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Wednesday, 18 June 2008

United Kingdom"s New Islamic Bank Gatehouse Bank Starts on a High Note

Within a month of being authorized as a wholesale bank in the UK by the Financial Services Authority (FSA), Gatehouse Bank has amassed six strong mandates for deals. This, says David Testa, CEO of Gatehouse Bank, underlines that these are encouraging times for Islamic finance especially in the worst conventional financial market for decades, and is a “testament to the way we established the bank and the support of our Board.”

Gatehouse Bank, the latest Islamic bank to be established in London, is 100 percent owned by The Securities House of Kuwait. The bank has a paid-up capital of £50 million and an Authorized Capital of £225 million, which can be drawn down as and when the need arises. “We submitted the licence application in November 2007. The application process went very smoothly, because we have a clear and simply business strategy. We got the licence approval on April 22, 2008. Our focus is wholesale banking - especially capital markets, wealth management and real estate funds,” explained Testa.

The flow of mandates is very encouraging. These range from opportunities in Europe, Kuwait, Bahrain, Saudi Arabia and from the US. Bankers are encouraged by the level of activity and appetite for Islamic finance especially in the UK. Although, there is increasing interest from US institutions and corporates, David Testa confirmed that Islamic finance is still in an education process in the US, although he found the market demand for Islamic finance more encouraging than expected. However, this interest comes against a background of the US Treasury recently announcing that there will be a greater degree of scrutiny of Islamic finance. Such ambivalent attitude is creating confusion in the market which can potentially marginalize the involvement of US institutions in Islamic finance especially in the home markets.

In many respects there is a developing Islamic finance cottage industry with the involvement of the University Bank in Ann Arbor; Devon Bank and Lariba in offering bespoke Islamic products such as Shariah-compliant mortgages. There are some 7 million Muslims in the US and many of them are successful businessmen running small-to-medium-sized companies.

However, small-to-medium-sized banks such as Gatehouse Bank and the other five authorized in the UK - Islamic Bank of Britain; European Islamic Investment Bank; Bank of London and the Middle East; Securities House (UK); and European Finance House - do have their work cut out. Gatehouse Bank, for instance, was bidding for acquisition deal in UK, but lost out to a major conventional bank. “This is a warning to the smaller banks,” explained Testa. “The large global institutions just want to do the deal for market share even though the deal size was small. The big banks can come in as and when they like. The line of difference is the scale of transactions and not pricing or cost.”

Gatehouse Bank’s key client focus is on GCC corporations and financial institutions keen to access the global capital markets; Asian, European and US non-Islamic borrowers seeking investor diversification; and Islamic investors funding investments in Asian, European and North American Assets. The bank prides itself in the strength of its distribution function. It had already recruited four top people with another two joining imminently.

Testa, until recently a senior executive at WestLB’s London branch, aims to “hit the ground running” with a quality team; innovative products; and placement power. “We have to keep our name out there and start building our reputation with well structured products and good returns for investors. We want to succeed in the international sphere. That is why The Securities House established a bank in the most expensive environment,” he stressed. Gatehouse currently has a staff of 27 and plans to increase this to the mid-30s by the end of 2008.

Recruitment has gone surprisingly well with senior personnel coming from global players such as Merrill Lynch , Lehman Brothers and Goldman Sachs, and from institutions such as Investec and banks from the GCC.

Gatehouse Bank’s Shariah advisory board comprises Sheikh Nizam Yaquby from Bahrain; Dr Abdul Aziz Al-Qassar from Kuwait; Sheikh Haytham Tamim from Lebanon; and Mufti Muhammed Shikdar from the UK.

At the moment it is a lenders market. Until a year ago, Islamic finance was more expensive than conventional, but the repricing of conventional market has meant that spreads have been widening perhaps more so outside the GCC.

The UK is a natural focus for Gatehouse Bank. Real Estate is always an attractive asset class, but the market, said David Testa, is stressed at the moment. As such, banks have to exercise caution. Gatehouse Bank does have plans to launch a real estate fund or company to investment in UK real estate assets, but only when the timing, portfolios and projected returns are right.

He remains bullish about acquisition financing, following on from the £522 million Aston Martin acquisition through an Islamic LBO (leveraged buy-out), which he helped structure during his days at WestLB. Private equity is another potential area of focus. Banks such as Gulf Finance House and Arcapita Bank have already been active in this area in the UK. He stressed that it is not an appropriate time to go to corporates for refinancing business because of the credit crunch.

Of course, if the UK government decides to issue a debut sovereign Sukuk, this would be an important catalyst for the market. Gatehouse Bank is also talking to UK clearing banks about corporate issuances.

David Testa is not unduly concerned about the competition in the Islamic space in the UK. He believes there is a clear business differentiation between UK Islamic banks. Bank of London & Middle East is focussing on bilateral business; European Finance House is reliant on a proud parent, Qatar Islamic Bank for business; and Gatehouse Bank is strongly capitalized with a clear focus on capital markets syndications, wealth management and real estate.

Testa believes that the London-based Islamic banks are sustainable and that eventually some may be more a target for acquisition by institutions such as Noor Islamic Bank and others. The inflow of cash from the GCC countries, “present a continuous stream of opportunities, although in the UK the CIS (collective Investment Scheme) remains a major problem especially relating to Stamp Duty Land Tax (SDLT). “I am not convinced Sukuk are structured correctly. If a UK institution sells down to GCC investors then you have withholding tax, which will hit the pockets of GCC institutions,” he added.

He remains sanguine about the recent AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) Shariah Committee statement on Sukuk. This to him is not new but an ongoing debate and work in progress. The recommendations refer mainly to Mudaraba and Musharaka structures . “Again if we talk about acquisition finance, if a perfect LBO is involved, then the perfect instrument is Mudaraba, because you don’t have to worry about a separate purchase undertaking because it is an asset finance,” explained Testa. However he maintained that there is some legitimacy in the AAOIFI approach.

(Pakistan Daily)

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