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Friday, 11 July 2008

The new colour of Islamic money

Source: Arabian Business/by Sean Cronin

Islamic banks are moving to centre stage in the Gulf as they bid to take market share from conventional lenders. Sean Cronin meets the founders of Abu Dhabi government-backed Al Hilal Bank and gets a taste of the new face of Sharia-compliant lending in the UAE.

It looks more like an Easyjet office than an Islamic bank, but the bright orange livery of the UAE’s latest Sharia-compliant lender is designed to set it apart from the crowd.

Hours from opening on its first day of trading, the main Abu Dhabi branch of Al Hilal Bank is a hive of activity with a line of tellers already sitting at their counters as workmen scurry around the brightly decorated banking hall, applying the finishing touches.

Al Hilal CEO Mohamed Jamil Berro is overseeing the organised mayhem and appears a picture of calm amid the frantic last-minute preparations that are going on all around him.

“This is a sample of the freshness that we are trying to project,” says the former Arab Bank executive. “It’s why we chose the orange, it’s an example of the differentiation we are trying to achieve.”

It is also a reflection of the changing face of Islamic banking in the UAE as it bids to move to the mainstream and displace the still larger conventional banking sector. Al Hilal becomes the eighth lender complying with Sharia to be launched in the UAE as the Islamic banking sector looks to tap growing wealth across the Gulf.

Berro believes that trend is gaining rapid momentum as Islamic lenders increasingly offer the bundle of services that their conventional competitors provide.

“The Islamic banking industry is growing and we think Islamic banks will take centre stage as the overall pie is growing,” he says. “The aim is to provide the customer with a bundle of products and services.”

Berro even believes Al Hilal will go one better with a plan to develop what it describes as a ‘financial mall’ around its main branch in Abu Dhabi — one of four branches around the UAE.

The basic idea is that customers visiting the branch will also be able to access dedicated home, car and personal loans — all with their own dedicated shop fronts. Women and children are also offered dedicated banking services in the mall.

A car showroom is available for customers seeking new wheels while a theatre has been installed for “movie presentations”. It’s all a long way away from the typical regional retail banking experience.

In a place where shopping has almost reached national pastime status, the mall is likely to be popular with customers.

“We are aiming for 10 branches in the UAE this year and next year we expect similar or bigger growth,” says Berro.

The bank will be joined by other newly arrived Islamic players looking to tap growing wealth across the Gulf, including Ajman Bank and Noor Islamic Bank in the UAE and Al Khaliji Bank in Qatar.

he number of super-rich in the Middle East jumped 15.6% in 2007 to around 400,000 according to research from Merrill Lynch. The US investment bank said in its World Wealth Report 2008 that high net worth individuals (HNWIs) in the Middle East were worth around US$1.7 trillion last year, up 17.5% from 2006.

The region’s rising wealth has helped the Islamic finance industry grow at a rate of about 15% a year and could already be worth US$1 trillion according to the Islamic Financial Services Board, while around 60% of Sharia-compliant assets are owned by Gulf investors. The assets of Islamic banks in the UAE are expected to account for about 27% of total banking assets by 2010, up from around 15% last year according to the International Association of Islamic Economics.

The Abu Dhabi Investment Council (ADIC), which operates as a sovereign wealth fund and established Al Hilal with start-up capital of about US$272m, hopes eventually to sell shares in the bank to the public. However, that is “some way off” according to chairman HE Eissa Mohamed Al Suwaidi, who is also a director of ADIC.

While Al Hilal bids to differentiate itself from rival Islamic lenders in the region through its colourful branding and shopping experience within its retail banking offering, it has also started its corporate finance activities and last month helped arrange a US$1.5bn Islamic loan for Dubai Financial Group, a unit of Dubai Holding.

Al Hilal was part of a syndicate that also included Al Khaliji Commercial Bank, First Gulf Bank, Noor Islamic Bank, Royal Bank of Scotland Group and Standard Bank Group.

As the number of Islamic lenders increases across the region, Al Suwaidi believes that a regulatory body overseeing transactions and ensuring that commonly agreed standards are adhered to, would help the industry develop.

“Regulation is something that is needed to give Islamic banking another push forward,” says Al Suwaidi, who notes that one of the biggest issues facing Islamic banks is how to manage short-term liquidity effectively. “This is where there are a lot of disagreements,” he says.

Berro agrees that increased regulation would help the industry, although he notes that the process may not be as fast as many might hope.

“There is a move towards standardising Sharia principles and fatwas in the banking industry but it might take a bit of time,” he says.

Improved regulation could also limit a recurrence of recent criticism over the Sharia-compliance of many deals. Earlier this year, Sheikh Muhammad Taqi Usmani, who chairs the Accounting and Auditing Organisation for Islamic Financial Institutions caused controversy when he claimed that as many as 85% of Islamic bonds, did not fully comply with Islamic law.

Al Suwaidi stresses that the decisions taken by Al Hilal’s own Sharia board are final and not subject to influence from the bank’s management.

“We have the three most respected scholars on our board and we comply with what they say — once they issue their decision, that’s it, we don’t go and debate it,” he says.

With oil rising to record levels and demand for Islamic banking showing no sign of retreat despite ongoing turmoil in global credit markets, the founders of Al Hilal Bank are confident that their future will be bright.

If not, to recall a famous advertising campaign, it will at least be orange.

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Alfalah Consulting - KL: www.alfalahconsulting.com 
Islamic finance consultant: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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