MANAMA: Mahmood Rafique, Editor: Bahrain’s Islamic finance industry is projected to surpass USD100 billion by 2027 with rising penetration, Fitch Ratings says.
Growth is being driven by rising public demand, a supportive regulatory environment, broadly stable operating conditions, and sukuk’s role as a key sovereign funding tool. Bahrain continues to host global Islamic finance standard-setting bodies such as the AAOIFI and IIFM. Fitch estimates Bahrain’s Islamic finance industry at about USD94 billion at end-1H26, driven by Islamic banking (75%) and sukuk outstanding (22%). The remainder comprises sharia-compliant collective investment undertakings (CIUs), and takaful companies.
Islamic banks continue to hold a significant and growing share of domestic banking sector assets at about 42% at end-5M26 (end-5M25: 40.7%). Islamic banks’ total asset growth (12% yoy) continues to outpace that of conventional banks (0.6% decline yoy). Fitch rates Kuwait Finance House B.S.C. (c) (BB/Stable) and GFH Bank B.S.C (B/Stable).
The Bahraini banking system faces limited immediate credit risk from the Iran war. The Central Bank of Bahrain (CBB) introduced a loan deferral and liquidity support programme including enhanced liquidity measures, reduced reserve and funding requirements, and extended repo facilities, including for Islamic banks.
Islamic retail banks were adequately liquid, but less so than conventional retail banks, at end-1Q26. Islamic retail banks were well capitalised, similarly to conventional retail banks, although Islamic banks’ capital ratios receive an uplift from the 30% alpha factor. Conventional retail banks were more profitable than Islamic retail banks and had better asset-quality metrics in 1Q26. The banking sector is undergoing consolidation, with the authorities’ encouraging mergers. The banking system remains concentrated, presenting a challenge for both the Islamic and conventional banking sectors.
Sukuk has a significant 37% share of Bahrain’s debt capital market at end-1H26 (end-1H25: 35%). Sukuk in Bahrain surpassed USD20 billion outstanding in 1H26, up 16% yoy, outpacing bonds growth (6.2%). The sovereign continues to dominate sukuk issuance, with corporate and bank issuance remaining limited. About 96% of Fitch-rated Bahraini sukuk is rated ‘B’ and 4% rated ‘BB’, with all issuers on Stable Outlooks. Fitch downgraded Bahrain’s sovereign rating to ‘B’/Stable from ‘B+’/Negative in February. Bahrain has no history of default.
“We forecast government debt, including sukuk, to continue to grow. Confidence in GCC support will allow continued market access, including sukuk, and domestic banks have the scope to absorb more government sukuk and bonds. Fitch estimates Bahraini government debt/GDP at 143% at end-2025. This is the third-highest among Fitch-rated sovereigns and well above the ‘B’ median of 53%,” Fitch Ratings in a statement said.
The net asset value of sharia-compliant CIUs reached USD2.5 billion as of end-1Q26, up 24.5% yoy, representing 22% of industry CIUs. Takaful holds a significant share in the country’s insurance industry, with 33% of gross premiums as of end-3Q25 (end-3Q24: 29%). The total assets of the takaful sector grew to over USD750 million by end-3Q25, up over 28% yoy, outpacing the conventional insurance sector (0.1% yoy fall).
“The CBB continues to take initiatives to regain Bahrain’s status as a regional financial hub. It launched a consultation proposal in February that aims to reduce the minimum paid-up capital for newly incorporated Islamic and conventional banks from BHD100 million to BHD2 million. This could enable more banks to be set up in Bahrain. The CBB issued a stablecoin issuance and offering module in 2025, which has clear guidelines established for both sharia-compliant and conventional digital assets.”
