David French writes for Reuters:
Bahraini financial firms face a tough task raising funding in 2012, as political tensions from last year's Arab Spring unrest fester and real estate investments show no sign of paying off.
Analysts say one option for banks in the tiny island kingdom is to look to neighbour Saudi Arabia, but getting a hearing is often a challenge because lenders there have enough local business on their hands.
The violent protests against Bahrain's rulers rattled Western banks operating there and equally importantly dealt a body blow to real estate prices, leading to impairments at Islamic banks in particular.
"Bahrain is a ghost town right now," said one Dubai-based banker who makes frequent trips to the island, speaking on condition on anonymity.
"All these big offices have been built but there are only 20 or 30 people in them. When you go and have a meeting there, you don't see a soul."
A report by Moody's in October stated 29 percent of loans extended by Bahraini retail banks in the kingdom were real estate-linked.
This is particularly the case for Islamic banks, who like the sector because of its sharia-compliance. Concern about their capital bases has already seen the central bank advocate the merging of five Islamic banks, which should be completed during the first quarter.
"Conventional banks have relatively less real estate exposure, especially compared to before the financial crisis, but Islamic banks have been affected and if you follow their results, there have been impairments on assets," said Waruna Kumarage, senior analyst for asset management at SICO Bahrain.
The value of assets in the Bahrain banking system fell to $202.2 billion at the end of October from $222.2 billion at the end of 2010, according to a report published early this year by the Union of Arab Banks.
Consultancy Ventures Middle East said the value of contracts awarded in the Bahrain building construction industry fell to $788 million in 2011 from $972 million in 2010, with estimates for 2012 seeing a moderate rebound to $949 million.
While there is little formal data on the sector, according to Kumarage, anecdotal evidence suggests issues such as oversupply were present before the unrest early last year.
"Whatever impact there has been on prices has come from the financial crisis and the oversupply since then. The ingredients were in place before that (the unrest)," Kumarage said.