The International Banking Corporation's Administrator Secures US Recognition of Bahrain Administration

The Gulf Daily News reports that a a US Court (presumably Federal Court sitting in New York City) has ruled upholding an early interim order which recognized the Bahrain administration of TIBC.  What this means is that legal action in the USA against TIBC is effectively frozen, thus allowing the Central Bank of Bahrain appointed Adminstrator, Trowers and Hamlins, to proceed unimpeded by US legal actions.

This is the sort of legal acceptance by a foreign jurisdiction of a local (GCC) bankrutpcy/insolvency procedure that I was thinking of with respect to my earlier post on the implications  of using the DIFC Insolvency Law and regime for any similar proceedings involving Dubai World subsidiaries.

You'll note that in conformity with Bahrain regulations, TIBC has amended its logo to include the phrase "in administration".

Earlier posts on TIBC and AlGosaibi as well as Maan AlSanea and Awal Bank can be accessed by using the respective labels on our home page.

ABC Rights Offering: Libya to Underwrite and ADIA May Not Participate

ABC posted a "Board Circular" concerning its proposed US$1.110 billion proposed priority rights issue of 1,110,000,000 common shares.   

This document contains some highly interesting information:

1. Central Bank of Libya will underwrite the offer at quite an attractive fee. 
2. ADIA may not participate in the Offer, thus reducing its stake in the bank from 27.6% to 17.7%.
3. A strong signal that ABC is in the market to acquire a regional "universal" bank to diversify away from its volatile sub par wholesale businesses.
   
4. A candid assessment of ABC by SICO.

More detail on those points below, but first an introductory "tafsir" of sorts.

The Central Bank of Libya has agreed to underwrite the entire rights issue.  Under a priority rights issue, shareholders have an absolute right to subscribe for and be allotted a sufficient number of shares to maintain their percentage shareholding in the Offeror.  They may of course subscribe for less than that amount (in which case they are absolutely entitled to that amount) or more (in which case the amount allocated to them above their minimum right will depend on the action of other existing shareholders).   In a situation like this an Underwriter agrees to purchase any unsubscribed for shares.

Since there is a high likelihood that enough shareholders will not subscribe for shares,  the Central Bank of Libya ("CBL") will very likely acquire enough shares under its underwriting commitment to trigger a mandatory offer requirement under the Central Bank of Bahrain Regulations Module TMA Takeovers, Mergers, and Acquisitions  Section 3.1.  ABC's Board is soliciting shareholder approval to waive this right as the CBL is not prepared to acquire the bank.

ABC's shares are currently selling at US$0.67 a substantial discount  to par, US$1.00.  Under Bahraini law, the Offer must be at par.  There is no straightforward way to offer shares at a discount from par.  This poses a real problem.  Why would a shareholder pay more for a share through an Offering than he would pay in the secondary market?  

Since the government-related institutional shareholders are presumably not  actively trading their shares, then ABC's share price is being driven by the private sector investors.   That suggests to me that retail investors are unlikely to be enthusiastic about acquiring more shares at US$1.00 when they could potentially buy them at the BSE for US$0.67.  Assuming of course they have any interest in acquiring more shares.  If that were the case, then one would expect ABC's shares to be trading near par - especially in an illiquid market like Bahrain where just a few trades can move the price significantly.

The government related entities have a different agenda and as well more detailed inside information to inform their decisions.

Let's turn to the Board Circular:

The first bit of information that jumps off the page is the comment about expectations of participation in the offer by the existing institutional shareholders who own 93.6% of the bank.  The Circular states:  "ABC expects Kuwait Investment Authority (“KIA”) and all the Libyan entities to subscribe to the rights entitlement in full."  There is one remaining institutional shareholder, Abu Dhabi Investment Authority, with 27.6%.  It would seem that it would be quite easy for ABC's Board to ask ADIA if it intends to participate.  And equally easy for ADIA to respond.   First, it's not like this is a surprise question.  Second, ADIA can move quickly on investment decisions.  After all, it decided to plunk down the modest sum of US$7.5 billion in an investment in Citigroup with three days "due diligence" though perhaps the outcome of that transaction has lengthened and strengthened due diligence procedures.  My guess is that this silence means that there is a very strong likelihood it has decided not to open its wallet.  Hence, the need for an underwriting.  Because if it has not, what is the point of the Board engaging an underwriter to cover 6.4% of the shares?  Especially given the proposed underwriting fee is greater than 6.4?

That leads into the second bit -  the underwriting fee.  As per the draft agreement Clause 4 (page 19 in the Circular):  "In consideration of the Underwriter agreeing to underwrite the Issue pursuant to the terms of this agreement the Company shall pay to the Underwriter a flat underwriting fee of US$ 110,000,000."  That is, CBL earns the full fee regardless of how many shares  it actually acquires.   Some simple math.

1. This amount represents 10% of the total Offer.  
2. But surely the Libyans know if they are participating, so if we remove their shares from the "risk of purchase column", then the CBL is getting US$110 million to take risk that it might have to purchase 63.7% of the Offer.  In this case the effective underwriting fee is a whisker short of 15.7%. 
   
3. If it is reasonably certain that the KIA will participate, then CBL is really taking risk on 34%  of the Offer and earning an effective fee of  29.4%. 
   
4. If the same holds true for ADIA, then CBL is taking risk on 6.4% of the Offer and earning an effective fee of 156.3%.
5. You will recall I said above that there was no straightforward way to offer new shares at below par.  What's interesting here is that the KIA has apparently not objected to this mechanism and is content to purchase its allotment at par.  Presumably because it does not wish to increase its shareholding.

Let's look a bit more closely at the effective discount on the shares.

1. If every existing shareholder steps up for its shares and there is no risk of their not doing so, then the Libyan Group as a total acquires 403,395,812 shares for US$403,395,812 and receives US$110,000,000.  The effective discount is 27.3%.  This is the maximum discount.
   
2. If the KIA participation is certain but the remaining shareholders' participation is not, then CBL acquires 780,465,916 shares for US$780,465,916 and the effective discount is 14.1%.  (In case you're wondering I allocated the "missing" share in the Table on Page 12 to the Libyans).  This is the minimum discount.
3. Note in the cases mentioned above, I am assuming that if there is no risk of participation by a shareholder then the underwriting fee earning on those shares is in effect a disguised discount for CBL.
   

The third item is that from the discussion of the use of proceeds and the recommendation of the independent consultant. It's clear that in addition to organic growth ABC is looking to achieve its business transformation through the purchase of a stake in a universal bank. It's a bit early to speculate on potential targets.  Or is it?  Anyone out there who wants to nominate a target, please post a comment.

Those who know their ABC history know that this was the strategy at one point.  Under Abdulla Saudi, ABC bought significant shares in Banco Atlantico (Spain),  International Bank of Asia (Hong Kong)  ABC Brazil and Daus (Germany).   These were acquired I believe largely because at that time it was not possible for ABC to acquire MENA banks.  As well, Abdulla's strategy was to build a truly global Arab bank "champion".  According to my analysis, some of these (Atlantico , IBA) were disposed of  later (early part of this century) or stakes reduced (Brazil) to raise cash to help ABC over a rough patch so that it would not have to raise capital.

The final item is the review of ABC by SICO which discusses subpar performance relative to peers 6%. to 10% ROE versus to its peer's 15% to 30%.  Well worth a look.

The fundamental strategic issue that any of the commercial banking oriented wholesale banks (former offshore banks) in Bahrain face is that they do not have the solid foundation of a domestic business.  That affects both sides of the balance sheet.

They do not have a natural "home" market to develop assets.  They must go abroad to develop these.   (Note:  Since the Bahrain market is relatively small, even a domestic bank cannot develop a very large domestic business platform).  Usually, the foreign lender who rides into town has a set of unpalatable choices to develop any sizeable business.  It can be the "stufee" on loans underwritten by the local banks.  Then it gets a participation in a loan but very little or none of the ancilliary business that the home banks get.  Such loans will be priced at razor thin margins over a domestic base rate.  Foreign lenders like Bahraini banks (as opposed to say foreign banks from Europe with a strong domestic base) don't have access to the same funding at the same price so the miniscule margins are compressed even more.

If that is not palatable, the foreign bank can go downmarket to chase yield.  But here as a foreigner usually operating out of an office in New York City, it is hard put to understand such credits or to monitor them.   Thus, it winds up making a lot of bad underwriting decisions.

Another option is to load up on bonds instead of loans.  Both Gulf International Bank and ABC did that, relying on ratings and professionalism of the investment banking firms who sold them investment grade (at least nominally) sub prime securities.  Both lost $1 billion in 2008 with GIB's losses apparently even more (hence the sale of some US$5 billion of assets to shareholders).

The one potentially attractive business line is specializing in banking services for foreign customers in one's "home" market.  But here there is another disability, an offshore or wholesale bank in Bahrain cannot provide the same service as a retail or onshore bank in Bahrain.  And of course competing against a National Bank of Kuwait or Samba for business in Kuwait or Saudi is even more difficult.

The picture is not much better on the liability side.  Instead of a core of very stable and generally lower cost retail deposits, the foreign wholesale bank is dependent on bought money (interbank deposits) and placements by its shareholders (a form of disguised or quasi equity which of course earns very low returns relative to its equity like risk).  This means that funding costs are higher and more volatile.

Finally as offshore banks, generally there is no assurance of support from the Central Bank of the country.  This is true with wholesale banks in Bahrain whose size dwarfs the local banking sector.  Simply put, Bahrain does not have the resources to stand behind these banks.  Now, when there are governmental shareholders, the bank does not suffer as much in terms of ratings and funding costs as say those banks which do not have such shareholders.  But it still operates at a disadvantage.

This was the reason that Abdulla Saudi, a much under appreciated banker in some quarters, embarked on his acquisitions of Atlantico, IBA, etc. as discussed above.  

Central Bank of Bahrain - Proposed New Regulation on Board Attendance

The CBB issued a consultation paper on 6 January with comments due by 30 January.

The proposal would make two main changes to the CBB's Module HC  "High Level Controls" which specifies corporate governance principles as well as the approval process for certain positions.

1. Board members would be required to attend 75% of all board meetings.  Attendance by video or telephone conference would constitute attendance as well as in person attendance.  The CBB encourages banks to amend their constitutional documents to allow video or telephone conference attendance at board meetings.
   
2. Publication of individual director attendance at (a) time of re-election (b) quarterly on the financial firm's website and (c) annually in the bank's audited financials details of each committee - number of meetings and attendance of individual directors.

Presumably, the consultation document evidences the CBB's concern that directors are not participating at a sufficient level in board meetings.

Central Bank of Bahrain - Dubai World Exposure Less Than 1% of Total Assets

 

HE Rashid AlMaraj, Governor of the CBB, said today as per Reuters that Bahraini banks' exposure to Dubai World was less than 1% of consolidated assets.

Saud AlGosaibi Resigns from Board of Saudi Re

25 November 2009 the Saudi Company for Reinsurance (Saudi Re) informed the Saudi Stock Exchange (Tadawwul) that Saud Abdul Aziz AlGosaibi had resigned as a director in view of his existing commitments.

He was one of the members of the founding committee of the company and one of the original members of the board.  The company was founded on 17 May 2008

Presumably related to the ongoing debt restructuring.

Saud is a board member of The International Banking Corporation (though since the bank is under Central Bank of Bahrain Administration, the Board no longer has any legal powers to commit TIBC).

Awal Bank - Analysis of 3Q08 and 4Q08 Financials

Summary

Based on limited financial information available, it appears that there was a severe reduction of the liquidity in Awal's balance sheet in 4Q08.  Without more financial reports (only 3Q08 and 4Q08 are available on Awal's website) and a full set of financials including the notes (only summaries are posted in public area of the website), it's impossible to determine what caused this reduction in liquidity.  

It's also equally difficult to determine if Awal's problems in 2009 (leading to Administration) were the result of illiquidity (reasonably good assets but illiquid so they could not be converted to pay off short term creditors) or insolvency (a decline in asset values significantly below carrying value).  As outlined below, my initial view is that it was the latter.    

Background

On 30 July 2009 the Central Bank of Bahrain announced that pursuant to Article 136 of the Central Bank Law, it had placed Awal Bank under administration.  Later on 9 August it announced the appointment of Charles Russell LLP as Administrator.

The Central Bank of Bahrain and Financial Institutions Law of 2006  ("CBBFIL") provides that three cases under which the CBB may place a licensee under Administration.:

1. "If the Licensee becomes insolvent or appears most likely to be insolvent.  
2.  If the license is amended or cancelled pursuant to the provisions of items (1) and (3) of paragraph (c) of Article (48) of this law.  
3. If the Licensee continued to provide regulated services which resulted in inflicting damages to financial services industry in the Kingdom." 

Presumably, the reason for the CBB's action was the first.  But note that Article 133 of the CBBFIL of 2006 defines insolvency as "A Licensee is deemed to be insolvent if his financial position becomes unstable and he stops paying his due debts other than administrative fines and whatever type of tax."

Financial Analysis

Since Awal was not traded on any exchange, it is not required to publish its full financials.  It did, however, release financial highlights: balance sheet, income statement, cashflow statement and statement of changes in equity - all consolidated.  3Q08 and 4Q08 reports are here.

Without detailed footnotes, the following analysis is somewhat limited.  Admittedly, it raises more questions than it answers.

Let's focus on the balance sheet changes between 30 September 2008 and 31 December 2008.  This would be the first critical period after the financial crisis hit but before the full force was felt.

1. Between these two periods, total assets declined US$1.8 billion dollars. 
2. Equity is only US$25 million lower between 3Q and 4Q08 (the change in YTD net income between the two periods). Therefore, we can say that in effect liabilities accounted for the entire change.
   
3. Every liability category declined:  long term debt US$779 million, due to non banks US$605 million, repos US$227 million (probably greater haircuts by counterparties), due to banks US$141 million, and other liabilities US$46 million. 
   
4. This reduction of liabilities (a negative cashflow) was funded by reductions in assets.   Cash and cash equivalents decreased US$1.429 billion  (from US$2.2 billion to US$785 million).  loans US$630 million, equities and options US$366 million, Funds US$315 million, and interest bearing securities US$49 million.  Partially offsetting these were increases of  US$841 million in Investment Properties and US$125 million Other Assets.

What does this all mean?

Without notes to the financials it's hard to tell, but here are a few observations.

1. A substantial outflow of cash --19.25% of the entire balance sheet -- occurred during the last quarter of 2008.
2. Investment properties (illiquid) increased while more liquid instruments (at least presumably more liquid) equities and options as well as funds declined.
3. Due to non banks declined roughly 45%.  Due to banks only 6%.  Were these contractual maturities?  Or did non banks have a greater insight into credit?  Or inside information?
   
4. Long term debt declined 43%.   It would be very interesting to see the notes to the financials to confirm this was a scheduled payment and not a prepayment.  LTD decreased over the year from US$2.373 billion (31 December 2007) to US$0.867 million (31 December 2008).

Conclusion

As far as the public reports I've seen, there was no payment default.  Rather Awal announced its decision to initiate debt rescheduling with its creditors.  One might expect that if there had been any sort of significant payment default, it would have become public fairly quickly.  Here's the CI downgrade and withdrawal of ratings report.  It does not mention a payment default.

That leaves a more classical balance sheet insolvency as the likely cause of Awal's problems: assets worth less than liabilities.

At 31 December 2008, Awal had US$7.6 billion in total assets supported by US$4.9 billion in liabilities and US$2.7 billion in equity.

That means a drop of at least 35% in the value of assets to reach insolvency.

The recent instruction by the Central Bank of the UAE to its banks to provide 100% for their exposure to Awal supports that view. 

As you'll recall from my earlier post on this topic, the CB UAE Governor is reported to have said that the provision requirements were in line with regional and international supervisors.  A 100% provision implies no recovery - which implies that Awal's assets are worth zero or close to zero (administrators, lawyers, and accountants always feast first on the estate of the bankrupt).

Global Investment House - Treasury Share Purchases 4Q08

As companies encounter financial difficulties, their business comes under more intense scrutiny.  This is part of the breakdown in trust that initially occurs when a borrower tells a lender that it cannot meet scheduled repayments or when a formerly high flying company has reversals. 

Suddenly the best customer in the world is a scoundrel - proving once again the old definition of  the commercial banker is well founded.  What is a commercial banker?  He's a guy who gives you an umbrella on a sunny day.  And at the first drop of rain wants it back immediately.

GIH is not immune to this process.  In an earlier post Suq Al Mal looked at the funding relationship between GIH and GMFA, a London Stock Exchange listed fund (of which GIH holds 29.99%) which has come under the review of at least one regulator.  The link to that earlier post is here.  There are several open questions from that post.  The key one is how GIH reportedly repaid deposits  taken from GMFA early (presumably before maturity) after it had declared a principal standstill on bank and bond debt.

Another topic that attracted attention is the dramatic 4Q08 increase in GIH's holdings of its own shares ("Treasury Shares"). Many analysts noted that between 30 September 2008 and 31 December 2008,  these increased from 20.5 million shares worth KD20.1 million to 81.9 million shares worth KD59.0 million.

This is the topic of this post.

One unsubstantiated rumor was that GIH had bailed out a substantial shareholder as it ran into difficulties.

As noted above, that theory is a rumor.

 

In the absence of Kuwait Stock Exchange mandated public disclosure of  details by a company in dealing in its own shares (as occurs on the LSE, for example) there is no conclusive answer.

However, it is possible to use GIH"s financials to investigate this issue a bit further.

The first line of inquiry is to see if Treasury Share purchases are out of the ordinary.  In other words, did these only occur to any extent during 4Q08?  Or does GIH have a consistent pattern of dealing in its own shares?

By looking at the Consolidated Statment of Changes in Equity GIH's quarterly financials, it is clear that at least during 2007 and 2008, GIH regularly traded in its own shares often in sizable amounts.

The following list summarizes 2007 activity:

1. 1Q07 Opening Balance: KD20.5mm Purchases: KD5.8mm Sales: KD1.8mm Closing Balance :KD24.4 mm.
2. 2Q07 OB: KD24.4mm P: KD16.8mm S: KD36.3mm CB: KD5.0mm.
3. 3Q07 OB: KD5.0mm P: KD12.1mm S: KD13.6mm CB: KD3.5mm.
4. 4Q07 OB: KD3.5mm P: KD41.4mm S: KD43.3mm CB KD1.5mm.

And here's 2008's activity.

1. 1Q08 OB: KD 1.5mm P: KD 8.6mm S: KD 2.5mm CB: KD7.7mm.
2. 2Q08 OB: KD 7.7mm P: KD30.3mm S: KD25.2mm CB: KD12.7mm.
3. 3Q08 OB: KD12.7mm P: KD 7.4mm S: KD 0.0mm CB: KD20.1mm.
4. 4Q08 OB: KD20.1mm P: KD49.0mm S: KD10.1mm CB: KD59.0mm.

I have not seen an explanation by GIH for this activity.  My guess is that these transactions were undertaken to support GIH's share price.

The next line of inquiry is to see if the price paid during 4Q08 was out of line with the market price.

The first step in that process is estimating the average cost per share GIH paid for the shares purchased during 4Q08.

Looking at the above information in conjunction with that in the Treasury Shares Note in GIH's financials, we can do just that.  At 31 December 2009,, GIH held 81.924 million of its own shares acquired at a cost of KD59.029mm or KD0.721 per share.

We can further decompose that aggregate cost into two components:  shares purchased during 4Q08 and those acquired earlier.

From an analysis of GIH"s financials, it seems Treasury Shares are accounted for on a FIFO basis.  If that assumption is correct, the average cost of the shares acquired during 4Q08 is KD0.683 per share.  Cost allocation to the KD10.1mm of share sales in 4Q08 would be from shares purchased earlier.  Using 3Q08 data, that would mean that after the 4Q08 sale, 10.438mm shares (from those held at the end of 3Q08) with an aggregate cost of KD10.236mm were part of the 4Q08 ending balances.

By simple arithmetic the number of shares GIH acquired in 4Q08 would be 71.486 mm shares (81.924mm - 10.438mm).  These "new" shares would have been responsible for KD59.029mm - KD10.236mm in cost (KD48.793mm)  which is fairly close to the cost of 4Q08 purchases reported in the 4Q08 financials.

Turning to KSE price data for GIH shares, we see the following:

1. From 1 January 2008 until 31 August 2008, GIH's shares traded in a fairly narrow band oscillating around KD1.000 per share.
2. In September the shares began a decline reaching KD0.770 at the end of the month.
3. During October the shares declined further to approximately KD0.485.
   
4. In November the shares traded in the KD0.400's ending the month at KD0.410.
5. In December the shares traded downward reaching KD0.242 on 23 December where they remained for the rest of the year.

Clearly, in order to achieve an average price of KD0.683 on the shares bought during 4Q08, they would have had to be purchased during October.

Let's look at KSE volume data based on the assumption that all share purchases and sales have to clear through the KSE.

There were several large trading days during the month: 

1. 8 October 16.7mm shares for KD9.7mm
2. 9 October 15.5mm shares for KD10.3mm
3. 14 October 14.7mm shares for KD9.8mm
4. 15 October 13.5mm shares for KD9.1mm
   

With the assumptions and analysis above, it is during this period that the shares would have to have been purchased if they cleared through the Exchange.

I'd also note that there were a series of six large identical trades on 4, 7, 8, 9, 10 and 11th December.  All for 55,920,000 shares at a price of KD21,530,950 at a per share price of KD0.385.

These trades seem to have been a calculated attempt to stem the decline in share price.  Besides pride there are a variety of other possible reasons for supporting a share price as anyone familiar with the closely related terms "Kuwaiti investor", "pledge", and "leverage" would know.    

You may be thinking:  why don't these trades - which total KD129.2mm -  appear in GIH's 4Q08 financials. Why aren't both Purchases and Sales for 4Q08 each KD129.2mm higher?  Good question.  I'm presuming because they were rollover transactions or offset by other transactions GIH did not have to include them.  If they were not GIH trades, then there is a very intriguing (notice I did not say interesting) question as to who did and why?

After this intervention stopped, the share price declined to KD0.242 at year end dropping eventually to double digits in 2009 before recovering later this year to just under KD0.100 today.

So this analysis has not provided a definitive answer to the rumor cited above.  One bit of further information, the timing of the purchase dates could go a long way to resolving this issue.

ADCB to Disclose Executive Salaries?

There's a report in The National (Abu Dhabi) that Abu Dhabi Commerical Bank ("ADCB") is in the early stages of considering to:

1. disclose the remuneration of key executives in its financials
   
2. submit executive remuneration policies to a shareholder vote
   

It should be noted that neither step has been finally approved.

If ADCB implements the compensation disclosure, it will be the first regional bank to do so. 

With respect to compensation policies, there already are some limited requirements for shareholder approval- at least in Bahrain - of stock option plans.  It sounds as though ADCB's plan is broader.

By way of comparison, in the USA, shareholders vote on generic descriptions of plans rather than on individual compensation for members of senior management.  And usually the approval is at a very high level of principles.

The topic of disclosure of senior management salaries was raised  in 2004 or 2005  by the Central Bank of Bahrain as part of extensive enhancements it proposed to make to its corporate governance regulations.   Most of which were finally accepted in the revised regulation.  Only one point was fiercely resisted by local banks - disclosure of individual key officers' salaries.

I once asked the CE of a bank there why there had been this opposition. 

His response was:  This isn't New York.   In New York, a senior officer of Citibank would be unknown to 99% of the people of the city.  And  fewer would know what that officer made even if they knew who he was.  Here it would be completely different, not only would everyone know who I am but also what I make.  That could be a big problem for me.  Not just security.  But having people ask for money.

Central Bank of Bahrain Real Estate Exposure Limits Lifted

Reuters reports that the CBB had lifted its previously issued restriction on Bahraini financial institutions" exposure to the real estate sector.

If you read the story carefully, you'll note that the "lifting" occurred 3 or so months ago.

What makes the story worthy of comment now?

From this blog's perspective, there are two takeaways:

1. The quality of the CBB as a regulator.
2. The fundamental problem a regulator faces.

On the first , as indicated by this speech by the Governor of the CBB, H.E. Rashid al Maraj,  the CBB was aware of the risks of over exposure to this sector and  has been following this issue actively since 2005.  I can confirm  from direct knowledge that this is case.

As a general rule, the CBB is one of the better central banks in the Gulf in terms of its prudential supervision, including the identification of risks and trends.  It has a highly organized and disciplined regulatory regime comprised of regular review and quarterly updating of its regulations as well as a robust consultancy process. 

As an example of its ability to look forward, the CBB issued a regulation in 2005 (if I'm not mistaken) on consumer lending designed to prevent consumers from getting over their heads in debt. The updated regulation is included in Section CM-8.1 of the larger Credit Risk Management Module.

The CBB also took a leading role in the creation of the first central credit reporting bureau in the country (again in 2005) enabling banks to determine an individual customers' outstanding credit facilities and obligations with other financial institutions.

The second point is that regulations have to be implemented in the real world.  Often what is a  sound idea would, if implemented, lead to greater problems than not implementing it.

A glance at the financial statements of major Islamic banks in Bahrain (both conventional banks like Kuwait Finance House Bahrain and Bahrain Islamic Bank or investment banks like Gulf Finance House and others) shows the magnitude of the "facts'" that the CBB faces with implementing this regulation.   Causing banks to reduce exposures within the limit would lead to the forced sale of assets in an already distressed market.  Forcing prices down and thus directly impacting collateral values on other loans. 

The extent of the "problem" is not only a matter of credit exposure to the property and construction sector but as well equity investments in real estate or in firms with a direct exposure to that sector, e.g., construction materials, property management, etc. 

In short the CBB faces the classic regulator's dilemma:  how does one safely let the air out of an asset bubble?  One which one has been trying to contain for several years.