Gulf Finance House redefines the role of banks

14 September 2008
GFH aims to capitalise on the growth of the Islamic banking sector and boost the regional economy with the launch of two sharia-compliant investment institutions.

GFH aims to capitalise on the growth of the Islamic banking sector and boost the regional economy with the launch of two sharia-compliant investment institutions.

Gulf Finance House (GFH) is less than a decade old, but Esam Janahi, its chairman and chief executive officer (CEO), has firmly established himself as a leading figure in the Islamic finance industry.

Building the bank from scratch, Janahi has managed to not only create an institution with assets of more than $2bn and profits expected to be in the region of $450m for 2008, but has also stretched the conventional notion of what a bank does.

GFH does not act as a traditional investment bank; it sees its role as closer to that of a master developer. The bank uses its ties with governments to obtain land that it then develops, after selling the idea to a growing pool of high net worth investors, of which there are now more than 3,000 from the Middle East.

Testing limits

The bank’s successful developments have so far ensured that appetite from investors remains strong. However, Janahi continues to test the limits of that demand. In late August, 12 months into his tenure as chairman, he announced the launch of two new Islamic investment banks - his third in as many months - this time partnering with Bahrain-based private equity firm Ithmaar Capital, and Abu Dhabi Investment House.

The banks are Agricapital, which focuses on investing in the agriculture sector, and Infracapital, which targets the infrastructure sector. This follows the launch of First Energy Bank in June, to focus on investment in the oil and gas and energy sectors, and HadeedMena in July, a $5bn steel company. GFH is planning more ventures.

Entering these sectors has been on GFH’s agenda for at least two years, but it is only now that the time is right, says Janahi. “We could have launched earlier, but six months ago, the markets were just not coherent enough for launching these initiatives,” he explains.

By using Islamic structures, he hopes to achieve two aims, the first of which is to make money. “If you go back to the Prophet Mohammed, you see that we are not expected to work for free,” he says. “And anything with an internal rate of return of less than 15 per cent would not be worth us investing in.”

The other aim is to contribute to the regional economy and to eventually list these subsidiaries on regional exchanges. “Eventually, they will go public as we want the guy on the street to make some money as well,” says Janahi.

While insisting that launching so many new projects does not dilute the validity of GFH, he concedes there is a risk that with so many investment opportunities to present to investors, he is in danger of cannibalising his own schemes. But Janahi is still optimistic about his ventures’ prospects.

“We stand to get more out of our investors because everybody is looking for diversification,” he says. “If we just had one investment opportunity to present to investors, they would allocate what they see as appropriate to that risk profile, and that industry.

If we come to them with many opportunities, in different sectors, the total they invest will be greater, but it will be spread over a number of projects rather than just one.”

Islamic banking has also come a long way since Janahi entered the sector. “We have gone through the first and second generation of Islamic banking, when the first wave of banks was set up,” he says.

“Then with the third generation, we saw the move into purely Islamic investment banks, such as GFH. Back in the late 1990s, we were still doing fairly standard transactions, but in the new millennium we had to bring something else [to the market].”

To do that, Janahi has focused on getting the Islamic industry to move away from standard products and to develop more of its own tools, part of the reason for GFH’s unusual business model.

“Back in the early 1990s, all we were doing was simple structured deals, raising money in the Gulf and placing it in the US,” says Janahi. “I got fed up with this model and wanted to keep more money in the region, which was when I came up with the idea for GFH.”

Following the explosion in the use of sukuk (Islamic bonds), despite some of the recent problems associated with the product, and coupled with the gradual sophistication of the market, Janahi predicts an increasingly bright future for Islamic banking, especially given the current turmoil in conventional banking.

“Islamic finance is becoming a more and more attractive and lucrative business to be in,” he says. “In the 1990s, there were no equity partnerships available. That is the beauty of international financial institutions - they do not like equity, they only like financing.”

Investment potential

With the huge demands on expenditure in developing areas such as the Middle East’s food security, infrastructure, energy resources and tourism industry, Janahi says the potential for equity investors, such as Islamic banks, approaching governments is huge.

“It is better for governments today to work with someone who can come in as a solution provider with cash, raise debt, and do all the financial engineering around a development project,” he says.

As a reflection of the growth in the Islamic banking industry since its inception in 1999, GFH has managed to repeatedly beat its own targets.

“When I started GFH with initial capital of $65m, we set out a five-year growth target that we had hit within two years,” says Janahi. “We then set out another five-year growth plan and had hit all our targets in the fourth year.”

The only serious challenge he sees to the onward march of GFH and its peers is regu-lation. “The only challenge we have is the rules and regulations of central banks,” he says. “All the potential is there [in the Islamic banking sector] but we have to find ways to continue to grow within the regulations and Basel accords.”

Mohammed Hussein, co-CEO of Ithmaar, was involved in the creation of Agricapital and Infracapital. He warns that regulating the industry must be balanced to avoid stifling innovation.

“I remember 15 years ago, investing in capital markets was not done by Islamic investors,” he says. “Then opinion suddenly started changing and now it is widely accepted. Having a central sharia board with a central bank is often suggested, but it would kill off differences of opinion and innovation.”

The next stage for GFH is a radical overhaul of its structure. Janahi is waiting for reports from the bank’s management about how to split the firm into five different operating lines to increase efficiency and productivity.

It is expected that this will include separating out the private equity and venture capital operations, asset management, and development arms. Once restructured, Janahi hopes that GFH will be ready for its next phase of growth.

Some analysts have raised concerns over the irregular nature of income from the GFH business model, and that the risks associated with the firm’s real estate exposure are depressing its share price. But the bank’s growing client base appear pleased with returns.

And increasing maturity does not seem to be slowing growth. Profit for the second quarter of 2008 was 41 per cent up on the previous year.

But with a whole raft of new developments from the past six months alone, the real test for Janahi will be delivering on the many opportunities he has identified.

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