In Bahrain, as with a number of the other GCC countries, Islamic law (sharia) applies predominantly to personal status and family matters, such as inheritance, marriage and divorce. Although Bahrain’s constitution, first adopted in 1973 and amended in 2002, states that sharia is a main source of law, it is not the only source. The kingdom has a mixed legal system heavily influenced by the English common law system, as well as the Egyptian and French civil codes.

A lot of the project and infrastructure development has been funded in some way through Islamic finance

From these foundations, Bahrain has effectively developed a ‘dual’ court system, which comprises both civil and sharia courts. The sharia courts deal primarily with personal status and family matters, and there are sharia courts of first instance in most local communities, which are subject to a single sharia court of appeal that sits in the capital, Manama. Any appeals beyond this have to be taken to the supreme court of appeal (which is part of the civil court system). The civil law courts deal with all commercial, civil and criminal cases. On this basis, it would be unusual for sharia to be applied in the context of a commercial or business transaction.

In many ways, Bahrain continues to be the key centre for Islamic banking within the Middle East. The kingdom has played a significant role in the development of the Islamic finance industry – a sector that now has a truly global reach and is estimated to be worth well in excess of $1 trillion. Indeed, the Central Bank of Bahrain (CBB) has been very proactive in developing a legal and regulatory framework within Bahrain that has encouraged and fostered the growth of Islamic financial services for many years now – and long before Dubai, Abu Dhabi and Doha started on their respective paths of rapid growth.

Of particular note, the CBB has developed a comprehensive prudential and reporting framework that is tailor-made for the needs of Islamic banking and insurance activities (takaful). In addition, the CBB itself regularly taps into the Islamic debt capital markets through its issues of both long and short-term Islamic bonds (sukuk).

The kingdom is also home to the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the International Islamic Financial Market (IIFM), both of which play a pivotal role in developing industry standards. One of the largest and longest-running industry conferences, the World Islamic Banking Conference, is held annually in Bahrain and continues to attract key industry players from around the globe.

Looking around Bahrain, a lot of the project and infrastructure development has been funded in some way through Islamic finance. The landmark Bahrain Financial Harbour, World Trade Centre, Bahrain Bay, Durrat al-Bahrain and Diyar al-Muharraq developments have all benefited (significantly in some cases) from funding using Islamic financing techniques. Bahrain’s water and power plants, notably the Hidd and Al-Dur independent water and power projects, have also been constructed using Islamic tranches as part of wider multi-sourced financing packages. In addition, Aluminium Bahrain (Alba), Bahrain Petroleum Company (Bapco) and Bahrain Mumtalakat Holding Company (Bahrain’s sovereign wealth fund) have all tapped into the Islamic markets in order to further diversify their own sources of funding.

As one would expect, the Islamic financing techniques used in the kingdom have been developed in accordance with sharia principles, and these principles must be adhered to when determining the acceptability of a proposed financing structure or product. Sharia is not a codified system of law – it is derived from a number of sources, primarily the Quran and the Sunnah. As such, interpretations of the key principles can vary between the scholars who are ultimately required to approve these Islamic transactions. Given its heritage, it is no surprise that a number of leading scholars are based in Bahrain.

However, sharia is often considered to play its biggest role only at the outset of an Islamic finance transaction, through ensuring that the Islamic structure and the documentation comply with Islamic principles. For Islamic banks in Bahrain, a sharia supervisory board or committee (comprising of scholars) will normally carry out a review and make recommendations before approving that structure and documentation. This may result in a formal approval (or fatwa) being issued. Thereafter, the signed documentation will govern the contractual relationship between the parties and any disputes will be resolved in the manner agreed between the parties. This is often exactly the same kind of governing law and enforcement provision that you would find in a conventional loan arrangement – with lawyers preferring to opt for the laws of Bahrain, or perhaps English law if there is a cross-border or international element to a transaction.