al ajmi2009.pdf


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IJSE
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because the government’s policy to develop Bahrain as an Islamic financial centre has
led the Central Bank of Bahrain (CBB) to:
.
develop a friendly business environment;
.
put in a place the regulation suitable for these types of banks;
.
host the AAOIFI which develops accounting, auditing, ethical and governance
standards that Islamic financial institutions are required to comply with; and
.
invest in developing human resources qualified in Islamic finance.
In addition, the house of representatives requires the government to finance public
projects using Islamic financial facilities. The government has developed the country
as a centre for conventional finance over the last three decades, allowing the country to
accumulate rich experience in dealing with the sophistication that characterizes the
banking industry. Although Bahrain is a Muslim country, it is also known to be an
open country and is inhabited by many nationalities and people with different religious
beliefs and cultures. The resulting duality of the banking system (conventional and
Islamic banks) offers clients excellent opportunities to choose between different
banking types as well as choosing an individual bank within each group.
The paper is structured as follows: Section II provides a brief account of the banking
environment in Bahrain, and this is followed by the salient features of the literature on
bank selection criteria in Section III. Section IV explains the instrument used to collect
information from the sample and the properties of the sample. The results and analysis
are presented in Section V, and this is followed by concluding remarks in Section VI.
II. The banking environment in Bahrain
Bahrain is a member of the GCC, alongside Kuwait, Oman, Qatar, Saudi Arabia, and
UAE. As of 2007, the size of the population is 1.05 million. Bahrain’s vision for 2030
identifies the financial sector as one of the five economic sectors that the country
attempts promote. However, the government strategic emphasis on this sector dates
back to 1975 when it took a decision to establish an offshore banking industry. This
strategy is part of a holistic strategy to diversify the economy away from the oil sector.
This policy has led to an increase in the share of the financial sector, which has increased
its share of gross domestic product (GDP) by 27 percent between 1980 and 2007, while
the oil sector shrank from 27 percent in 1980 to 15 percent. The growth of the financial
sector has been brought about by a strong regulatory setting, friendly business
environment and the establishment of support services needed by the banking industry
to develop and expand. Over the last few years the oil sector has been the largest
contributor to the country’s GDP.
The banking industry in Bahrain started in 1923, when the Eastern Bank (now
Standard Chartered Bank) opened its first branch, followed by a branch of the British
Bank of the Middle East (now, HSBC) in 1945. The first locally incorporated bank,
National Bank of Bahrain was incorporated in 1957. As for the Islamic banks, the first
bank to operate in accordance with the rules and principles of Islam, the Bahrain Islamic
Bank (BisB) was incorporated in 1978. The BisB was the third Islamic bank to be
established in GCC countries, after DIB and the Kuwait Finance House (KFH). As of
November 30, 2007, the industry is composed of 417 banks and financial institutions,
of which 26 Islamic retail and wholesale bank are licensed. The retail banking segment of