The First Mover
Before Dubai built the DIFC. Before Abu Dhabi established ADGM. Before Qatar created the Qatar Financial Centre. There was Bahrain.
In the 1970s and 1980s, when the Gulf’s newly wealthy oil states needed a financial intermediary, they turned to Bahrain. The kingdom — small, resource-limited, but geographically central and governmentally pragmatic — positioned itself as the region’s financial hub decades before anyone else recognised the opportunity. By the mid-1980s, Bahrain hosted the regional offices of virtually every major international bank. Citibank, HSBC, Standard Chartered, BNP Paribas, and dozens of others operated from Manama because there was simply nowhere else in the Gulf that provided the regulatory infrastructure, the English-speaking workforce, and the lifestyle amenities that international financial professionals required.
The kingdom’s advantages in that era were formidable. It had a functioning central bank — the Bahrain Monetary Agency, later restructured as the Central Bank of Bahrain — that regulated financial services to a standard that, while not matching London or New York, was credible by regional standards. It had a relatively liberal social environment — permitting alcohol, entertainment, and mixed-gender socialising — that made it liveable for Western professionals. It was small enough to navigate easily and large enough to house a professional community. And critically, it had no competition. Saudi Arabia was closed. Qatar was undeveloped. Abu Dhabi was focused on oil. Dubai was a trading port, not a financial centre.
Bahrain’s first-mover advantage was genuine and sustained for approximately two decades. From the mid-1970s through the late 1990s, Bahrain was the GCC’s undisputed financial capital.
What Changed
Two things changed, and both were decisive.
First, Dubai decided to compete. The establishment of the Dubai International Financial Centre in 2004 was a deliberate, lavishly funded assault on Bahrain’s position. Dubai offered what Bahrain could not: a massive, growing domestic economy to serve as the financial centre’s hinterland; a world-class physical infrastructure programme that produced iconic buildings and purpose-built office districts; an airline (Emirates) that connected Dubai to every major financial centre on earth; and the capital to subsidise financial centre development for as long as it took to achieve critical mass.
Dubai’s advantages were not marginal. They were overwhelming. Within a decade of DIFC’s establishment, the gravitational centre of Gulf finance had shifted decisively from Manama to Dubai. International banks that had maintained their regional headquarters in Bahrain for twenty years quietly moved them to DIFC. The talent followed. The deal flow followed. The conferences and industry events followed.
Second, Abu Dhabi decided to compete. The establishment of ADGM in 2013 created a second well-funded challenger in a market that Bahrain was already struggling to defend against the first. ADGM brought Abu Dhabi’s sovereign wealth to bear on financial centre development, offering incentives, regulatory innovation, and proximity to the world’s largest pool of institutional capital. Bahrain now faced competition from two emirates that, combined, controlled sovereign wealth exceeding $1.5 trillion.
Bahrain’s Enduring Advantages
The narrative of decline, however, is incomplete. Bahrain retains several structural advantages that neither Abu Dhabi nor Dubai can easily replicate.
Regulatory Maturity
Bahrain has been regulating financial services for approximately fifty years. The Central Bank of Bahrain is not merely a central bank — it is the single consolidated regulator for the entire financial sector, covering banking, insurance, capital markets, and (since 2017) fintech and digital assets. This integrated regulatory model, unusual in the region, provides coherent oversight and reduces the regulatory fragmentation that can plague jurisdictions with multiple regulatory bodies.
The CBB’s track record — through the 1991 Gulf War, the 1997 Asian financial crisis, the 2008 global financial crisis, and the 2020 pandemic — provides a depth of institutional experience that ADGM, established in 2013, simply cannot match. Regulatory credibility is not something that money can buy quickly. It is built through decades of consistent, competent supervision.
Islamic Finance Standard-Setting
Bahrain hosts the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the global standard-setting body for the Islamic finance industry. AAOIFI’s standards govern Sharia compliance, accounting, auditing, and governance for Islamic banks, insurers, and capital market participants worldwide. Hosting AAOIFI gives Bahrain a structural role in Islamic finance that is embedded in the industry’s institutional architecture.
The kingdom also hosts the International Islamic Financial Market (IIFM), which develops standardised documentation for Islamic treasury, hedging, and liquidity management products. Together, AAOIFI and IIFM position Bahrain at the centre of global Islamic finance infrastructure — a position that no amount of capital deployment by Abu Dhabi or Dubai can dislodge through competition alone.
The practical significance is that banks and financial institutions involved in Islamic finance must engage with Bahrain’s standard-setting bodies regardless of where they are headquartered. This provides a steady flow of institutional activity — conferences, working groups, consultations, standard revisions — that sustains Bahrain’s relevance even as deal flow migrates to larger centres.
Institutional Depth
Bahrain hosts more than 350 regulated financial institutions — a remarkable concentration for an economy with a GDP of approximately $44 billion. The sector includes conventional and Islamic banks, insurance companies, investment firms, money exchangers, and fintech firms. Many of these institutions have been operating in Bahrain for decades and have built client relationships, operational infrastructure, and regulatory track records that create genuine switching costs.
The diversity of the financial sector is also notable. Bahrain’s banking system includes locally incorporated banks, branches of international banks, wholesale banks, Islamic banks, and specialised development banks. This diversity means that the sector is not dependent on any single category of financial activity — a resilience that has been tested through multiple economic cycles.
Cost Competitiveness
Bahrain is substantially cheaper to operate in than either Abu Dhabi or Dubai. Office rents in Manama’s financial district are a fraction of those in DIFC or on Al Maryah Island. Residential costs for expatriate professionals are lower. Regulatory and licensing fees are competitive. For a mid-size financial institution that does not require the prestige address of DIFC or the sovereign capital proximity of ADGM, Bahrain offers a functional, regulated jurisdiction at meaningfully lower cost.
This cost advantage is particularly relevant for back-office operations, shared service centres, Islamic finance specialists, and firms that serve the Saudi market — for which Bahrain’s geographic proximity (connected by the King Fahd Causeway) and cultural familiarity provide natural advantages.
Lifestyle and Accessibility
Bahrain’s social environment remains more liberal than Abu Dhabi’s or most of Saudi Arabia’s. For expatriate professionals who value a relaxed social atmosphere, Bahrain offers a lifestyle proposition that larger, wealthier neighbours cannot match through sheer capital investment. The kingdom is also small enough that the daily experience of living and working there is more manageable — shorter commutes, less congestion, closer community networks — than the sprawling urbanism of Dubai or the still-developing suburban infrastructure of Abu Dhabi.
Bahrain’s Structural Disadvantages
Against these advantages, Bahrain faces structural disadvantages that are formidable and, in some cases, worsening.
Market Size
Bahrain’s domestic economy is simply too small to generate the financial activity that sustains a major financial centre. With a GDP of approximately $44 billion and a population of approximately 1.5 million, the domestic demand for financial services is limited. Bahrain’s financial sector has always been oriented toward serving the broader Gulf market rather than the domestic one, but this positioning makes it vulnerable when competitors emerge that are embedded in much larger domestic economies.
Dubai’s GDP exceeds $120 billion. Abu Dhabi’s exceeds $300 billion. Saudi Arabia’s — the market that Bahrain’s financial sector has historically served — exceeds $1 trillion. Bahrain’s financial sector must compete for the same regional capital flows while being anchored in the smallest significant economy in the Gulf.
Fiscal Stress
Bahrain’s government finances are under sustained pressure. Public debt has risen to approximately 120 percent of GDP. Fiscal deficits have been persistent. Credit ratings have deteriorated — Bahrain is rated B+/B2 by the major agencies, well below investment grade. A $10 billion support package from Saudi Arabia, Kuwait, and the UAE in 2018 provided breathing room, but the underlying fiscal dynamics have not been resolved.
Fiscal stress matters for a financial centre because it raises questions about sovereign creditworthiness, regulatory stability, and the government’s capacity to invest in the infrastructure and incentives that financial centre development requires. A jurisdiction whose sovereign debt is rated below investment grade faces an inherent credibility challenge when trying to attract the world’s most sophisticated financial institutions.
Sovereign Wealth Deficit
Bahrain’s sovereign wealth fund, Mumtalakat, manages assets of approximately $18 billion. This is substantial relative to Bahrain’s economy but trivial relative to its competitors. Abu Dhabi’s combined sovereign wealth exceeds $1.5 trillion — more than eighty times Mumtalakat’s assets. Dubai’s ICD manages approximately $300 billion in government assets.
The practical implication is that Bahrain cannot compete on capital. It cannot offer the subsidised incentives, the co-investment opportunities, or the institutional capital relationships that Abu Dhabi and Dubai can deploy to attract financial institutions. When ADGM offers a fintech company subsidised office space, healthcare, and a regulatory sandbox, and Bahrain offers a regulatory sandbox without the subsidies, the competitive dynamic is asymmetric.
Credit Rating Drag
Bahrain’s below-investment-grade sovereign rating creates practical obstacles for its financial sector. Some international institutional investors are prohibited by their mandates from holding assets in sub-investment-grade jurisdictions. Global banks allocate higher capital charges to exposures in lower-rated countries. Insurance companies face similar constraints. These technical limitations reduce the pool of international financial institutions willing to establish or maintain a significant presence in Bahrain.
The Strategic Question
The question facing Bahrain is whether first-mover advantage — once the most powerful force in its financial sector — can survive when the later entrants have resources that Bahrain cannot begin to match.
The historical evidence from financial centre competition globally is mixed. New York displaced London as the world’s primary financial centre in the early twentieth century on the strength of America’s economic growth, not because London’s regulation deteriorated. Singapore overtook Hong Kong in certain financial categories by offering regulatory clarity and political stability during periods when Hong Kong’s were in question. In each case, structural economic forces eventually overwhelmed incumbency.
Bahrain’s situation is most analogous to a first mover in an industry where the barriers to entry were initially high but have since been eliminated. Bahrain’s early monopoly was sustained by the absence of alternatives. Once Dubai, Abu Dhabi, and Qatar built alternatives — better funded, better located, and backed by larger economies — the monopoly ended. What remains is a question of niche: can Bahrain defend a meaningful role in Gulf finance by specialising in areas where its advantages are genuine (Islamic finance standards, cost, regulation, fintech) rather than trying to compete across the full spectrum of financial services?
The honest answer is: probably, but only as a second-tier centre. Bahrain will continue to host hundreds of financial institutions. It will continue to serve as a cost-effective base for mid-market firms, back-office operations, and Saudi-oriented financial services. It will continue to lead in Islamic finance standard-setting. It may continue to innovate in fintech regulation.
But the deals that define regional finance — the billion-dollar mandates, the sovereign wealth allocations, the IPO advisory work, the landmark M&A transactions — will increasingly be done in Dubai and Abu Dhabi. Bahrain’s challenge is not survival but significance. The kingdom will remain a financial centre. The question is whether it will remain one that matters.