The Gulf Islamic banking sector has been bolstered with the arrival of some formidable newcomers in recent years. With varied business models and new products, these institutions are offering a modern approach to Islamic banking.
Saudi Arabia’s Alinma Bank and UAE’s Noor Islamic Bank (NIB) have carved out particularly strong positions in the market. According to MEED’s list of the top 20 GCC Islamic banks by asset size, published in September this year, NIB was the 10th largest bank, with assets of $6bn as of June 2009, while Alinma, with assets of $4.4bn, was ranked 15th.
At a time when credit has been tight due to the global economic downturn, these two debt-free institutions have provided much-needed financing to private companies and public projects alike.
Alinma was set up following a royal decree in March 2006 by three Saudi government funds: the Public Investment Fund, the Public Pension Agency and the General Organisation for Saudi Insurance. This government support made the bank attractive to potential investors, and in April 2008 Alinma raised $2.8bn in an initial public offering (IPO) on the Saudi stock exchange (Tadawul).
Not only was it the largest IPO of the year in the Middle East and North Africa (Mena) region by value, but it was also the largest IPO in Saudi history, and was 174 per cent oversubscribed.
Alinma’s huge capital reserves have helped to reduce liquidity pressures in the kingdom’s relatively limited domestic banking sector, and it has played an important role in financing some of Saudi Arabia’s major infrastructure projects, which might otherwise have been delayed due to the drying up of project finance from inter-national banks. In March, for example, Alinma committed $300m to the $2.5bn Rabigh independent power project in Saudi Arabia.
Meanwhile, NIB was launched by Noor Investment Group in January 2008 with a manifesto announcing its intention of becoming the world’s largest Islamic bank by 2013. Today, NIB has a capital adequacy ratio – the key measure of a bank’s financial strength – of 21.3 per cent, well above the Central Bank of the UAE’s minimum requirement of 11 per cent.
Established with paid-up capital of $860m, NIB is, in common with Alinma, part of a new breed of Islamic finance institutions that have the financial backing of their governments.
Ownership of NIB is split, with Investment Corporation of Dubai holding 25 per cent, the UAE government 5 per cent, and Dubai Group, a subsidiary of Dubai Holding, 25 per cent. The remaining 45 per cent is divided equally between 15 other shareholders.
“We launched NIB with a three-fold strategy,” says Hussain al-Qemzi, group chief executive officer of Noor Investment Group. “This was to contribute to the economic development of the UAE and the region, develop a financial services institution focused on client services and, in the long term, build a respected and internationally recognised sharia-compliant brand.”
With the global economy in turmoil, Al-Qemzi concedes that the bank has had to revise its original manifesto and amend its timelines for expansion.
“We have had to revise our international expansion plans due to the uncertainty in the global financial markets, with regard not only to liquidity, but also portfolio quality and fluctuating valuations of potential acquisitions that fit with our expansionary strategy,” he says.
“We are no longer working to a deadline for achieving this vision, as we believe it is more important to get it done right than to get it done fast.”
NIB has now switched its attention to investing heavily in its retail distribution network. Over the past 12 months, the bank has added six new branches to its network, which now includes 10 branches in Dubai, four in Abu Dhabi and two in Sharjah. NIB’s focus this year is to continue to develop a wider range of retail offerings, which it hopes will help to deliver further growth in the future.
“Islamic banks have done relatively well in commercial and investment banking to date,” says Al-Qemzi. “But they have been lagging in their retail offering and we believe that opportunities exist for growth in this segment, with a focus on unique, sharia-compliant products.”
A key challenge facing all banks in the GCC today, both old and new, is how to differentiate their offering from the competition.
“To date, banks have made little effort to differentiate themselves in any way, since standard retail and corporate products exist across the banking industry,” says Faisal Hasan, head of research at Kuwaiti investment bank Global Investment House.
“Many of the new banks are sharia-compliant, which caters to a niche but faster-growing market”
Faisal Hasan, head of research, GIH
“However, many of the new banks are sharia-compliant, which caters to a niche but faster-growing market, and they are trying to bring in better products and services.”
At launch, NIB offered three types of banking service: consumer, investment and corporate finance. But it has since gone on to introduce foreign exchange and remittance services, as well as takaful (Islamic insurance), through Takaful General and Takaful Life. In May this year, the bank introduced the UAE’s first retail banking branch that is open 24 hours a day, seven days a week.
A third newcomer to the Islamic banking sector, Al-Hilal Bank, headquartered in Abu Dhabi, was founded in June 2008 by the Abu Dhabi Investment Council, an investment arm of the Abu Dhabi government. With a capital base of $1.09bn, it also started trading from a strong position.
The need to differentiate is especially apparent in the UAE, which, with about 50 local and foreign banks, is considered an over-banked country, where competition is stiff and banks such as Al-Hilal face the challenge of taking on these banks in attracting new customers. Furthermore, there is arguably less room for product differentiation for Islamic banks, given the restrictions imposed by sharia law.
Al-Hilal has worked hard at developing a broad range of products. Its core operations include personal and corporate banking, and treasury and investment services.
But it also offers general and medical insurance services, and has gone on to launch more innovative products. For example, in April this year, the bank began offering loans for car purchases.
Qatar’s Al-Khaliji Bank is another relative newcomer. Incorporated in Doha in January 2007, the bank is looking to build a presence across the region, offering conventional and Islamic banking services. It is listed on the Qatar Exchange and raised QR3.6bn ($1bn) of capital, recruited 490 staff and completed an acquisition of 100 per cent of the share capital of France’s BLC Bank in November 2008.
Al-Khaliji recorded a net profit of QR136.3m for the first nine months of 2009, an increase of 543 per cent on the same period last year. Loans and advances grew by 19 per cent to QR8.3bn over the same period and deposits soared by 66 per cent to QR7.7bn.
Al-Khaliji’s total assets reached $4.43bn on 30 September 2009, which represented a 4.49 per cent market share of all Qatar’s listed banks’ assets. This puts it just below another newcomer from Qatar, Masraf al-Rayan, which has a 5.95 per cent market share, with total assets of $5.85bn.
Masraf al-Rayan was incorporated in January 2006 with a paid-up capital of $1.1bn. The bank now has five branches in Qatar and offers four core services: retail, corporate, investment and private banking.
According to Hussain al-Abdulla, chairman and managing director of Masraf al-Rayan, the bank is now seeking to “develop and offer more innovative sharia-compliant products and financial solutions to meet the banking and investment requirements of clients, as well as diversifying its sources of income, mainly in retail banking.”
Clearly, the newcomers are aware of the need to make inroads into less crowded areas of the banking market to ensure their survival.
But as competition intensifies in the GCC’s banking sector in the coming years, there is likely to be consolidation. It has often been observed that the GCC has yet to produce a truly regional bank, with the size and range to compete with major international banks. Fewer but larger banks would help the Gulf compete with other financial centres across the world.
The chief executive officers of the Gulf’s major banks are also calling on the GCC’s monetary authorities to devise new banking policies to help broaden the horizon for financial and banking co-operation in the region.
As Hasan points out, how much scope there is for a new institution in the market varies between the GCC countries. While he concedes that the UAE and Bahrain appear over-banked, he acknowledges that “the banking pie is growing, especially in terms of the Islamic segment, and the new banks have the opportunity to grab the larger market share of that pie.”
The most recent arrival in the region’s banking community is Kuwait’s Warba Bank, established by the decree of the Kuwaiti cabinet in September this year. It is the fourth Islamic bank in the country, with capital of $350m. Sovereign wealth fund the Kuwait Investment Authority owns 24 per cent. The remaining 76 per cent, worth $265m, will be distributed equally to Kuwait’s 1.1 million citizens. Every Kuwaiti citizen registered with the Public Authority for Civil Information will be granted 684 shares in Warba Bank.
This is a unique financial initiative at the regional and international levels for two reasons. First, no government has ever established a bank and allocated the majority stake to citizens. Second, this is the first bank in which all Kuwaitis will be holding shares, giving the entire Kuwaiti population an interest in the bank’s success.
Al-Qemzi says the GCC’s banking industry is at an important juncture. “On the one hand, banks are constricted in terms of specialisation and product innovation, due to regulatory and legal reform,” he says. “But conversely, we have a young population that knows what it wants from its financial services provider and often compares its local experience with experiences in other parts of the world. As a result, local and regional banks must continue to evolve their business approach to meet their customers’ needs.”
$10.3m – Alinma Bank’s third-quarter profits in 2009
55 per cent – The Dubai government’s stake in Noor Islamic Bank