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Risky business

July 2006
Atiyeh Shananier, general manager of Arab Islamic Bank, spoke to Robin Wigglesworth about the travails that Palestinian banks routinely face
Spare a thought for Palestine's banks. Whilst GCC banks are reporting ever fatter profits, Palestine's banks face yet another crisis. Political deadlock and international ostracism is merely the latest in a long line of difficulties that Palestinian banks have had to overcome, and banking executives are becoming as adept crisis managers as any in the world.

Arab Islamic Bank was established in 1996, and works exclusively within the Palestinian Territories. It currently has seven branches across Palestine.

It is the largest of three banks in Palestine that operate according to Shari'ah principles, and has a current paid up capital of $22 million. Arab Islamic Bank decided in April 2006 to raise the capital $35 million, and expects to complete the capital increase before the end of the year.

How are you going to raise your capital?
We are offering our shareholders to pay $1 for new shares. We are limiting the offer to our shareholders, not the public. So far in 2006 we have also distributed profits as shares for around $1.2 million.

What sort of services and products do you offer?
We do all banking products, but in addition to retail, we concentrate on corporate banking. There are some corporations here that are dedicated to business in Palestine, despite the risks of doing business here.
However, despite the risks, there are quite a few that are doing well, and we decided to be a more or less a corporate bank, and concentrate particularly on our financing facilities offering.

Is it difficult to do business in Palestine?
Of course, but we are here and we are familiar with the risks. We just focus on running a successful business within the given political and operational risk situation. We have been here for ten years, so we know how to work through it.

It is like guiding a boat through troubled waters. There are of course risks, but they are calculated, surmountable risks. When you are here, you look at it differently than if you were outside Palestine looking in.

There are a lot of opportunities. There are a lot of people that live here, there is a lot of trade going on, internally with the Palestinian population, and externally between Israel and Palestine. There are imports from all over the world, and whilst it might not run smoothly all of the time, there is a demand for banking here.

It isn't the easiest place to work, but we work within the constraints that we have, and are doing well, despite the situation.

How closely do you work with the Palestinian Monetary Agency?
The Palestinian Monetary Agency (PMA) controls and regulates all the business around here, and acts like a central bank. We obey their banking laws, passed by the Palestinian Authority and enforced by the PMA.

Do they have a different regulatory approach to an Islamic bank like AIB?
Their attitude might have been different five or ten years ago, when they were unfamiliar with the workings of Islamic banks, but today monetary agencies and central banks know how Islamic banks and institutions work. They know about the international Islamic accounting procedures, are familiar with our products and services, and regulate us accordingly.

What is the banking sector in Palestine like?
There are around 22 banks operating in Palestine, eight of them Palestinian and the rest of them mostly Jordanian or Egyptian. The major players are the Jordanian banks, such as Arab Bank and Bank of Jordan.

They have around 75% market share of the total banking sector, both in terms of deposits and financing.

The other 25% is spread among the remaining banks. Within the eight Palestinian banks, we are ranked number two in terms of total assets, deposits and lending, after the Bank of Palestine, a conventional bank.

HSBC has been here a long time, either as HSBC Middle East or before that British Bank of the Middle East.

Standard Chartered used to be here as well, but they closed their offices four-five years ago.

What are the greatest challenges that you and the other banks face operating in Palestine?
First of all, there are a lot of them. The biggest problem right now is of course the political situation. We have no influence over it, but it affects everything we do. Because the current Hamas government is considered as terrorist by the Israelis, they are trying to make life hard for Palestinians.

For example, Israeli banks have decided to cut all relations with all the Palestinian banks, and we were given three months notice to close all our accounts and business with them. After these three months we won't be able to serve any transactions between Israel and Palestine, and more than half our business is to serve the internal trade between the two countries.

These types of decisions are very harmful for the banking sector, and harm the business relations between Palestinian and Israeli companies. Potentially, this could harm more than 50% of our business.

The second problem is also caused by the current political situation. The government cannot afford to pay the salaries of its employees, so the purchasing power of most Palestinians is drastically reduced, and they cannot pay back existing loans.

The current situation is difficult, but we are getting used to it. Five years ago the problem was just getting people to the bank. Customers weren't able to come to the bank because of blockades and curfews. We have also had problems with moving money around, and with clearing cheques.

These are problems that an Emirati or Bahraini bank cannot even envisage, but when you have been here, problem-solving becomes a habit, and crisis management is the norm. It's complicated, but it helps if you are experienced, and know how it works.

Do you have a problem with non-performing loans?
For three months now, none of the loans given to employees of the government have not been serviced, because they simply do not have any income. And many salesmen and merchants can't pay their loans because few people can afford to buy anything.

The PMA has tried to lessen the control on loans, and not ask the bank to make reserves for these unpaid loans, because we expect that as soon as the political situation is resolved, some normality will be restored.

How is the Hamas government handling the banking sector? Do they treat the Islamic banks differently?
The old government treated the Islamic and conventional banks equally, and Hamas has not changed this position. They haven't shown any indication of preferring Islamic banking. Perhaps in the future, given the opportunity, they might try to shift towards favouring Shari'ah compliant banking, but so far they have kept to the old government's policies.

Whilst the previous government was taking loans from banks, the Hamas government is trying to pay back the loans, so our level of loans to the government has been reduced recently. On one hand this is good, but on the other hand, the government is one of our major customers.

Are you hoping that more GCC money finds its way into Palestine?
We need investments from the Gulf. For example, we are in the process of establishing a new Takaful company for Palestine, and we would like Gulf Takaful companies to be a major partner in this venture. It will be the first Takaful company in Palestine, with $10 million in capital, we will own 25% of the company, and I hope it will be established by early next year at the latest.

The major investors are us and Palestine Investment Bank, another Palestinian Islamic bank, which will own 15%, and 22% for three local insurance companies. The rest of the capital will also be open to public subscription.

We have good relationships with most of the Islamic banks in the Gulf, which are obviously doing very well and have excess liquidity due to the high oil prices, but we would very much like further to improve our relationships with them.

Do you have close ties with Islamic banks in the GCC?
We sometimes rely on our relationships with the large Gulf banks to do our business and be part of the international community. We would like Arab Islamic Bank to become larger thanks to the expertise and shareholding of a large Gulf player. We would be very amenable to having one of the major Islamic banks as an important partner and shareholder.

However, people outside the area often look upon it as a very risky prospect, and we understand that it isn't easy to make a commitment like that.

© Banker Middle East 2006

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