Problems of starting a business in Bahrain

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Problems of starting a business in Bahrain

Despite the advantages benefiting commercial entities operating in the Kingdom of Bahrain (a relatively developed finance sector, a modern transport infrastructure with duty-free trade access to the Arabian peninsular, a government eager to attract foreign investment, and the absence of taxes), it would be prudent for foreign investors to consider some potential obstacles in the form of sector restrictions, quota systems, and political unrest stemming from ethnic tensions. While still a relatively young, small, and specialized economy, the Kingdom of Bahrain was one of the first Arab states to both generate a revenue from oil and subsequently effect a post-oil transition. Bahrain’s financial development initially benefited from an accelerated beginning due to an influx of Lebanese refugees with experience in the banking industry, and the kingdom is now regarded as one of two world centers for Islamic finance. Further growth was bolstered by significant investments in transportation and aluminum production, these factors resulted in the kingdom’s Ministry of Industry, Commerce and Tourism enforcing understandable regulations protecting these and other industries from foreign encroachment.

Bahrain’s ministry imposes barriers to foreign involvement in most aspects of the finance, oil, and transportation industries, in addition to postal services, print media publication, healthcare, commercial fishing, and natural pearls. Since Bahrain’s revenue still comes from oil, the ministry enforces restrictions in the form of complete barriers to entry by foreign entities intending to profit from activities involving oil refining or distribution, but provides allowances in the interest of exploiting any undiscovered oil reserves by imposing taxes amounting to 46 percent on revenues derived from oil exploration. In addition to the aforementioned sector restrictions, the ministry also imposes employment quotas on commercial entities operating in most industries.

The Bahrainisation policies can be narrowly defined as the kingdom’s labour laws requiring a company’s workforce to be composed of a certain percentage of citizens, the rationale being a means of ensuring that Bahrainis are able to secure employment in a society where foreigners are almost equal in number to citizens. These laws were recently amended (as of April, 2017) to enable companies to pay a fine, referred to as an application fee amounting to BHD 300 per foreign employee, in lieu of meeting the Bahraini employment rate mandated in their industry. It can be safely assumed that a company composed of a sizable workforce, requiring individuals of various skills, would certainly depend on foreign employees and would likely suffer additional costs in the endeavor to recruit for critical positions when limited to Bahrain’s 1.3 million citizens.

The broad intent of the Bahrainisation policies can be additionally considered to include other mandates such as the minimum capital requirements for foreign investment, majority local (Bahraini) or regional (Gulf Cooperation Council, (GCC) ownership of commercial entities operating in certain regulated industries, and the social security payments (GOSI) that both employees and companies based in the kingdom are obliged to make. Recent amendments to Bahrain’s 2001 Commercial Companies Law relaxed regulations in favour of foreign investment by decreasing the minimum capital requirements for shareholding entities from one million Bahraini Dinars to BHD 250,000 and enabled foreign ownership or acquisition in selected industries. Despite these recent amendments, the lower capital requirement for the incorporation of a limited liability shareholding entity may still be prohibitively high for all but the most affluent of investors, and the ministry continues to mandate Bahraini majority ownership of limited liability partnerships in all fields. While these policies benefit the kingdom’s social and economic welfare in protecting Bahraini capital and employment, foreign companies are faced with the challenges of maintaining ownership in limited liability ventures, securing financing, and fielding an effective workforce drawn from a relatively small local population.

Kingdom of Bahrain continues to benefit in terms of wealth and security under the traditional guardianship of Saudi Arabia, from the supportive alliance of the GCC, and a close relationship with the United States. But as is similarly the case with other nations in the Middle East, Bahrain suffers from occasional conflicts arising from the schism between Shia and Sunni communities in the region. Political and ethnic tensions in Bahrain culminated in an attempted uprising in 2011, as a chapter in the chain of events known as the Arab Spring, where accusations of corruption fanned by leaked documents led to mass protests by opposition groups portrayed as mostly Shia and supported by Iran to antagonize the Sunni monarchy and majority ruling class. This chapter ended in a Saudi-led suppression of the protests and a three-month state of emergency that marred the Kingdom of Bahrain’s humanitarian record. Despite the recent political upheaval, the monarchy has continued to maintain peace and stability while increasing transparency in the conduct of the kingdom’s law enforcers during the protests, as evidenced by the formation of the Bahrain Independent Commission of Inquiry (BICI) by His Majesty King Hamad bin Isa Al Khalifa.


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