The landscape of Middle East Islamic banking is about to be changed by the imminent birth of a new institution in Bahrain.

Albaraka Banking Group (ABG) is the fruit of an ambitious plan to consolidate the diverse banking assets of the Jeddah-based Dallah Albaraka Group under a single parent company. Not only will the scattered holdings be rationalised, but potential synergies and economies of scale could contribute to the creation of a potentially dynamic new force in Islamic banking. Capitalised at $600 million, ABG will benefit from being one of the largest Islamic banks in the world.

After almost a year 's work - in which Kuwait-based The International Investor has acted as financial adviser - the first phase of the project is close to completion.

Approval from the Bahrain Monetary Agency (BMA - central bank) has been received for the establishment of ABG - it has been issued an offshore licence - and for its absorption of the first group of subsidiaries (see box). 'The first tranche will be absorbed by the end of the year, ' says Adnan Yousif, ABG's chief executive officer. 'We have all the local approvals, but are still awaiting the final word from some of their home regulators.'

'The plan is then for the other financial institution subsidiaries of Dallah Albaraka to gradually be assimilated, one by one, ' says Yousif. 'There are another 14 of them that will be included, with each one subject to the scrutiny of the BMA. I expect them all to be on board by the middle of next year.'

The names of the subsidiaries owned by the parent, ABG, will initially not be changed, but the nature of their operations will be altered. The process of consolidation will see much of the duplicated back-office activities of the different subsidiaries centralised; not only will cost savings be considerable, but efficiency should be improved. New banking products will be developed centrally and sold through the wide-reaching networks of the group's members. ABG will also have a central treasury division which will cater for the entire group's needs. 'It is significant that ABG will concentrate on the liabilities side of the balance sheet, unlike a number of Islamic institutions which focus on the asset side of the equation, ' says Yousif.

ABG itself will initially function as a wholesale and investment bank, and it will have plenty of muscle with the group's consolidated balance sheet, one of the largest in the Islamic banking community. 'We will be able to use this balance sheet strength to get involved in a broad range of deals, including the cross-selling of products, ' says Yousif.

'But, in particular, we'll be able to take on larger and longer-term exposures in the wholesale banking sector.'

ABG is planning to tap new regional markets, says Yousif. The three currently favoured are Yemen, for its retail banking market, Syria, for investment and retail banking, and Iran, where there is demand for the full gamut of ABG's Islamic services. Of course, Yousif adds that if he could enter the Saudi market, he would be there in a flash.

There are also plans for ABG to expand into its own backyard. 'We are starting offshore in Bahrain, ' says Yousif. 'But we will move onshore - the Islamic retail market needs more competition. It's really a question of waiting until the consolidation process is completed.' At present, the only two local players are Shamil Bank of Bahrain, and Bahrain Islamic Bank, and there is some speculation that the two are preparing to become one through merger.

It is also planned that ABG's ownership structure will be altered radically. 'When the first phase of the consolidation phase is done, and integration has been completed, we will start moving on the flotation plans, ' says Yousif. The aim is, through a series of private placements and an initial public offering (IPO), to sell 55 per cent of the equity in ABG and have it listed on the Bahrain Stock Exchange (BSE).

The first wave: early entrants into Albaraka Banking Group

INSTITUTION BRANCHES COUNTRY

Banque al-Baraka d'Algerie 12 Algeria

Al-Amin Securities & 1 Bahrain

Investment Company Al-Baraka Islamic Bank 1 Bahrain

Egyptian Saudi Finance Bank 10 Egypt

Jordan Islamic Bank 55 Jordan

Al-Baraka Lebanon Bank 5Lebanon

Al-Baraka Bank 5 South Africa

BEST Bank 4 Tunisia

Al-Baraka Turkish Finance House 20 Turkey

Source: Albaraka Banking Group