DUBAI, 22 March 2004 — The approval by the UAE Central Bank of an application by the Middle East Bank (MEB) to fully convert into a dedicated Islamic bank is another sign of the growing importance of the sector in the region. Whether the conversions of conventional banks into Islamic banks in the GCC should be of concern to the conventional banking sector may yet be too early to gauge.
In Dubai, MEB, which is capitalized at AED500 million and which has nine branches in the UAE, has confirmed that its board of directors had already taken the strategic decision to recommend conversion endorsed by an extraordinary general meeting of the shareholders of the bank on March 10, 2004. Upon completion, MEB will become the fourth Islamic bank in the UAE after Dubai Islamic Bank, Abu Dhabi Islamic Bank, and National Bank of Sharjah, which has just completed its first full year of an Islamic balance sheet for 2003 after taking the conversion route in 2002. Malaysia is the only other country which has set a precedent for conversion of a conventional financial institution into an Islamic one, when the Mahathir government approved the conversion of Bank Rakyat Kerjasama (the Malaysian Cooperative Bank) into an Islamic cooperative bank in the mid-1990s.
One banking expert sees the trend of the future development of the Islamic banking sector in the region from the perspective of National Bank of Sharjah, the first conventional bank to convert fully into an Islamic bank. “We believe this has been the start of a very noble trend.
There are two institutions in the UAE who are in the process of converting to Islamic financial institutions. One is Emlak Finance, the mortgage financing subsidiary of Emaar Properties, recently completed an IPO, of which we were one of the subscription offering banks. One reason why the IPO was successful is because Emlak Finance announced that it was converting into an Islamic financial institution.
In Kuwait, Kuwait Real Estate Bank, last similarly took a decision to convert fully into an Islamic bank, and has already lodged an application with the Kuwait Central Bank for a license under Kuwait’s new Islamic banking law. In Saudi Arabia, the board of Bank Al-Jazira in 1997 took a strategic decision that all future product developments in the bank were to be on a Shariah-compliant basis. Over a period of time, stresses a Bank Al-Jazira source, the conventional holdings of the bank would be watered down. The board also concluded that it was not realistic to develop conventional financial products, which would be difficult to sell in Saudi Arabia.
Bank Al-Jazira, one of the smaller banks in the Kingdom, of course already operates under a general banking license from the Saudi Arabian Monetary Agency (SAMA). Its conversion would be an “internal” one. Just as Al-Rajhi Banking and Investment Corporation (ARABIC) which similarly operates under a general banking license, but stresses that all its activities are Shariah-compliant within the scope of the license. The Kingdom of course does not have a separate Islamic banking law like many countries including Malaysia, Kuwait, Turkey, Lebanon, and Pakistan.
Islamic bankers, however, also stress that although growth in the sector is driven by demand for Islamic financial products and services on religious grounds, the competitiveness of Islamic banks compared with conventional banks is also a major consideration. In 2002, of the ten commercial Islamic commercial banks in the Gulf region, some 8 featured in the top 50 banks in the region according to performance especially the financial ratios. “We are there not merely for the sake of religion, but for good business practice and performance. We are competing very well with our peers. In 2002, in terms of return on assets (ROA) the Islamic banks in every GCC country performed higher than the best ones in the conventional sector. The reason for this is because we have the best of two worlds — ethics and performance,” stresses Adam.
Dr Mohammed Khalfan ibn Khirbash, the UAE minister of state for finance & industry, and chairman of Dubai Islamic Bank, the pioneering first Islamic commercial bank to be established way back in 1976, recently alluded to this phenomenal growth and demand for Islamic banking products in the GCC and elsewhere.
However, Dr. Khirbash warned that with growth and demand, comes the awesome responsibility of managing such growth and demand in the global Islamic finance sector. This he stressed is one of the crucial challenges that lie ahead. “There are still some clear impediments that prevent us from bridging the gap between the sophistication of our customers and the speed of innovation. We also need to address the structural issue of the liability mismatch (between short-term deposits and longer-term maturities), and the lack of Islamic bankers experienced in product development. Our credit analysis and our risk management techniques too vary widely from bank to bank. There are still difficulties related to cash management due to the lack of Islamic investment opportunities,” he explained.