New GCC Islamic banks target global growth

The increasing appeal of Islamic banking has prompted the establishment of sizeable new banks in the Gulf, which could soon head East. Acquisition opportunities in the Middle East are limited, and most of the Gulf countries are heavily banked – more than 50 banks, eight of them Islamic, compete for customers in the UAE.
This means that the new Islamic banks being established there are looking to Muslim countries abroad for much of their growth. So far, Kuwait Finance House and Saudi Arabia’s Al Rajhi Bank are the only Islamic banks in the Gulf to have built up a substantial presence in Asia, but that could be about to change.

Hussain Al Qemzi, group CEO of Dubai’s Noor Islamic Bank, which launched in January this year and is majority-owned by the government, says it aims to be the world’s largest Islamic bank within five years. Overtaking Bank Melli Iran, which has Shariah compliant assets of $35.5 billion, will require rapid expansion, so it is largely concentrating on acquisitions.

In addition to a network of branches in the UAE, Noor has opened a representative office in Tunisia and formed a bank in the Maldives in joint venture with the country’s government and an affiliate of the Islamic Development Bank. It aims to have a presence in three continents – Asia, Africa and Europe – and Al Qemzi says the bank is considering three acquisitions in Asia.

“Our timeframe is to sign at least one or two of them by the end of the year,” says Al Qemzi. “Two of them are Islamic banks and one is conventional, so we would have to work around converting it.” Al Qemzi also hints that Noor could move its IT operations from Dubai to a lower-cost location in Asia in the future.

Noor is competing for local market share with fellow newcomer Al Hilal Bank, which launched in June this year. Backed by the Abu Dhabi government, Al Hilal started life with $1.1 billion in capital, compared to Noor’s $1 billion, and is placing more focus on the domestic market.

“Our strategy for expansion is first to develop our banking model and entrench it into the local market,” says Al Hilal CEO Mohamed Jamil Berro. “That’s the priority for us.”

Al Hilal has a branch model which Berro believes is unique: customers will walk into a financial mall, segmented by demographics. There will be special branches with lower counters for children, areas for small business owners, as well as coffee shops and exhibitions of Islamic art. From Ramadan this year in September there will be car showrooms, where customers will be able to finance, register and insure their purchases before driving them out of the bank. Each customer will also be able to choose his own account number.

Berro is confident this model can be applied in other countries, but will not name his likely target markets, other than: “The world, in theory.” He says Al Hilal will begin planning its overseas expansion next year, and aims to be one of the top three banks in the region within five years. This year will be spent launching its takaful and real estate development subsidiaries.

Al Hilal’s model appears to be targeted at high-value customers, but Berro says that, as a universal bank, it has products for everyone.

Noor has launched an initiative specifically targeting low income customers. It has signed a memorandum of understanding with Emirates Post Authority which will see it use the post office network to offer banking services. Al Qemzi says he aims to reach the 50% of the UAE population that is currently unbanked.

“I think if this is a good model we might use the techniques learned from it in Asia, for example, or Africa,” says Al Qemzi. He aims to open at least two branches of the post office bank in the UAE this year.

Within the GCC, there are other large Islamic banks emerging. Masraf Al Rayan launched in Qatar in 2006 with capital of $2 billion, and has since opened a consumer finance unit in Saudi Arabia and a representative office in Libya.

Little is known about Alinma Bank, which is part-owned by the government of Saudi Arabia and held the Middle East’s second-largest IPO in June this year, but its $4 billion in capital should enable it to build a large presence. In Bahrain, Ummar Bank, backed by the head of the Albaraka banking group and other Gulf investors, is expected to launch next year with $11 billion of start-up capital.

Al Hilal’s Berro says that the public appetite for Islamic finance is growing so rapidly that there will be a large enough market for all of these banks.

“Any new Islamic bank on the market has a strong potential to grow,” says a Middle East-based banking analyst. “International expansion into Islamic banking in Asia, the Middle East and North Africa could be an interesting play.”

With powerful shareholders and no shortage of liquidity, one or two of these banks could become a global name in Islamic banking. Their combined entry to the market could also show whether the growth in demand for Shariah compliant finance shows any signs of slowing.