It sounds like the name of a new Japanese bank entering the Gulf market for the first time. But on closer inspection Noriba Bank BSC, which was incorporated in Bahrain in May this year and due to start operations next month, is a Swiss-owned investment bank managed by an Arab banker.

More remarkably, Noriba Bank is a dedicated Islamic bank wholly-owned by the Zurich-based UBS Group, Switzerland’s leading bank and the largest provider of private banking and asset management services in the world.

Noriba Bank, as such, is the latest venture of a blue-chip Western global banking major into the growing Islamic banking sector, and once again raises questions about the reasons why Western institutions are involved in Islamic finance.

This at a time when the global banking sector is retrenching, affected by a sluggish US economic recovery; the economic woes in Brazil; and exposure to a spate of US corporations, which have either collapsed or are in serious trouble due to accounting failures and alleged stock option frauds. Morgan Stanley and Deutsche Banks are the latest global banking majors to shed heavy job cuts.

Noriba is not just some name conjured up by executives in Zurich. It is a clever pun on the Arabic word ‘riba’ which means interest. Noriba Bank should really read ‘No Riba’ (No Interest) Bank. UBS has drafted Mohammad Toufic Kanafani as chief executive officer of the new bank — a banker of extensive experience in the Gulf countries. Kanafani, until a few months ago headed the asset management department at the Jeddah-based Bank Al-Jazira, which manages five Shariah-compliant funds.

In a statement, Kanafani stressed that “Noriba will follow a Shariah-compliant investment policy geared toward the requirements of institutions and private clients globally. We will offer a wide range of Shariah-compliant investment vehicles including mutual funds, discretionary portfolio management, private equity, Islamic bonds, real estate, leasing, foreign exchange, and Murabaha (cost-plus financing) transactions.”

So why has UBS leveraged its extensive Islamic finance activities out of a number of subsidiaries in London, Geneva, and Zurich, into a single global platform out of Bahrain? This at a time when ABN Amro last year sold its Gulf operation, including its Islamic Banking Unit in Bahrain to Bank of Muscat; when Barclays Capital recently shut its Islamic Banking Unit in London; and when Citigroup has reportedly abandoned its Citi Islamic Banking Challenge, following an attempt to regroup Citibank’s Islamic banking activities from Bahrain, where it has the Citi Islamic Investment Bank, to Dubai.

If Citigroup is in the process of divesting from Citi Islamic Investment Bank — the bank for various reasons never made any impact on the regional and global Islamic banking scene — then that would leave Noriba Bank as the only dedicated Islamic bank owned by a Western banking group. This indeed is a heavy burden and responsibility, because Noriba’s activities will inevitably (rightly or wrongly) become a benchmark for the involvement of Western blue-chip banks in Islamic banking.

HSBC, which has a dedicated Islamic banking division, HSBC Amanah Finance, out of its Middle East regional office in Dubai, and which was the sole lead manager and bookrunner for the pioneering and highly successful first sovereign Islamic global securities issue totaling $600 million launched by the Ministry of Finance of Malaysia in June, could claim that it is the benchmark for the involvement of Western institutions in Islamic finance. HSBC last week closed a $92 million Islamic aircraft leasing financing facility for Emirates Airlines — the third such facility in the last year. But in terms of private banking and asset management, UBS is leagues ahead of HSBC — both in terms of conventional and Islamic activities. Take, for instance, Islamic global equities — UBS Islamic Global Equities Fund has almost $100 million under management, whereas the HSBC Amanah Global Equity Fund has just under $6 million under management. HSBC has recently launched three capital protected funds with a total fund size of about $45 million. HSBC’s strengths, it seems, lie more in deal flow and Islamic structured finance for the aircraft leasing, power generation, gas and oil and other sectors.

Other Western banks such as BNP Paribas, Societe Generale, Morgan Stanley, Merril Lynch, Goldman Sachs, Deutsche Bank, Standard Chartered, ANZ Investment Bank, are all involved in Islamic finance, private banking, and asset management. But this involvement is either on an ad hoc basis or in a very specialized way.

UBS hitherto ran its Islamic banking activities out of its dedicated unit at UBS Warburg in London, headed by Ismail Dadabhoy. What will happen to this unit is not clear. Dadabhoy has always maintained that the involvement of Western institutions is healthy for the Islamic banking market, because it allowed the market to move away “from the niche factor to a more acceptable product range as part of banking. Our involvement is not just another way of making profits and generating business, but also a way of servicing our clients. Western institutions are in general constantly proactive in developing different types of conventional banking products. Islamic finance is no different in that. innovations are now starting to come through.”

Noriba’s timing could not be more opportune. US banks are faced with various difficulties in their relationships with Middle Eastern, especially Islamic investment clients. This is due to the difference of opinion between the US and Saudi Arabia over Washington’s handling of the ‘War against International Terrorism’ and the targeting of Arabs and Muslims living in and visiting the US; the fear among Gulf investors that in an overzealous post 9/11 compliance environment their assets may be unwittingly frozen; and the partial repatriation of Gulf private funds from North America.

Whereas British banks are perceived by some in the Middle East as following in the footsteps of their US counterparts especially in their overzealous implementation of compliance, European continental banks, in general, especially French and most Swiss banks have maintained a more independent line. They will, however, never compromise on international best practice in compliance. In fact, they have some of the most stringent anti-money laundering measures in place.

The differences are also more subtle — politics and mandate. US banks are a hostage to their political masters. The US government recently threatened sanctions against European and other financial institutions participating in the subscription of Iran’s eurobond issue. US banks were of course barred from participating.

It was also the Swiss private bank Pictet et Cie which aggressively took on the Luxembourg authorities in the courts following the suspension of two of the Islamic equity funds it managed on behalf of The International Investor of Kuwait. The Luxembourg authorities admitted that they did not have any evidence that the funds had done anything wrong or had any links to investors suspected of money laundering funds. They in fact suspended the funds at the request of the US Treasury and the EU authorities.

US and British banks also tend to focus on one product area such as private banking, asset management or structured finance. UBS sees Islamic finance as a package, comprising a range of products and services.

Commitment to Islamic banking is not a problem for UBS. Getting the mandate, the product range, marketing and distribution right, is far more important. This is where others are failing and have failed in the past.

UBS is unlikely to be a fair-weather friend of Islamic banking. However, its success as a dedicated Islamic bank owned by a Western global banking major, will be a crucial indicator of the involvement of Western banks in the future development of global Islamic finance.