formation of fund issuers, as well as the funds themselves. Companies that issue funds must have a financial institution as a 99 percent shareholder. There are detailed regulations regarding collective investment undertakings contained in CBB Rulebook, Volume 7.
Collective investment undertakings are defined as follows:
“Collective investment undertakings are undertakings:
- The sole object of which is the collective investment of capital raised from the public in financial instruments or other assets and which operates on the basis of risk-spreading; and
- The holdings of which are re-purchased or redeemed, directly or indirectly, out of those undertakings’ assets.”
Collective investment undertakings may be issued either locally or overseas. They may not be sold into Bahrain on a cross-border basis. For CIUs, various classes of investors may be approached, depending on the type of CIUs:
Retail CIUs may be offered to all types of investors but are subject to restrictions on investments and other detailed requirements.
Expert CIUs have fewer restriction requirements and may be offered to expert investors, with a minimum investment of $100,000. Expert investors are:
- Individuals who have a minimum net worth (or joint net worth with their spouse) of $100,000, excluding that person’s principal place of residence.
- Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than $100,000.
- Governments, supranational organisations, central banks or other national monetary authorities, local authorities and state organisations (minimum investment $100,000).
Exempt CIUs are virtually unregulated but may be offered only to accredited investors, for a minimum investment of $100,000. Accredited investors are:
- Individuals who have a minimum net worth (or joint net worth with their spouse) of $1 million, excluding that person’s principal place of residence.
- Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than $1 million.
- Governments, supranational organisations, central banks or other national monetary authorities, and state organisations whose main activity is to invest in financial instruments (such as state pension funds).
Private investment undertakings (PIU)
There is another form of fund known as the PIU which can only be marketed to high-net-worth investors (HNWI), for a minimum investment of $3 million.
HNWIs are defined as:
- individuals holding financial assets (either singly or jointly with their spouse) of $25 million or more;
- companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than $25 million; or
- governments, supranational organizations, central banks or other national monetary authorities, and state organizations whose main activity is to invest in financial instruments (such as state pension funds).
The Bahrain Bourse is also under the general supervision of the CBB. Both domestic and foreign companies may be listed on the Bahrain Bourse. Shares in any listed company must be traded through the Bahrain Bourse unless a special exemption is given.
Any offering of securities must be first approved by the Capital Markets Supervision Directorate at the CBB which sets conditions of issues, and detailed requirements for documentation to be used, including a capital issue, which includes issues of shares and bonds.
Naveen Thakur, Partner
Noor Al Taraif, Associate
Zu’bi & Partners Attorneys & Legal Consultants