“I am not a preacher. We have no interest in taking conventional banks and converting them to Islamic institutions,” says Salah Jaidah, chief executive officer of Qatar Islamic Bank (QIB), which is advancing quickly with its strategy to create a global Islamic banking network.
He admits that some clients of Islamic banks want to completely opt out of the conventional banking system, but says they are a minority compared with those investors who are just seeking to tap additional liquidity sources.
Instead of preaching conversion, Jaidah aims to create an operation with the expertise to compete with conventional banks in terms of the products it offers corporate clients, and in its ability to place debt with investors around the world.
This vision is what has informed the QIB strategy, which centres on creating a global network through establishing Islamic banking hubs in Europe, the Middle East and the Far East, since 2006. Jaidah’s message to potential overseas corporate clients is clear. “[We want to] go into those markets and say to corporates, ‘if you want finance, we have got it’,” he says. “But it just so happens that we do it in a sharia-compliant structure, and we believe that doing it in this manner will not have any effect on the pricing or structure of your finance.”
The banking hubs will essentially act as centres to promote the origination of Islamic finance instruments from local businesses, and to distribute products that QIB has developed, or that have come from other parts of the QIB group.
For now, the US is a market that QIB does not expect to enter until the regulators address some of the tax issues that make Islamic finance more expensive than conventional banking. Once these complications are resolved, QIB will seek to enter the US market.
The launch of QIB subsidiary European Finance House in London this year, following on from last year’s establishment of Asian Finance House in Malaysia, began the process of establishing a real presence in the world’s biggest financial market.
The Qatari network of QIB will serve as the Middle East hub, and also supply some of the back-office technology and risk-evaluation expertise. “To ensure that the business growth is controlled, we recently boosted the risk management capabilities, and added a bit more sophistication in terms of international credit evaluations,” says Jaidah.
“We have introduced an ongoing review of our portfolio to eliminate concentrations in specific sectors, as I know a lot of Islamic banks are hovering around real estate exposure, but we wanted to make sure that in QIB this is controlled, evaluated and on a good asset base.”
Now that the risk-management function has been upgraded, it will act as a check and balance on all QIB’s subsidiaries. “This allows us, as investors in those subsidiaries, to have a better idea of the credit risk, and credit mix of their investments,” says Jaidah.
However, he insists that the other subsidiaries operate completely independently. “We believe in the separation of these subsidiaries and that it avoids falling into a slow bureaucratic behaviour when you have a head office in a remote location,” he says. “So they are definitely standalone businesses and we are eager to see them become key players in their own markets.
Hopefully, we will list those banks in their own markets to give them even more of a local presence in their designated markets.”
Jaidah all but rules out acquisitions to enter new markets. “We believe that acquisitions would only be applicable for us if it was an existing Islamic bank,” he says. “We have no interest in converting conventional banks.”
He sees acquisitions as a way for banks to get licences to operate in competitive markets, but says it is QIB’s strategy not to enter competitive markets, but to enter markets that have yet to be exposed to Islamic banking, or where QIB can add value to the existing Islamic banking sector.
Further expansion is also planned, with a licence application already filed in Turkey, and North Africa also on the map.
With the global reach in place, Jaidah says the next step is to encourage greater use of Islamic finance products by a more diverse stream of borrowers. “Both sides of the Islamic finance market, buyers and sellers, are in need of asset classes of the A, A- and B+ type – the typical European-type assets,” he says.
“We want to specialise in the second and third-tier transactions that have no relationship to governments of the region, or firms with cheap inputs because of government ties. Anyone can do those deals.”
The ‘anyone’ in question are the Islamic arms of international banks, for which Jaidah has little time. “Because of the seriousness of this industry, you need standalone Islamic banks from top to bottom,” he says. “The placement teams, asset underwriters and asset creators of an Islamic bank are completely different to those in a conventional bank.”
The biggest challenges that he sees for the Islamic banking industry are shaking off negative connections with real estate, and the current lack of co-operation between Islamic institutions, which prevents the industry from being able to underwrite deals of the size done in conventional finance. “Sub-prime has reflected negatively in the minds of people even though Islamic banking has nothing to do with it and the underlying asset of a sukuk does not have to be real estate related,” he says.
Jaidah says Islamic institutions offer the global financial system the ability to move away from the overleveraged model that contributed to the sub-prime collapse. “Islamic banking is about equity participation,” he explains. “If you look at the mortgage market, it was about financing what has already been financed three times before and overleveraging until you are not even sharing in the equity of the assets.”
Jaidah admits there is a danger in the Islamic banking industry of the underlying assets dropping in value, but says the extent to which this could occur is limited. “If Islamic banks started allowing overleveraging and no equity participation, we could fall into the same trap, but then it is not about partnership and it is no longer Islamic banking,” he says. “Because of this equity sharing and using cash flows to justify the lending, I do not believe the current scale of financial crisis will be replicated in the Islamic industry.”
He also accuses the industry of adopting a ‘cocoon’ mentality that is hampering the development of the Islamic banking industry. “Transactions created in Saudi Arabia are sold in Saudi Arabia, and the same for deals in Kuwait,” he says. “We can never see what is going on in Dubai.”
To break out of this mentality, a spirit of greater co-operation is something that Jaidah is keen to foster, not only between QIB’s global subsidiaries, but also with rival banks. “In the bond markets they understand this and bonds originated in China are sold in America,” he says. “They have understood this but so far the Islamic banks do not seem to understand it.
“We need to open our minds. A club deal would require that we all talk to each other, and that needs a change in mindset. We are now trying to talk to other banks and see if they have the same strategy.”
$5.8bn – Qatar Islamic Bank’s total assets in 2007