Dubai: Emirates Islamic Bank (EIB) was launched in 2004 to provide high quality Islamic banking services across the UAE. A fully owned subsidiary of Emirates NBD, the bank offers a range of Sharia compliant products and services.
Instead of conventional credit facilities like loans and overdrafts, the bank uses Islamic financing methods such as Murabaha, Ijarah and Salam. The bank uses Islamic profit-sharing structures and Islamic investment funds.
Following the financial crisis, the bank saw a big surge in asset impairments resulting in 2011 first quarter net loss of Dh20 million compared to net profits of Dh66.6 million in the previous year. For the quarters ahead the bank expects see a consistent decline in impairment charges and improvement in income streams.
In a recent interview with Gulf News, Faisal Aqil, general manager of retail banking and acting deputy CEO of Emirates Islamic Bank, said the worst of the financial crisis is behind and the bank is poised to build quality assets in retail corporate and SME (small and medium enterprises) segments of the business that will see a marked improvement in its profitability. The bank expects to see 5 to 10 per cent balance sheet expansion this year.
Gulf News: Among the Islamic banks operating in the country, you are one of the significant players in retail banking business. How do you expect the new regulations on bank fees and various limitations on funding imposed by the central bank to affect your profits and service quality?
Faisal Aqil: We believe that the new regulations will have a significant impact on all banks operating in the country including us. The regulation of service charges and fees will certainly affect the service quality and profitability of banks.
There are various classes of customers who require different levels of banking services. If we have to provide same levels of service to all at uniform price what will be the difference between a priority banking customer and an ordinary account holder?.
There are customers who want special attention and they are willing to pay the price. There are others who just want the basic minimum services. If there is no pricing differentiation how are we going to deliver different levels of services in a cost effective manner?
As we all know central bank has the last word when it comes to banking sector regulations? Is there any way out for banks from these regulations?
As all other banks we feel regulations should not be on the pricing of banking services. If the regulations are aimed at protecting the banking system it should deal with the policies and procedures of financing, the requirements of down payments, financing terms such as the terms of financing collateral requirements and financing to value ratios etc.
If the pricing is made all equal across the board for all banking services, it reduces the scope of competition among banks in providing services at competitive and market driven prices.
What do you think the impact of these regulations on your earnings and the banking sector as a whole?
The impact will be huge on revenues and profitability of banks in the country. Some elements of regulations such as the new terms of retail financing and the reduction in the multiples of financing will make the banking sector healthier and make people less indebted.
Going forward, the introduction of credit bureau will enhance these benefits to the banking sector and consumers. While the banks will be able to better assess risks, customers will be able to command better pricing on financing based on their overall credit worthiness. In the short term we expect the regulation to have negative impact on both funded and non-funded income.
The fee incomes are certainly going to be adversely impacted; the impact on financing income can be gauged only after a few months. But the general consensus among bankers is the new regulation will adversely impact the income streams.
Emirates Islamic Bank posted a first-quarter loss of Dh20 million, compared with net profits of Dh66.6 million the year before. While the costs have been on the rise, revenues have been on decline. How do you assess your performance?
There has been an increase in the costs. But the real issue is not about the costs. In Islamic banking it is the funded income that decides the profitability to a great extent. Our funded income net of provisions and loss in revaluations declined in the first quarter. In essence our income declined while the cost remained more or less stagnant. The cost to income ratio appears higher because of decline in our income.
What has been the major component of your impairment allowances that increased by by 44 per cent in the first quarter from Dh75.4 million to Dh108.5 million the same period? Do you expect the impairments have peaked?
It has been the revaluation of our portfolio of investments in securities and real estate that has seen such an increase in impairments.
As far as financing is concerned, impaired assets, constitute a lower component of total impairments. We believe provisions have peaked and going forward it will decline. As a bank we are fully compliant with the central bank regulations on provisions and capital adequacy.
What is your outlook towards financing in the current year?
As I said we are going to see a decline in impairments from the second quarter. We are one of the most liquid banks and that gives as opportunity to expand our assets. We will be aggressive in our financing activities for the rest of the year and expect to see a big growth in our asset book.
Which are the areas in which you expect to see maximum growth?
We expect to see big asset growth in small- and medium-sized enterprises (SME) segment. The risk is lower and the margins in this segment are very healthy. Retail is becoming extremely difficult and in the corporate segment the margin is very low.
What about mortgages, do you see opportunities in this segment?
We are a very serious player in the mortgage business. As the market improves and property valuations stabilise we see new but selective opportunities in this segment. Emirates Islamic Bank announced significant changes to their home mortgage policy. The revision will help end users increase ability to enter the property market at very competitive terms including profit rates, etc.
What is the kind of financing growth you expect this year?
We expect 5 to 10 per cent financing growth for EIB this year. As I said, retail will be extremely difficult this year; we will have to aggressively expand financing in other segments, primarily in SME and corporate segments. Our liquidity is very healthy. We have a financing to deposit ratio of 72 per cent at the end of the first quarter. That gives us ample scope for expanding our books.
There has always been this speculation about a potential merger between EIB and Dubai Bank. This has been denied by Emirates NBD a couple of times in the past. In the context of the recent acquisition of Dubai Bank by the government, the speculation is once again on the fore. What are your comments?
We are not aware of any such move. As of now there hasn't been any communications within the bank. What we hear are from newspapers. Obviously it is a fully government owned bank and its future will depend on government decision.