Bahrain is one step closer to enacting the Secured Transactions Law

Bahrain has approved a comprehensive Secured Transactions Law establishing a unified, modern framework for creating, perfecting, prioritising, and enforcing security rights over movable assets. The law is expected to materially improve access to credit—particularly for small and medium enterprises (“SMEs”) by enabling businesses to leverage receivables, inventory, equipment and other movables as collateral while maintaining their operational use, underpinned by a new electronic notice register and streamlined enforcement mechanisms.

The legislation comprises 60 articles and forms part of a broader governmental program to strengthen Bahrain’s financial infrastructure and legal environment, enhance transparency, and align with international best practice. It is also geared toward supporting Bahrain’s performance under the World Bank’s evolving Business Ready (B–READY) framework through more efficient collateral regimes and clearer creditor protections. The law has been approved by the Shura Council following prior parliamentary clearance, with a formal final vote noted as forthcoming; implementation will depend on the issuance of executive and technical regulations, including the operationalization of the electronic registry.

What the Law Does

At its core, the law recognises and governs a broad conception of a “Security Right” over movables, regardless of form, including fiduciary transfers of title, finance leases, retention-of-title sales, transfers of receivables, and acquisition financing arrangements. It defines key parties, assets, and returns, and allows general or specific descriptions of collateral and obligations, enabling coverage of present and future assets and revolving or contingent obligations.

The regime’s objectives include acknowledging non-possessory security rights over movables, simplifying creation, unlocking full collateral value (including for future assets and multiple, layered grants), and ensuring fair and efficient enforcement. The scope of eligible collateral is wide, covering tangible and intangible movables, including receivables, inventory, equipment, commercial business elements, agricultural products, and property accessories to real estate, subject to delineated exclusions. Importantly, the law contemplates coordination between the notice register and any special asset registers through Cabinet-issued rules.

Perfection, Priority, and the Electronic Notice Register

Security rights become effective against third parties primarily through registration of a notice in an electronic register, which may occur even prior to the underlying security agreement with the debtor’s written consent. Possessory arrangements can also be noted to secure priority, provided possession and a fixed-date agreement exist. Priority is generally determined by the time of effectiveness against third parties, and the law specifies a cascade of super-priority claims (e.g., judicial expenses, certain taxes and preservation costs) that sit ahead of secured creditors in distributions from collateral proceeds.

The register is designed for public searchability, subject to governing regulations, and may be operated by qualified private entities. Official register reports will have probative authority as to timestamp and content. The framework also prescribes mechanisms for modification, cancellation, error correction, and fee-setting, as well as liability protections for registry operators. The public transparency objective was explicitly underscored by the Minister of Justice, who emphasized that both mortgagor and mortgagee should be able to confirm pre-existing encumbrances on goods—highlighting the register’s role in reducing information asymmetry and enabling efficient credit decisions.

The priority model includes specific rules for purchase-money security interests in inventory and other movables, commingled goods, returns and proceeds, and set-off in deposit accounts. Buyers and lessees in the ordinary course take free of security interests created by the seller/lessor’s inventory financing, preserving commercial fluidity. Subordination arrangements are recognized and can be noted without affecting third-party effectiveness, and secured priority survives insolvency absent contrary statutory adjustment.

Receivables Financing: Permissions, Notifications, and Protections

The law places particular emphasis on receivables financing, facilitating security even where underlying commercial contracts contain anti-assignment or anti-security provisions in designated sectors, while preserving the counterparty’s rights against the grantor. Parties may notify account debtors of the security right and instruct payment; after effective notification, discharge occurs only by payment to the secured creditor or as properly re-instructed. The statute carefully balances creditor enforcement with account-debtor protections, including defences and set-off rules, proof-of-claim requirements, and constraints on unilateral changes to payment currency or place beyond agreed terms.

Enforcement: Extra-Judicial Options with Judicial Safeguards

A distinguishing feature is the authorization of non-judicial enforcement. Upon debtor default, secured creditors may elect to take ownership, sell, lease, or license collateral outside court, following a notice period of at least 30 days to the debtor and relevant rightsholders. Interested parties may seek relief from the enforcement judge, who must act within short, defined timelines. The law requires all enforcement activity to be commercially reasonable, addresses distribution of proceeds and deficiencies, and preserves the ability to collect receivables or instrument payments. Judicial enforcement remains available and is governed by expedited procedures, appeal timelines, and rules to avoid unnecessary stays, with special regimes contemplated for securities and CBB-licensed financial assets.

These enforcement refinements are intended to speed recoveries while maintaining balance and good faith obligations. Policymakers flagged that careful attention to executive regulations will be essential to ensure operational clarity and market confidence once the registry and procedures go live.

Governance, Conduct Standards, and Penalties

The law embeds duties of good faith and commercial reasonableness, mandates disclosure by the grantor of existing rights and material events affecting collateral and creates rights of inspection and information for secured creditors and other stakeholders. It also provides for administrative penalty payments—calculated up to 2% of the secured obligation—for violations, and imposes criminal penalties for false filings, destruction or impairment of collateral, unlawful dealings, and obstruction of enforcement, with corporate liability provisions for legal persons.

Why This Matters

For lenders and borrowers alike, this law promises a step-change in Bahrain’s secured credit market. By expanding eligible collateral to cover a wide spectrum of movables and enabling non-possessory security interests perfected via a transparent electronic notice system, the regime can reduce reliance on real estate collateral, bring down risk pricing, and open new channels of working capital finance, especially for SMEs with substantial receivables and inventory but limited fixed-asset bases. Policymakers explicitly link the reform to enhancing Bahrain’s competitiveness and stimulating private-sector growth through better credit access at lower cost.

In the near term, market participants should track the issuance of implementing resolutions defining registry operation, search/report parameters, interoperability with special registers, and the CBB’s sectoral rules on deposits and securities. The law provides that its entry into force follows publication in the Official Gazette, with a deferred effective date calculated from publication to allow for readiness of technical and procedural infrastructure, a sequencing that is consistent with the Minister’s indication that the “technical spine” must be in place for the system to function as intended.

Practical Next Steps

Stakeholders may wish to review existing financing arrangements and collateral pools, consider opportunities to restructure security packages over movables, and prepare to utilize the electronic notice register once operational. Borrowers can evaluate monetization of receivables and inventory through revolving facilities, while lenders can refine priority, subordination, and intercreditor frameworks to align with the law’s timing and notice mechanics. Attention to notice content, timing, and commercially reasonable enforcement planning will be critical to preserve priority and mitigate disputes under the new regime.

We will continue monitoring the issuance of executive regulations and registry activation milestones. For further analysis of sector-specific implications, including banking, trade finance, asset-based lending, and receivables platforms, please contact Rafiq Jaffer, Partner or Natalia Kumar, Senior Counsel.