The twenty million pound lifeline thrown by Qatar International Islamic Bank (QIIB) to the Islamic Bank of Britain (IBB) at the end of July through a private placement of 20,000,000 new ordinary shares at a price of 1 pence per share will give IBB some breathing space, but whether it addresses the bank's fundamental shortcomings must remain a moot point.
To what extent IBB benefits from this capital injection from one of its founding shareholders is also open to question. For after expenses of 1.8 million pounds, the net proceeds of the capital injection will only be 18.2 million pounds. The expenses presumably incurred to lawyers, the stock exchange and the regulator, the Financial Services Authority (FSA), is alarmingly high, and in the case of IBB's current position and the state of its balance sheet, arguably unjustified.
The new ordinary shares will also represent approximately 78.5 percent of the enlarged issued ordinary share capital immediately following completion of the placing.
For QIIB, the placement could not be more enticing. The issue price, for example, was priced at a hefty discount of 69.2 percent to the closing price of 3.25 pence per ordinary share on July 26 on the Alternative Investment Market (AIM) of the London Stock Exchange and of 67.5 percent to the net book value per ordinary share as at Dec. 31, 2009.
IBB has made an application for the new ordinary shares to be admitted to trading on AIM and it is expected that trading in the shares will commence on Aug. 18, the first business day following the proposed general meeting of the shareholders on Aug. 17.
Assuming the price holds at around 3.25 pence per share, then QIIB would have made a staggering 45 million pounds simply through the appreciation of the value in its shares due to the hefty discount. Perhaps the level of discount reflects the high risk of the investment, but either way QIIB seems to be a bigger beneficiary than the very bank it is trying to give a lifeline to.
The consolation is that QIIB has agreed to carry out a strategic review of IBB's business and operations after the final approval of the placement by the company's board. The aim is to assist IBB in moving toward profitability over the medium term. The strategic review, according to documents lodged with the London Stock Exchange, "will examine and consider the implementation of measures to enhance efficiencies, reduce costs and refocus the business of the company in a manner consistent with UK market demands together with the needs and expectations of the bank's target customers". It remains to be seen how a small Islamic bank in Qatar can effect a strategic review of an Islamic bank in the UK, where the market conditions, dynamics and demography could not be more different to the Qatari market. QIIB, which is listed on the Qatar exchange and regulated by the Qatar Central Bank, reported total assets in excess of 3 billion pounds and net profits of 95 million pounds for fiscal year ending Dec. 31, 2009.
Perhaps Gerry Deegan, managing director of IBB, can be excused for his new-found optimism when he stressed, "Qatar International Islamic Bank was instrumental in establishing the Islamic Bank of Britain as one of the first Islamic banks in the West and this capital injection demonstrates its continuing commitment. This is very good news for Islamic Bank of Britain's shareholders, staff and customers as well as for the Islamic banking sector in the UK." The net proceeds of the placing will be used to provide the IBB with sufficient regulatory capital to manage and grow its business.
The reality is that IBB, like almost all of the other four authorized Islamic banks in the UK, have had very difficult times in the last two years. The global financial crisis and the credit crunch merely exacerbated the market conditions. In March earlier this year, IBB, which started operations in September 2004, announced a pre and post-tax loss for the year ended Dec. 31, 2009 of 9.5 million pounds compared with a loss of 5.9 million pounds in 2008. The loss, according to IBB, resulted from a difficult and challenging market in which the impact of the UK recession on the housing market, unemployment, disposable incomes and market yields adversely affected the bank's revenues.
The bank reported customer deposits of over 186 million pounds, financing at 46 million pounds and nearly 50,000 customers in its 2009 financial statements.
QIIB is considered by the UK panel on takeovers and mergers to be acting in concert with Qatar Islamic Insurance Company (QIIC), Sheikh Thani Bin Abdulla Al-Thani and Mohsen Moustafa, the main shareholders of IBB. Following the placement, this group of shareholders known as the concert party will own 88.20 percent of the enlarged share capital of IBB, of which QIIB alone will own 80.95 percent. The placing is conditional upon the approval by the shareholders who are independent of the concert party.
Going forward, IBB's strategy is to enhance profitability by growing its secured financing, through its home purchase plan book, funded by longer term deposits and capital whilst increasing fee and commission income as a proportion of revenue.
An IBB statement stressed, "The board is conscious of its responsibilities to ensure that Islamic Bank of Britain has sufficient regulatory capital to manage and grow the business. The board closely monitors the Company's capital position to ensure compliance with the FSA's capital requirements through the Internal Capital Adequacy Assessment Process (ICAAP). New capital is required to support the future growth in customer assets, and ensure that an appropriate buffer is maintained over the minimum regulatory requirement. The new funding raised from the placing will significantly alleviate the current constraints on the IBB's capital and will allow renewed growth in the Company's asset base and assist it in moving toward profitability over the medium term."
Despite the continued market and trading conditions which make it difficult to forecast future revenues with any certainty, the directors of IBB believe that following the Placement, IBB "will be well placed to take advantage of its position as the sole full-service wholly Shariah-compliant retail bank operating in the UK with the strategic support of QIIB, an established Islamic bank and committed shareholder in the company."
While the levels of new business applications, in particular the home purchase plan, for the year ended 31 December 2009 has increased, this has not been reflected by a corresponding growth in the asset base due to the lack of capital and available funding. In addition, those customer deposits that have not been used to fund asset growth produced lower returns due to declining yields in the Islamic inter-bank markets further affecting the IBB's margin.
By Mushtak Parker
© Arab News 2010
