Bahrain is accustomed to winning accolades for keeping its cool during times of regional crisis – from the Iran-Iraq war and Gulf tanker bombings to the invasion of Iraq – using its position as an experienced, well-established financial centre to maintain investment into the Gulf Co-operation Council (GCC) region and beyond.

The government’s efforts were recognised when Bahrain was placed 39th out of the 157 countries ranked in the 2007 Index of Economic Freedom, published jointly by The Heritage Foundation and The Wall Street Journal. For regional perspective, Oman was placed 54th, Kuwait 57th, Qatar 72nd and the UAE 74th.

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Bahrain scored 80% – the same as the Bahamas – in the ‘business freedom’ category, which measures how free people are to start a business, obtain a licence and close a business. In the ‘financial freedom’ category, which measures the banking and financial system’s relative openness, Bahrain scored an astonishing 90% (the average is 52%) – the same as Hong Kong, Australia and Ireland.

In August, the rebranded Central Bank of Bahrain (CBB) released its first annual report, detailing the state of the nation’s economy: the prognosis was good. According to CBB (formerly the Bahrain Monetary Agency), gross domestic product increased by 7.1% in 2006, driven by strong local and foreign investment, a record high current accounts surplus and an expanding private sector. Bahrain’s current account surplus for 2006 was $1.9bn, its highest ever, and exports rose 15.3%. There was also a strong flow of FDI into Bahrain in 2006, with $2.9bn of overseas capital entering the economy.

CBB said that Bahrain had streamlined the process of registering new businesses introducing a flat registration fee of Bd20 ($53) for any new commercial entity wishing to set up operations and lifting restrictions on foreign ownership. The number of commercial licences registered in 2006 grew by 16.6%.

With such incentives, it is no surprise that Bahrain continues to draw investment, even in the face of competition from rivals such as Dubai and neighbouring Qatar, and from the opening up of its biggest market rival, Saudi Arabia.

Takaful central

Manama has long shown itself adept at developing niche businesses, beginning as a stopping point for air travellers going from Europe and North America to Asia, and then as an offshore banking centre. Among its recent niche operations has been a focus on the global Islamic financial boom. It has been active in making itself a home for Islamic banks and for companies providing takaful (Islamic insurance).

A recent study by the Federation of GCC Chambers of Commerce forecast that the Gulf’s insurance sector would grow to $7bn by 2010 from its current $5bn. In March, CBB gave a licence to Germany’s Allianz Group to set up a global hub, Allianz Takaful, providing Islamic insurance products in Bahrain. That follows the creation of Aman Bahrain Insurance Company by new Manama-based Islamic bank Al Salam. Last September, global insurance giant Hannover Re was given a licence to start up a re-takaful company in Bahrain, Hannover ReTakaful, which will be the principal underwriter of Hannover Re’s worldwide re-takaful business.

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In July, Hannover Re received a second licence, allowing it to establish a branch office in Bahrain, providing conventional reinsurance. Mohammed Akoob, general manager of the new office, which will be Hannover Re’s only one in the Middle East, says that the group received “outstanding support and co-operation” from CBB.

Real estate push

Various real estate plays are now under way to consolidate Manama’s attractions for incomers. According to a March 2007 report by Kuwait-based Global Investment House (GIH): “The Bahraini government has enacted various laws to give a further boost to the burgeoning real estate market in the country. Laws have been passed allowing nationals from other GCC countries to own property in Bahrain. Another decree was passed recently, allowing foreigners and foreign investors 100% ownership of land in predetermined areas.”

In May, the first phase of the island’s flagship development, the $1.5bn Bahrain Financial Harbour (BFH), was opened to great fanfare. CBB governor Rashid Al Maraj said: “While, as the CBB, we are actively working on the regulation side in the kingdom, it is developments such as the BFH that we believe will play a large role in addressing the issue of meeting the complex and constantly evolving infrastructure needs of the sector.”

The BFH will target core sectors in the business community, including investment and commercial banks, legal and advisory services, IT firms, financial consultants and real estate investment trusts. BFH chief executive Stephen Rothel says: “The country is very strong in wholesale business and Islamic finance. The BFH is where all the firms want to come to compete and co-operate… it will be where most of the major finance companies in Bahrain will be.”

Although commercial rents have appreciated rapidly in Bahrain, GIH recently noted that with two enormous projects coming up, BFH and the World Trade Center, “the office segment is likely to face an oversupply situation”.

Also on the cards, although still at the design stage, is a new free zone to be located near the Sheikh Khalifa Bin Salman Port. A Bahraini official recently said the free zone could begin operations in the third quarter of 2008. Abdul Hakim Al Shemmari, head of the Bahrain Chamber of Commerce and Industry’s committee involved in shaping the free zone blueprint, says: “It will expand the investment options available to the private sector and offer better opportunities to forge ties with foreign companies.”

Bahrain is also setting up a Science and Technology Park, designed to host high-tech companies; it will contain science laboratories, educational facilities and a university. With the estimated cost running at $1bn across three phases, the Economic Development Board, which pushes for private-led development of Bahrain’s economy, recently signed a memorandum of understanding with Kuwait Finance House to develop the scheme.

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