It is both a good and a bad time to be an Islamic bank in the Gulf Cooperation Council (GCC). On the one hand, demand for sharia-compliant finance is booming even faster than for the services of its conventional counterparts. On the other, the opportunity has been spotted by a host of new challengers – whether greenfield institutions, converted conventional banks or international and regional players setting up Islamic windows and subsidiaries.
However, judging by 2006 profits, the Gulf’s veteran heavyweights seem to be suffering little adverse impact, while consumers are enjoying the benefits of the banks’ improved customer service. With the choice of providers growing, marketing on the basis of being Islamic is no longer a key selling point. “Leading companies in Islamic finance are moving away from the traditional product focus to a customer focus, which is reflected in the major emphasis they put on marketing, service quality and customer service,” says a recent report by international consultancy AT Kearney. “Marketing strategies employed are geared towards building up reputation – both as a financial services provider and as an Islamic company.”
New options
In the UAE, longstanding giants Abu Dhabi Islamic Bank (ADIB) and Dubai Islamic Bank (DIB) have been joined by Emirates Islamic Bank, Sharjah Islamic Bank and Dubai Bank – all three conversions from conventional institutions – as well as Islamic finance operations from conventional players of the calibre of National Bank of Abu Dhabi and Mashreqbank.
“You’ve got to question if you had money in DIB, with a 25-year history, whether you would want to move to a bank set up a few days ago,” Khalid Howlader, vice-president, Middle Eastern and Islamic structured finance group, at Moody’s Investors Service, tells Emerging Markets. “But possibly they can offer products they call Islamic that the older, more conservative institutions can’t do.”
DIB is making a name for itself in structuring sukuks, an increasingly popular financing tool among local corporates. The bank arranged international issues for Dubai Ports, Customs & Free Zone Corporation and Nakheel in 2006 that broke new records for their size. On the retail side, the bank has followed other Islamic stalwarts in expanding its branch network. On announcing a 2006 profits hike of 47% to AED1,560 million ($425 million), chairman Mohammed bin Kharbash claimed that the network had grown by 320% since 2002. DIB and ADIB are also undertaking sizeable programmes of sukuk issuance on their own account, in an effort to ease the asset/liability mismatches that plague the industry, making them absent these days from major project finance deals.
New ground
Kuwait’s Islamic finance sector has seen a shake-up in recent years, as the long-held monopoly enjoyed by Kuwait Finance House (KFH) was broken by the issue of two new licences to the greenfield Bubyan Bank and the converted Kuwait Real Estate Bank. So far, the impact on the bank’s performance of competition appears non-existent, with profits of KD344 million ($1,186 million) in 2006, a 40% increase.
Among the region’s biggest Islamic investment banks, the main trend seems to be towards ever-larger deals. Launching the five-year strategic plan of Bahrain-based Gulf Finance House in April, chairman Fuad al-Omar confirmed this growing ambition. “We have more opportunities than we can currently service, and we see an opportunity to increase the size and number of projects we undertake,” he said.
The bank’s core focus is on infrastructure projects, despite its growing raft of glossy real estate developments across the Middle East and southern Asia. Bahrain Finance House made profits of $212 million last year, reinforcing the impression that the challenges of fresh competition are being successfully weathered by the GCC’s bulge bracket Islamic banks.