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The world’s best Islamic banks

10 Apr 2013

The world of Islamic finance continues to evolve in terms of complexity and depth. Meeting the needs of an increasingly sophisticated clientele is not an easy task. ASIAMONEY reveals which institutions have done the best job. Chris Wright reports.

Best Islamic Bank in Asia

From its roots as a brainy but limited-reach investment bank in Malaysia, CIMB Islamic can now claim to be a universal Islamic banking operation in four Asian markets: Malaysia, Indonesia, Thailand and Singapore.

Alongside that it can also boast of corporate and investment banking operations in Brunei and outside the region in Bahrain, linking the operation to the lucrative funds of the Middle East.

Investment banking continues to be what sets CIMB apart, however. Aside from being the clear leader in Malaysian sukuk, or Islamic bonds, discussed in detail in the Malaysia category, the bank also lead managed 15.7% of all global sukuk in the year to October 31, handling 192 global issues.

Moreover, CIMB deals tend to be innovative market leaders: leaving aside the Malaysian ringgit bond issues, trailblazers in the last 18 months have included Axiata in the first rated sukuk in renminbi, a Rmb1 billion (US$160.89 million), in the first issue off a US$1.5 billion multi-currency sukuk programme; a US$800 million trust certificate issue for the Islamic Development Bank in Saudi Arabia; and a US$357.8 million exchangeable sukuk into Parkson Retail for Khazanah Nasional.

Beyond that, in addition to the market-leading Malaysian franchise, there is a genuine regional footprint now, reflected in the 48% growth in total assets for CIMB Islamic between 2007 and 2011.

Indonesia is the heart of it, and will continue to be; CIMB’s stake in Bank Niaga was the foundation for CIMB Niaga Syariah, which so far focuses on middle-to-high-net-worth individuals and business banking. CIMB Niaga itself is the fifth largest bank in Indonesia, providing a suitable bedrock upon which to build a Shariah, or Islamic law-compliant financial business that should make the most of Indonesia’s vast, and insufficiently tapped, potential for Islamic finance.

CIMB has always been astute in realising that business opportunities will arise if you help them to get started. It has advised governments on Islamic finance frameworks particularly around domestic capital markets in Indonesia, Thailand, Singapore, South Korea, Hong Kong and the UK, relationships that now stand the group in good stead for expansion.

In September 2011, CIMB set about a new range of regional initiatives, coinciding with its merger of its corporate banking, treasury and markets businesses. Among other things, the aim is to regionalise products and services – so a new product in one country can easily be adapted for another with the help of the same originating team; to regionalise client coverage, drive cross-border collaboration and cross selling, and to offer hedging and risk management solutions regionally.

No other bank enjoys anywhere near the same vision and desire to compete in the Islamic finance space over such a broad geographic scale. CIMB deservedly continues to hold its crown as Asia’s top Islamic finance institution.

Best Islamic Bank in Brunei
Bank Islam Brunei Darussalam

BIBD remains the only logical choice for this award in Brunei, formed by the 2005 merger of the two major Islamic financial institutions in the country.

It only requires the 14 bank branches possessed by BIBD to cover all of the tiny Borneo nation; the bank speaks with pride of its 47 ATM machines.

It appears to be in strong shape, with around US$4.8 billion of assets and total equity of US$766 million generating a pre-tax profit of US$87 million in 2011. The capital adequacy ratio of 26% speaks of considerable surplus liquidity. It is, about as far as is possible in a small market, a diversified universal business, with consumer banking accounting for 65% of revenue, corporate banking 19% and institutional banking 13%.

BIBD was also the first institution to launch Islamic mutual funds in Brunei, and it has subsidiary businesses for fixed deposits, vehicle hire purchase, consumer product financing, securities and brokerage, takaful and investment banking, with a particular trophy being a co-lead role on the Republic of Indonesia’s US$1 billion sukuk issue in 2011.

Yet for all its successes, questions exist. Why does the web site not carry any annual report later than 2011, and no financial statements after that date? Why, in June 2012, did a single annual general meeting cover two whole financial years to approve financial statements going back to 2010?

Lacking competition, BIBD has not felt the necessary impetus to be as transparent as perhaps it could be. Yet despite this it remains the clear national leader in Islamic finance.

Best Islamic Bank in Indonesia
Bank Syariah Mandiri

Indonesia continues its steady belated take-up of Islamic finance, and Bank Syariah Mandiri, as the biggest Islamic lender in the country, remains the institution in the best shape to benefit.

Separating the contribution of Bank Syariah Mandiri from the whole Bank Mandiri group is tricky in quarterly announcements and only fully extrapolated when annual reports come out. What is apparent is that IDR551.1 billion (US$56.76 million) of profits were accrued from the Islamic division in the 2011 financial year.

Mandiri accounted for this figure as part of a group-wide fee-based income figure of IDR1.3 trillion, which suggests that revenues from Shariah business are becoming highly notable within the broader bank.

A more recent investor presentation from February 2013 lists total assets in Bank Syariah Mandiri at IDR54.2 trillion, total deposits of IDR47.4 trillion and a return on equity of 25.04% – good business.

To put that into context, the 11 banks offering Shariah-compliant financial services in Indonesia had IDR199.7 trillion in assets between them by the end of 2012, putting Mandiri at about a quarter of the market.

Bank Syariah Mandiri’s market strength has grown dramatically since 2007, with total financing, deposits and assets all up four times over since then. At the same time non-performing loans (NPLs, or non-performing financings to use the Shariah equivalent) have fallen from 3.43% in 2007 to 0.95% in 2011, before nudging up again to 1.07% last year. Net interest margins and cost of funds are steady.

The Islamic bank operates from 712 offices in 33 provinces, a reminder of the vast assistance it gets from having such a strong and prominent parent. As of September 2013, 15,354 people were employed in the Shariah bank. The parent has also been helpful in other ways: first with a three-year capital injection programme, which in turn has helped secure strong ratings; and secondly as a cross-selling opportunity.

The opportunity to grow Islamic finance services in Indonesia is highly appealing. Islamic assets represent 23.1% of the Malaysian banking system yet in Indonesia it’s just 4.7%, despite the latter possessing a far bigger Muslim population.

Indonesia’s government has set a target of 10% of total bank assets being Shariah-compliant by 2015-20. It’s a somewhat broad target, but the intention is clear. It seems that Indonesia’s government and regulators finally appear to be serious about this: the sovereign’s global sukuk are fairly regularly issued, closely followed and widely sought, and most of the legal infrastructure is in place now to encourage further growth. All this in a rare buoyant economy underpinned by domestic demand.

If Bank Syariah Mandiri is in the strongest position in this fledgling industry, than that is an excellent place to be.

Best Islamic Bank in Malaysia


CIMB dominates sukuk bond issuance in Malaysia to a remarkable degree. The bank handled 29.2% of all ringgit sukuk between January 1 and October 31, 2012 – a total of 204 issues. Added to that it conducted a further 192 global sukuk issues.

Among CIMB’s recent highlights was the world’s largest ever sukuk to date: a MYR34.35 billion (US$11.08 billion) Islamic medium term note programme from Projek Lebuhraya Usahasama (PLUS), the highway group.

CIMB was sole principal adviser and sole lead arranger on this deal, which apart from its sheer scale required negotiating among numerous authorities, regulators, investors and a rating agency connected with the underlying toll highway projects. It describes itself as being “solely entrusted to take on the task of delivering a successful consent solicitation exercise involving almost the entire market” to ensure the success of the transaction.

Among other steps, executing the transaction involved a buyback exercise from nine sets of bondholders, and a consent solicitation with a further seven, concurrently. It was no vanilla financing exercise.

Other big Shariah-compliant deals have included IPOs for Felda Global Ventures (at MYR10.4 billion it was, by the middle of 2012, the second biggest IPO worldwide after Facebook) and IHH Healthcare, which was the awarded best regional initial public offering for 2012 by Asiamoney.

Additionally the bank was involved in DanaIfra Nasional’s MYRB2.4 billion Islamic medium term notes issues; big power and energy sukuk fundraisings for Kimanis Power and TNB Janamanjung; and deals taking Malaysians offshore for Axiata and Khazanah, discussed in the Asia section.

Malaysia is also the hub of CIMB’s securitisation structured finance team, which specialises in hybrid securities such as Tier 1 and 2 capital instruments for banks, and corporate hybrids or perpetual capital securities. It has securitised home loans, auto loans, bonds, property and government receivables in Shariah-compliant ways.

Beyond the capital markets, CIMB now enjoys a scale that it never used to enjoy. It is the second biggest Islamic bank in Malaysia in asset terms, just five years after broadening from its investment banking base, and is still the first name in any discussion of local innovation. The group launched 35 products into the market in the first 11 months of 2012, and said it had a further 59 in the pipeline.

It is successful in corporate banking too, arranging big bilateral Islamic facilities for Dana Infra’s mass rapid transit project and for an aircraft acquisition by Malaysian Airlines. And in retail, where it simply didn’t exist as recently as 2005, it now has over MYR40 billion of assets and innovates in speed of service, range of branches, consumer products (7.7 million customers in Malaysia) and regional partnership, particularly Indonesia. It is also the leading structured product house in Malaysia.

No other bank can offer this compelling mix of investment banking leadership and innovation with a solid corporate and retail presence.

Best Islamic Bank in Pakistan
Meezan Bank

A look at the numbers of Meezan Bank secures it this particular award.

Annual deposits and other accounts soared 36% during calendar year 2012; Islamic financing and related assets were up 26%; investments increased 55%; total assets expanded 37%; shareholders’ equity rose 16%.

2012 marked an impressive year of statistical year-on-year improvements for Meezan Bank, Pakistan’s first, biggest, and still-best Islamic bank.

In a mode of continuing expansion – its branch network went from 275 to 310 during 2012 – profit growth has been tempered by expenses, but still both net profit and earnings per share were up 3% in 2012.

Meezan has deposits of PKR230.43 billion (US$2.34 billion) and total assets of PKR274 billion. Profit, at PKR3.5 billion after tax, is somewhat slim today, but that’s still a near quadrupling since 2007, and the prospects are impressive in a market in which Islamic finance is very much the preferred direction of the local banking system.

The bank reported a 24.34% return on average equity in 2012 and has a healthy capital adequacy ratio of 14.08% (Pakistan’s banking regulator requires 10%).

Whereas Malaysia’s CIMB has become a universal bank, having grown from investment banking roots, Meezan has built its presence from a consumer banking background. As a result it dominates with the largest Islamic branch network in the country.

The bank today has corporate, investment and commercial banking segments alongside asset management (through subsidiary Al Meezan Investment Management) and treasury, although consumer remains the heart of the institution.

Pakistan is still not the easiest market in which to do business; an NPL ratio of 5.3% in 2012 is an improvement on 6.14% the previous year, but it still speaks of weak creditworthiness in parts of the book.

Nevertheless, Pakistan is on something of an upswing: its gross domestic product (GDP) grew a decent 3.7% in fiscal 2012, and the KSE 100 equity index rose 49%, one of the best in the world, during the year. Reflecting that buoyancy, Meezan – which turned 10 years old in 2012 – is, according to chairman Ebrahim Bin Khalifa Al-Khalifa, the fastest-growing bank in the history of Pakistan over that period.

One other thing: many Islamic institutions look well-placed for growth but don’t produce the best investor relations material (witness Bank Syariah Mandiri, although its parent is better). In Meezan it is refreshing to see an emerging market Islamic bank get its 2012 annual report out by March 2013 and for it to be well thought out, clear and informative.

Best Islamic Bank in the Middle East
Al Rajhi

What should be the most important criterion when awarding the top Islamic bank award in the Middle East? Daring expansion and innovation? Or scale and safety, a vote for steadiness in continuing uncertain times? The mood in the region still requires the latter of these, and for that reason Al Rajhi – conservative and reliable – remains our choice for the region.

We highlight Al Rajhi despite the fact that its regional presence is not as dynamic as, say, Kuwait Finance House or Al Baraka; leaving aside its considerable Malaysian operation. Al Rajhi’s other major overseas presences are in Kuwait and Jordan.

But it’s possible to make the case for a regional award what is in truth a largely domestic business because of the sheer importance of the Saudi economy and markets within the region. The United Arab Emirates may have the buildings, and Qatar the headlines, but Saudi Arabia, to put it simply, is the whole point. And Al Rajhi is still the largest Islamic bank in the world by both market capitalisation and assets.

It would be wrong to present Al Rajhi as lacking in innovation; instead, it is simply prudent. A standout transaction in 2012 involved the US$1.33 billion ijarah mawsufah fi zimmah financing for Jabal Omar, a US$6 billion real estate and hospitality development near the Grand Mosque in Mecca.

Al Rajhi was exclusive financial adviser on the financing, which was made exceptionally complex by the land title structures that relate to Saudi Arabia’s holy cities: one can’t say that anyone owns this holy land. Its solution was an Islamic land-lease and asset ownership structure involving the safeguarding, but not the transfer, of title deeds by a Saudi-owned security agent. That was enough to give lenders sufficient comfort to release their funds, without falling foul of Mecca property law or the people who enforce it.

Al Rajhi has had a difficult year, once again facing allegations of terrorist financing following a US Senate investigation into HSBC in July. The bank itself finds it tiresome – part of the evidence against the bank is the appearance of founder Sulaiman Al Rajhi’s name on a handwritten list found in the Bosnian offices of a Saudi Arabian charity in 2002, a list that may have been written decades earlier – and it has been swift and robust in its denials.

In the main, the bank lets its assets speak for it: SAR247.2 billion (US$65.92 billion) on September 30, with net profit of SAR7.885 billion in 2012. The latter was up 7% on the previous year, while its banking revenue was up 34%. And boasting a return on equity of 22.54%, Al Rajhi enjoys strong favour with its investors.

Best Islamic Bank in Bahrain
Al Baraka Islamic Bank

Globally, Al Baraka has turned into one of the bigger forces in Islamic finance. It is active now in 15 countries through 400 branches, including a strong presence across North Africa, while it has ventured as far east as Iraq.

This bank may lack Al Rajhi’s financial strength, being rated ‘BBB-‘ by Standard & Poor’s, but Al Baraka is growing fast and has an impressive asset base for its breadth, with US$19 billion in assets by the end of 2012.

This award, though, is for the bank’s Bahrain business: Al Baraka’s home and the location of one of its two listings (the other being Nasdaq Dubai). In Bahrain it offers retail and investment banking services.

Al Baraka particularly benefits from the health of its Bahrain-based parent, which enjoyed a 21% year-on-year increase in deposits in 2012 alongside 11% in assets, 11% in net income and 23% in net operating income.

Best Islamic Bank in Kuwait
Kuwait Finance House

One Gulf market in which the traditional Islamic banking leader is facing renewed external threats is Kuwait.

Kuwait Finance House is instrumental to the fabric of financial services in Kuwait, and in particular Islamic finance, but it must be watching the rise of Boubyan Bank – backed by National Bank of Kuwait – closely.

For the moment, though, Kuwait Finance House is the bank with the broadest range of business, covering personal and commercial banking, leasing (a particular strength), asset management, private banking, project finance and real estate.

Also, perhaps sensing the rise of competition, it has set about a five-year strategic transformation programme. In March the first tangible sign of this came with the launch of KFH Real Estate Company, a separate investment vehicle formed out of its fully-owned subsidiary Nakheel United Real Estate. This consolidates all of Kuwait Finance House’s real estate activities globally, and is expected to be followed by similar investment vehicles in other business lines.

While business has been tough in Kuwait, in particular in asset management, where a regulatory overhaul appears to have stopped new products from being approved for the time being, Kuwait Finance House is doing fine financially.

In February it reported a 9% year-on-year rise in net profit for 2012, at KWD87.7 million (US$306.97 million), with its capital adequacy ratio up to 14%. The bank’s total assets in 2012 grew 9% to KWD14.7 billion, with deposits up 6% to KWD9.4 billion.

Best Islamic Bank in Qatar
Qatar Islamic Bank

Qatar is the other market in the Middle East where an exceptionally powerful long-standing leader is being challenged by newer home-grown rivals.

In Qatar’s case, Barwa is winning praise for its rapid growth, particularly in sukuk, but it has not yet quite made sufficient ground to make an argument for it to dislodge Qatar Islamic Bank as the leading Islamic bank in the country.

Qatar Islamic Bank, after all has just under 40% of the Qatar Islamic banking market, and 11% of the country’s entire national banking system.

Size isn’t everything, but Qatar Islamic Bank appears to be in rude health too. Its most recently published financial statements give a snapshot of its financial status as of September 30, 2012. At this time its asset base stood at QAR66.8 billion (US$183.35 million), up 26.7% year on year, with a net profit of QAR1.13 billion. Customer deposits were up 50%, while capital adequacy ratios improved and provisions were lifted.

Much like Abu Dhabi Islamic Bank, Qatar Islamic Bank’s own issues are capital markets landmarks in the Islamic world, with a US$750 million five-year sukuk deal in October that attracted a US$6 billion order book despite paying only 2.5% profit rate (the sukuk equivalent of interest or yield).

Shortly afterwards, it arranged a €500 million (US$638.56 million) revolving murabaha financing facility for Qatar Telecom, the first Islamic finance deal the telco had signed, demonstrating Qatar Islamic Bank’s ability to boost Islamic finance in its home country.

Best Islamic Bank in Saudi Arabia
Al Rajhi

Al Rajhi is the clear Islamic leader in Saudi Arabia. It is the largest bank, conventional or Islamic, by market value, anchored on a peerless Islamic retail business based on the trust of millions of Saudi Arabian families.

Better still, that retail base – young, Muslim, growing in wealth and sophistication – is going to account for increasing opportunity both individually and in corporate life as it grows up.

Al Rajhi also has the largest network of branches and ATMs (500 and 3,100 respectively), with 25,000 point of sale locations, in order to serve that base. Flowing from that is a retail financing business that gives Al Rajhi the Islamic equivalent of a net interest margin of just under 4.5%; the sector as a whole is more like 2.8%.

Beyond that, corporate finance is growing, while the bank ranks second in equity brokerage now through its Al Rajhi Capital arm, which is also a major player in asset management, and increasingly active in investment banking and research.

As a business, Al Rajhi embodies steady efficiency, often logging twice the return on equity of its Saudi peers; it continued to make money through 2009 when the rest of the sector was belatedly hit by the global financial crisis. Citi has estimated that Al Rajhi’s 2014 net income could be double what it was before the financial crisis, with a return on equity of around 25%.

Best Islamic Bank in United Arab Emirates
Abu Dhabi Islamic Bank

Our award for the United Arab Emirates’ standout Islamic bank changes hands this year, with an Abu Dhabi institution replacing a Dubai one.

In recent years Abu Dhabi Islamic Bank (ADIB) has embodied efficiency and ambition. Founded only in 1997, it is far younger than Dubai Islamic, but since 2008 in particular – when new management arrived with a clear strategic vision – the momentum has been clear. It is now the fourth-largest Islamic bank globally by assets, has huge backers in its majority ownership by the Abu Dhabi ruling family and sovereign wealth fund, and now has decent on-the-ground reach as well, with 75 branches, 549 ATMs and over half a million customers.

Total assets were up 14% year on year in 2012 to AED85.7 billion, with customer financing up 11%, customer deposits 13%, capital resources 23%, revenues 13% and net profits 9%; the return on shareholders’ equity in 2012 was 17.7%, with a total capital adequacy ratio of 21.4% and a Tier 1 ratio of 18.4%.

Beyond the numbers, it has also been striking to observe ADIB’s participation in more and more of the landmark deals in the Middle East. Top of the list was a deal for ADIB itself: a US$1 billion perpetual non-call six-year hybrid Tier 1 sukuk issue in November 2012. It was not only the first-ever Shariah-compliant Tier 1 issue, but the first Tier 1 instrument from any Middle Eastern bank, whether conventional or Islamic. As the first Basel III-compliant issue from the region it was closely watched and has swiftly become a benchmark.

ADIB was also a bookrunner on the Jebel Ali Free Zone refinancing, one of the most important deals of the year in the Middle East region. This is the biggest container port between Rotterdam and Singapore and accounted for 21% of Dubai’s GDP in 2009, and is a Dubai flagship – but it faced a maturing AED7.5 billion (US$2 billion) floating rate sukuk that had been launched in far brighter economic days in 2007.

The bookrunners launched a AED4.4 billion eight-year amortising term loan, then underwrote a US$650 million Regulation S sukuk. To do so they had to launch a consent solicitation to all of the original bondholders, asking them to dissolve the trust so the refinancing could take at all. This would never happen in conventional finance, but Islamic finance requires a genuine, physical underpinning asset, and it can’t be pledged to two deals at once.

ADIB is becoming more active internationally, with expansion so far in Egypt, Iraq, the UK and Saudi Arabia. It is clearly a name to watch for the future.

10 Apr 2013