Gulf Finance House (GFH) was once the highest-profile bank in Bahrain. Its rapid growth, along with its vision for developing the region, and Bahrain in particular, was widely applauded by the many Islamic banks that sprang up, keen to ape its model.

But the financial crisis has hit the firm hard, stunting its ability to get investors to fund the projects it has already launched and causing the value of its assets to drop considerably.

In response, GFH has had to embark on an aggressive asset disposal to shore up its balance sheet. Like other banks based in Manama, it has also been working closely with the Central Bank of Bahrain in trying to ride out the worst of the turmoil.

But the problems with Bahrain’s banking sector do not start or end with GFH. As its recently installed chief executive officer, Ted Pretty, says, GFH’s tough action on paying off debts, cutting costs and providing for bad loans is the sort of thing that other banks also need to consider.

As GFH gets its own house in order, the spotlight will shift to some of its smaller local rivals. It is more than likely that other banks will be revealed to be facing similar issues.

One local banker says that 2010 could be the year when Bahrain’s financial sector implodes, especially as the central bank is now making sure banks make full provision for the fall in asset values.

All this represents a tremendous risk to Bahrain’s attempt to promote itself as the conservative alternative to Dubai.

The new management team at GFH may well succeed in rescuing the bank over the next 12 months, but the central bank’s work in rescuing the wider financial system will continue for much longer.