Analysts say the only opportunity for the tiny island kingdom off Saudi Arabia lies in funding the large infrastructure projects planned in the Gulf region, but building up expertise will be a long, hard grind with uncertain outcome.
Bankers and analysts say the country's financial industry faces years of limited growth as this business model has been swept away by the crisis and retail banking is overcrowded in Bahrain and elsewhere in the region.
"The outlook is grim if there is no change," said John Sandwick, a consultant on Islamic wealth and asset management.
Several Western bankers and consultants have left Bahrain this spring to offer their services from Switzerland or London instead, from where the Gulf's wealth can also be catered to.
The financial industry accounts for 25 percent of Bahrain's GDP and is an important provider of jobs. Assets of Bahraini banks grew more than three-fold between 2002 and 2008 to $252 billion, but have since fallen to $224 billion as of March.
"I can't see what the next trick is going to be," said a senior Bahrain-based banker who did not wish to be named.
"It was a one-trick pony, they rushed head-long into the sharia-compliant space without really looking at the risk of the industry, the very concentrated risks that these outfits took," he said.
Debt troubles at Gulf Finance House, a poster child for the boom years, has shown that the sector was overexposed to regional real estate, raising questions about Bahrain's reputation as a well-regulated financial hub.
NO EASY ANSWERS
The Gulf Arab region's need to finance hundreds of billions in infrastructure and energy projects is seen as the most promising next market for Bahraini banks, but it will need years to build expertise.
"Definitely there is a need for that, maybe it won't get you 40 percent return as an investor, but the need is there", said Salman Al Khalifa, regional head of financial institutions at BNP Paribas.
But the Gulf region, including Bahrain, has yet to build up a powerful fund industry that could cater to that demand, as regional investors prefer to invest directly in equity.
Building up an asset management and project finance base by designing products Bahrain's real-estate spoiled banks are not used to will be laborious and require time, bankers said.
"It's not going to be a one-day wonder as with the sharia-compliant banks," the Bahrain-based banker said.
Bankers said plans by some Bahraini banks to build up asset management, which could cater to the region's small but growing insurance and Islamic insurance industries and create more stable revenue streams, would take time.
"Bahrain still has proximity to the investors....but what they lack is a deep, rich basis for professional asset management. They permitted investment banking to take all the honey," said Sandwick, who is based in Geneva.
Bahrain, which has a population of just over one million, about the same as Birmingham, has established itself as a financial hub catering to the world's top oil exporting region thanks to its liberal regulatory environment which allows hundred percent foreign ownership.
The sales teams of its investment houses travel frequently across the bridge to the rich households of Saudi Arabia, and Kuwaiti merchant families have traditionally banked through Bahrain as Kuwait lacks a sound banking system.
But the region's sovereign wealth funds have mostly invested their assets internationally through Western banks instead of helping a local industry off the ground.
"The size of the industry is really quite small and it's an equities-only market," the banker said.
"I don't see any reason why somebody would bring a fund management team out here to Bahrain, unlike Singapore that was able to achieve that back in the early 90s," he said.
The banker said that international banks are increasingly sending their teams directly into each country of the region, in particular to Saudi Arabia, instead of entertaining hubs in Bahrain or the Dubai International Financial Centre (DIFC).
Neighbouring Qatar, the world's largest exporter of liquefied natural gas, had to scale down its ambitions to become a regional financial hub, now also focusing on attracting asset management and insurance business.