Mashreq says Manama’s banking sector sailed through the war smoothly — and it’s playing the long game on the kingdom

The regional war could have weighed on Bahrain’s banking sector, but it didn’t — and that’s mostly thanks to the proactive measures of the central bank, which moved in tandem with other Gulf central banks to offer support to the sector before it even needed it.

The Central Bank of Bahrain’s liquidity package gave lenders a buffer before the stress peaked, and the decision to defer loan installments helped ease cash flow pressure on companies at the sharpest moment, Mashreq Bahrain’s country head Ahmed Dayyat tells EnterpriseAM. The combined effect: no visible disruption to bank liquidity and — critically — room for banks to keep extending support to clients rather than pulling back.

“Those efforts along with initiatives taken by banks individually managed to ensure that [the sector] sailed very smoothly,” Dayyat tells us. “We haven’t seen any disruptions,” he adds.

That outcome was not inevitable. Bahrain entered the conflict carrying the second-highest government debt-to-GDP ratio of any Fitch-rated sovereign globally, at nearly 150%. Debt servicing was already consuming roughly a third of state revenue. The war spiked the regional risk premium and drove up the cost of an already-expensive borrowing program. In the months before the fighting started, both Fitch and S&P had already downgraded the sovereign further into junk territory.

But there are positive signs: Manama launched a fiscal consolidation package in December — a 10% corporate tax from 2027, energy price hikes for businesses, a 20% cut in administrative spending — that signaled the government understood the math. And the bond market's verdict has been more constructive than the macro backdrop might suggest.

In June, Bahrain raised USD 1 bn through a 10-year bond issuance — hours after Bahraini defense forces intercepted missiles and drones launched from Iran. Orders crossed USD 3.2 bn, while the yield tightened from initial guidance of 7.5% to 7.125% as demand came in. For a B-rated sovereign to pull off a 3.2x oversubscription while missiles are being intercepted overhead is, at minimum, a market telling you it believes the Gulf support structure holds. The UAE's AED 20 bn currency swap agreement with the CBB, signed in April, is part of that structure — and Dayyat says it's part of what kept confidence in the sector intact through the worst of it.

That’s the backdrop against which Mashreq is making its bet, and it comes as several international banks retreat from the country. The retreat isn't a war-era phenomenon: HSBC sold its Bahrain retail franchise last year, long before the conflict began, part of a broader Gulf retail exit. Standard Chartered is now weighing the same move — the bank confirmed it is exploring a sale of its wealth and retail banking business in Bahrain while keeping its corporate and investment banking franchise, the latest step in a multi-year global retail retrenchment that has already taken it out of Jordan, Lebanon, and several African markets.