Abstract:
The proponents of Islamic finance argue that unlike conventional finance it emphasizes the real
economy. Such emphasis should be reflected in the sectoral distribution in an economy. In this paper, in light of a
conceptualization of the real economy, the sectoral distribution of financial activities of conventional and Islamic
banks in Bahrain is explored. The paper uses the data available from the Central Bank of Bahrain (CBB) regarding
the sectoral distribution in both conventional and Islamic banks. The breakdown of banks into both retail and
wholesale banks as well as onshore and offshore banks is examined to identify any important trends or patterns
in light of the conceptualization of the real economy. The analysis of data finds certain concentration in the real
estate sector. Islamic banks also have a bias toward consumer finance, which has implications in promoting a debt
culture. Several other gaps between the commonly proclaimed merits of Islamic finance and the praxis in reality
are also identified. The research is based on a single country, Bahrain, a financial hub for both conventional and
Islamic banks. Even though Bahrain has a diversified economy, it is still limited in terms of some key sectors, such
as manufacturing and agriculture. Thus, broader study including other countries with major presence of Islamic
banks would be the next step in this research. Bias to certain sectors can be problematic in case of a potential crisis.
Also, in certain respects, such as bias of Islamic banks toward consumer finance, it might be serving to promote debt
culture that many developed countries are already beset with. The research can create better awareness about various
patterns of sectoral distribution.