Bahrain’s Position
Bahrain is the institutional home of modern Islamic finance. While Malaysia leads in assets under management and Saudi Arabia dominates in market size, Bahrain holds a structural position that neither can replicate: it is the seat of the global standard-setting bodies that define how Islamic finance operates.
This distinction between market size and institutional authority is critical. A country can build Islamic banking assets by mandating Sharia-compliant products for a captive population. Building the infrastructure that governs how those products are structured, audited, and regulated across borders is a fundamentally different capability. Bahrain has built the latter.
AAOIFI: The Global Standard Setter
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is headquartered in Bahrain. Established in 1991, AAOIFI develops and issues accounting, auditing, governance, ethics, and Sharia standards for the global Islamic finance industry.
AAOIFI standards are adopted by regulatory authorities in Bahrain, the UAE, Qatar, Saudi Arabia, Jordan, Lebanon, Sudan, Syria, and several other jurisdictions. Central banks in these countries either mandate or recommend compliance with AAOIFI standards for Islamic financial institutions operating within their jurisdictions.
Why this matters for investors: AAOIFI standards determine what constitutes a valid Islamic financial product. A sukuk, a murabaha facility, or a takaful policy that complies with AAOIFI standards has international credibility. One that does not may face challenges in cross-border distribution, regulatory acceptance, and Sharia audit. Bahrain’s role as AAOIFI’s host means that the kingdom is embedded in the governance infrastructure of the global Islamic finance industry.
AAOIFI also operates the Certified Islamic Professional Accountant (CIPA) programme and other professional certification schemes, making Bahrain a centre for Islamic finance education and professional development.
The International Islamic Financial Market (IIFM)
Also headquartered in Bahrain, the IIFM develops standard documentation and product uniformity for the Islamic financial services industry. IIFM master agreements — covering hedging, collateralisation, and inter-bank transactions — are used by Islamic financial institutions globally.
The presence of both AAOIFI and IIFM in Bahrain concentrates the standard-setting and documentation infrastructure of the global Islamic finance industry in a single jurisdiction.
Islamic Banking in Bahrain
Bahrain’s Islamic banking sector operates alongside its conventional banking sector under a unified regulatory framework administered by the CBB. The CBB issues distinct licences for Islamic banks and applies Sharia governance requirements specific to Islamic operations.
Market structure: Bahrain hosts multiple licensed Islamic banks, including both retail and wholesale (offshore) institutions. Islamic banking assets in Bahrain represent a significant share of total banking system assets and have grown consistently over the past decade.
Key institutions:
- Bahrain Islamic Bank — One of the earliest Islamic banks, established in 1979
- Al Baraka Banking Group — International Islamic banking group headquartered in Bahrain
- Kuwait Finance House Bahrain — Subsidiary of KFH Kuwait, operating retail Islamic banking
- Ithmaar Holding — Islamic financial group with banking, real estate, and investment arms
- ABC Islamic Bank — Islamic subsidiary of Arab Banking Corporation
The diversity of Islamic banking institutions — from domestic retail banks to international wholesale banks — creates a competitive market that has driven product innovation and service quality.
Sukuk Market
Bahrain has been a consistent issuer of sovereign sukuk, using these Islamic bonds to finance government expenditure while maintaining Sharia compliance. The CBB manages regular sukuk issuance programmes, including short-term sukuk al-ijara and longer-tenor instruments.
Government sukuk programme: The CBB issues sukuk on a regular basis, providing benchmark instruments that anchor the domestic Islamic capital market. These sovereign sukuk serve as pricing references for corporate issuers and establish a yield curve for Sharia-compliant fixed income.
Corporate sukuk: Bahrain-based issuers access both domestic and international sukuk markets. The kingdom’s regulatory framework and AAOIFI compliance infrastructure make it a credible jurisdiction for structuring and issuing sukuk.
For investors, Bahrain’s sovereign sukuk offer exposure to the kingdom’s credit risk in a Sharia-compliant format. The yields reflect Bahrain’s fiscal position — higher than Abu Dhabi or Saudi Arabia due to elevated public debt — which provides a premium for investors comfortable with the credit profile.
Takaful Market
Takaful (Islamic insurance) is well-developed in Bahrain, with multiple licensed takaful operators covering general, life (family), and health insurance. The CBB regulates takaful operators under a dedicated framework that addresses the specific governance and product requirements of Sharia-compliant insurance.
Bahrain’s takaful market benefits from the kingdom’s overall Islamic finance ecosystem — the AAOIFI standards, Sharia governance infrastructure, and professional talent pool support product development and regulatory compliance.
Why Bahrain Matters for Islamic Finance
The investment case for Bahrain’s Islamic finance sector rests on institutional infrastructure rather than market size:
Standard-setting authority. AAOIFI and IIFM headquarters ensure Bahrain’s ongoing relevance to the global Islamic finance industry regardless of where the largest asset pools are located.
Regulatory maturity. The CBB’s Islamic banking and takaful regulatory frameworks are among the most developed in the world, providing clarity and predictability for institutions operating under Sharia principles.
Professional ecosystem. The concentration of Islamic finance institutions, standard-setting bodies, and educational programmes creates a talent pool and professional network that supports specialised advisory, audit, and compliance functions.
Cross-border positioning. Bahrain’s Islamic finance infrastructure serves as a bridge between the GCC, Southeast Asia, and international capital markets. Institutions structured in Bahrain with AAOIFI-compliant products can distribute across the global Islamic finance market with regulatory credibility.
Comparative advantage. While Abu Dhabi competes in conventional financial services through ADGM and Dubai competes through DIFC, Bahrain holds a structural advantage in Islamic finance that is reinforced by institutional incumbency. Moving AAOIFI or IIFM out of Bahrain would be disruptive and impractical — the kingdom’s position is embedded, not easily contestable.
For investors seeking exposure to Islamic finance — whether through direct investment in institutions, sukuk portfolio construction, or advisory and professional services — Bahrain is the jurisdiction where the governance infrastructure resides. That matters more than market size.