Business | Banking
The growth of Islamic banks
The growth of Islamic banks and financial instruments prompts issues as to the challenges of business and profitability. Financial Review spoke to Mohammad Berro, Al Hilal Bank's Chief Executive Officer, and Hussain Al Qamzi, Group CEO of Noor Islamic Bank, for their insight, representing recent entrants to this vibrant sector.
- By Ahmed A. Elewa, Senior Reporter and Gaurav Ghose, Financial Features Editor
- Published: 23:32 August 19, 2008
- Image Credit:
The growth of Islamic banks and financial instruments prompts issues as to the challenges of business and profitability.
Financial Review spoke to Mohammad Berro, Al Hilal Bank's Chief Executive Officer, and Hussain Al Qamzi, Group CEO of Noor Islamic Bank, for their insight, representing recent entrants to this vibrant sector.
Interview with Mohammad Berro, Al Hilal, Bank's Chief Executive Officer
The UAE is said by analysts to be 'over-banked'. How do you see Al Hilal Bank fitting in, given such a crowded market?
There is of course enough room for growth, not only in the UAE, but the region as a whole, and the reason is simply the preference of many clients to switch to Islamic banking and financial solutions, and this is evident when we observe the growth recorded by Islamic banks which has exceeded that of conventional banks. Notwithstanding that the growth in both segments is remarkable due to the robust macro-economic growth, the establishment of new Islamic banks meets an urgent demand in the market.
Does the increasing number of Islamic banks and financial instruments indicate that the UAE will become an international Islamic financial centre, more so than London or Kuala Lumpur?
The financial services sector in the UAE in general, whether Islamic or conventional, has matured significantly in the recent years — where you find the bulk of Islamic bonds (sukuk) for instance. Yet, one has to be careful when assessing such success, as the well-established markets such as London or New York will not diminish or disappear.
Rather we are having new financial centres developing to complete the picture, whether in the UAE or other countries such as Russia. Having said that, in terms of Islamic finance, there is no doubt that the UAE is playing a pioneering role at present and is well-placed to take the lead in this field.
Recently, more sophisticated financial instruments have developed in the international markets. Does this limit Al Hilal's ability to provide parallel solutions?
Al Hilal is investing heavily in three main areas: human resources, research, and technology — and this will enable us to come up with some of the most innovative products in the market.
However, what we believe is that the availability of a specific product does not necessarily entail success. What is more important is reaching the client, and that is why some banking products are not providing the best terms in the market, yet we find them quite popular.
Islamic banks and financial solutions have developed in a relatively short time compared to conventional banking, which stands on centuries of experience.
Nevertheless, Islamic products are developing at a very fast pace to catch up, establishing themselves among the leading financial alternatives worldwide.
We do not intend to fill some gap, but rather focus on a specific strategy to play a significant role to support the national economy, as well as the economies of the Islamic and Arab worlds. The fertility of the Islamic financial products is evident if we consider that many multinational banks are already very successful in providing Islamic financial solutions.
Do you aim to focus on particular segments or products?
We intend to become a full-fledged banking institution, whether in consumer or corporate banking, although the pace of development might differ, not because of more focus, but rather due to the higher values associated with corporate clients.
In time we seek to balance all our services, even within the corporate field, where we intend to extend our scope to encompass large corporations, private and public, and at the same time pay more attention to the small and medium enterprises. Even the individual entrepreneur will be able to find services tailored to his needs.
We are already meeting all the sophisticated requirements for a leading bank, including Basel II, and in time, we will introduce more innovative products and services, as the development of our research facilities will grow in tandem with our operations.
If we take, for instance, the simple procedure of opening an account, we are the only bank that offers the client the facility of selecting his account number, in addition to the electronic signature service, which saves more time and effort and provides more secure transactions.
Have you faced difficulties recruiting the necessary staff?
There is an obvious scarcity in the cadres of Islamic banking professionals, and we have had to overcome many difficulties, which resulted in a diverse cultural mix among our personnel, including from Arab and Asian countries, where Islamic banking had a significant history.
Given ambitious targets, what are the expansion plans? When do you expect profit generation, and do you have plans for public listing?
In terms of our plans in the near future, we have already launched our Takaful (Islamic insurance) affiliate, with paid-up capital of Dh100 million, and the studies to establish our real estate arm are now in the final stages.
Al Hilal Real Estate will be fully-owned by the bank, and will become one of the main developers in Abu Dhabi and the UAE, with paid-up capital not less than Dh500 million.
We will also establish our own brokerage arm to manage portfolios according to Sharia laws, and we intend to provide the most innovative solutions in this field. Al Hilal's size and significant impact on the market will be more obvious in 2009 when the organic growth reaches recognisable frontiers. Now we have only four branches, but by the end of 2008 this number will be ten or even eleven, and by the end of 2009 some 15 additional branches will open doors.
Moreover, we are already planning regional and international expansion capitalising on our innovative model of operation, providing new concepts such as mall banking, where the client steps into a branch with walkways and aisles providing all the different services and products.
The full banking model is still being constructed, and our options for international expansion are being considered as to whether it will take place as an organic growth, or to seek the acquisition of existing assets.
According to our business plan, profit generation will become tangible starting from next year. Converting to a publicly-listed bank is a decision that lies with the shareholders.
Other than banking activities, are there other areas where Al Hilal is active?
We have succeeded in establishing a major Islamic bank in five months, and during that period we have already invested Dh150 million in the sukuk issued by the government of Ras Al Khaimah and Dh70 million in the sukuk issued by Aldar Properties.
We have also participated in providing a syndicated loan equivalent to Dh900 million for Dubai Financial. Other negotiations are still taking place with leading institutions, including Enoc, all in line with our expansion strategy, which includes as well commodities, real estate and car loan finance.
On a general issue, and the consumer banking side, isn't personal indebtedness of this sort potentially becoming excessive?
Consumer credit receives a lot of focus, but in my opinion the best measure is its ratio to GDP (gross domestic product). If this rate is high, [it] can be a negative influence. In the UAE the level does not exceed 10 to 12 per cent, a safe range, compared to a country like Malaysia, for instance, where the rate is up to 20 per cent, but is still a safe margin.
Interview with Hussain Al Qamzi, Group CEO of Noor Islamic Bank
Is banking overcrowded in the UAE, as some analysts say?
I don't know whether that's correct. I know a lot of people talk about [it], but I see a lot of business because of the growth we are seeing. Banks seem to continue to grow against the prosperity that the UAE is witnessing at the moment. I think we probably are not crowded, maybe so in terms of numbers, but not in terms of volume of business. The size of the banking industry is still okay for the UAE as a whole, as an industry. Maybe we can have some bigger banks and organisations.
What opportunities do you see for Islamic banking in the
Middle East?
It is almost non-existent outside the GCC. In the Middle East, almost none. If you go north you find just one bank in Jordan. And one very small, unheard of, bank in Lebanon. Syria has none. Iraq doesn't have any and Egypt has only one bank. North Africa as a whole doesn't have.
So the market is untapped. We have opened a representative office in Tunisia. There is a big market still open for Islamic banks. I think there is room in some countries for the GCC [banks] to move in, but there are some issues: absence of licences and absence of targets you can buy.
What are the different segments in which Noor Islamic Bank is involved?
Noor Islamic Bank is involved in three lines of business. We are into commercial/corporate finance and into debt restructuring, which comes as part of it. Also, we have our consumer banking operation as well as investment banking. Investment banking is still new. We are mostly active in the other two. But if we are to break it up, majority of it was corporate until recently, but now we are witnessing a very rapid growth in consumer banking.
I think within a short time they may be equal. It seems to be moving in that direction. As for investment banking, our strategy will have a focus on the UAE and the region. We will look at various areas — private equity is one of them and we will look at some other funds and investment products. We will also like to focus on some special areas that remain untouched so far.
As a new bank, how do you go about differentiating yourself in a fragmented industry? Aren't margins affected because of intense competition?
Noor Islamic Bank has a range of products. However our strategy is not about products, its market entry is through our knowledge of the market. The bank is run by very experienced bankers who know their way around the market, and we have demonstrated our success. That success is defined by the size that we have built in six months. And my yardstick is the time.
Today we are almost close to Dh20 billion in assets, and this is larger than some of the existing banks, which have been around for more than 20 years. Also, we have been very active in the syndication market and have lead-arranged many deals within these six months. One of the areas we wanted to focus when we entered the market was to lead and arrange finance for major projects, which we think Islamic banks are better suited to fundamentally. Mostly we are arranging in the local market. We have done a lot of big ones: Aldar, AIG and Tamweel.
One of the things we have to keep in mind is that in this market the customers are very sophisticated and they want more value for their money. Yes, margins are dwindling, and, for example, in auto finance banks are even exiting. I think banks should not look at fighting in terms of margins. The market should change into creating more value for the customer, creating more convenience and better ways of managing their money.
Where are the Islamic banks on 'financial intermediation'?
I think Islamic banks have managed to jump into this quicker than conventional banks in this country. It was a domain mostly controlled by foreign banks. Islamic banks have built a very good reputation and stand a good chance to take this outside the region.
What is the scope of Islamic banks in terms of catering to small and medium enterprises?
I think many banks are now specialising in this sector in the UAE, [although] I don't have statistics how many are involved. This sector gives you the diversity in consumer banking; they also give you a higher spread than the big commercial bank. This is a sector which has its own risk criteria. Has it matured? No. But today we are dealing with some corporate names that were 10 years ago the size of SMEs today.
Talking about harmonisation, isn't it true that Islamic banks lack scale, their products are complex, and there is no global regulatory body.
I don't think there will be one global regulatory body for Islamic banks. The management of the bank will have to follow the regulatory body of the country it is operating in. Some of these countries have laws that specialise for Islamic banks, for example, more extensive laws for Bahrain and Malaysia. Overall, Islamic banks have learnt to live with that kind of environment, to adapt and comply with the regulations of the countries concerned.
Through many new recommendations that come within the Islamic banking conferences every year, there is more awareness of Islamic banks, and I think some of the regulators have come forward and tried to understand better than others.
The UK's FSA is one good example. As for scale, that is one of the reasons for launching a bank of our size. We need to create global, trans-regional Islamic banks. Noor Islamic bank was positioned as one of these, as it will do business in the UAE as well as in other countries.
What might those countries be?
Our target is that in five years we will have business in three continents. Recently, we entered Maldives, and the offer came through the Government of Maldives. We did not have a presence there and we saw it complementing our strategy, which will look at Pakistan, India, East Africa.
Tunisia is our eye into North Africa. We are looking at Algeria. Also the UK, France, Belgium, Germany, Turkey — we also had a look at East Europe. We still are looking at them, we had some talks but it doesn't always materialise. We wish to be in India. We will continue looking at opportunities all the time.
What about your entry into microfinance?
That is one of the reasons behind tying up with Emirates Post. I think this is one of the projects where we will test it. Our studies have shown that almost 50 per cent of this country is unbanked.
It is not just the construction workers — there are a lot of people who live and work — hotel staff, sales, taxi drivers, a lot of low-income people who cannot access banks, including some of the UAE citizens who stay in remote areas. We wanted a partner like the Emirates Post because of their ability, their stronger logistics and stronger distribution.
Could you talk about your outsourcing activity?
We have a joint venture with Adventity from India. We are establishing an entity here in Dubai. This entity can provide efficient services at a low cost. It is a different company with its own board. We are availing the services of that company. We thought of this model when we started the bank because of the higher cost in the UAE.
We have seen the value of it, and we think many companies will follow this approach. Specific activities of the company involve all labour-intensive activities focusing on the core business, mainly taking care of technical issues. Part of the back office operations can be in India, and also can be in another country that might have capability of processing in Arabic language. We are actually operating now.
One of the operational limitations of an Islamic bank is that hedging is not possible under Sharia — is that a disadvantage?
It is a disadvantage. Anything related to hedging is really difficult because there is no approved hedging mechanism or product available for Islamic banks. We use other methods — we do sometimes spot deals, or we try to stay within one currency or cover it in another way. But hedging is out of the question. It will be a few years before we see a product that covers it.
What about transparency and disclosure — there is a feeling that there is less of these in Islamic banks when compared to conventional banks? Do you agree?
We are not at the moment a publicly-listed company. For the moment we are regulated by the Central Bank of UAE, and we are majority owned by government (the Dubai Government and Federal Government). So we are also subject to their audit. We also have our own external auditor. We have our own internal auditor. We have a lot of measurements that see to it that we remain transparent. I think the UAE is also maturing.
We can see now different auditors [involved], and we get more professional management. I have managed public companies before. I follow the same rules. I am tasked with taking this bank public in a few years. How can we do this without being transparent? And also with our aim to make it a global bank, transparency and proper governance is very important.
What is your experience of the necessary recruitment of expert personnel — how much of a problem is that?
We have seen the market move so much in the last one year. There is liquidity, there is opportunity, but there aren't sufficient resources. I am not talking about the UAE only. This is true for the entire region where you find the same problem: Saudi Arabia, Pakistan, India.
We cannot get good people, and we cannot rely all the time to bring people from outside. Pakistan is consolidating, and they need their own resources. And this could happen anywhere in the world. I think the UAE should start thinking about it long-term. I think we should have at least 50 per cent or more of our own people.
On a general note, what do you say about Emcredit, the credit bureau which has almost failed to get the banks to sign up. Why do you think this has happened?
I think banks are mistaken if they don't join. My feeling is that this is coming out of the competitive position and the sharing of information. If there are issues, they should be looked at seriously and discussed with both the bureau and the government.
More from Banking
More from Business
Relax with out weekly feature publications.
Business Editor's choice
-
‘Wrong Way' Krugman
The source of our economic malfunction lies with government-mandated bank regulations
-
Greek exit could make Eurozone stronger
Departure will show limits of bailouts and allow remaining members to act much more like a unit
-
UAE upholds values of free trade
Recently released statistics confirm an established fact, namely that of the UAE embracing the free trade principle in general and imports in particular
