|Types of product offered||Description of product|
|Mudarabah savings account||A mudarabah savings account is based on the shariah principle of 'unrestricted mudarabah'. Under the mudarabah principle the customer will act as a capital provider and the bank will act as a mudarib (entrepreneur) using its expertise. The bank pools all customer funds with its own capital and invests it in shariah-compliant modes of investments. The resulting profit is shared between the bank and customers according to predetermined ratios. Mudarabah is a profit-and-loss sharing product and the better the bank performs, the higher the profits earned.|
|Term investment deposit (mudarabah)||Term investment deposit is based on the shariah principle of unrestricted mudarabah. Under the mudarabah principle the customer is an investor (rab-al-mal) for a fixed period and the bank will act as a mudarib (entrepreneur) using its expertise. The bank pools all customer funds with its own capital and invests it in shariah-compliant investments for a specified investment term and expected profit rate. The resulting profit is shared between the bank and customers according to predetermined mutually agreed ratios.|
|Izdihar savings account||An izdihar account is a savings account based on the Islamic principle of unrestricted mudarabah, which means customers can earn profit on their savings. Funds are placed in a common investment pool where they are invested in strict compliance with shariah principles to generate the best possible returns. Profits generated from the investments are shared between the bank and the customers according to a pre-agreed profit-sharing ratio.|
|Current account (qard hasan)||The current account is based on the Islamic contract of qard hasan (interest-free loan). You as a depositor will be the lender and the bank will be the borrower. The deposited funds are invested in halal activities only. Irrespective of the profit or loss generated by the bank from the investments, the funds are guaranteed payable on demand without any profit or penalty.|
|Wakalah investment||Wakalah investment is based on the Islamic concept of wakalah istithmar, under which you become the principal (muwakkil) and the bank becomes the investment agent (wakeel) of your funds. The bank invests these funds in shariah-compliant financing and investment activities. The targeted profit earned from the investments is distributed to the customers upon maturity of the account. The bank (as wakeel) deducts its agreed agency fee (wakalah fee) and, at maturity, pays both the targeted profit amount and the principal funds to the customers as per the terms of the wakalah agreement.|
In Bahrain and from Bahrain private equity funds, whether they are to be established in a shariah-compliant manner or generally established as a conventional fund, no particular structure is used.
Common structures would be Cayman Islands exempt limited partnerships (if in the form of a partnership or a Cayman Islands exempt corporate fund). The investment may also be set up in Bahrain as a private investment undertaking. This is a flexible type of fund that only needs to be registered with, rather than approved by, the CBB, and that has very limited restrictions on its ability to invest, although there are very high thresholds on the type of investor and the minimum investor amount in respect of investing in such a fund.
In general, any fund that is to be shariah-compliant would have to obtain a fatwa and make its investments in shariah-compliant products and in compliance with the various tenets of shariah.ii Real estate investments
In respect of real estate funds, no particular structure is used and the same considerations in respect of a conventional fund would be taken in establishing a shariah-compliant real estate fund.
The common structures are offshore limited partnerships and companies, locally domiciled funds and real estate investment trusts. The Trust Law Bahrain was introduced in late 2016, enabling the establishment and listing of real estate investment trusts, known as Bahrain real estate investment trusts (BREITs).
BREITs can be established as either an expert collective investment undertaking (CIU) or an exempt CIU. Expert CIUs may be offered only to expert investors, who must deposit a minimum of US$10,000. Exempt CIUs are lightly regulated but may only be offered to accredited investors who invest at least US$100,000. BREITs are gaining more attention in Bahrain, though very few have been launched to date.
GCC nationals and wholly owned GCC entities may own land in Bahrain on a freehold basis. A non-Bahraini person or legal entity can own real estate or land in certain designated areas where foreign ownership is permissible.iii Investment funds
Investment funds are generally established in Bahrain as companies, partnerships or trusts. No particular type of fund structure is used to enable it to be shariah-compliant.
A common structure used when the fund is to be marketed to retail investors would be a shariah-compliant expert fund. This type of fund requires a minimum investment of US$10,000 and can only be offered to investors who already hold financial assets of at least US$100,000. Expert funds can be leveraged by borrowing up to a limit of 20 per cent of the value of assets under management.
A further example of a type of investment fund used in Bahrain is a shariah-compliant exempt fund. This can only be marketed to accredited investors (who already hold assets worth US$1 million) and the minimum investment amount is US$100,000. This type of fund is lightly regulated.
Bahrain introduced the Investment Partnership Law in 2017 and in doing so is the first country in the GCC region to have introduced national legislation enabling the formation of limited partnerships in a manner comparable to structures utilised in reputable offshore fund domiciles. Key features of the new Law include the ability for a general partner of a Bahrain investment limited partnership to be established as a subsidiary or a special purpose vehicle of an investment business. This would allow sponsors not to be unduly exposed in terms of liability and while using one of the preferred and widely recognised international models for private equity funds. The new Law also aims to make Bahrain a more attractive market for investors by setting a high liability standard in respect of general partners.
The Protected Cell Companies Law, enacted in Bahrain in 2016, allows for the formation of protected-cell companies (often called segregated portfolio companies or sub-funds). Both a limited partnership fund and a segregated portfolio fund can be established as a shariah-compliant fund. A protected-cell company is a corporate structure in which a single legal entity is comprised of a core legal entity under which there are several divided cells or portfolios. The protected-cell company allows for each cell to be managed by a single or separate investment manager. As a fund develops, expands and targets under or varying asset classes, new cells can be established, which enables long-term flexibility and provides opportunities for investors to be exposed to new asset classes or sectors at lower costs for the fund promoter or manager. Each cell's assets can be ring-fenced and are therefore only available, or exposed to, the creditors and shareholders of each particular cell. The development of this Law signifies a will to develop the funds industry in Bahrain.
As at the end of June 2019, the number of mutual funds stood at 2,136, of which 74 were Bahrain-domiciled, compared with 2,290 funds as at June 2018. The number of shariah-compliant funds stood at 80, as at June 2019.iv Trusts
The Trust Law Bahrain replaced the Bahrain Financial Trusts Law of 2006 and aims to provide detailed guidance on the creation and administration of financial trusts within the Kingdom. While such trusts are widely used in other jurisdictions, they are new to the Middle East and Bahrain is one of the first countries to put in place this type of legal framework. It is anticipated and hoped that these updates will allow for the development of onshore shariah-compliant structures to hold assets, particularly for families who have previously tended to use offshore jurisdictions to do so. These trusts are also used in the development of BREITs, which can be established pursuant to the CBB fund regulations.
Bahrain currently has no income tax, corporation tax (except for oil, gas and petroleum companies that are engaged in exploration, production or refining, regardless of their place of incorporation) or capital gains tax and no estate duty, inheritance tax or gift tax. However, Islamic finance transactions involving real estate may be subject to taxes. For example, if the legal ownership of the land is transferred or registered, this could result in registration fees. On all property purchases, a registration fee of 2 per cent is levied, which is reduced to 1.7 per cent if registration and payment are completed within 60 days of the relevant transaction. If an Islamic financial transaction involves payments under an ijarah, this will generally not be subject to taxation. In Bahrain, Islamic finance transactions typically involve no actual movement of legal ownership and only the economic or beneficial value or ownership is transferred, which is not subject to any taxes.
Under existing Bahraini laws, payments under the bonds, sukuk or notes will not be subject to taxation in Bahrain, no withholding will be required on such payments to any holder of notes, and gains derived from the sale of notes will not be subject to Bahraini income, corporation or capital gains tax. In the event of the imposition of any withholding, the issuer will have undertaken to gross up any payments subject to the withholding.
Following an extraordinary meeting of finance ministers in Jeddah in June 2016, the GCC countries approved the introduction of value added tax (VAT) in the GCC. Bahrain signed the GCC Unified VAT and Excise Treaties on 1 February 2017 and brought into effect on 1 January 2019 the Bahrain VAT Law. A new tax authority, the National Bureau for Revenue, has been set up to oversee the VAT regime and is responsible for the registration and assignment of those subject to VAT, and for enforcement of VAT-related obligations.
VAT has been introduced at the standard rate of 5 per cent although some supplies are zero rated, exempt from VAT or outside the scope of VAT. VAT has been introduced on a staggered basis depending on the size of a business's turnover. Businesses with annual turnover exceeding 5 million dinars became subject to VAT from 1 January 2019, businesses with turnover of between 500,000 and 500 million dinars became subject to VAT from 1 July 2019, and businesses with turnover of 37,500 to 500,000 dinars will become subject to VAT from 1 January 2020. Businesses below the 37,500-dinar threshold but with a turnover above 18,750 dinars are entitled to voluntary registration if desired.
There can be no doubt that from a commercial and legal perspective the introduction of VAT heralds a significant development in the region. The new VAT regime is consumer-friendly with zero ratings for basic necessities such as healthcare, education, basic food items and the construction of new buildings, both residential and commercial properties. The introduction of VAT by GCC governments will be regarded by many as a constructive measure to assist, diversify and strengthen those countries' respective fiscal revenue streams in an era of falling oil prices; and to promote economic stability in the long term. It is important to note in this regard that the International Monetary Fund has previously encouraged the GCC countries to introduce VAT.
Islamic financial transactions are generally exempt from VAT if the income earned by the supplier is by way of interest, a profit margin akin to interest, or by way of an implicit margin. However, fees, commissions or commercial discounts received by Islamic finance providers are not exempt and are subject to VAT at the standard rate of 5 per cent.
As with the introduction of VAT in Saudi Arabia and the United Arab Emirates from 1 January 2018, and on account of its staggered introduction, it is taking some time for businesses and the tax authorities to absorb the changes. It is currently too early to judge, but it is hoped that the Bahrain tax authorities will operate with a light touch during this introductory phase.
It is also notable that VAT has been introduced as part of a GCC-wide customs union. Therefore, it is vital that the design of local regimes takes this customs union into account, to avoid overload and unnecessary complexity for governments and businesses alike.