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The Central Bank of Bahrain (CBB) has issued the new requirements incorporating the corporate governance code of Bahrain in line with the code issued earlier this year by the Ministry of Industry and Commerce.

 

The new rules include both the new corporate governance code requirements (formally announced, the existing CBB requirements and new Board attendance rules). One of the principles of the new code is targeting Islamic institutions in relation to the implementation of Islamic Shari'a principles.

 

The CBB corporate governance rules focus on the Board’s roles and responsibilities, the decision-making process and independence of judgment.

 

The CBB rules clearly state that the Board’s role and responsibilities should include monitoring and reporting, conflict of interest avoidance and transparent communications with shareholders. The review of the strategy process requires the Board to review the bank’s business plans and the inherent level of risk in these plans as well as assess the adequacy of capital to support the business risks of the bank.

 

The CBB also puts more stringent rules on non-executive directors.

 

Being a single regulator for all listed and unlisted financial institutions, the CBB will issue similar requirements for insurance companies, investment firms and Bahrain Stock Exchange Listed companies in the near future.

 

The new rules will become fully effective from January 1, 2011 in line with the implementation date of the Code.

 

November 14, 2010

 

 

Analysis and Forecast: Decreasing Risk


 

This is a very important step by the Bahraini Central Bank to address growing concerns over uncontrolled lending and conflict of interest. The problems caused by the Saad and Gossabi family business last year, has exposed serious issues with corporate governance of financial institutions in Bahrain and the rest of the Gulf. Political Capital has covered this particular issue and warned that unless government institutions enforce more stringent governance regulations, further large family businesses are likely to happen, leading to incalculable difficulties for banks and businesses. Multi-sector large family businesses form the overwhelming majority of businesses in the Gulf.

 

Bahrain seems to have introduced appropriate regulation to deal with this issue. In addition, the regulations also cover Islamic banking. Overall, this will further consolidate Bahrain’s position as a regional leader in banking and Islamic banking, particularly given increasing competition from places like Dubai and Doha. It remains to be seem how effective will the implementation of those regulations will be.

 

A further positive development is when the code becomes applicable to institutions other than banks.