The CBB is asking the kingdom’s financial institutions to be conservative when calculating shareholder dividends this year, to ensure their balance sheets are strong enough to cope with future market turbulence.

Rasheed Mohammed al-Maraj, governor of the CBB, has written to banks calling for prudence, a request that finance houses are interpreting as a warning that 2009 will be a tough year.

The CBB is keen to ensure that the banks are prepared for leaner times in 2009, as part of its role as regulator of the capital markets, as well as the financial services sector.

“The central bank wants to make sure that financial institutions do not pay out all their profits from 2008 as dividends to shareholders, when 2009 looks like being a much less profitable year,” says a source at one of Bahrain’s largest banks.

“The central bank has asked that companies make sure they will have enough money for 2009 before looking at paying dividends,” says another senior banker.

The move is the CBB’s second attempt since the new year to use its powers of persuasion, rather than explicit regulation, to intervene in the market.

In early January, the CBB wrote to Bahrain’s banks saying that it was closely monitoring the interest they charged on loans as it had become clear that many banks were not handing on to borrowers a 75 basis point cut in its benchmark lending rate, to 0.75 per cent, aimed at stimulating the economy.

“The CBB wrote to say that it had noticed that banks were reducing the rate they pay on deposits, but it had not noticed any change in the rates charged on borrowings,” says another senior banking industry source.

Central banks around the world have been struggling to ensure that interest rate cuts are passed on to bank customers facing high debt servicing costs. Instead, many banks are using central bank rate cuts as a way of improving their profit margins.

Although Bahraini banks have so far managed to avoid the liquidity crunch that has hit banks in the UAE and Saudi Arabia, policymakers in the country are preparing to act to combat the impact of the deteriorating economic environment. Finance Minister Sheikh Ahmed al-Khalifa says Bahrain has a plan to provide short-term liquidity to the banks if necessary.

Bahrain has also eluded much of the currency speculation that has caused problems for the financial sector in other GCC economies over the past year.

International investors largely avoided speculating on a revaluation of the Bahraini dinar, so the currency has not suffered the sudden withdrawal of funds experienced by the UAE dirham and Saudi riyal in the second half of 2008, when investors decided the currencies were unlikely to be revalued in the short term.

The withdrawal of billions of dollars of foreign money forced the Central Bank of the UAE and the Saudi Arabian Monetary Agency (Sama) to inject money into the banking system to ensure that banks could continue to lend.