We would like to know about Kauthar Bank.
I first became a major shareholder in Universal Bank in 1996. Then I decided to convert it into an Islamic bank. The practical step was taken in 2001. We renamed it as Kauthar Bank after changing the articles of memorandum of the bank.
Tell me about the ownership, the capital structure and the main activities of the bank?
The bank has several shareholders both individual and corporates, of which I am the main shareholder. The capital is currently about $14 million and the total assets of the bank is about $20 million. We mainly offer Mudaraba, Musharaka and Ijara financing. Unfortunately, we cannot offer Murabaha facilities because under Azeri law a bank cannot be involved in trade activities. As such it cannot buy commodities on behalf of a client and then sell them to the client at a mark-up. We use Mudaraba and Musharaka for both sides of the balance sheet - to attract deposits and to extend financing facilities. The Ijara facility is mostly for small-ticket leasing of equipment, machinery, agricultural tools, etc.
What is your customer profile and what is the potential to extend this?
We have two customer segments - those that believe in Islamic finance as a matter of conviction and belief; and those who are interested in alternative finance and investment as a diversification of source of funding. In both cases they are individuals, small firms, SMEs and corporates. Currently the bank has attracted about $5 million in customer deposits, but the potential is much bigger. However, it will require more market education, awareness and a wider range of products to realize this potential.
What has been the reaction of the Central Bank of Azerbaijan to Islamic banking and your bank?
At first it was not that favorable. But after the visit of a delegation from the Jeddah-based Islamic Corporation for the Development of the Private Sector (ICD), which is a member of the IDB Group, the central bank and government started understanding what Islamic finance is and what the potential benefits for the country could be. The regulatory climate for Islamic banking is much more favorable now, although the regulators need to be informed more about the structures and specific characteristics of Islamic financial contracts. In 2006 the IDB in cooperation with the government organized an Islamic investment and financing conference in Baku. This helped a great deal in demystifying Islamic finance to the officials here. It also resulted in a joint Islamic investment fund, the Caspian Investment Company (CIC), being set up by the IDB and the Azeri government. This fund invests mainly with SMEs and in projects according to Islamic financial principles. Kauthar Bank has also signed a MoU with the ICD for financing, investment and cooperation. Bahrain's International Investment Bank has acquired a 49 percent stake in Amrah Bank in Azerbaijan and they are in the process of converting the bank into an Islamic bank.
What more would you like the Central Bank of Azerbaijan to do?
Both our customers and investors would like to see a formal Islamic banking law adopted in Azerbaijan. So far, we do not have any problems of tax neutrality for our products because they are the same for both conventional and Islamic banking. However, once we introduce more Islamic products such as Diminishing Musharaka home financing and so on then the question of double stamp duty may arise. Also at the moment our clients do not differentiate necessarily between the pricing of conventional and Islamic banking. They distinguish between halal and haram products.
What is the market potential for Islamic finance in Azerbaijan and beyond?
Azerbaijan is a young country. Two years ago our GDP growth rate was 40 percent. Even after the credit crunch it is in double digits. This year it forecast to be about 12 percent. We have a population of just under 9 million. But there are over 3 million Azeris living in Russia and an even larger number in Iran. The total Azeri diaspora is about 50 million worldwide. There is huge potential in both the private sector and the government sector. The Azeri people have a good savings culture as in Malaysia, so savings can be harnessed more efficiently through Islamic savings and deposit accounts, especially in the light of the global financial crisis. SME financing is also very important for countries such as Azerbaijan like in Malaysia and Turkey, where the enterprise culture is very high. When these SMEs understand the partnership and financing culture of Islamic banking they will migrate more and more to Islamic finance. This potential is almost as big as the size of the private sector in the country that can be involved in the Islamic finance industry. Also there is huge potential in the oil sector that is state-owned. There are opportunities to issue Sukuk against various assets or even to securitize the cash flow of oil and gas-based projects. This would pre-empt the government paying interest on debt facilities and instead benefit from the proceeds and at the same time pay Sukuk certificate holders from revenue streams through dividends. This potential for Sukuk is similar in size that may be raised from the World Bank or through the Eurobond market. In the long term we hope that Kauthar Bank can participate in this potential as the leading Islamic bank in terms of deposits, financing and underwriting.
What are your priorities for the next few years?
We want to consolidate our business in terms of capital base, balance sheet, range of products, market education and Shariah compliance. We have approached two leading Shariah advisories to sit on our Shariah Advisory Board. One of them is Dr. Daud Bakar, the well-known scholar from Malaysia who has accepted in principle subject to agreement. We also want to develop our human capital and would like to tie up with an Islamic institution in the GCC or Malaysia that can help introduce more expertise and products into our market.
