Contributed By Haya Rashed Al Khalifa
The Kingdom of Bahrain is not immune from normal global developments, including overall sovereign and corporate demand for financing and the cost of procuring such funds in international markets. However, the banks in Bahrain continue to be well capitalised, non-performing loans continue to be at low and manageable levels, and funding and liquidity buffers are well above the minimum required standards despite the COVID-19 pandemic.
A number of key policy responses (including fiscal, monetary and macro-financial) were issued by the Central Bank of Bahrain to mitigate any implications for customers of financial services, financial institutions and merchants affected by COVID-19.
The Central Bank of Bahrain (CBB) has been empathetic to the effect of COVID-19 on small and medium enterprises, as well as individuals. During the peak of the impact of COVID-19, starting from March 2020, the CBB instructed local banks to offer their clients a deferral on loan payments, for a period of six months.
Thus, while the loan market has, by and large, remained stable during the pandemic, the CBB and local banks have taken a client-friendly policy to ensure long-term benefits for customers and the national economy.
As of 30 June 2022, the CBB has announced that retail banks are not required to defer loan instalments, which serves as an indicator that there is a return to economic stability in Bahrain following the effects of COVID-19.
The authors have not noticed any significant role played by the high-yield market.
Bahrain has a large concentration of Islamic banks, which technically do not make loans. Much of the credit they provide is given by way of murabaha (a cost-plus mark-up arrangement). The Kingdom has always had a number of non-bank financing companies that operate on either an interest-bearing or Islamic basis. Islamic banks and financing companies collectively constitute a significant alternative credit provider segment.
Bahrain is repositioning itself to be a fintech hub in the region, combining conventional and sharia-compliant fintech solutions. The Kingdom has witnessed the growth of a significant number of technology-based solutions, both from existing banks and financing companies, as well as new entrants in the market. Government policy is firmly directed towards supporting the vibrancy of this sector. Most banks have been keen to adopt new technologies driven by customer demand.
The CBB established a dedicated Fintech Unit in 2017 to ensure best services are provided to individual and corporate customers in the financial sector. On 28 May 2017, the CBB announced the issuance of the Regulatory Sandbox Framework, which aims to provide a safe space where businesses can test innovative fintech products and services.
There have been several recent legal, tax and regulatory developments that affect business transactions in some way (eg, amended bankruptcy laws, the introduction of VAT) but none that have been directly targeted at the loan market.
Bahrain is a member country that has adopted the 2030 Sustainable Development Agenda of the United Nations, which contains 17 sustainable development goals. The goals include the promotion of inclusive and sustainable economic growth.
The Bahrain Association of Banks has issued policy recommendations for the regulatory consideration of sustainable finance. The recommendations aim to push the CBB to issue regulatory guidelines to be implemented by all financial institutions in Bahrain, to help foster the 2030 Sustainable Development Agenda among the Bahraini financial institutions.
All financial institutions that wish to undertake financing activities are required to be duly licensed by the CBB and comply with the relevant prerequisites and conditions.
The provision of financing through banking operations requires either a retail or wholesale banking licence. Islamic banking services must be compliant with sharia principles as provided for under the CBB Rulebook Volume 2.
A company wishing to obtain a conventional or Islamic banking licence must submit the CBB Form 1 Application for Licence, alongside all documentation the CBB may require, depending on the relevant licence.
The CBB would review the application, and then provide an “in-principle” confirmation if all requirements have been met to its satisfaction. This process to provide the in-principle confirmation may take from a few days to numerous months, depending on the complexity of the application, whether all the applicant’s information is complete, and the responsiveness of the applicants to the CBB’s requests.
After all the documentation has been duly submitted, the CBB shall issue a formal decision on the licence application within 60 calendar days. If the CBB approves the application, a publication shall be circulated in the Official Gazette. If the application is rejected, the applicant will be notified in writing alongside the reasoning of its rejection.
Foreign lenders are not restricted from granting loans per se, but they may not undertake any financial services in the Kingdom (including the provision of loans and credit) unless duly authorised by the CBB.
The granting of security or guarantees to foreign lenders is not restricted or impeded by national legislation, but the vires of individual companies needs to be permissive.
There are no exchange controls at present.
There are no statutory or regulatory restrictions on a borrower’s use of proceeds. However, the borrower shall be bound by any conditions and restrictions set forth in the financing arrangement.
The Kingdom of Bahrain enacted the Financial Trust Law (Decree No 23 of 2006, as amended), which provides for a limited form of trust law (as understood in common law countries) for financial transactions effected in Bahrain. The civil law concept of “security agent” is also widely used.
A loan can be transferred by assignment or by novation (essentially pursuant to a contractual transfer certificate). The manner in which security is transferred depends on the asset in question, as well as any conditions contained in the security agreement. In some cases, it may be preferable to discharge and re-execute the security.
Debt buy-back is permitted in interest-bearing finance. It is generally not permitted in Islamic finance.
There are no express legislative provisions that govern public acquisition finance, to the best of the authors’ knowledge.
With the exception of VAT and certain taxes payable in the oil and gas sector, there is no general taxation in the Kingdom of Bahrain. For the avoidance of doubt, and reciprocity, the Kingdom has entered into double-taxation treaties with most of its significant trading partners.
There are no other taxes, duties or tax considerations that are relevant to lenders making loans to entities incorporated in the Kingdom of Bahrain.
Technically, there are some legal provisions permitting the CBB to set upper limits. However, in practice, these provisions are not applied, and the only likely impediment commercial lenders could encounter is an adverse public policy finding by the courts on a case-by-case basis. In the authors’ experience, such findings are extremely rare.
There are numerous methods by which security arrangements may be effected in Bahrain, including conditional bank guarantees, personal guarantees, mortgages on immovable properties and business mortgages. The process for the perfection of a security will always be subject to the applicable formalities and requirements as set out by the relevant regulator.
In terms of a business mortgage, the mortgage agreement entered between the mortgagee and the mortgagor must be signed before a notary public, and subsequently be registered with the Ministry of Industry and Commerce for perfection. This would thus bind all third parties, as the commercial status of the company in question would state the term “under mortgage” in the public company register. Publicly traded shares would require additional approvals from Bahrain Bourse, and the mortgagor would need to issue a formal letter to Bahrain Bourse, providing details of the mortgaged securities, and the mortgage agreement. The mortgaged securities would then be registered in a special register, effectively restricting the mortgagor from dealing with the securities without the consent of the mortgagee.
The perfection of land mortgages requires the notarisation of the mortgage agreement, and for it to be registered at the Survey and Land Registration Bureau. This further secures the mortgagee rights before third parties, pro rata to the priority rankings as provided for under the Bahraini Civil Code. Secured mortgagees are placed before any secured creditors, and if more than a mortgage exists, then the priority will be based on the date of registration. However, priority ranking shall remain with any associated costs of the legal proceedings brought forward, outstanding employee entitlements, and special privileged rights such as those of contractors and architects.
The costs of notarising a mortgage agreement are dependent on the number of pages contained, and typically may range from BHD100 to BHD300, and then nominal fees for registration at the relevant authority.
There is no concept of a floating charge (or similar) under the laws of Bahrain.
Technically, it is possible to give a guarantee downstream, upstream or cross-stream.
There are no statutory limitations on a target company issuing a security or financial assistance for its acquisition.
There are no general restrictions or consents regarding the granting of security or guarantees that are required by law. However, certain types of commercial businesses operating in highly regulated environments (including the financial services and telecommunications sectors) have overriding duties to report and seek approval from the applicable regulators of their strategic decisions, which could include embarking upon activities of this nature.
The typical forms of security are released by filing for deregistration of a mortgage at the Survey and Land Registration Bureau (with respect to real estate), applying for deregistration of the mortgage at the Ministry of Industry and Commerce (with respect to business mortgages), or executing a deed of discharge and returning possessory documents (for non-registered securities). The manner in which a security is to be released will depend on the asset type.
The Bahraini Civil Code identifies how competing security interests shall be assessed. The first security created and registered shall take priority and then all subsequently registered securities shall follow in priority pro rata their deed of inscription.
Deeds of subordination (and intercreditor agreements generally) are often used and upheld by the courts. Priority of security can be varied by contract providing all the contracting parties agree. The better view is that contractual subordination will survive insolvency of the debtor. However, if the borrower has undergone bankruptcy and reorganisation procedures, then the subordination agreement or any arrangement of the sort must be lodged with the bankruptcy trustee.
All perfected security interests shall be enforced against the terms of the security agreement, in which the conditions of enforcement must be laid out. These conditions typically include non-compliance with the payment schedules under a loan agreement, significant breach of the loan/security agreement’s terms and conditions, or the insolvency of the borrower.
Enforcement of the perfected security depends on whether the security agreement contains a direct enforceability clause. If such clause exists, the creditor or security holder would be entitled to attend before the Execution Court directly and request the enforcement of the security. If the clause does not exist, then the creditor would be obligated to obtain a civil court judgment first, approving the execution of the security agreement, before approaching the Execution Court.
Bahraini courts permit the utilisation of foreign law as the law of the contract, if expressly provided for under the contractual agreement. Parties’ submission to a foreign jurisdiction is also recognised and permitted.
However, there are certain matters that Bahrain shall have exclusive jurisdiction over, superseding any agreement that states otherwise. Lands in Bahrain shall always be subject to the laws and regulations of Bahrain, and any decision to conduct proceedings relating to the land, under a foreign law or jurisdiction, shall be deemed null and void.
Where bilateral treaties for mutual recognition and enforcement of judgments exist, it is normal practice for a judgment given by a foreign court against a company to be enforceable in the Kingdom of Bahrain without a retrial of the merits of the case, but again subject to public policy exceptions (which may require a re-examination of the merits). In the case of foreign judgments issued by countries with which Bahrain does not have treaties for mutual recognition and enforcement of judgments, a fresh civil suit must be filed in Bahrain, with the original judgment attached as evidence. In such cases, Bahraini courts may examine the merits of the case at their discretion.
The Kingdom of Bahrain was one of the first signatories to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. As a signatory to the New York Convention, Bahrain complies with the terms of the Convention, and may only reject the enforcement of an award under the terms of Article V of the New York Convention.
The courts tend not to review the merits of the arbitration, and refusal to enforce the award will only occur if any procedural irregularities invalidated the arbitration, or it has been proven that the award is not yet final. The enforcement may also be refused if the Bahraini courts find that the subject matter is not capable of settlement by arbitration under Bahraini laws, or the enforcement would lead to a contravention of Bahraini public policy.
The CBB has repeatedly stated that there can be no discriminatory treatment vis-à-vis local or foreign lenders.
Outside formal insolvency proceedings, it is normal for debtors and creditors to meet to try to resolve issues on a consensual basis. “Standstill” and “asset realisation” agreements (and similar) have been successfully used to give effect to those discussions. Where financial services companies are involved, the CBB often takes a proactive role, sometimes helping to broker solutions. The CBB has powers to place a bank or other financial services company into administration in an attempt to avoid the instigation of formal insolvency proceedings.
Technically, security operates “outside” insolvency processes and would ordinarily be enforced by lenders immediately without waiting for the insolvency process to begin (subject always to any prior restrictive order a disgruntled party has obtained from the courts). Loans and other forms of debt owed are caught by, and subject to, the mandatory insolvency process.
The Reorganisation and Bankruptcy Law of Bahrain (Law No 22 of 2018), under Article 93, sets out the priority of claims as follows:
The Central Bank of Bahrain and Financial Institutions Law (the “CBB Law”) also provides for a priority of claims under Article 156, which determines the rights of interested parties in the property of a CBB licensee in liquidation.
Such a concept is not recognised in Bahrain, which primarily follows civil law precepts.
Lenders operating under a common law tradition do not always appreciate that the equitable rights and remedies they are accustomed to in financial dealings are not always explicit in civil law countries. This is not a deficiency of Bahrain, but rather a jurisprudential difference of approach it shares with many other countries. Often, similar outcomes can be achieved through other means, but, arguably, civil law is invariably more protective of the debtor as the lender’s “self-help” remedies are less prevalent. Whilst the English language is widely used in Bahrain, including in financial institutions, the judicial system is primarily accustomed to operating in Arabic. As such, it is often a challenge to convey certain sophisticated nuances of the common law lending tradition in a readily understood manner.
Project finance has been used in Bahrain since the 1970s. Most of the large locally incorporated banks will have project finance specialists and one or two of the larger locally incorporated law firms will have at least one person who is familiar with the techniques. There is no project finance law as such. Transactions are structured according to general banking and commercial law requirements.
There is no specific legislation that specifically governs public-private partnership (PPP) transactions in Bahrain. Legislative Decree No 41, “With Respect to Policies and Guidelines of Privatization”, of 2002 deals with privatisation in general but does not specifically apply to PPPs, as is seen in some other countries of the Cooperation Council for the Arab States of the Gulf. Accordingly, PPP transactions are carried out within the framework of generally applicable administrative, civil and commercial laws, and the models used are normally imported from international market practices and adapted to fit the local legal system.
No governmental taxes, fees, charges, filings or approvals are applicable for a private project finance transaction.
The financing documents are normally governed by English law. The transaction documents (eg, for construction and/or leasing, and/or granting security) are normally governed by Bahrain law.
The National Oil and Gas Authority (NOGA), established in 2005, used to assume responsibility for all matters related to oil and gas in the Kingdom of Bahrain. However, pursuant to the decree issued on 27 September 2021, the NOGA has been legally dissolved, and the Ministry of Oil assumed all the NOGA’s duties and responsibilities.
The Supreme Council for Environment, the Electricity and Water Authority and the Ministry of Works, Municipalities Affairs & Urban Planning are the other relevant governmental bodies whose approvals are required for activities related to power and mining.
The main issues when structuring project finance will be very much similar to other jurisdictions. The project company can take the form of various entities with limited liability: eg, a joint stock Bahrain shareholding company (BSC) or a with limited liability company (WLL). All Bahraini companies/partnerships are governed by the provisions of the Commercial Companies Law pursuant to Article 5 of the Law. Generally speaking, there are no restrictions on foreign investment; however, some companies of national strategic importance may be constrained by their constitutional documents and/or the government regulator.
Project funding is typically provided by international banking groups (those with or without a presence in Bahrain), with one or two large, locally incorporated banks normally brought into the syndicate as the deal originator(s) or to provide local knowledge and context. There have been relatively few projects wholly originated and funded by local banks alone. The use of export credit agency finance and project bonds will be known by bankers in the Gulf.
The extraction and exportation of natural resources are regulated activities and special approvals must be sought from the relevant regulators, including the NOGA, the Supreme Council for Environment, the Electricity and Water Authority and the Ministry of Works, Municipalities Affairs & Urban Planning. Subject to the type of activity being carried out, various requirements would be applicable, depending on the type of entity and the shareholders’ nationalities.
The environmental legislative system in the Kingdom of Bahrain is among the most advanced in the region. Bahrain is aiming to strengthen its efforts to protect the environment and natural resources through devising the necessary legislative guarantees to ensure the optimum use of those resources and promote development that does not cause harm to the environment and the health of citizens. Such legislation is overseen by the Supreme Council for Environment. Other sector-specific laws and orders are passed by the relevant authorities for the health and safety of Bahraini residents and visitors.