There has been a spate of announcements about the launch of new Islamic banks recently. Paul McNamara went along to the launch of $10 billion Al-Masref bank to find out about the strategy behind this new mega-bank
The Bahrain Monetary Agency has licensed Al-Masref as a fully-fledged commercial bank that will operate under Islamic Shari'ah principles. Chairman of the founding committee, Khaled Bin Ahmad Al Souweidi, explained why there was a current global trend for 'giant' institutions. While a capitalisation of $10 billion may seem large compared to existing Islamic banks, he pointed out that a $10 billion conventional bank would seem modest when compared to other traditional international banks, some of which have net values in excess of $100 billion. It is Al-Masref's avowed aim to become a giant among international banks within a decade. This will help leverage economies of scale, decrease fixed costs as a percentage of revenues, increase profitability, and ensure a higher return on equity.
Since the bank is still in its formative stages, none of the key staff has yet been appointed. Managing the process at the moment is the founding committee, mostly leading Kuwaiti businessmen. Among them on the founding committee is Hamed Al-Bader, who is currently chairman and managing director of Orient Investment Company of Kuwait.
The thinking behind the bank is not new. The period after 9/11 has witnessed the repatriation of much of the Arab money held internationally. Estimates of how much this might be range from hundreds of billions of dollars to many trillions of dollars. Add to that the historically high levels of oil prices and today the GCC is flush with liquidity. These excess funds are seeking regional investments.
At the same time, the private sector is assuming a greater role in the region, in part because governments are finally convinced that they are less efficient when it comes to economic decision-making. The rise in the prominence of private equity as well as the rise in IPO interest both attest to this fact. Moreover, a confident new generation of entrepreneurs is demanding more flexible and more sophisticated methods to fund their growing companies both domestically and across the region, fuelling the need for a new type of pan-regional banking and investment entity that understands and meets their requirements effectively.
It is no longer seen as a sustainable business model to operate on a purely domestic basis. A look at banks like Ahli United Bank in the conventional space will show that the spur to go regional is paying dividends. A swift look at HSBC's balance sheet will also show how lucrative being 'the world's global bank' is. Be big and be regional if you want to survive. Be big and be global if you don't want to get swallowed up.
The founders of Al-Masref are prominent figures from Islamic banking and investment institutions, and have accumulated decades of know how in the field.
Their intention is to establish a one stop shop, full service Islamic commercial bank with an authorised capital of $10 billion, initially 50 percent paid up, and therefore with enough resources to pursue their goals effectively. The bank is also big enough to enjoy the all important economies of scale necessary to operate on the global stage.
According to Al-Masref, the bank "will embrace and integrate the change in the markets of the past three decades and the evolving linkages between financial services in banking, investment and insurance. The Shari'ah-compliant products and services envisioned will be cost effective and innovative to attract Muslims and non-Muslims alike. Al-Masref will be equipped to compete with top tier global banks to leave its mark on the Islamic banking industry and to propel its evolution".
The founders have chosen Bahrain as the centre for their activity since the BMA has one of the most respected and robust bank regulation systems in the region. Bahrain is also the de facto centre of Islamic banking, with the benefits of economic clustering in financial services
The marketAccording to Al Masref research, Muslims represent about 20% of the world's population or 1.2 billion people, distributed across 55 Muslim countries and many non-Muslim ones across the globe. The market opportunity presented by such demographics is huge and remains largely untapped. The last thirty years have seen an exponential growth in Islamic institutions, yet the market still has not seen an all-embracing, one stop shop financial institution of the size, scale and scope of the major global conventional banks.
Geographically, the bank will focus on the GCC followed by the Middle East as a whole, then larger Islamic economies followed by Europe and North America, in that order. Their target customers are high net-worth as well as middle and lower middle-income households.
The product offeringThe intention of the founders is to establish a 'full service' Islamic bank. Al-Masref will use cheque and deposit accounts as a means of attracting clients to a range of comprehensive and complementary services.
To attract a broad range of customers, Al-Masref's marketing strategy will be to sell its products based on the attributes of ethical, Shari'ah compliant products.
Business structure
According to the Al-Masref business plan, the founders recognize that success requires a robust business structure that integrates capital, people, processes and technology with business and market strategies.
Capital
Its large capital base will give Al-Masref vital advantages to:
Meet the resource demands of the next phase in the evolution of Islamic banking by acting as a catalyst in facilitating the securitization of Islamic banks' assets thereby unleashing the full growth potential of that sector
Enjoy significant economies of scale. Economies of scale implies improved profitability and a higher return on equity primarily through avoidance of duplication of overheads and semi-fixed costs
Use balance sheet size as a competitive tool
Offer a more complete product line, bringing customers closer to one stop shopping in financial and investment terms and therefore forging stronger links with them and permitting the sale of multiple products and services to the same customer as well as repeat business in terms of the individual product or service; and
Develop more distinctive products and therefore more effective branding
As with any start up bank in the region, one of the biggest issues they will face is in finding enough people of sufficient quality to be able to staff the bank. Al-Masref estimates presume that they will need around 500 qualified staff, rising to 1,000 when the bank is fully mature. Al-Masref believes that it will have the financial capability to recruit the highest calibre staff.Technology
One of the core advantages that any new bank has when coming to market is the ability to utilise state of the art of technology. Global conventional banks need robust transactional accounting and technology systems that enable them to offer a range of customer focused services. These can improve economies of scale by reducing cost per transaction and the cost of geographical product rollouts, facilitate the integration of acquisitions, provide a more effective management decision tools. Al-Masref hopes to use technology to great advantage and offer the level of service that leading conventional bank offer, rather than competing with the technology levels of other Islamic banks.
Breakout box
We spoke to Basil Al-Nakeeb, executive vice president at Orient Investment Company, one of the investors in Al-Masref and member of the founding committee
Can you tell us who the shareholders in the bank are?
It is not that I cannot tell you but simply that there are so many that it would take too long to tell you.
Is Al-Masref really just an investment bank?
It is a full service commercial bank. It is a one stop shop and will have retail banking too. We will start in the GCC and later we expand to other Islamic countries and later to non-Islamic countries.
Who will be the management team of the bank?
In all likelihood, the chairman of the bank will be Khaled Bin Ahmad Al Souweidi. Many of the investors who have come in have done so because of him, because of his name and reputation. And they would insist on his having a key role such as chairman because of the level of trust and confidence that they have in him.
When do you expect the bank to be fully operational?
We hope that all the necessary elements will be in place before the summer. After that we will need to give a little time for all the logistics to be in place.
Do you have a Shari'ah board in place?
We have spoken to several very high profile Shari'ah scholars but we have yet to finalise the board itself.
© Banker Middle East 2006
