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Bahrain Economic Quarterly

Second Quarter 2012

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Table of ContentsThe Economic Outlook ................................................................................................................. 3

The Global Outlook............................................................................................................................... 3

The Regional Outlook ........................................................................................................................... 6

Bahrain‘s Economy ............................................................................................................................... 7

Special Articles ............................................................................................................................ 12

Microfinance: An Untapped Opportunity ........................................................................................... 13

Bahrain Global Rankings Performance ............................................................................................... 22

Chart Set ...................................................................................................................................... 43

Sources ......................................................................................................................................... 53

Abbreviations .............................................................................................................................. 54

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3

The Economic Outlook

The global economic outlook remains

unusually fragile with the situation in the

Euro-zone being the main source of

uncertainty. However, also the US is facing

mounting fiscal challenges while growth is

clearly slowing in the Asian economies. The

already established dichotomy between the

relatively stagnant advanced economies and

much more resilient emerging markets looks

certain to persist, although we are

witnessing a renewed turn to stimulus

measures in both cases. The GCC region is

set for growth with buoyant oil pricesboosting fiscal balances , and governments’

planned infrastructure projects expected to

underpin growth in many sectors. Bahrain

is expected to see a clear improvement in its

growth this year with the EDB forecasting

growth of 2.4% for the year, up from 1.9%

in 2011.1

The Global Outlook

The European crisis represents the largest

risk of discontinuity globally, as the

structural weaknesses persist and the Euro

area dips into recession once again.

Unresolved issues related to the debt crisis

remain a cause for uncertainty and negative

market sentiment in Europe, although the

US economy has begun to show tentative

signs of recovery.

Emerging economies, by contrast, while still

facing concerns, are profiting from stronger

local demand and even relatively resilient

1 This is based on the new GDP breakdown which uses 2010as the base year. The previous base year, 2001, would givereal growth of 2.2% in 2011 and a projected 3.7% in 2012.

export demand. Their growth prospects

hence remain far stronger than those of the

advanced economies. Growth forecasts for

2012 by the IMF, OECD, IIF and

Bloomberg show China leading major

economies and the IMF is expecting growthof 7.8% for the year, still strong compared to

mature economies but down from previous

years. China has had rapid growth over the

past decade. The US is expected to see 2-3%

growth while the Euro area will likely

remain mired in recession.

Mature Economies

Mature economies are still reeling from the

effects of the global economic crisis, which

was triggered by the financial crisis of 2008

The US has begun to show weak signs of

recovery, with minimal positive growth in

all quarters over the past year, with the

exception of the fourth quarter of 2011 when

it grew 4% over the previous quarter. Japan

experienced much more volatile quarterly

growth, peaking at 8% in the third quarter of

2011 and then dropping to 0.1% in the next

quarter. Growth picked up in 2012 to 5% in

the first quarter, and dropped again to 2% in

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

United States Euro Area Japan China

GDP Growth Forecasts

2012

IMF OECD IIF Bloomberg Consensus

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4

the second quarter of this year. Euro area

growth mirrored the Japanese pattern at

lower rates, dipping into the red at the end of

2011 (-1.3%) and contracting again in the

second quarter of 2012 (-1%) after a faint

positive reversal in the first quarter.

The Euro-zone continues to be in a mild

recession, albeit with considerable internalvariation, and the future remains unclear.

This has led to a far more interventionist

stance by the European Central Bank (ECB),

designed in part to counter the effects of the

ongoing fiscal consolidation. The ECB

lowered the key rate to 0.75% in July, a

historical low, and it has issued longer-term

loans to banks while signaling its

willingness to boost government bond

purchases. Despite this, the leading

indicators remain negative with, for

instance, the Markit Eurozone PMI

Composite Output Index showing little

change from 46.4 in June to 46.1 as of

August.

Although Germany saw an improvementwith a rise from 43 in July to 49.2 in

September, this does little to dispel fears of

a continued crisis as readings below 50

signal a contraction.

Other concerns in the Euro-zone stem from

the widening dichotomy between the

economically stable countries like Germany

as opposed to the fiscally challenged

peripheral economies such as Spain and

Greece. As the political resistance toausterity mounts, it is still unclear whether

there will be a Greek exit from the union,

while formal bail-outs of the much larger

economies Spain and Italy are seen as

increasingly likely.

The crisis in the Euro-zone has in turn had

some global spillover effects through lower

trade volumes, reduced European

investment, and weaker performance by

foreign companies with Europeanoperations. This has been one of the

negatives affecting the US economy as well,

although growth has otherwise benefited

from some improvements in retail sales and

manufacturing, as well as an incipient

turnaround in the housing sector.

-2%

0%

2%

4%

6%

8%

10%

Q3 2011 Q4 2011 Q1 2012 Q2 2012

Mature Economies

Quarterly GDP (YoY)

percentage growth

United States Euro Area Japan

Source: US Federal Reserve, Eurostat, Bank of

Japan, OECD, IMF

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

ECB Policy Rate

Percentage

2010-2012

Source: ECB

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5

Nonetheless, the economy still remains

reliant on exceptional stimulus measures

with little sign of a sustained improvement.

Among other things, planned fiscal

tightening – by approximately 4% of GDP –

is expected by some observers to pull theeconomy back into recession by next year.

This was one of the factors prompting the

US Federal Reserve to renew formal

quantitative easing in September. The open-

ended ―QE3‖ is likely to involve purchases

of US$85 billion of longer-term securities

per month through the end of 2012 alone. In

addition, the Fed plans to keep long term

interest rates near zero levels until 2015.

Emerging Economies

Emerging economies continue to outperform

their advanced counterparts with, for

instance, the Asia Pacific (this also includes

some high income countries such as Japan

Korea and Australia) region achieving a

strong 7% growth during the first quarter of

this year. Much of this is due to greater

macroeconomic stability and moreconservative management than in advanced

countries.

In spite of their resilience, emerging markets

are affected by the global slowdown. The

emerging economies of Central and Eastern

Europe proved particularly vulnerable to the

global crisis having benefitted from the

boom and large capital inflows prior to

2008. While these drove rapid growth, they

also created vulnerabilities through largecurrent account imbalances. While growth

remains positive, it has been slowing

because of the region‘s exposure and

proximity to the suffering Euro-zone.

Although the Latin American economies

have benefitted from the structural growth in

demand for their minerals and other raw

materials, weaker export demand is spelling

lower growth. The IMF projects growth of

3.2% this year, down from 4.5% last year.

Part of the reason for the slower growth is

weak global demand, particularly in the USand Europe.

The Asia-Pacific region still constitutes the backbone of global growth with China alone

contributing more to the global GDP growth

than the advanced economies taken together.

The most recent Chinese data points to a

fairly marked slowdown, however, and the

government has formally reduced its growth

target from 8.0% to 7.5%. In response, the

authorities have taken measures to

accelerate planned investment projects and

to undertake renewed monetary easing.

Many are concerned by China‘s highdependence on exports against the backdrop

of a weakening global economy. In the

second quarter of the year, China‘s GDP

growth dropped to a 3-year low of 7.6%,

mainly due to weaker exports. Exports,

however, continue to make up a large

-2%

0%

2%

4%

6%

8%

Q3 2011 Q4 2011 Q1 2012 Q2 2012

Emerging Economies

Quarterly GDP

Percentage growth

Latin America Asia/Pacific

Emerging Europe

Source: US Federal Reserve, Eurostat, Bank of Japan,

OECD, IMF

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6

portion of China‘s GDP as efforts to

rebalance growth have brought limited

results.

The Regional Outlook

The GCC is not immune to the effects of the

global slowdown, and the main areas which

we expect to be affected are trade, tourism,

and reduced capital flows. Nonetheless, the

outlook for the GCC countries remains

favorable, although last year‘s rapid rebound

in growth is likely to give way to relative

stabilization. The GCC countries are

expected to see real GDP growth of around

5% for 2012, down from 6.4% last year.

A key factor supporting the strong regional

growth prospects is the persistence of

historically high oil prices which in turn can

support government spending. Crude oil

prices reached $113.36 per barrel at the end

of August 2012, up from June this year, but

still not as high as the levels seen in 2011.

The increase comes from increased regional

political tension as well as reduced risk

aversion, partly in connection with the

increases in unconventional monetary

stimulus measures around the world. The

higher oil prices are generally being used by

governments to provide support to the non-

oil sectors. The region is further benefiting

from increased oil production, partly in

response to production disruptions

elsewhere as well as the Iranian sanctions.

Saudi Arabia has been the key swing producer in this regard with estimated spare

capacity of 2.5 million barrels per day. Its

output has in recent months averaged around

10 million barrels per day.

The key regional challenges remain dealing

with current and upcoming unemployment,reducing the economies‘ dependence on oil,

increasing integration in the GCC and

selecting key industries to support which

will stimulate growth of the private sectors.

The UAE in particular is feeling the effects

of the global downturn with GDP growth

expected to drop to 4% down from 5.2% last

year according to the IMF due to fiscal

consolidation and the weak global economy.

Kuwait, Saudi Arabia and Qatar are

expected to lead growth with rates of around

6%. In the case of Qatar, this marks a sharp

drop from the double digit rates seen during

the recent natural gas investment boom.

Nonetheless the growth prospects for Qatar

remain favorable, with the government

expecting to spend around 10% of its GDP

(around $39 billion) on infrastructure and

total project disbursements. Budget

surpluses are expected to remain ample. The

fiscal surplus is expected to be 7.8% of GDP

for 2012 and current account at 22% of GDP

this year. However, the global slowdown

will undoubtedly affect Qatar as funding for

projects and infrastructure depends to a

degree on foreign investment, partnerships,

60

70

80

90

100

110

120

130

140

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

A p r - 1 1

J u l - 1 1

O c t - 1 1

J a n - 1 2

A p r - 1 2

J u l - 1 2

Crude Oil Petroleum Prices

USD per barrel

Source: bp Brent oil price history

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7

and partly externally funded loan

syndications.

In Saudi Arabia, the strong 7.1% growth last

year received a major boost from increased

government spending supported by high oil

prices and increased production levels.

However, also the private sector is

beginning to gather momentum. Non-

hydrocarbon GDP grew by 5.1% in 2011,

led mainly by construction and

manufacturing. Economic growth has

received a boost from the government‘s

emphasis on housing, most notably through

a project designed to build half a million

new affordable homes by means of a $110

billion fiscal package. Access to housing isalso likely to receive a boost from the recent

approval of the long-awaited mortgage law

and banks have already sharply increased

their real estate lending. Efforts are also

underway to reform the labor markets, for

instance through a new jobseekers

allowance and a broader program designed

to boost the employment of Saudi nationals

in the private sector. Among other things,

the government has boosted the funding for

small and medium-sized enterprises. We

expect Saudi growth to normalize this year

due to slower growth in government

spending and oil prices and production even

as the private sector recovery continues to

gather momentum. Saudi growth in Q1 was

5.9%, a rate that decelerated further to 5.5%

in Q2.

Bahrain’s Economy

The EDB expects Bahrain‘s GDP to grow

by at least 2.4% in 2012,2 driven above all

by increased manufacturing and government

spending. The first two quarters of the year

have generally been characterized by

favorable trends. Real GDP grew by 4.2% in

the second quarter relative to the same

quarter last year after businesses began to

recover from the events of 2011. Relative to

the first quarter of the year, GDP fell by

around 1%, which makes it the first negative

quarter on quarter growth since last year.

However, the drop was almost entirely due

to falling volumes from the Abu Sa‘fa fieldwhile the non-oil sector continued to

rebound, indeed by a remarkable 8.1% YoY.

2 This assumes that the temporary disruption in the AbuSa‘afa field only fully normalizes by the end of the year. An

earlier rebound or any compensation would boost thecontribution of the hydrocarbons sector.

-10

-5

0

5

10

15

20

25

30

% change

YOY

GCC Real GDP

YOY Percentage Growth

2006-2013*

Bahrain Kuwait

Oman Qatar

Saudi Arabia United Arab Emirates

*2012 and 2013 growth figures are IMF estimates

Source: IMF, World Bank and CIO

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8

This points to good progress of the

increasingly broad-based recovery.

Most sectors have by now experienced a

clear rebound since last year, including

mainstays such as construction,

manufacturing and hotels and restaurants.

Virtually all the the second quarter weakness

has come from temporary production

disruptions in the mining (oil and gas)

sector, which contracted by 7% relative to

the first quarter, and 10% relative to the

second quarter of 2011.

The Central Informatics Organization has

rebased real GDP, and the base year is now

2010 instead of 2001. This means that

mining (mainly oil and gas extraction) now

makes a much bigger contribution to GDP

(21.5% in 2011) reflecting the higher oil

prices in 2010, and thus the fall in it had a

proportionately greater impact on the overallGDP.

Despite the recent reversals, we expect oil

production to increase in the second half of

the year. It should be noted that oil

production is expected to increase over the

coming decade, in particular due to the

project aimed at raising production in the

Awali field by Tatweer petroleum. The

target is to double oil production within the

first 5 years of operations by using enhanced

oil production techniques.

There has been a particularly strong rebound

in parts of the service sector that recorded

the sharpest falls last year. For instance, the

hotels and restaurants category grew by

6.5% in the first quarter and 5.5% in the

second quarter. This sector took one of the

hardest hits in 2011, when it fell by 17%

compared to the previous year.

Construction grew by 10% in the first

quarter (quarter on quarter) and shrunkslightly by 0.7% in the second quarter

compared to the first, reflecting government

spending on infrastructure and housing. This

still indicates a 7% recovery compared to

the same period last year. Manufacturing

followed a similar trend, growing 13% in the

first quarter over the fourth quarter of last

year, and then slower at 1% in 2012.

Growth is likely to pick up further in 2013

due to a growth in infrastructure spending,as more than 20,000 housing units are set to

be built by the government in the coming

five years. In addition, Bahrain is expecting

to receive its first tranche of the $10 billion

GCC fund this year, most of which will be

spent on government projects to improve

infrastructure and social conditions in

Bahrain.

-8%

-6%

-4%

-2%

0%

2%

4%

2,300

2,350

2,400

2,450

2,500

2,550

2,600

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

BD

million

Bahrain GDP growth

Quarterly change

growth GDP

Source: CIO

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Finance, which currently makes up 17% of

GDP, has been affected repeatedly byglobal and local events. First the global

financial crisis in 2008 led to a liquidity

squeeze all over the world, and a somewhat

delayed effect was felt in Bahrain during

2009. Soon thereafter, several investment

banks were affected by the drop in the real

estate market prices in the region. Another

hit came following the unrest in 2011 when

the sector, particularly wholesale banking,

faced uncertainty and capital flight. Mostrecently, one of Bahrain‘s largest investment

banks, Arcapita, filed for Chapter 11

bankruptcy in the US. Overall, the finance

sector experienced a 2.7% YoY contraction

in the first half of this year compared to the

first half of 2011.

Despite signs of weakness in the wholesale

banking sector, the retail banks continue to

show robust growth in assets. Retail banks‘

lending - a good indicator of confidence inthe market- has grown. The year on year

growth in credit to the private sector has

increased substantially this year relative to

2011, reaching an increase of BD 1 billion

in July, a 19% increase. Loans to

government did not exhibit the same

consitency or magnitude of growth, and

several months showed negative growth. In

January, February and March credit to the

public sector shrank between 8 and 9

percent each month, which makes a decrease

in value of between BD 17 million and BD

21 million each month. This indicatesrenewed confidence by banks in the private

sector as well as growing demand for credit,

signaling increased liquidity in the private

sector, and is indicative of a more

broadbased recovery led by the private

sector.

Unemployment lagged behind the weaker performance of output in 2011, and

increased to its highest level during the

current data series of 4.7% as of June 2012.

Dealing with this social challenge remains

one of the pressing issues facing policy

makers in Bahrain today.

-40.0%

-20.0%

0.0%

20.0%

40.0%

1st

Qtr

2nd

Qtr

3rd

Qtr

4th

Qtr

1st

Qtr

2nd

Qtr

3rd

Qtr

4th

Qtr

1st

Qtr

2nd

Qtr

2010 2011 2012

Bahrain Sectoral Growth

Quarterly

Mining

Manufacturing

Construction

Wholesale & Retail Trade

Hotels & Restaurants

Transport & Communications

Financial Services

Source: CIO

-400

-200

0

200

400

600

800

10001200

Jan Mar May Jul Sep Nov Jan Mar May Jul

2011 2012

Year on Year Growth in Credit to the

Private sector and Government

2011-2012

YoY growth in credit to the Government

YoY growth in credit to the Private Sector

Source: Central Bank of Bahrain

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Inflationary pressures in Bahrain have

remained relatively weak in recent months,

partly because of the negative contribution

of housing costs in an environment where

rents are still trending down. However,

inflation jumped to 4.2% in June of 2012 in

a marked turnaround from a deflationary

period in 2011 when it fell to -2% in April.

Some of the contributors to inflation have

been higher prices in categories such as

recreation and culture, alcoholic beverages

and tobacco as well as restaurants and food

and non-alcoholic beverages whichincreased to a lesser extent. However, most

of the increase was due to a base effect

resulting from the period of exceptionally

low price growth in 20113.

1The weights of the consumer price index reveal that thelargest contributions to the basket used to measure the CPIwas the category of food and non-alcoholic beverages,followed by miscellaneous goods and services, recreation andculture and education- these are all categories which recordedgrowth over the period which explains the sharp growth inCPI over the past year. Communication dropped by 5.6% andmakes up 5.4% of the basket, slowing the growth in CPI.

1

1.5

2

2.5

3

3.5

4

4.5

5

Unemployment Rate

Percentage

Source: Ministr of Labour-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

9 / 2 0 0 9

1 2 / 2 0 0 9

3 / 2 0 1 0

6 / 2 0 1 0

9 / 2 0 1 0

1 2 / 2 0 1 0

3 / 2 0 1 1

6 / 2 0 1 1

9 / 2 0 1 1

1 2 / 2 0 1 1

3 / 2 0 1 2

6 / 2 0 1 2

Inflation rate

Consumer Price Index

2009-2012

Source: Central Informatics Organization

-10.0% 0.0% 10.0% 20.0% 30.0%

Recreation and culture

Alcoholic beverages…Furnishing, household…

Transport

Miscellaneous goods…

Food and non-alcoholic…

Restaurants

Clothing and footwear

Healthcare services

Education

Housing, water,…

Communication

Growth of Consumer Price IndexCategories

July 2011-July 2012


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11

16%

7.1%

7.0%

5.6%

5.4%

5.1%

2.0%1.3% 1.0%

CPI Weights

Percentage Food and non-alcoholic

beveragesMiscellaneous

goods and services

Recreation and

culture

Education

Communication

Restaurants

Electricity gas &

other fuels

Transport services


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Special Articles

This edition of Bahrain Economic Quarterly

contains two special articles that provide an

analysis of the microfinance industry inBahrain and the positioning of the Kingdom

within the global rankings.

The Microfinance article provides an

examination of the microfinance market in

Bahrain, identifying key players and

evaluating different aspects of the industry.

The history and landscape of the

microfinance industry dates back to 1998

and a brief outline traces its evolvement to

the present day. An overview of all themicrofinance providers‘ ser vices and the

composition of their loans is given. Finally

the article looks at possible improvements in

the sector, and outlines several challenges

which it faces.

The Global Rankings article assesses

Bahrain‘s standing in international indices

and reviews the Kingdom‘s performance in

various component indices. This piece

provides an update about the Kingdom‘s

progress and identifies areas for further

improvement. The analysis lists the most

recent global rankings of Bahrain according

to 16 leading international indices.

Evaluation of the reports demonstrates that

Bahrain has attained impressive results in a

number of indices. Although some of this

standing has been eroded lately, Bahrain‘s

position remains highly competitive on a

global scale.

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13

Microfinance: An Untapped Opportunity

What is M icrofi nance?

The idea behind modern day microfinance isoften attributed to Dr. Muhammed Yunus,

winner of the Nobel Peace Prize and a

Bangladeshi university professor who

decided to create a bank which would

extend financing to the poor. Its central

objective was to reduce the exploitation of

the poor by lenders and, by doing so, allow

them to invest and create self-employment

opportunities. This institution, known as

Grameen Bank, remains a model for many

microfinance institutions worldwide, which

are seeking to replicate its success.4

The term microfinance refers to the

provision of financial and non-financial

services such as credit, savings, cash

transfers and insurance to low-income

individuals. The goal of microfinance

institutions (MFIs) -- entities who provide

this particular type of financing -- is to

enable their clients to escape poverty bystarting their own businesses and eventually

generating a steady source of income.

The loans offered by MFIs are usually

modest in size, far smaller than those offered

at conventional banks. Due to the

disproportionate administrative costs

associated with small loans, conventional

banks prefer to focus on larger tickets where

the proportion of such costs is lower. As a

result, a large segment of the population in

need of small loans are likely to struggle to

gain access to funding from conventional

sources. Due to these factors, MFIs are often

not for profit, and a large part of their

mission is social development. They also

4 Grameen Bank

share risks with their customers. Despite the

growth of microfinance in recent years, it is

estimated that only 10% of the world‘s

economically active poor have access to

even the most basic financial services.5

Other factors differentiating MFIs from

regular banks include:

Minimal collateral requirements

Minimal guarantees

Core business that usually does not

depend on collecting deposits

Shorter loan tenors

Higher interest rates

A not for profit operating model

designed to boost social wellbeing

A predominance of business start-up

funding

Efforts designed to help clients succeed

through initiatives such as workshops,

training, and regular follow-ups

Occasionally the reliance on

unconventional methods such as group

financing, a method in which several

people apply for a loan as a group and

share a joint responsibility for it. If thegroup defaults, then they will all be

exempt from future loans. This creates

social pressure to repay the loan

Benefi ts of M icrofi nance

Recent estimates by the Social Insurance

Organization indicated that close to 88% of

businesses in Bahrain are micro-enterprises.

Micro-enterprises are defined as businesses

that hire up to 10 employees, and have a

capital investment of up to BD 20,000 for

the manufacturing sector, and annual

5 Judith Brandsma & Deena Burjorjee, Microfinance in the Arab States (New York: United Nations CapitalDevelopment Fund, 2004)

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14

turnover of up to BD 100,000 for all other

sectors. In view of the sector‘s importance

for the economy of Bahrain, microfinance

can serve as an important tool for boosting

overall economic development.

Poverty and income inequality have become

increasingly salient socio-economic issues in

recent years. Microfinance has historically

been proven to provide a powerful tool to

help alleviate them. The advantage of

microfinance over government- funded

programs is the lesser fiscal burden involved

in the former. Moreover, by relying on

microfinance, low-income individuals can

be expected to create a living for themselves

and become economically independent

instead of relying on regular grants from

private or public organizations.

Recent figures indicate that an increasing

number of Bahrainis are resorting to social

welfare as a source of income. The number

of people receiving social welfare, according

to Ministry of Human Rights and Social

Development figures, grew by 93% between

June 2009 and April 2010 alone.

Moreover, the average welfare payments

given to welfare recipients also rose (taken

by dividing the total welfare pay-outs by the

number of eligible welfare recipients) from

BD 291 to BD 836 per month in the same

period.

Throughout the history of Microfinance,women have dominated among MFI clients.

The main reason for this has been their

greater vulnerability to poverty. They

nonetheless tend to be more likely to use

additional sources of income to nurture and

develop their families, by spending on

education, nutrition and health for other

household members. Generally, they tend to

have better repayment rates, which makes

them more attractive customers to financial

institutions. Microfinance can also serve as

a powerful tool for the empowerment of

women, who are more likely to be

dependent on their spouses in developing

nations.

Many developing nations have high levels of

income inequality and a generally small

middle-class. Successful microfinance

programs can help grow a larger middle

class and potentially make it a majorityrather than a minority of the population.

History and Landscape of M icrofi nance

I nstituti ons in Bahrain

The origins of Bahraini microfinance can be

traced to the launch in 1998 of the

MicroStart Program, which was designed to

combat unemployment while seeking todiversify the economy away from its finite

oil resources. The MicroStart project was a

joint collaboration between the United

Nations Development Program (UNDP) and

the Ministry of Labour and Social Affairs

along with the NGOs (Awal society and the

CMWS). The main objective of this project

39,356

75,904

- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000

J u n - 0 9

J u

l - 0 9

A u

g - 0 9

S e p - 0 9

O c

t - 0 9

N o

v - 0 9

D e

c - 0 9

J a n - 1 0

F e b - 1 0

M a

r - 1 0

A p

r - 1 0

Eligible Welfare Recipients

Number of People

Growth: 93%

Source: Ministry of Human rights and Social

Development, EDB Analysis

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15

was to provide small short-term loans to

low-income individuals, with a slight focus

towards women. The program created a

system of sustainable credit delivery, as well

as a management capacity for this system in

several national welfare Non-GovernmentOrganizations (NGO‘s). The total budget for

this project was $1.5 million.

Statistics from the UNDP indicate that this

project was relatively successful and by

2002, around 7,600 loans had been given to

approximately 4,300 low-income individuals

for a total value of around $2.5 million.

These amounts made up around 40% of

social assistance beneficiaries, or 30% ofregistered unemployed nationals at that

time.6

This project provided training to the NGOs

(Awal society and the CMWS) to move

from a charitable approach to lending, to a

more banking oriented approach, and

estimates indicate that it increased the

societies‘ revenues between 25-50%.

Societies were also given grants from the

UNDP and MOL‘s funds to kick -start their

lending.

As a result of the success MicroStart and the

highly positive impact it had on poverty

reduction and civil society capacity

development, the Government of Bahrain

(represented by the Ministry of Social

Development – MoSD) along with the

UNDP decided to continue the project with

the purpose of expanding its impact and provide more focus on youth and women as

its primary target. At the national level, the

project contributes to achieving the national

economic vision for the year 2030 which

states that “we aspire to shift from an

6 Salman, Ali, UNDP. Personal interview. April 2012.

economy built on oil wealth to a productive,

globally competitive economy, shaped by the

government and driven by a pioneering

private sector – an economy that raises a

broad middle class of Bahrainis who enjoy

good living standards through increased productivity and high-wage jobs. Our

society and government will embrace the

principles of sustainability, competitiveness

and fairness to ensure that every Bahraini

has the means to live a secure and fulfilling

life and reach their full potential”.

The new project named ― Expansion of

Micro Finance Services to the Needy

Citizens in the Kingdom of Bahrain”; was

officially signed between the MoSD and the

UNDP on February 2008 for a three-year

period ending in January 2011. The major

objective of the new project was “to create

an enhanced environment for equitable job

creation and sustainable economic growth”.

As such, the primary focus was to expand

the number of loan recipients / micro

entrepreneurs through three distinct action

areas, these are:

Targeting the youth,

Increasing focus on women as loan

recipients, and

Increasing the number of NGOs

participating in the project to expand

access to credit through prudently

managed civil society actors (NGOs).

The total project budget amounted to US$

1.4 million of which US$ 500,000 was to be

provided by the Ahli United Bank,

US$500,000 by the Ministry of Social

Development and the remaining

US$400,000 by UNDP which was to raise

this amount as part of its partnership with

the government of Bahrain or from other

resources.

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After consideration of the paradigms in the

global microfinance industry, witnessing a

growing number of “Regulated

Microfinance Institutions and Microfinance

Banks” entering into the field, the MoSDand Ahli Bank decided to re-channel part of

their financial contribution to the

Microfinance project to help establish a

regulated Microfinance Institution, later

called the “Family Bank - FB”. The

decision was taken with a view to rooting

the project within the mainstream financial

system in the Kingdom of Bahrain and

guaranteeing the continuation of activities

beyond the life of the project,

notwithstanding the role of the NGOs as

partners besides the bank.

Bahrain has by now seen the emergence of

two microfinance lending institutions –

Ebdaa Bank and Family Bank. In addition,

the Bahrain Development Bank which

currently finances slightly larger loans to

SMEs, initially offered micro financing.

These banks target the same markets as the

societies mentioned above, although the sizeof loans offered by the societies tends to be

smaller (see figure below).

In addition, the banks are licensed by the

Central Bank of Bahrain, and thus have

more stringent regulations than the societies

do. Examples include a minimum capital

requirement, Central Bank licensing fees,

audit and publication of financial statements.

There are also restrictions on the amount of

capital that can be lent out relative to the

liabilities (also known as gearing), which

apply to the licensed MFIs.

Microfi nance Banks

Table (1): Comparison of MFIs

Ebdaa Family

Range (BD) 200 – 5,000 500 – 7,000

Interest rate

(p.a.)

4-15%

annually *

12%**

Paid up capital

(BD)

1,885,000 5,000,000

Net Profit 2011 NA -519,576

Number of loans

since inception

2,624 861

Total value of

loans (BD)

3,571,249 1,309,999

% of loans given

to women

68% 64%

Shareholding Private and

public

Private and

public

Source: Family Bank and Ebdaa Bank

*depending on the product, tenor,

**6% subsidized by Tamkeen

Ebdaa Bank

Ebdaa bank is a closed joint stock company

which is 60% privately owned. It was

formed in 2009 and aims to improve the

social and economic conditions of Bahrainis

through microfinance. Unlike family bank it

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is not an Islamic bank, and offers

conventional as well as sharia compliant

services.

Table (2): Ebdaa bank loans by age

Source: Ebdaa Bank

When looking at the geographic distribution

of Ebdaa Bank‘s loans by governorate, a

clear predilection for the Northern

directorate can be seen as in the case of

Family Bank. The capital and southern

directorates received a disproportionately

low share of loans, probably in reflection of

higher relative incomes in these areas.

The range of Ebdaa Bank loans is between

BD 200-5000, with over 50% of the loans being of very small size, between BD 200

and BD 1000. As seen in the chart below,

largest loans are relatively rare, with only

4% in the range of BD 4001- BD5000.

Source: Ebdaa Bank

The largest proportion of Ebdaa Bank‘s

loans, 32%, goes to people above the age of

46, closely followed by 36-45 year-olds who

received 26.5% of the total, and 28-35 year

olds who accounted for a comparable 26%

share. 18-27 year olds received around 15%

of total loans.

The vast majority of loans are of shortmaturity, with over 84% being 24 months or

less.

Family Bank

The Family Bank was established in 2010 as

the first Islamic microfinance bank in the

Middle East. It, much like other MFIs in

Bahrain, aims to serve low-income families

by financing their entrepreneurial projects.

In addition to funding, it provides start-up

services such as help with market research

and training courses. As can be seen in the

table above, the Family Bank‘s recent

results show that maintaining profitability is

a challenge. To achieve the objectives of the

program ―funding community-based

organizations‖, Family Bank signed

Norther

n

36%

Souther

n

4%Capital

8%

Central

35%

Muharr

aq

17%

Ebdaa Bank Loans by

Governorate

% of total number of loans

2012

Source: Ebdaa Bank

0%

10%

20%

30%

40%

50%

60%

Ebdaa Bank Range of Loan Amounts

Bahraini Dinars

% of total loans in this range

Source: Ebdaa Bank

Age Percentage of Total Loans

18 - 27 14.90%

28 - 35 26.14%

36 - 45 26.52%

46 - 64 32.43%

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cooperation agreements with several

associations helping individuals and families

with limited incomes.7

The vast majority of loans given by the

Family Bank are in the trade sector, whichaccounts for 65% of the total loans given.

Other popular sectors include food-related

businesses (11%) and the services sector

(6%). Fishing and Manufacturing make up

5% and 4% of total loans respectively,

followed by Gift & Stationary Services,

Agriculture and Salon Services at 3% each.

Trade tends to be a common business for

low-income persons due to the lower fixed

costs and labour required to set up shops.

Many trading businesses can be run by one

person, often the owner himself, and do not

require machinery or a large space. Food-

related services can be expected to be

popular among women in the informal

sector, as many can create food preparation

and distribution companies. This is

convenient especially for mothers with

children at home.

7 El Shabrawy, Atef. Family Bank. Personal Interview, April2012.

The Northern Governorate has been the

largest beneficiary of Grameen program

financing, the Family Bank‘s largest

program. It received 32% of the total funds

disbursed, although only 23% of the

population live there. The SouthernGovernorate on the other hand received 1%

of Grameen program financing, and has a

much higher percentage of population (8%)

relative to the funds received. Muharraq also

received a larger portion than its population,

with 26% of financing relative to 15% of

population.

The Grameen program offers group

financing and lower loan amounts than the

other Family Bank program, the

Microenterprise Financing (MEF). It also

offers loans to entrepreneurs who are just

starting and/ or who do have Commercial

Registrations. Geographic areas with high

concentration of loans tell us where

microfinancing has been most widely used,

perhaps due to more needy Bahrainis living

in those locations. It may also indicate

geographic areas which might be unaware of

the programs available, and could betargeted by MFIs.

Trade

65%

Food

related11%

Other

Services

6%

Fishing

5%

Manufac

turing

4%

Gift &

Stationar

y

Services

3%

Agricultu

re

3%Salon

services

3%

Family BankComposition of loans by sector

Source: Family Bank

Norther

n, 32%

Sourther

n, 1%

Capital,

8%

Central,

33%

Muharra

q, 26%

Grameen Program Beneficiaries by

Geographic Location

Source: Family Bank

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Microfi nance Societies (NGOs)

In addition to the two banks, two NGOs

offer Microfinance in Bahrain. Both the

Awal Women‘s Society and the CMWS

were involved in the initial launch of the

MicroStart program, and were trained and

supported by the UNDP and the government

of Bahrain. These societies have a

successful track record and offer loans of

even smaller amounts than the microfinance

banks. In the words of a society member, the

people with whom they deal value a wordmore than any signed agreement. This

appears to be true as both societies have

very low default rates of around 2%.

Table (3): Comparison of NGOs

Source: Awal Society and CMWS

These societies are an important part of the

microfinance industry, and supporting them

is crucial as they reach the lowest income

groups and deal with clients on a personal

basis, forming lasting relationships with

them and following their success and failure.

Microf inance Chal lenges and Possible

Improvements

Clients-specific issues

A recent market research survey conducted

by ‗Planet Finance‘ for the Ministry of

Human Rights and Social Development

looked at approximately 500 microfinanceentrepreneurs, some clients and some non-

clients. These entrepreneurs specialize in a

variety of activities ranging from traders, to

street vendors, to services and handicrafts.

The survey results indicated that men tended

to be more involved in services and

commerce, whereas women tended towards

less profitable activities, like handicrafts and

street vending.

The average monthly sales turnover for

micro-entrepreneurs is BD 535, and the

average profit margin is BD 290. This is

slightly higher than the Bahraini minimum

wage of BD 250 but lower than median

wage of BD 489 as of the fourth quarter of

2011. This is something which may be

improved through better guidance for

entrepreneurs. Further, females run smaller

business than males with 80% of small

businesses with low sales turnover beingcontrolled by females while they account for

only 40% of the larger businesses. The

reasons for this trend may include the

sectoral preferences of women, as well as

the amount of time which they can spend on

their businesses. Increasing guidance for

Northern

23%

Southern

8%Capital

27%

Central

27%

Muharra

q

15%

Population by Governorate

Bahrain 2009

Source: Family Bank

Awal CMWS

Number of loans since

inception

15,273 17,341

Value of loans since

inception (BD)

3,789,800 3,239,050

Manufacturing 23% 20%

Trade 62% 66%

Services 15% 14%

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women could encourage them to enter more

profitable industries.

Some of the most prevalent challenges faced

by micro-entrepreneurs are sourcing money

and the amount of monthly cash flowgenerated from the activity. Interestingly,

the reimbursement of credit, keeping

financial records and registering activities

are the least challenging.

Clients and non-clients awareness of MFIs is

generally low, and thus something which

could be improved through nation-wide or

state-led marketing. For example those

receiving unemployment and other

government benefits could be notified of

various micro-financing options.

Competition

Among some MFIs main concerns were

increasing competition in the market. The

rise in the number of industry players in

Bahrain‘s small market has squeezed profit

margins, and increased MFI dependence on

government and donor sponsors. As a result

industry players have little to no profits. In

order for the micro-finance industry to be

sustainable going forward, it is essential to

reduce such dependencies.

One possible option for the industry would

be consolidation. Smaller players tend to

have higher relative costs, and cannot take

advantage of economies of scale. Indeed,

international experience has shown thatcompetition between MFIs in one country

can limit their ability to achieve their goals

of helping low-income individuals as MFIs

will tend to be more attracted to consumer

loans, which limits their economic impact

on low-income individuals. Consolidation

could strengthen the impact which the

industry has, increase awareness as more

money can be spent on marketing, and give

low income persons a single source which

can give them information on all their

options, reducing the time and difficulty it

takes them to compare their options on theirown.8

Regulatory and Legislative Challenges

Bahrain currently has two MFIs licensed by

the Central Bank of Bahrain (CBB), Family

Bank and Ebdaa Bank. However, the CBB

does not have a licensing framework

specifically for MFIs, and the two existing

institutions are registered under Volume 1and 2, under which both mainstream

conventional and Islamic banks are licensed.

They hence operate under the same

regulations as their larger counterparts.

The CBB is currently in the process of

developing a sector-specific framework for

microfinance. This will include more lenient

regulations than those applied to regular

banks when it comes to minimum capital

requirements, licensing fees, and public

disclosure requirements, but also more

stringent gearing requirements. It will

exempt MFIs from capital adequacy

requirements, and include things such as

consultancy services. Currently, there is no

legislation that covers the micro-financing

activities of societies.

Also, as the majority of the microfinance

customers are considered informal thissector needs regulatory and technical

support. Despite the registration as

productive family members in the MOSD,

the legal status of these micro activities is

often not fully formalized, although such

8 Al Qassim, Wahid. Ebdaa Bank. Personal interview. April2012.

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activities are tolerated. This issue can be

addressed through better regulation and

creating a legal structure for such entities.

Cultural challenges

Group financing is not very popular in

Bahrain despite MFI attempts to offer it to

their clients. This is mainly due to the

different cultural differences between

Bahrain and countries where the model took

shape. Bahrainis are more inclined to take

independent loans and to repay them on

their own. Though there is a strong sense of

community, independence regarding

financial matters is a value Bahrainis seemto hold high.

Some MFIs also found the need to introduce

Islamic financing to their products. This is

due to the strong cultural and religious

values which tend to govern their client

base.

In addition, Bahrain‘s culture of welfare-

dependence may also pose a challenge. It

will take education and training to instil an

entrepreneurial mind-set, and move people

away from depending on social assistance.

Although microfinance in Bahrain has

developed remarkably since its initiation in

1998, in order for it to be most effective

certain reforms must be made. These

reforms will ensure that the sector is

sustainable and helps Bahrainis have higher

incomes and become self-sufficient andindependent.

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Bahrain Global Rankings Performance

This article benchmarks the Kingdom’s

international position in comparison to

other economies with respect to a number ofkey economic and social indicators. It

assesses Bahrain’s standing in international

rankings and reviews the Kingdom’s

performance in various component indices.

This piece provides an update about the

Kingdom’s progress in international

rankings and identifies areas for further

improvement. The analysis lists the most

recent global rankings of Bahrain according

to 16 leading international indices that areusually issued and updated on an annual

basis. The analysis uses data from a number

of widely respected sources including

research and findings from the Heritage

Foundation, Transparency International,

United Nations Development Programme

(UNDP) , United Nations Conference on

Trade & Development (UNCTAD), World

Bank , the World Economic Forum and the

Fraser Institute.

Some reports and indices rely only on

statistical data while others build their

findings on a combination of statistics and

survey data. Statistical data consist of

indicators capturing quantitative

information, such as inflation rates, GDP,and life expectancy. These data sets are

collected by international organizations

including the IMF, the World Bank, and

various United Nations agencies from

reporting national entities (central banks and

statistical agencies) in their member states.

The survey data is more qualitative in nature

and covers a variety of issues such as the

protection of property rights, independence

of the judiciary, and the quality of the

educational system.

The article addresses each index and helps

illustrate the areas where the kingdom is

outperforming or underperforming

internationally.

Introduction

Bahrain has attained impressive results in a

number of recent global rankings. Although

some of this standing has been eroded of

late, Bahrain‘s position remains highly

competitive on a global scale. The indices

that showed improvement were global

competitiveness, corruption perception,

education development index, and travel and

tourism. The table below provides a

snapshot of the Kingdom‘s performance in

the latest reports compared to the previousones.

7 / 1 4 4

1 2 / 1 7 9

2 4 / 6 0

2 7 / 1 4 2

3 0 / 1 3 2

3 2 / 1 5 5

3 7 / 1 4 2

4 2 / 1 8 5

4 0 / 1 3 9

4 2 / 1 8 7

4 6 / 1 8 3

5 1 / 1 2 7

1 1 1 / 1 3 5

1 4 5 / 1 6 3

0

20

40

60

80

100

120

140

160

F r e e d o m o f t h e W o r l d

E c o n o m i c F r e e d o m

F i n a n c i a l D e v e l o p m e n t

N e t w o r k e d R e a d i n e s s

E n a b l i n g T r a d e

L o g i s t i c s P e r f o r m a n c e

G l o b a l C o m p e t i t v e n e s s

D o i n g B u s i n e s s

T r a v e l & T o u r i s m

H u m a n D e v e l o p m e n t

C o r r u p t i o n P e r c e p t i o n

E d u c a t i o n D e v e l o p m e n t

G e n d e r G a p

E n v i r o m e n t P e r f o r m a n c e

Bahrain's Worldwide

Rank

Source: Various Reports

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Table (1): Bahrain’s comparative ranking

Index Latest

rank

Previous

rank

Change

in rank

Economic

Freedom

12 10 -2 ↘

Economic

Freedom of theWorld

7 10 +2 ↗

Ease of Doing

Business

42 39 -3 ↘

Global

Competiveness

35 37 +2 ↗

Financial

Development

24 23 -1 ↘

Networked

Readiness

27 30 +3 ↗

Corruption

Perception

46 48 +2 ↗

Education

Development

51 45 -6 ↘

Travel and

Tourism

Competiveness

40 41 +1 ↗

Logistics

Performance

48 32 -16 ↘

Enabling Trade 30 22 -8 ↘

Gender Gap 111 110 -1 -

Environmental

Performance

145 -

Source: Various reports

Evaluation of the reports suggests thatBahrain‘s main comparative strengths

include the following:

Macroeconomic stability (low inflation)

Favorable tax regime

Strong banking and finance sector

High standard of human development

Efficient business regulations

ICT readiness

Human Development I ndex

Bahrain occupied the 42nd position out of

187 countries in the 2011 Human

Development Report (HDR) published by

the United Nations Development

Programme. The Kingdom continues to

feature in the category of ―Very High

Human Development‖ countries.

The 2011 HDR presents Human

Development Index (HDI) values and ranksfor 187 countries for the year 2011

The HDI is a summary measure for

assessing long-term progress in three basic

dimensions of human development: a long

and healthy life, access to knowledge and a

decent standard of living.

As in the 2010 HDR, a long and healthy life

is measured by life expectancy. Access to

knowledge is measured by i) mean years ofadult education9, and ii) expected years of

schooling for children of school-entrance

age10. Standard of living is measured by

Gross National Income (GNI) per capita

which is expressed in 2005 constant prices.

Bahrain’s HDI value and rank

Bahrain‘s HDI value for 2011 is 0.806.

Among the countries in the ―Very High

Human Development‖ category are Norway,

Australia, Netherlands, the United States

and New Zealand.

Between 1980 and 2011, Bahrain‘s HDI

value increased from 0.651 to 0.806, an

increase of 24% thanks to an annual increase

of about 0.7%. The rank of Bahrain‘s HDI

for 2010 was 39th out of 169 countries.

However, it is misleading to compare valuesand rankings with those of previous reports,

because the underlying data and

9 the average number of years of education received in a life-time by people aged 25 years and older10 the total number of years of schooling a child of school-entrance age can expect to receive if prevailing patterns ofage-specific enrolment rates stay the same throughout thechild's life

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methodology have changed, while the

number of countries included in the HDI has

increased to 187. Moreover, a number of

key indicators for many countries were

unavailable in the 2010 report. Bahrain‘s

HDI remains the 3rd

highest within the GCCregion.

Table (2): Bahrain’s overall rank in the 2011

Human Development Index

GCC Rank Economy 2011 rank

1 UAE 30

2 Qatar 37

3 Bahrain 42

4 KSA 56

5 Kuwait 63

6 Oman 89Total 187 economies

Source: 2011 Human Development Report

To ensure as much cross-country

comparability as possible, the HDI is based

primarily on international data from the UN

Population Division, the UNESCO Institute

for Statistics (UIS) and the World Bank. To

allow for assessment of progress in HDIs,the 2011 report includes recalculated HDIs

from 1980 to 2011 according to its new

methodology. These are displayed in Table

3 below.

The Kingdom continues to perform well in

health and education, the two main

components of the HDI. Life expectancy at

birth increased by 5.4 years, mean years of

schooling rose by 5.3 years and the expected

years of schooling advanced by 3.3 years.Bahrain‘s GNI per capita decreased by about

12% between 1980 and 2011. Table 3

reviews Bahrain‘s progress in each of the

HDI indicators.

Table (3): Bahrain’s HDI trends based on consistent time series data, new component indicators and

new methodology

Life expectancy

at birth

Expected years

of schooling

Mean

years of

schooling

GNI per

capita

(2005 PPP$)

HDI value

1980 69.6 10.0 4.1 31,987 0.651

1985 71.3 13.1 5.2 21,224 0.700

1990 72.3 13.5 6.0 19,302 0.721

1995 73.0 13.6 7.2 21,302 0.750

2000 73.7 13.4 8.3 22,715 0.773

2005 74.3 13.4 9.0 27,102 0.795

2010 74.9 13.4 9.4 27,874 0.805

2011 75.1 13.4 9.4 28,169 0.806


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Assessing progress relative to othercountries

Bahrain‘s 2011 HDI of 0.806 is below the

average of 0.889 for countries in the very

high human development group and above

the average of 0.641 for the Arab States.

Among the Arab States, countries closest to

Bahrain in terms of their 2011 HDI rank and

population size are Qatar and United Arab

Emirates. They are ranked 37 and 30

respectively (see Table 4).

Table (4): Bahrain’s HDI indicators for 2011 relative to selected countries and groups

HDI

value

HDI

rank

Life

expectancy

at birth

Expected

years of

schooling

Mean years

of schooling

GNI per

capita

(PPP US$)

Bahrain 0.806 42 75.1 13.4 9.4 28,169

Qatar 0.831 37 78.4 12.0 7.3 107,721

United Arab

Emirates

0.846 30 76.5 13.3 9.3 59,993

Arab States 0.641 - 70.5 10.2 5.9 8,554

Very high HDI 0.889 - 80.0 15.9 11.3 33,352


Economic Freedom

Bahrain has consistently been the regional

top performer in terms of economic

freedom. This position is evident in the

K ingdom‘s performance in two prominent

economic freedom indices discussed below.

Index of Economic Freedom

The 2012 annual Index of Economic

Freedom published by the Heritage

Foundation and the Wall Street Journal

ranked Bahrain the 12th freest economy in

the world out of 179 countries. Bahrainremains the freest economy in the Middle

East and North Africa (MENA) and its

economic freedom is well above the world

average. Bahrain is the only country from

the MENA region to feature in the Top 20.

The 2012 Index of Economic Freedom

measures the level of economic freedom on

10 pillars: business freedom, trade freedom,

fiscal freedom, government size, monetary

freedom, investment freedom, financial

freedom, property rights, freedom from

corruption and labour freedom.

Figure 2 displays the scores of the top 15

freest economies (in order from highest to

lowest) according to the Index. It is apparent

that Bahrain is among the strongest and

most competitive economies in the world, a

group that includes countries such as the

United States, Hong Kong, Singapore and

Australia. In addition, Bahrain‘s score is

higher than those of some European

economies, for example: the United

Kingdom and the Netherlands.

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Bahrain‘s economic freedom score is 75.2

which is well above the world average. Its

overall score is 2.5 points less than last year

due to declines in six of the 10 composites,

including freedom from corruption, property

rights, and government spending.

The report highlights that the Kingdom has

been undergoing a challenging transition to

greater openness and transparency, more

visibly since early 2011. Compared to many

other countries, Bahrain performs quite well

on many of the four pillars of economic

freedom. The report stresses that the

Kingdom‘s openness to global commerce is

sustained by its competitive and efficient

regulatory environment.

Table (5): Index of Economic Freedom, GCC

Ranking

Source: 2012 Index of Economic Freedom

According to the index, Bahrain‘s main

strengths are the financial sector, its

openness to global commerce, and its

competitive and efficient regulatory

environment. A key area for improvement

would be to reduce the high level of publicspending which raises questions about fiscal

sustainability. In addition, the index implies

that improvements in property rights and

corruption are critical for establishing a freer

economy.

Table (6): Bahrain in details

2012

score

2011

score

Change

Overall 75.2 77.7 -2.5 ↘

Business

freedom

76.5 77.4 -0.9 ↘

Trade

freedom

82.8 82.8 0 -

Fiscal freedom 99.9 99.8 0.1

Government

spending

72.2 80.2 -8 ↘

Monetary

freedom

70.4 74 -3.6 ↘

Investment

freedom

75.0 75 0 -

Financial

freedom

80.0 80 0 -

Property

rights

55.0 60 -5 ↘

Freedom from

corruption

49.0 51 -2 ↘

Labour

freedom

91.1 97 -5.9 ↘

Source: 2012 Index of Economic Freedom

Economic Freedom of the World

Bahrain is ranked as the 7th freest economy

in the world in the Economic Freedom indexof the 2012 Economic Freedom of the World

Report published by the Fraser Institute. The

index measures the degree to which policies

and institutions of countries are supportive

of economic freedom in five broad areas:

size of government, legal system and

property rights, access to sound money,

0

10

20

30

40

50

60

70

80

90

100

H o n g K o n g

S i n g a p o r e

A u s t r a l i a

N e w Z e a l a n d

S w i t z e r l a n d

C a n a d a

C h i l e

M a u r i t i u s

I r e l a n d

U n i t e d S t a t e s

D e n m a r k

B a h r a i n

L u x e m b o u r g

U n i t e d K i n g d o m

T h e N e t h e r l a n d s

Top 15 Freest Economies

Source: 2012 Economic Freedom

GCC

2012

Rank

Economy 2012

rank

2011

rank

change

1 Bahrain 12 10 -2 ↘

2 Qatar 25 27 +2 ↗

3 UAE 35 47 +12 ↗

4 Oman 47 34 -13 ↘

5 Kuwait 71 61 -10 ↘

6 KSA 74 54 -20 ↘

Total 179 economies

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freedom to trade internationally and

regulations.

Hong Kong retains the highest rating for

economic freedom, 8.90 out of 10. The other

top 10 nations are: Singapore, 8.69; New

Zealand, 8.36; Switzerland, 8.24; Australia,

7.97; Canada, Bahrain, 7.94; Mauritius,

7.90; Finland, 7.88; and Chile, 7.84. The

rankings of other large economies include:

United States (18th), Japan (20th), Germany

(31st), South Korea (37th), France (47th), Italy

(83rd), Mexico (91st), Russia (95th), Brazil

(105th), China (107th), and India (111th).

Bahrain has increased its scores and

improved its relative level of economicfreedom.

Table (7): Economic Freedom of the World,

2012 and comparisons with the 2011 report

GCC

rank

Economy 2010

score

2010

rank

2009

rank

Change

in rank

1 Bahrain 7.94 7 10 +3 ↗

2 UAE 7.83 11 17 +6 ↗

3 Qatar 7.7 17 - -

4 Kuwait 7.66 19 15 -4 ↘

5 Oman 7.64 20 38 +18 ↗

6 KSA 7.06 65 - -

Total 10 144 141 ↗

Source: 2012 Economic Freedom of The World Report

Bahrain in details

The Kingdom has improved in the areas of

―size of government‖, ―legal system and

property rights‖ and ―access to soundmoney‖. Positive progress took place also

in two sub-areas of ―regulations‖, namely

―business‖ and ―labour ‖ Regulations. On

the other hand, Bahrain‘s rank has showed

slight deterioration in ―freedom to trade

internationally‖ and dropped in one of the

―regulations‖ sub-area of ―credit market

regulation‖.

Table (8): Bahrain’s rank in the areas of the

2012 Economic Freedom Index

Areas 2010

score

2009

score

Change in

score

1 Size of

Government

6.88 6.56 ↗ +0.32

2 Legal System &

Property Rights

7.0 6.76 ↗ +0.24

3 Access to Sound

Money

9.18 9 ↗ +0.18

4 Freedom to

Trade

Internationally

7.90 7.93 ↘ -0.03

5 Regulation

Credit Market

Regulation

Labour Market

Regulations

Business

Regulations

8.73 8.74 ↘ -0.01

9.0 10 ↘ -1

8.87 8.74 ↗ +0.13

8.33 7.48 ↗ +0.85

Total score 10

Source: 2012 Economic Freedom of The World Report

Doing Business

In 2011, Bahrain ranked 42nd out of 185

economies in the 2013 Doing Business

Report published by The World Bank and

International Finance Corporation. The

Doing Business report measures ten areas of

business regulations and their enforcement

across 185 economies. Singapore tops the

overall ranking, Hong Kong SAR, New

Zealand, United States of America and

Denmark round out the top five.

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28

Bahrain ranks 4th in the MENA region and

ranks 42nd worldwide amongst 185

economies

Table (9): Ease of Doing Business, 2013 and

comparison with 2012 GCC

rank

Country 2013

rank

2012*

rank

Change in

rank

1 KSA 22 23 ↗ +1

2 UAE 26 29 ↗ +3

3 Qatar 40 40 No Change

4 Bahrain 42 39 -3

5 Oman 47 49 ↗ +2

6 Kuwait 82 77 ↘ -5

Total 185 183

Source: 2013 Doing Business Report*All Doing Business

2012 rankings have been recalculated

Bahrain dropped 3 places to 42nd in the 2013

rankings, but despite this deterioration,

Bahrain performs comparatively well in

many areas and occupies the 7 th position

worldwide in dealing with construction

permits and the 7th

position in tax paymentsand the 27th position in resolving insolvency.

Areas of improvement for Bahrain include:

―trading across borders‖ where the Kingdom

moved up 2 places to 49th, and ―enforcing

contracts‖ (2 places up to 114th).

Bahrain‘s ranking dropped most markedly in

the area of ― business start-up‖ where it fell

from 84th in 2012 to 88th in 2013. The

second largest drop was in ―protecting

investors‖, where Bahrain dropped threeranks to 82nd. The third largest drop was in

―getting credit‖, which saw a decline from

127th in the previous year to 129th.

The other areas saw only minimal variations

of one position.

Table (10): Bahrain’s rank in the pillars of the 2012 Doing Business Index

Source: 2012 Doing Business Report

0 100 200

Saudi Arabia

United Arab EmiratesQatar

Bahrain

Oman

Kuwait

Regional Average ( MENA)

Ease of Doing Business Rank

Source: 2013 Doing Business Report

Rankings DB 2013 rank DB 2011 rank Change in rank

1 Starting a business 88 84 ↘ -4

2 Dealing with construction permits 7 6 ↘ -1

3 Getting electricity 48 49 ↗ +1

4 Registering property 29 29 No change

5 Getting credit 129 127 ↘ -2

6 Protecting investors 82 79 ↘ -3

7 Paying taxes 7 6 ↘ -1

8 Trading across borders 54 53 ↘ -1

9 Enforcing contracts 113 113 No change

10 Resoling insolvency 27 27 No change

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Global Competi ti veness

Bahrain occupied the 35th position in the

Global Competitiveness Report 2012-2013

published by the World Economic Forum.

The Global Competitiveness Index (GCI),which is based on 12 key indicators,

provides a comprehensive picture of the

competitiveness landscape in countries

around the world at all stages of

development. The 12 pillars include

institutions, infrastructure, macroeconomic

stability, health and primary education,

higher education and training, goods market

efficiency, labour market efficiency,

financial market sophistication,

technological readiness, market size,

business sophistication, and innovation.

Switzerland tops the overall ranking,

followed by Singapore, Finland, Sweden,

and the Netherlands. In the Middle East and

North Africa, Qatar (11th), the United Arab

Emirates (24th) and Bahrain (35th) improved

their performance while Saudi Arabia (18th)

and Kuwait (37th) saw slight decline.

Bahrain moved up two positions to 35th place this year. The improvement in the

Kingdom‘s standing reflects a better

institutional framework (21st) and greater

macroeconomic stability (29th). Bahrain‘s

competitiveness reflects highly

efficient goods and labour markets (ranked

16th and 21st respectively), developed

financial markets (18th) and high quality of

infrastructure (29th).

Going forward, putting the country on a

more stable development path will require

further investment with a view to improving

the quality of scientific research institutions,

enhancing the university-industry

collaboration in R & D and developing the

K ingdom‘s capacity for innovation.

Table (11): Global Competiveness Index

GCC

rank

Country 2012

rank

2011

rank

Change

2011 -

2012

1 Qatar 11 14 ↗ +3

2 KSA 18 17 ↘ -1

3 UAE 24 27 ↗ +34 Oman 32 32 - -

5 Bahrain 35 37 ↗ +2

6 Kuwait 37 34 ↘ -3

Total 144 142

Source: 2012-2013 Global Competitiveness Report

Financial Development

Bahrain ranked 24th out of 60 economies in

the 2011 Financial Development Report published by the World Economic Forum,

dropping one place compared to last year .

The Financial Development Index analyses

aspects of financial systems, including the

institutional environment, the business

environment, financial stability, banks,

capital markets, and overall capital

availability and access. Bahrain‘s average

score is 3.9 (out of a possible 7). Honk

Kong- SAR tops the overall ranking,

followed by the United States, United

Kingdom, Singapore and Australia.

Bahrain ranks 2nd in the GCC and 24th

worldwide in the Financial Development

Index. The Kingdom delivers relatively

sound performances in both the business and

institutional environments. It has relatively

strong corporate governance (17th) and a

high degree of financial sector liberalization

(15th

). Bahrain ranks 1st

in the tax pillar.Financial stability offers mixed results for

Bahrain where it ranks very high in terms of

banking system stability (2nd). However the

overall score in the pillar is offset by a 51 st

place rank in currency stability.

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The banking and financial services

improved in rank from 14th to 11th. Non-

banking financial services placed 36th in

2011 from 42nd place in 2010

Table (12): Bahrain’s rank in the Financial

Development Index

Source: 2011 Financial Development Report

There has been a drop in financial stability

from 23rd place in 2010 to 37th in 2011. This

is likely due to a drop in rank of risk of

sovereign debt crisis from 22nd in 2010 to

41st in 2011. The business environment is a

strong advantage, ranking 16th, although it

has dropped two places from 2010. The cost

of doing business has fallen five places to

15th and the Kingdom has a relatively low

score for currency stability, ranking 51st.

Financial disclosure needs to be improved

and has dropped from 36th place in 2010 to

37th place. Financial markets placed 45th,

performing worse than the 42nd position

achieved last year. Non-banking financial

services represent an area for improvement.

Bahrain is also limited in its levels of

securitization (51st).

Overall, improvements need to be made in

non-banking financial services and financial

markets, as well as stabilizing the currency

and monitoring the cost of doing business.

ICT Readiness

Bahrain continues to feature prominently in

the top 30 economies and is leading the

Arab world in The Global Information

Technology Report 2012, produced by theWorld Economic Forum in cooperation with

INSEAD. The Kingdom has also improved

its position within the top 30 global

economies, climbing three places, and is

now ranked 27th out of 133 economies

worldwide.

The Networked Readiness Index (NRI)

assesses how prepared countries are to use

ICT effectively on four criteria:

General business, regulatory and

political environment for ICT

The readiness of three stakeholder

groups – individuals, businesses and

governments – to use and benefit from

ICT;

The readiness of infrastructure and

digital content, alongside its

affordability and the skills required;

The impact on economic and socialconditions.

Sweden and Singapore continue to top the

rankings followed by Finland, Denmark,

Switzerland and Netherlands.

Bahrain‘s performance is remarkable in

many aspects. The Kingdom creates a fairly

sophisticated enabling environment for

entrepreneurship and innovation (11th) that,

coupled with good ICT readiness (25 th) in

terms of infrastructure, affordability, and

overall skills, has brought the kingdom to

the forefront of ICT readiness. This progress

has been led by a strong commitment from

the government (4th), although this has not

yet been matched by the business

GCC

2011

Rank

Economy 2011 rank 2010

rank

change

1 KSA 23 26 +3 ↗

2 Bahrain 24 23 -1 ↘

3 UAE 25 21 -4 ↘

4 Kuwait 28 28 - -

5 Oman - -

6 Qatar - -

60 economies 57

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community (39th). As a result, the progress

in innovation and shifting toward more

knowledge-based activities (54th) has been

limited. Efforts to integrate ICT in a more

general innovative ecosystem at the

corporate level should help to boost thedesired economic impacts of ICT and

technology more broadly.

The Kingdom can further improve its

competitiveness by:

Raising the level of existing scientific

institutions and creating new ones

Fostering scientific research and

technological innovation

Encouraging and increasing companyspending on R & D

Enhancing university-industry

collaboration in R&D

Table (13): Networked Readiness Index, 2012

Economy 2012

rank

2011

rank

Change

Bahrain 27 30 +3 ↗

Qatar 28 25 -3 ↘

UAE 30 24 -6 ↘

KSA 34 33 -1 ↘

Oman 40 41 +1 ↗

Kuwait 62 75 +13 ↗

Total

economies

142 138

Source: 2012 Global Information Technology Report

Corruption Perception

The Corruption Perception Index, published by Transparency International, ranks

Bahrain 46th out of 183 countries. It moved

up two places from 48th place in 2010.

The Corruption Perception Index ranks

countries based on how corrupt a country's

public sector is perceived to

be. Country scores indicate the perceived

level of public sector corruption on a scale

of 0 - 10, 0 being absolutely corrupt and 10 being the least corrupt. The findings of the

2011 CPI show that the vast majority of the

183 countries recorded a score below five.

New Zealand, Denmark and Finland top the

list, while North Korea and Somalia are at

the bottom of the index.

As shown in Figure 5, Bahrain is perceived

to be the 3rd least corrupt country in the

GCC, moving up from 4

th

place in 2010. Ithas scored 5.1 out of a possible 10 (10 being

least corrupt).

Bahrain was the only GCC country that

succeeded in improving its ranking in the

2011

CPI. The Kingdom advanced by

two notches to arrive at position 46 globally.

7.26.8

5.14.8 4.6 4.4

0

1

2

3

4

5

6

7

8

9

10

Corruption Perception Index

Qatar

UAE

Bahrain

Oman

Kuwait

Saudi Arabia

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