Noor Islamic Bank (NIB) is a young institution with big ambitions. The Dubai-headquartered bank opened for business at the beginning of this year and now has 10 branches across the UAE. It has set its sights on becoming the world’s largest Islamic bank by 2013.

It is a bold ambition but, like other fledgling Islamic banking institutions across the world, Noor has every reason to be optimistic. The global Islamic finance market is valued at $700bn and has been growing by 15-20 per cent annually over the past few years. Ratings agency Standard & Poor’s forecasts global demand for Islamic finance will surge to $4 trillion within five years.

Established with a paid-up capital of $860m, NIB, a subsidiary of Noor Investment Group, is part of a new breed of Islamic finance institutions that have the financial backing of their governments.

Ownership of the bank 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 individual shareholders.

Attracting customers

There are obvious parallels between NIB’s first year of trading and that of other new institutions such as Al-Hilal Bank of Abu Dhabi. Both started trading with a large capital base and both have bold international ambitions.

With NIB and Al-Hilal launching within 18 months of each other, they also face the challenge of taking on established players in attracting customers.

“A challenge facing all banks is how to differentiate themselves from the competition,” says Ahmad al-Janahi, deputy group chief executive officer (CEO) of NIB.

"Given the strictures imposed by sharia law, there is not much room for product differentiation, so our strategy is to deliver the broadest range of products with an emphasis on unique and personalised services.”

NIB offers three types of banking service: consumer, investment and corporate finance, with the majority of its transactions in the latter two sectors.

The bank has been involved in debt restructuring and syndications, and has arranged finance for several high-profile companies based in the UAE.

“We have been involved in major transactions for companies such as [the UAE’s] Tamweel, Enoc [Emirates National Oil Company], Aldar [Properties] and AIG Global Real Estate,” says Al-Janahi. “We also recently arranged a $1.5bn commodity Murabaha [sharia-compliant finance] syndication for Dubai Financial Group.”

NIB’s consumer banking division is also enjoying rapid growth, helped by its large distribution network - six offices in Dubai, two in Sharjah, one in Abu Dhabi and one Al-Ain, plus a service centre in Mall of the Emirates in Dubai and 59 ATM machines nationwide.

In the eight months it has been operating, NIB has built up a customer base of 10,000 and accumulated assets of $5.4bn, which Al-Janahi claims is larger than some banks that have been around for decades.

Recruiting staff

However, as is the case with Islamic banks the world over, there are certain immovable obstacles that NIB will have to overcome if it is to achieve its goals.

The much-publicised shortage of staff with knowledge of Islamic finance poses a significant challenge to the sector.

“While there are opportunities for growth, the resources are just not available,” says Al-Janahi.

“This is not a problem limited to the UAE, but rather to the entire region. It is hard to find good people and hire them as their own countries are also going through expansion and consolidation in this industry and therefore are competitive about keeping their homegrown resources.”

Another challenge common to all banks is finding the best practice for regulating their products and services.

To date, Islamic financial institutions in the region have sought guidance from the Accounting & Auditing Organisation for Islamic Financial Institutions (AAOIFI), a Bahrain-based body set up in 1991 that is widely considered the standard bearer for the global Islamic finance industry.

The AAOIFI has issued up to 70 standards on accounting, auditing and governance, in addition to codes of ethics and sharia standards.

However, Al-Janahi says many Islamic banks are required to adhere to the regulatory body of their host country, which has led to fragmentation in global regulatory standards.

“While some countries, such as the UK, Bahrain and Malaysia, do have laws that are specialised for Islamic banks, others do not,” says Al-Janahi.

Like many other lending figures in the sector, Al-Janahi is dubious about the possibility of creating uniform regulation for Islamic products, but says greater consensus is being achieved through debate at industry events.

In particular, AAOIFI conferences on regulation allow practitioners, scholars and regulators to debate the issues.

The resolutions that emerge from these conferences are often taken up by the industry as a basis for developing the framework for product development.

“Conferences are helping to create more awareness about Islamic banking in general, and regulators are taking a greater interest in understanding how Islamic banks should be run,” says Al-Janahi.”

International growth

Looking ahead, NIB is considering several key growth strategies, in particular private equity investment vehicles and funds, as well as ramping up its international presence.

In June, NIB opened its first overseas representative office in Tunisia, which will be responsible for investment and corporate banking, as well as channelling investment opportunities from the GCC into North Africa.

At the end of July, NIB announced a joint venture with the Maldivian government to establish the country’s first Islamic finance house, Noor Maldives Islamic Bank, which is expected to start trading by the end of 2008. The bank will have an authorised capital of $100m and a paid-up capital of $10m.

There have also been reports that NIB is partnering with the International Finance Corporation (IFC) to open one of the first Islamic banking institutions in Syria.

IFC’s proposed investment would be in the form of a stake of up to 15 per cent in the bank’s equity. However, no more details have been released and the project is still pending approval.
Given NIB’s 2013 target, it is clear that acquisitions will take precedence over organic growth.

To this end, the bank plans to spend between $500m and $1bn on individual acquisitions in Asia, Europe and North Africa over the next five years.

“Opportunities for rapid growth exist particularly in regions that have large Muslim populations but no facilities for Islamic banking,” says Al-Janahi.

NIB plans to open 10 branches in the UAE by the end of the year, as well as opening branches or making acquisitions elsewhere in the region.

“The Middle East is a target market as, outside the GCC, there is little Islamic banking available,” says Al-Janahi.

“We have not isolated any one target for acquisition but it may involve converting them into sharia-compliant institutions.

This would involve navigating different regulatory bodies and processes, which would be a key challenge in achieving our 2013 goal.”

By focusing its acquisition strategy on existing Islamic finance institutions, the issue of human resources would be also minimised, according to Al-Janahi.

In acquiring Islamic finance institutions, we would also be inheriting their expertise and local market knowledge, without which we would not be able to become the leading global Islamic bank,” he says.