The GCC Journal

Bahrain’s Banking Heritage: How an Island Became the Gulf’s Financial Capital

Decades before DIFC existed, Manama was the Gulf’s banking hub. Its story explains why Bahrain still punches above its weight in finance.

In the 1970s, when oil revenues were flooding the Gulf and the region needed a financial center to manage the money, the obvious candidate was Beirut. Lebanon had the bankers, the sophistication, and the infrastructure. Then the civil war began. Almost overnight, a small island in the Persian Gulf, with limited oil reserves and a population of barely half a million, stepped into the vacuum and became the banking capital of the Middle East. That island was Bahrain, and the story of how it captured the Gulf’s financial industry remains one of the most consequential episodes in the region’s economic history.

The 1970s: Seizing the Moment

When Beirut fell, Manama was ready

The first oil shock of 1973 created enormous financial surpluses across the Gulf states. Those surpluses needed to be managed, invested, and recycled into global markets. Beirut, the region’s established financial center, was collapsing into civil war. Iran, briefly a contender, lost its chance with the 1979 Islamic revolution. Bahrain, recognizing the opportunity, moved decisively. In 1975, the government approved Offshore Banking Regulations that allowed foreign banks to establish units in Bahrain without being subject to local banking rules, offering tax exemptions on profits and the ability to serve non-resident clients across the Gulf.

The advantages were clear: a geographic position at the heart of the Gulf, close to Saudi Arabia (connected by the King Fahd Causeway from 1986), a relatively educated English-speaking population, a stable political environment, and a regulatory framework inherited from the British that was liberal enough to attract international banks while maintaining credible oversight. By the mid-1970s, around 30 banks had licenses to operate in Manama. The momentum was extraordinary.

The High Point

The most densely packed financial hub in the region

By the turn of the century, Manama was home to 48 offshore banking units, 32 investment banks (20 of them Islamic), 19 onshore commercial banks, 40 representative offices of international banks, 17 money changers, and nine investment advisory firms. It was the most densely packed financial hub in the entire region. Notable homegrown institutions included Investcorp, founded in 1982 as the Gulf’s first international investment bank (its chairman told Euromoney at the time that it would be “a catalyst for change in the region’s financial markets”), and the Bahrain Islamic Bank, licensed in 1979 as the country’s first Islamic bank.

The Islamic Finance Capital

Home to the largest concentration of Islamic financial institutions in the Middle East

One of Bahrain’s most enduring competitive advantages has been its early and deep commitment to Islamic finance. The Central Bank of Bahrain introduced the first comprehensive regulatory framework for Islamic banking and insurance in the region, covering Sharia governance, capital adequacy, risk management, and disclosure requirements. Today, Bahrain hosts the largest concentration of Islamic financial institutions in the Middle East, including six Islamic retail banks, six Islamic wholesale banks, nine Islamic windows of conventional banks, and five takaful (Islamic insurance) companies.

Islamic banking assets in Bahrain grew from $1.9 billion in 2000 to $61.7 billion by mid-2024, an increase of over 32 times. The market share of Islamic banks rose from 1.8% of total banking assets to 25.3% over the same period. Bahrain is also home to several of the global standard-setting bodies for Islamic finance, most importantly AAOIFI (the Accounting and Auditing Organization for Islamic Financial Institutions, established in 1991), which develops and issues the accounting, auditing, governance, and Sharia standards used by Islamic financial institutions worldwide.

The Dubai Challenge

When the DIFC changed the competitive landscape

Bahrain’s dominance began to erode in the 2000s when Dubai launched the DIFC in 2004, creating a purpose-built financial zone with independent courts, common law, and aggressive incentives for global banks and fund managers. Dubai offered something Bahrain could not easily match: scale, lifestyle, and a brand that attracted young international talent. Many firms that had historically operated from Manama opened DIFC offices, and some moved their regional headquarters entirely. Abu Dhabi’s ADGM, launched in 2015, added further competitive pressure.

Bahrain’s response has been to specialize rather than compete head-on. The country remains a leading center for Islamic banking, for mutual fund incorporation, and for fintech regulation (through its pioneering sandbox and open banking framework). Its cost base remains significantly lower than Dubai; foreign banks can set up anywhere in the country without needing to rent in a designated financial district. And its single-regulator model (the CBB oversees everything) offers a simplicity that fragmented regulatory environments elsewhere cannot match.

The Bigger Picture

The oldest financial center in the Gulf is still evolving

Bahrain’s banking heritage matters because it provides context for the country’s contemporary positioning. When Bahrain launched the GCC’s first fintech sandbox in 2017, it was not a small country trying something bold for the first time; it was a country with 50 years of financial services experience deploying the same instinct that served it in 1975: move fast, regulate smartly, and offer international firms a reason to set up in Manama rather than somewhere bigger. The Bahrain Institute of Banking and Finance, established in 1981, has trained over 100,000 students. The CBB aligns its standards with the Bank for International Settlements in Basel. And the Waqf Fund, established in 2006 in collaboration with the industry, invests in Islamic finance education and research.

Bahrain will never reclaim the outright dominance it held in the 1990s. Dubai is too large, too connected, and too well-branded for that. But the Gulf’s oldest financial center has found something arguably more sustainable: a niche built on regulatory expertise, Islamic finance leadership, fintech agility, and a cost structure that makes it accessible to the firms that larger markets price out. For an island of 1.7 million people with limited oil reserves, that is a remarkable achievement, and a model of economic diversification that other small states would do well to study.