Elaf Bank New Islamic Bank in Bahrain

How would you assess the present state of the Bahraini economy amidst the crisis and what is the outlook for 2009 and 2010?

Elaf Bank, New Islamic Investment Bank: Bahrain of course was among the emerging economies in the Gulf. It was playing a leading role in the financial sector mainly. But the boom in Bahrain shows that the crisis did not affect it directly. Definitely there is an after-shock now which will affect Bahrain and other economies in the world. If everyone is reluctant to invest and go into new ventures, then all the economies will start to be affected. But there was no immediate effect, except that we found some kind of stagnation in the real estate sector. But that’s understandable, and we don’t consider it to be a major setback. Hopefully if this does not persist for a long time, then I think Bahrain will be able to emerge from this unaffected.

When will this happen?

Elaf Bank, New Islamic Investment Bank: Everyone has been affected by this, and we don’t know if the crisis has reached the end. People speculate that there might be some bad news that we will hear. If that is the case, then I’m sure we don’t know how to cope with this situation. If the economists tell you that this is the end of it, then at least you know the extent of the problem and you know how to solve it. I think the expectations that by the middle of 2010 we would start emerging from this world crisis and if other economies were not hit badly, it means we outlasted it safely.

How well are the GCC economies protected from the global economic downturn?

Elaf Bank, New Islamic Investment Bank: I don’t think anybody is really fully protected, because some people, even if they didn’t invest directly in the source of the problem worldwide, they are invested in some securities worldwide, and their prices by de facto declined. So someone’s portfolio could have been considered a safe portfolio, but when you look at it today there is a lot of depreciation in it. I think everyone was affected by every country in the Gulf was affected differently for different reasons. The government of Kuwait for example had been trying to pass a law for some time to prevent financial institutions from playing the role of banks. And the moment they passed that law, the world crisis happened. So you find that the Kuwait economy all of a sudden went into a kind of jigsaw puzzle, where the banks were full of cash but were not lending to the market. While you look at Dubai for example, which is a different story. The banks in Dubai dried out because they were very active in lending to real estate. Abu Dhabi is a different story. Saudi Arabia probably has growth. If you talk to any Saudi businessman, projects are still going on, businesses are going on normally, there is a very large economy. So you cannot put the entire Gulf in one basket. There are definitely a lot of commonalities, but each country is separate from the others.

According to Moody’s, the Sukuk market would hit US$ 200 billion by 2010. How do you assess the situation in Sukuk market and how do you assess its potential for growth?

Elaf Bank, New Islamic Investment Bank: I hope that Moody’s is correct because w have started to see a slowness in the issuance of Sukuk since the second half of 2007 when people started hearing about this world crisis. In the first half of 2007, there were several issues, and the size of it reached about 26 billion dollars, and we were expecting to close 2007 with a record in the issuance of Sukuk in the range of 50 billion dollars. That would have brought the outstanding volume of Sukuk to exceed 100 billion dollars and I think the target of 200 billion dollars would have been achieved. Today, if we think that we’ll reach that target in the next two years to come, that is a very optimistic figure. I don’t know if that will be achieved, because the outstanding balance is 50 million, which means that during 2009 and 2010 you have to issue another 150, and I think that is too ambitious. But we hope so. Definitely Sukuk is a solution for Islamic banks, particularly for the liquidity which is a classical problem of Islamic banks. Now in 2009 we have already noticed issues, be it in Indonesia or Abu Dhabi or Qatar. The Sukuk are coming back. If they reach 150 billion, which is very optimistic in my opinion, it would be great, and we hope for it.

So what would be the realistic figure for growth?

Elaf Bank, New Islamic Investment Bank: I think now as a new recovery if we reach between 60 to 100 million that would be a great number.

How has the global crisis affected the Sukuk market?

Elaf Bank, New Islamic Investment Bank: The Sukuk market was affected less than the bond market. If you look at percentage of decline for the underlying assets, it was definitely less than the bond market. But it was affected such that very few people went to the market with new issues, so there were no new volumes. But when you talk about conventional bonds, you are talking about trillions of dollars traded. Sukuk is still an emerging product. The first Sukuk was started in 2001, so it takes time to build a sizable portfolio. Some of the issues that happened in 2001 matured already and disappeared from the market. That’s why I said the outstanding balance now is in the range of 50 or 60 billion dollars.

You mentioned “I would like to see more firms like Elaf Bank entering the market with the intention of developing the Islamic secondary market and with the aim to be global market makers.”  What is your assessment of the Islamic secondary market?

Elaf Bank, New Islamic Investment Bank: Originally we were called the Sukuk Exchange Center Bank. The objective was to be active in the secondary market, which is a classic problem among Islamic financial institutions. And that’s why I said we would like to see more like Elaf because one player cannot do anything alone. You need more than ten organizations like Elaf and larger. We do welcome such organizations because we don’t consider it competition in the field, we like more people to come and play the secondary market. Another position you need are people to be market makers, which means you have deep pockets and large capital. That will encourage investment in these areas, and that’s why I hope to see more people coming into this market. Of course, secondary markets need primary issues. So if the volume of Sukuk is only 60 billion dollars, and did not yet reach a massive volume, what can you trade in the secondary market? People are now holding them because they are giving them good returns. One of the problems of Sukuk is that they are issued, grabbed by some people, and they hold on to maturity. But when there is a sizable, massive volume like 200 billion or 500 billion, then I’m sure they become an instrument for corporations and institutions and individuals for liquidity. Anytime people need cash, they can feel like they can go to this secondary market and liquidate my assets because later on I can buy more assets. Today they feel if they sell these assets, what is the substitute? The inter-banks, which are not giving the same returns. That’s why I think the focus should be on primary issues first, and in the medium to long term, the secondary market will develop automatically.

Do you see other institutions entering the secondary market?

Elaf Bank, New Islamic Investment Bank: Hopefully so. We are now hearing of new banks that were licensed in Bahrain to play the same role we do. There was a company established before us in 2002-2003, meant to specifically manage liquidity, and we would really like to see more.

Is Bahrain going to be the center of this?

Elaf Bank, New Islamic Investment Bank: Technically yes. Bahrain so far is considered to be the capital of Islamic banks. Bahrain and Malaysia are the two rivals or competitors for the position of “capital.” For the Middle East, Bahrain is definitely the capital, and Malaysia is also an advanced market in Islamic banking.

During the International Islamic Leadership Summit in Istanbul, Mr. Rainer Geiger, Head, MENA-OECD Investment Programme SA declared “There are numerous types of risks, for Islamic banks such as liquidity, a still developing money market; legal risk (enforcement of claims) and equity risk.”  Do you agree or disagree with this statement and are these risks a cause of concern to Elaf Bank?

Elaf Bank, New Islamic Investment Bank: As long as there are risks they are concerns to everyone because if you want to grow you want to really circumvent these risks. These are typical risks in Islamic banking, especially retail banks. We are an investment bank, so our concern is less than commercial or retail banks, especially if they have a sudden rush for whatever reason. But also for us it is a concern as a secondary market because you want to tap that market and raise funds for your clients. But the element of risk is that there is no last resort for Islamic banks yet. And that is why we would like to encourage all central banks which license Islamic banks in their countries is to have products that are accepted Islamically, that in case a bank has a problem he can refer to this central bank as the last resort. Today if you are in a squeeze, you can go and borrow. Islamically, you cannot borrow. So you have to have a certain mechanism adopted by your central bank which will allow you to liquidate some of your assets; they take it from you with a promise to give back, there has to be a mechanism engineered by central banks to encourage the availability of a last resort. The second, more natural step is to have an active secondary market, because then a bank can go immediately to that secondary market and liquidate the assets they have in a fair trade offer and bid.

To what extent is Elaf Bank poised to face the global financial crisis?

Elaf Bank, New Islamic Investment Bank: First of all, we are lucky that we are a new bank, so our portfolio was fresh and most of it happened to be in new products. We are not affected. But our problem would be that we have so many good projects in the pipeline and if I cannot place it then like anybody else I will face a recession in my operations and business. Placing these deals is how we make our profits and revenue. If this persists as a long-term economic slowness, we, like any other bank, would be affected.

What are the major challenges Elaf Bank is facing?

Elaf Bank, New Islamic Investment Bank: I already passed my first challenge which was to recruit the right people. I am very proud of my team, I think we did a fantastic and successful exercise on creating a very cohesive and professional team altogether. The second would be the ability to place my deals successfully. We have a lot of good deals and are working very diligently on placing them, everyone is working very hard, and I am very positive that we will place them.

Mr. Haram your newly appointed General Manager for Support Services said “I look forward to my new role with Elaf Bank and hope to positively contribute to the Bank’s visionary business model.” What is your visionary business model and how do you differentiate from other Islamic investment banks?

Elaf Bank, New Islamic Investment Bank: First of all, our vision is based on a triangular benefit first to our shareholders, second to deliver to our customers – Muslims or non-Muslims -an efficient and successful product with a good return, and third to be able to retain our professionals by giving them part of the profits eventually so that they feel that this is their bank. Optimizing between these three interests is the basic element of our business model.

You mentioned “the developments noticed by the industry in recent years and the ongoing turmoil in the markets, leads me to believe that Islamic finance will soon provide very substantial and promising opportunities for specialization and diversification.” Do you see Islamic finance as the providential response to the global financial system?

Elaf Bank, New Islamic Investment Bank: Islamic banking has two dimensions. First, it is an alternative for committed Muslims to practice their economic life within the parameters of Shariah; it gives them ease of mind and satisfaction.  We never tried to pose ourselves as opposed to global financial sector, but there are certain advantages that I hope people will see the benefit of in Islamic banking. If deals were done in the Islamic way, you wouldn’t have seen what happened today in the world financial crisis, because aside from being a fair industry, it is really based on fundamental assets. The assets have to be there, so you can’t create money out of money. It has to get into the roots of the economic cycle. In the long term, it does really create stability. You won’t have the ups and downs. This is one advantage. I think it has been recognized, and people in the Western world have started to wonder why banks did not default directly.

Where do you see the opportunities in Islamic finance at the present time?

Elaf Bank, New Islamic Investment Bank: First of all I think there should be more understanding towards it from the rest of the world. There is a lot of satisfaction in doing business with the committed people, and we should not deny them the opportunity to practice their religion worldwide if they want to. Second, it will really encourage people to get into the equity participation. And that’s where we believe most commercial banks are geared to work in the short term; they just give you credits and consumer finance to encourage spending. The fundamentals of Islamic banking have to be understood and focused on and that’s where the benefits come from. We all know that there should be the right balance between equity and financing, and it should be strong enough to allow for shocks like the one we just saw.

As an investment bank you have for instance announced the closing of a 2-year Murabaha financing extended to the Shamil Bosphorus Modaraba sponsored by Shamil Bank and Turkish partners to undertake projects in Istanbul and on the Turkish coast in excess of $450m. In addition you have launched a Sukuk Fund. How do you characterize your investment strategy and what investments are you making at the moment?

Elaf Bank, New Islamic Investment Bank: Our initial strategy was to walk before we run and had a focus on the GCC, but that doesn’t stop us from looking worldwide. We had an opportunity in the UK and Sudan, so we are not limited to the Gulf. But it is only natural that we grow in our region. However, whenever we have the opportunity and we do the proper due diligence and there are reliable partners, we will go into it.  So this is part of the strategy. It also depends on the type of industry or sector. We are definitely determined not to become another real estate agent, so we decided to have 30% of our portfolio in real estate, and the rest in other sectors like manufacturing, oil and gas, services, water – which is very important for us -, hospital management and these types of things. Additionally, we are getting more and more into establishing leasing companies, because leasing is an industry that leads itself to Sukuk which are trade-able, and this is necessary for developing a secondary market in Sukuk, because if you have something of a debt nature you cannot trade it according to Shariah. The only ones you can trade are those of an equity nature, called Ijarah.

How much of your portfolio would you like to dedicate to this?

Elaf Bank, New Islamic Investment Bank: Probably another 30%. Remember that Shajara is a tool, and could be used in any of the sectors I talked about. We have to distinguish between the sectors of the economy and the tools.

We interviewed the CEO of First Energy Bank and they said their revolutionary business model is based on investment purely in the energy sector, and that there is a lot of room for growth. How much of your portfolio would you like to dedicate to this potential competition?

Elaf Bank, New Islamic Investment Bank: On the contrary, I think First Energy Bank should open those for us, because again, in this industry, I don’t think there is any single player that can dominate the whole market. In Islamic banking, there is so much room for many more people to come in, and the more, the healthier. I hope all of them are committed, sincere, and know the industry well. We don’t want people who come in just to camouflage the industry rather than to believe in it and know it very well.

How would you characterize the relationship between your clients and yourself? Who are your clients and how do communicate with them?

Elaf Bank, New Islamic Investment Bank: We have two types of clients. First of all, there are certain clients that we identify; we think they are in need of financing, a good research department, your people and a network. We identify them. If they are not familiar with Islamic banking, we have to present our case and show them the benefits they would get from an Islamic bank. If you succeed at this, they become your clients. The second type are people who come to you who have heard about you and your role. But in both cases – and this part of the characteristics of Islamic banking itself – but we as a team have to act as a true and sincere advisor to our clients. If you bring me a project and tell me ‘these are the guarantees, please go and raise money for me’ and I am not convinced I’ll tell you ‘thank you very much, I’ll never take this to the market.’ If we believe that your project is not fundamentally sound, we try to advise you not to go into it. Sometimes people get shocked and upset that we tell them their projects are not sound, but sincere advise is the kind of relationship we would like to deliver to our investors.

In terms of geographical reach, how far are you reaching? You mentioned you had projects in Sudan and England.

Elaf Bank, New Islamic Investment Bank: We have been in England and Turkey, and are now looking at the Far East. We have also been in Malaysia and Indonesia.

Some say that now is the time to invest in America; are you considering this step as well?

Elaf Bank, New Islamic Investment Bank: Yes, probably, but it depends on the priorities. Basically, I am not sending a team to the USA now on my own. We have been approached by several American firms because there was a conference this last October that I was at in New York where people were introduced to Islamic banking. But nothing has materialized yet because then the economic crisis started to speed up and most of them were reluctant to present anything that was a sound or tangible proposal. But yes, it is something we will always consider if we receive the proper invitation.

How confident are you about the projects you are investing in, in terms of return on investments?

Elaf Bank, New Islamic Investment Bank: For all the projects we go into, we are very comfortable. This year, in spite of everything, all of the investments showed profits, which was unexpected but we were very happy with that. We were expecting some of them to break even or show maybe even minor losses. 2008 was an opportunity for everyone to blame things on the world crisis and show their hidden losses, but all our investments showed profit. There are certain products whose value went down in the market because of the trading capabilities of the market.

How would you comment on your strategic goals for 2009 and 2010. You have been established just recently, so how would you define your growth strategy?

Elaf Bank, New Islamic Investment Bank: As you know, strategy is not just for one or two years. 2009 for us is very crucial, if we succeed  and open new lines for ourselves without the help of our shareholders and based on our own guarantees and merits, that would be a great achievement and success. That is really our target for 2009 and 2010. We need to make sure that although we are young, we can stand on our feet. If we can do that now during this storm, it means we will be even more successful in the future when markets start becoming more positive.

What is your policy in terms of sustainable development? How is the bank acting towards this in terms of investment or itself as an institution?

Elaf Bank, New Islamic Investment Bank: Today we are invested in a project that is developing an integrated complex which we are offering six cars for every 100 meters. Even the municipality was surprised that this is the first client that comes to us and says ‘I want to offer that.’ And instead of going about it normally, we went ahead and initiated a world competition where we invited international design houses to come and design it for us. The proposals are being reviewed, and there is still one left to be submitted next week. But this project will really be a solution for Bahrain. For us, one of the conditions is that it has to be environment-friendly, economically-able to cut down on future maintenance, and these conditions have to be present in the winner of this project.

How would you assess your relationship with the Central Bank of Bahrain as a newly-established entity, and what are the advantages for international banks to set up their headquarters in Bahrain?

Elaf Bank, New Islamic Investment Bank: Elaf Bank is new, but my relationship with the Central Bank goes back to my days in Bahrain during 1999-2002. I think it is one of the most friendly central banks, yet they are determined about creating standards and regulations. They have that attitude because they want to make Bahrain into a financial center. They play the role of a regulator but at the same time they are very supportive. I think we have a fantastic relationship of great confidence. What I like about Bahrain is that you immediately find yourself at home. As a Lebanese, I never felt like a foreigner in Bahrain. The people are very friendly, very ambitious, and one of the great things about the Gulf area is that you can find Bahrainis working as everything from taxi drivers to Chairmen of companies. They’re not all necessarily the owners and the big bosses of the companies, so it really creates a nice mix. I am probably one of the banks that has the highest percentage of Bahrainis employed.