banking in the arab world

8/3/2019 Banking in the Arab World

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FINANCIAL TIMES SPECIAL REPORT | Thursday September 22 2011

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ShariacomplianceIslamic banks,beset by squalls inthe past few years,have defied thecritics. RobinWigglesworthPage 3

ARAB WORLDBanking & FinanceFINANCIAL TIMES SPECIAL REPORT | Thursday September 22 2011

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The biggest worry for the finan-cial community in the MiddleEast at the start of 2011 wasthe lingering losses on bad

loans from the global financial crisisand the downsizing of staff.

Very soon, however, the region wasswept by a wave of popular unrest asthe awakening of Arab youth her-alded a new era.

In March, after Tunisian and Egyp-tian leaders had been ousted, bankersin the financial centre of Bahrainfound themselves in the midst ofstreet battles, with stones flyingthrough the acrid fug of tear gas inManamas financial district.

Libya descended into civil warbefore Muammer Gaddafis regimewas pushed out of Tripoli, and inYemen and Syria popular protestsdemanding the departure of presi-

dents continue.The unrest has served as a sharp

wake-up call about the need for newfoundations of economic equality andpolitical enfranchisement to underpinstability. As the oil-rich Middle East

and north Africa undergo a historicaltransformation, analysts say that nocountry is immune to popular actionand even those that appear most pro-

tected, including wealthy Qatar andthe United Arab Emirates, will haveto pay greater attention to the needsand aspirations of their people.

Bankers were hoping that 2011would herald a recovery from thefinancial crisis, but in reality, eco-nomic growth and market activityhave stagnated.

The International Monetary Fundforecasts that the growth rate Egyptsgross domestic product will fall from 5p er cent to 1 p er cent, while theunrest will halve Tunisias growth.

Arab equity markets are down amidpaltry volumes, while initial publicofferings in the second quarter fell 52per cent on the previous year.

Promising signs of corporate debtissuance have been crimped by globalheadwinds. As the dust begins to set-tle on regional revolts, bankers aretweaking business plans as theysearch for opportunities.

Where the response has not beenviolent repression, governments haveinitiated huge infrastructure spendingand more state jobs to blunt anger

among their young populations,where an average of one in four isunemployed.

If the past oil-fuelled decade was alost opportunity during which cheap,in many cases also borrowed, money

was squandered on luxury apart-ments, bankers are preparing for asurge in p ub lic investment andreforms that would distribute wealthmore widely.

V Shankar, chief executive forStandard Chartered in Europe, MiddleEast, Africa and the Americas, says:The youth unemployment problemwill need to be solved: there will

either be a demographic dividend, asyouth participate in economic revival,or a demographic deficit.

He adds: Progress will come fromdiversification from oil and frominvestment in infrastructure, schools,

hospitals and in boosting services.The remedy is hardly new, but Mr

Shankar believes the seriousness ofthe challenge has been met by closerco-operation among the Gulf states top romote action, b oth within theregion and in countries that are goingthrough political transitions.

The Gulf Co-operation Council haspledged $10bn for social programmes

in Oman and in Bahrain, where pro-tests continue, amid calls to broadenmembership of the six-nation bloc tothe regions other monarchies, Jordanand Morocco.

Europe has also promised $38bn for

Arab states in transition, includingEgypt, Tunisia, Morocco and Jordan.Two of the regions largest markets,Egy pt and Saud i Arab ia, haveemerged as polar opposites on thespectrum of revolutionary change.

HSBC, which sees Egypt as its mainregional market, is confident politicalchange in north Africa will fore-shadow economic renaissance, despite

lingering fears that the revolutioncould be hijacked by groups display-ing a less investor-friendly approach.

Whoever comes to power will rec-ognise Egypt as a big player in theMiddle East as a conduit to the west,

says Simon Cooper, chief executive ofHSBC Middle East. We hope to see aTurkish model emerge, he says,referring to Ankaras thriving econ-omy under an Islamist-oriented gov-ernment.

Saudi Arabia, the worlds largest oilexporter, has escaped unrest and haslaunched a big social spending pro-gramme, a fiscal stimulus equivalent

to about 30 per cent of GDP. Riyadh isalso flexing regional muscle, leadingGulf efforts to put down pro-democ-racy protests Bahrain.

Prospects fornew business

pinned on anold remedySimeon Kerr says thatthe wave of popularunrest is promptinggovernments to spendmore on infrastructureand social programmes

Inside this issueMerchantfamiliesJames Drummond

reports on calls forstronger internalcontrols Page 2

Private equityAcquisitions andasset disposals through IPOs havevirtually dried up Page 2

Sovereign wealth fundsGulf governments will be spendingmore money on the home front this

year as they try to placate theirpopulations, writes Camilla HallPage 3

EgyptBanking is notexpected toreplicate last

years 39 per centearnings growthbut it has held upwell in spite ofpolitical turmoil,

finds Heba Saleh Page 3

Private banking Local banks arerekindling their interest in the sector,leaving big operators to wonderwhether they will be friend or foePage 4

Project finance Why someinfrastructure projects are morepopular than others Page 4

Insurance Andrea Felsted reportson the increasing popularity ofTakaful Page 4

Step change: unrest has served as a sharp wake-up call about the need for new foundations of economic equality Alamy

Continued on Page 2


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2 FINANCIAL TIMES THURSDAY SEPTEMBER 22 2011

Arab World: Banking & Finance

Farouk Soussa, Citischief regional economist,sees much promise in SaudiArabias liquid banking sys-tem and project pipeline,despite concerns over aforecast softening of oilprices as global demandweakens.

Qatar, the gas-rich backerof Libyan rebels, has thisyear slowed its breakneckpace of international acqui-sitions, but recent signs arethat its investment appetiteis returning.

L ibya may becomeanother promising frontier,if a new government canconsolidate control.

The emergence of newmarkets is a potential life-saver for investment bank-ers, many of whom havebeen disappointed by the

meagre pickings on offer inthe low-fee environment ofthe regional powerhouse,Saudi Arabia.

Niche restructuring advi-sory work has not been ableto offset the collapse in feesfrom the dearth of IPOs andmergers. The large invest-ment banking teams at theDubai International Finan-cial Centre (DIFC) were cutafter the financial crisis andinstitutions are again qui-etly trimming costs in linewith the realities of limitedprofitability.

Bankers are optimisticabout a revival in projectfinance, as governmentsshower their populationswith infrastructure spend-ing to blunt unrest.

But this is a case of backto the future, a return tothe 1990s, when Arab gov-ernments also launched around of infrastructure

spending. Thats what ahandful of us were doing adecade ago, says one Gulfbanker. The corollary tothe rise of project finance isthat equities, debt andmergers are dead.

Private banking, at least,is on the rise, as the ranksof the regions super-wealthy continue to grow.Wealth management armsof banks such as UBS aretrying to foster l inksbetween their private andinvestment banking teamsto generate deal flow fromtheir private clients.

JPMorgan, for example,has moved relationshipmanagers from Bahrain toDubai. The decision to shifta small team to Dubai camebefore the Shia-led upris-ings in Bahrain; the banksays it remains committedto the island.

As the Sunni governmentin a majority Shia countryvacillates between repres-sion and reconciliation, theislands banking industrycontinues to suffer.

Crdit Agricole andRabobanks asset manage-ment arms are relocatingto the DIFC, while otherinstitutions, keen to showcommitment to BahrainsSaudi-oriented financialcentre, are retaining head-quarters in Manama whilequietly moving out staff.

More affordable, wellpositioned Dubai has beenthe great beneficiary ofunrest, as investors flock toits established infrastruc-ture and easy lifestyle.

Hopespinnedon oldremedy

Contributors

Simeon KerrGulf Business

Correspondent

Robin WigglesworthCapital MarketsCorrespondent

Heba SalehCairo Correspondent

James DrummondGulf News Editor

Camilla HallGulf Correspondent

Andrea FelstedSenior RetailCorrespondent

Stephanie GrayCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For advertising details,contact:Mark Carwardine on:+44 (0) 207 873 4880;e-mail:[email protected]

All FT Reports areavailable on FT.com at:

www.ft.com/reports

During the Gulfs oil-soakedyears of expansion, privateequity was one of its hottestnew industries, as localmerchant families soughtways to channel theirwealth back into their ownregion, and overseas inves-tors wanted to capitalise onthe Arab worlds growth.

This sparked a fundrais-ing bonanza. More than 130funds were established inthe Middle East and northAfrica between 2003 and2008, which raised $24bnaccording to Preqin, a dataprovider.

Even in 2008, when thewest was gripped in a deep-ening credit crunch, 30funds raised $5.5bn.

As a result, dealmakingsoared, as firms snapped upstakes in companies such as

EFG-Hermes investmentbank, Egyptian Fertilisers,Damas, a jewellery chain,Maritime Industrial Serv-ices and Spinneys, a super-market chain.

State-run private equityfunds mostly looked abroad,and bought assets such asthe Tussauds Group, Bar-neys, Loehmann and Inch-cape Shipping Services.

Yet the industrys bloomhas faded swiftly in the pasttwo to three years, as theglobal financial crisis hitthe region, rattling fund-raising, dealmaking andexits through public equitymarkets.

Regional private equityactivity has dropped signifi-cantly over the past twoyears, concedes ImadGhandour, managing direc-tor at local firm Cedar-Bridge. The most visibleparts of private equity

acquisitions and asset dis-posals through initial pub-lic offerings have virtuallydried up. Dealmaking inparticular continues to suf-fer from an idiosyncraticMiddle East problem; entic-ing owners of companies tosell to private equity.

The private sector ismade up mostly of familyowned merchant groupswhich often prefer to buildvast, sprawling empiresrather than cash out onunderperforming or non-core assets. Even familyowned conglomerates thathave run into difficultieshave generally been able tohold on to their assets.

This is partially thanks tothe willingness of localbanks, sometimes owned bythe families themselves, toextend loans to influentialcustomers, and under-devel-oped insolvency laws,which make creditors reluc-tant to call an officialdefault.

Its not in the culture ofbanks in the region to pullthe plug on companies thatare struggling, says PervezAkhtar, a partner at Fresh-fields Bruckhaus Deringer,

the law firm. Theyre a lotmore patient.

Moreover, when merchantfamilies are willing to sell,they are usually only pre-pared to part with a minor-ity stake and ask for pricesthat many firms blanch at.

Theres still a persistentgap between the valuationsof buyers and sellers, MrGhandour says. Companyowners still see a lot ofupside, and demand thesame multiples as they didbefore the crisis, but buyerswant discounts.

Exits have also provedtricky. Generally, investor-friendly listing rules havealways made IPOs a less-than-ideal exit strategy forprivate equity firms, butlethargic equity marketshave virtually precluded

any listings in recent years.The value of IPOs has

slumped from a peak of$13.5bn in 2008, to about$2bn in 2009 and 2010, andonly $382m so far this year,according to Dealogic.

Listing abroad is possi-ble, but not very practical,

and Middle East investorsarent the only ones whoare cautious these days,Mr Akhtar says.

The dearth of exits andresulting lack of returns has exacerbated a fundrais-ing shortage. Despitehealthy oil prices, mostinvestors remain reluctantto commit capital to newfunds. Scores of vehicleshave been announced overthe past three years, butonly 15 funds have beenable to close, with $2.4bn ofcommitments.

Executives say even exist-ing funds are not as cash-rich as the headline figuresmay indicate. Many inves-tors have promised capitalonly to renege, and themuch talked about drypowder has proved wetterthan expected.

Middle East privateequity firms use far less lev-erage than is the norm inthe west, but rocky creditmarkets have nonethelessmade it hard to supplementscarcer equity with debt.

The financial crisis putpressure on a lot of inves-tors, and the Arab spring

made people doubly averseto risk, Mr Akhtar says.

Many private equityhouses had expected a turn-round in dealmaking, fund-raising and exits this year,but the eruption of politicalunrest has severely dampedthis hope, with risk aver-sion on the rise among bothfirms and their investors.

Where does this leave anindustry that showed suchpromise during the boomyears?

Experts predict that theresult of the past threeyears of travails will be amore humble industry, withsmaller funds and smallerdeals.

While larger buy-outshave virtually disappeared,executives say there is areasonable amount of activ-ity on the less visible,smaller scale, with manydeals typically valued at

$50m or less.The funds are a lot

bigger than the regionaleconomy warrants, andthere are too many, MrGhandour says. Theregional industrys sweetspot is in the small-capmarket.

Years of oil-soakedexpansion are overPrivate equity

The industrys bloom has faded,writes RobinWigglesworth

Political unrest hasdamped hopes,with risk aversionon the rise among

firms and investors

It is more than two yearssince the dispute betweenSaad Group and AhmadHamad Algosaibi and

Brothers (Ahab) first hit theheadlines. Much of what hap-pened is the subject of complexand lengthy litigation in Londonand other financial centres.

In essence, Maan al-Sanea, arelative by marriage of the Algo-saibi family, denies using hisrole in Ahab to run a schemethat has left the company andhis own Saad group owing morethan 100 regional and interna-tional institutions an estimated$20bn. The register of litigantsreads like a Whos Who of MiddleEastern banking.

How did it come to pass that somany institutions with such longand, for the most part, successfulassociations with the region gotthis one so badly wrong?

Andrew Cunningham, head ofDarien Middle East, a consul-tancy, says: The saga may beone of the largest but it is not anisolated incident. Governance infamily companies in the MiddleEast is recognised as a hugeproblem and getting them toimplement robust internal con-trols has been an enduring chal-lenge. The Saad-Algosaibi dis-pute illustrates how much is at

stake.A report by Moodys, the rat-

ing agency, published last yearin the wake of the Saad Algo-saibi collapse, noted that expo-sure to only two companies

caused material problems.Although family owned groupsare usually well resourced andhave taken steps toward institu-tionalisation, corporate govern-ance and transparency remainpatchy, with bankers also resort-ing to name lending practices[lending based on relation-ships], the report said.

It continued: We note, how-ever, that these practices havebecome the exception ratherthan the norm, since the defaultsof Saad and Ahab, with banksbecoming less willing to financefamily owned businesses.

Constantinos Kypros of Moodys says that while some

name lending may haveresumed, the regulators havebecome more sensitive to therisks involved in credit concen-tration.

In Saudi Arabia, the CapitalMarkets Authority has intro-duced a regulation that, from thebeginning of next year, requiresthe boards of listed companies toinclude independent directorswho are not shareholders.

Nasser Saidi of Hawkamah, abody that seeks to promote goodcorporate governance, admitsthat progress has been patchy.Identifying and engaging inde-pendent, non-executive directorsto serve regional board rooms isdefinitely one of the corporategovernance issues faced by theregion, Mr Saidi wrote in ane-mail response to questions.

In our work, however, theconstant question posed by theprivate sector in trying to ensurecompliance to the CG code iswhere do we find these [truly]

independent directors?Mr Saidi says that Institute of

Directors Mudara, a sister insti-tute of Hawkamah, has trainedmore than 150 directors, but saysthat most of them have yet to

be fully tapped. There are otherinitiatives trying to build a cadreof independent non-executives,but the business model has notfully taken off as it has in otherparts of the world, Mr Saidiwrote.

Anais Faraj, managing directorat The National Investor, pointsto the rating accorded to Greece,and the stampede for the doorwhen payments became due.Everyone knew of Greeces ques-tionable credit history and its

poor accounting, he says, butstill institutions were happy tolend when the going was good.

Local banks have credit histo-ries of borrowers, which providecomfort, but institutions are

often encouraged by their ownboard members to extend loansway beyond what is prudent.

International banks are morerigorous, Mr Faraj says, but riskcommittees typically look at onlyone important metric the priceof oil. Generally, credit commit-tees are tough, but the sad real-ity is that, with internationalbankers, the credit assessmentsare done by licking their fingerand sticking it in the air. Theythink: Hes a bigwig in the

chamber of commerce and so hemust be good for the money.

The Saad Algosaibi imbrogliodid cause banks in Saudi Arabiato review lending and extracttighter reporting commitments

from would-be creditors andcredit growth in the kingdomslowed sharply.

But with institutions awashwith capital, Mr Faraj believesthe cycle is repeating itself, thistime because they are concen-trating on a few top companiesin each market. The banks needbetter audited numbers andshould spread risk by lending tomore corporates. They are delud-ing themselves by thinking that,if they lend to the top 10 per cent

and that top 10 per cent aremonopolists, it is therefore saferthan lending to the middle 50 percent. The quality of the risk andthe quality of the information isthe same.

Calls forstronger

internalcontrolsMerchant families

James Drummondconsiders the falloutfrom a dispute betweentwo large groups

Worry factor: regulators have become more sensitive to the risks involved in credit concentration Getty

Although family ownedgroups are usually well

resourced, corporategovernance andtransparencyremain patchy

Continued from Page 1


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FINANCIAL TIMES THURSDAY SEPTEMBER 22 2011 3


Sovereign wealth Spending stays close to home

Gulf governments will be spending moremoney on the home front this year, asthey try to placate their populationswith job creation and infrastructureprojects.

Depending on the oil price, that maymean less investment overseas or amore focused approach to foreigninvestment, analysts say.

It is difficult to generalise aboutsovereign wealth funds in the region.The Qatar Investment Authority spendsquite differently from the one in AbuDhabi, while Saudi Arabia invests themajority of its sovereign funds throughits central bank.

But two factors affect governmentsspending plans: the need to provide fortheir people; and the oil price.

The most significant effect of theArab spring is that the increase ingovernment spending limits the surplusof GCC governments, which meansthere are fewer resources to investabroad, says Rachel Ziemba, asovereign wealth fund expert atRoubini Global Economics.

Instead, the governments and thefunds themselves, especially thesovereign development funds, havecome under more pressure to invest inprojects at home.

Saudi Arabia, the largest Arabeconomy, is leading the charge in statespending with plans to exceed thisyears budget by about 40 per cent.

In other Gulf countries, political andsocial unrest has pushed governmentsincluding Bahrain, Kuwait and Oman togrant more to their people.

Most recently, Qatars governmentgave public sector workers salary andpensions rises of between 50 and 120per cent. Furthermore, the government

may spend $57bn over the nextdecade to create the infrastructure forthe 2022 World Cup, according toMoodys estimates. Qatar has alsoused its sovereign funds to prop upthe banking sector.

In Abu Dhabi, government

investment arms such as MubadalaDevelopment Company have beendeployed to support local entities,including Aldar Properties, a local realestate developer and Tabreed, adistrict cooling company.

All that spending at home does notmean that sovereign funds mandatedto invest abroad will suddenly changetrack. It just means there may be lessallocated to them. The Gulf states havealso promised billions of dollars tocountries such as Egypt and Tunisia.

Gulf SWFs are scanning the regionfor investment opportunities in post-revolution economies. Because they

know the regional economies so well,they may be better poised to takeadvantage of opportunities as theyarise, says Ann Wyman, head ofemerging markets research Europe atNomura.

Despite debt woes in Europe and thedowngrade of the USs credit rating,funds are still highly active abroad.

Last month, Qatars fund announceda 500m capital injection into themerger of two Greek banks. In thesame month a Qatar-backedconsortium invested 557m inLondons Olympic Village.

Furthermore, despite its vastspending plans, Saudi Arabia is stillamassing foreign assets. Thesepassed the $500bn mark for thefirst time in July.

Saudi Arabia is thought to bean important holder of UStreasuries.

The continued growth isprobably caused by highergovernment revenues ratherthan a slowdownin spending,

says PaulGamble,

head of research at Riyadh-basedJadwa Investment.

The kingdoms oil production wasclose to an all-time high in June andindependent estimates put it higher inthe following months, according to MrGamble. Saudi Arabia increased oilproduction, as unrest spread acrossthe Middle East.

Meanwhile, in Abu Dhabi, theemirates International PetroleumInvestment Company bought Cepsa, aSpanish oil company, for 3.7bn inFebruary, indicating that overseasinvestments are not off the table.

Despite the new bout of dollar

volatility, analysts say the Gulf statesare unlikely to diversify theirinvestments away from the greenbackin the near term.

All funds have already diversified afair amount where they can butthe problem is: Where do you diversifyto?

The euro has its problems too, evenmore so in some ways, given the risingrisk of a split over the medium termand weak economic growth, Emergingmarket currencies tend not to beconvertible. The Swiss franc, andCanadian and Australian dollars areinsufficiently large, says Ms Ziemba.

The currencies of the Gulf states,except Kuwaits, are pegged to

the US dollar. This means theyare have an incentive tosupport the currency for thesake of their own economies.

So, despite increasinginvestment at home,inter

nationalinvestmentsare still taking

place, albeit ata slower pacethan during theboom years.

Camilla Hall

High liquidity ishelping Egyptsbanks weather atough year, fol-

lowing the popular uprisingt ha t t op pl ed H os ni

Mubarak, the former presi-dent, in February.

As political turmoil drovetourists and investors away,the economy sputtered andgrowth in the financial yearto June 2011 fell to 1.8 percent, from 5.1 per cent theyear before.

The first quarter of 2011witnessed the most notableimpact, with the economycontracting 4.2 per cent,compared with 5.6 per centgrowth in the previousquarter, before the start ofthe uprising. The secondquarter, to the end of June2011, saw the star t of arecovery, as growth rose 0.4per cent, according to offi-cial figures.

With loan-to-depositratios averaging about 50per cent, Egypts lendershave not been damaged bythe shock to the economy,although bankers say thesector is not expected toreplicate the 39 per centgrowth in earnings it sawlast year.

Egyptian banks do notrely on external funding

nor on interbank lendingfrom international banks,says Elena Sanchez, bank-ing analyst at EFG-Hermes.If that had been the case,it would have created aliquidity crisis. Overall,there is confidence in theb an ki ng s ec to r w hi chexplains how deposits havestayed in the system.

In an attempt to protectthe banking system and thevalue of its currency, thegovernment also imposedrestrictions on transfersabroad after the revolution.

It also froze the assets of

dozens of individuals linkedto the previous regime. But,even if the system remainssound, credit growth hasbeen anaemic in 2011,says Ms Sanchez, reflecting

the severe slowdown in theeconomy. There has been avery significant slowing ofloans growth, she says.

She notes, however, thatbanking revenues as a per-centage of assets have notreally deteriorated and netinterest, which accounts formost of banking revenue,has held up. She describesbanks as having a veryhealthy revenue stream.

Before the revolution,the banking industry had alow asset/deposit ratio,says Andrew Long, chief

executive of HSBC BankEgypt, highlighting the factthat, even during the pastfew years of high growth,the economy was not signif-icantly leveraged. Now,he sa ys , po st -revolution, with the econ-omy in flux, there is notmuch sign of companiesand individuals wanting toborrow for investment.

He says that, while hisbank has had to roll over asmall number of loans tobadly affected sectors, suchas tourism, interest repay-ments are still coming in

and there is an expectationthat those loans will bepaid as expected, althoughit may take longer.

But, Mr Long says, othersources of revenue such asfees from activities relatedto the capital markets havef al le n, a s t he s to ckexchange bore the brunt ofthe shock . CommercialInternational Bank, Egyptslargest private lender bymarket value, says the mar-ket for loans grew 3.5 percent in the first six monthsof the year, but its own loanbook expanded by 6.37 percent.

H is ha m E zz a l- Ar ab ,chairman and managingdirector of CIB, ascribes thesectors resilience to thereforms of the past eightyears, which strengthenedlenders and promoted con-solidation, reducing thenumber of operators in themarket from 62 to 39.

After foreign investorsreduced their holdings oftreasury bills by $5.9bn inthe first six months of theyear, the government has

been looking to local lend-ers to fund almost 90 per

cent of its deficit which itestimates at 8.6 per cent ofgross domestic product forthe fiscal year to end inJuly 2012.

After turning down a$3bn loan from the Interna-tional Monetary Fund, thegovernment has been issu-ing local currency treasuryb il ls t o r ai se E 1 20 bn($20bn), sending yieldsabove 13 per cent, theirhighest in three years. Pub-lic and private-sector bankshave increased their invest-ment in treasury bills by 46and 56 per cent r espec-tively, according to Bloomb-erg data.

S om e a na ly st s h av evoiced concern that lendingto the state might crowdout credit to the private sec-tor, slowing recovery. Egyp-tian banks, they say, arerisk-averse at the best oftimes, and the attractivey ie ld s o f g ov er nm en t-guaranteed bills will act asa disincentive to lending toprivate business.

Bankers disagree, how-ever, saying the decline in

business lending reflects adrop in demand rather than

liquidity constraints or ashying away from r isk. Lo an s i n E gy pt a re ademand-driven and not asupply-driven commodity,says Mr Ezz al-Arab. So,

he adds, if foreign directinvestment is negative or

flat and domestic invest-m en t h as s lo we d, l oa ngrowth will obviously beanaemic.

He and others say invest-ment will not return until

the end of political uncer-tainty after parliamentary

and presidential electionsthis year and next. Thefundamentals of Egyptsattr activeness ar e stillthere, says Mr Ezz al-Arab.There are 80m consumers,

sun, the sea and the SuezCanal. Unrest will probably

continue to hurt the macropicture and impact the nearterm. But we are confident,the future will be positiveand the economic perform-ance will improve.

Confidence and

liquidity helpease the turmoilEgypt

The economy hastaken a dive butlenders have beencushioned, writesHeba Saleh

Resilience hasbeen ascribed toreforms whichhave promotedconsolidation

Empty quarter: political upheaval has driven tourists and investors away. Growth has fallen to 1.8 per cent, from 5.1 per cent last year Getty

Unresthas led tostatespending

Islamic banking has faced aseries of squalls over the pastfew years, both financial andphilosophical, but has kept ongrowing, defying many criticsand even surpr ising someadherents.

The industry may have side-stepped the main brunt of thefinancial crisis, thanks to pro-hibitions against interest thatprecluded investments in thecomplex credit derivatives thatfelled many conventional banks.Nonethe less, it still felt thepain of the resulting downturn.

Several shar ia-compliantinvestment companies tottered.Islamic bonds defaulted for thefirst time. And many Islamicbanks were hammered by losseson real estate loans and invest-ments.

Coupled with political unrest

in the Arab world particularlyin Bahrain, the regional hub forIslamic finance it could havebeen a perfect storm for a youngand vulnerable industry.

Yet overall, Islamic financehas continued to expand, bothin absolute terms and relative toconventional banking. Manyexperts estimate that it hascomfortably surpassed the sym-bolic $1,000bn of assets mark.

Despite all the turmoil weveseen in the Arab world, this hasbeen a good year, says RaziFakih, deputy chief executive ofHSBC Amanah, the British

banks Islamic arm. Driven bycustomer demand, retail andcommercial Islamic bankingcontinues to make inroads intothe conventional space, hesays.

Many individual Islamicfinance companies experienced

a difficult time, and continue todo so but, overall, the industryhas fared better than many peo-ple expected.

The growth has been mostpr onounced in tr aditionalstrongholds such as Malaysiaand the Gulf, but advances havealso been made into westernmarkets. Companies such asNomura and General Electrichave issued Islamic bonds, orsukuk, and Islamic banks havesprung up in the US, Europeand Asia.

The statistics vary, but theindustry is definitely growing,

says Humphrey Percy, chiefexecutive of UK-based Bank ofLondon and the Middle East, asharia-compliant institutionbacked by Kuwaiti investors.

Even Islamic debt marketshave continued to grow, despitethe still-uncertain outcome of

restructuring of several promi-nent sukuk, such as one issuedb y T he I nv es tm en t D ar , aKuwaiti house that owns part ofAston Martin, and one sold byMaan al Sanea, the Saudi bil-lionaire.

The global volume of Islamicbond sales r eached $15.3bnthrough 60 deals by the end ofAugust 2011, the highest totalover that period since 2007, andup 52 per cent on the $10bnraised over the same period lastyear. Malaysian issuers haveaccounted for three-quarters ofIslamic bonds in 2011, but

several big Gulf-based entitieshave also tapped the marketthis year including the IslamicDevelopment Bank in SaudiArabia and HSBC Middle East.

In addition to growing in size,Islamic finance has also grownin depth and sophistication. In

the past, it has largely been acommercial banking phenome-non. But it now spans retailbanking including sharia-com-pliant credit cards, car loansand insurance to investmentproducts and services.

Islamic finance has come outof the corner over the past fewyears. It started with bank lend-ing, and has now even creptinto derivatives, says TobiasMuller-Deku, partner at Fresh-fields Bruckhaus Deringer, thelaw firm.

However, not everyone isenthusiastic. Some experts say

growth has come at the expenseof Muslim jurisprudence andprinciples. In 2008, Sheikh TaqiUsmani, ar guably Islamicfinances leading scholar ,argued that some sukuk struc-tures were too lenient, whichseverely rattled Islamic debt

issuance for several years. In2009, the International IslamicFiqh Academy, a body of clericstied to the Organisation of theIslamic Conference, ruled that acommon Islamic banking instru-ment was prohibited.

Critics outside the industrycan sometimes be sharper even those who are sympa-thetic. In his book The Crisis ofIslamic Civilisation, Ali Allawi,an academic and former minis-ter of defence in Iraq, lambastedthe artful delusion of Islamicbanking, accusing it of relyingon acquiescent boards and

elaborate artifices that appearto meet the outer forms of thesharia, with no regard for itsinner meaning and purpose.

In many respects, Islamicbanking at least in the MiddleEast seems undecided whetherto go down a more lenient, but

practical route where some com-promises with conventionalfinance are made; or to pursue astricter path, most likely at theexpense of growth.

Malaysia has pursued a prag-matic approach, and enjoys anindustry far more vibrant thanthat of the Middle East. Yetm an y v ie w t he M al ay si anapproach as too liberal.

Its a debate the Muslimworld needs to have, says oneexpert. At the moment you canalmost finance a pork belly fac-tory as long as you dont haveovert interest.

Niche market defies its critics, gaining in depth and sophisticationIslamic finance

But some are less thanenthusiastic, saysRobin Wigglesworth


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4 FINANCIAL TIMES THURSDAY SEPTEMBER 22 2011


G ul f b an ks a re t ry in g t ocompete with the likes of BankSarasin-Alpen and Credit Suissefor private banking clients inthe oil-rich Middle East.

Private banking has been agrowth area for internationalbanks in the region after deal-orientated investment bankingfailed to offer the opportunitiesthat had been hoped for.

Howev er , local b anks arerekindling their interest in thesector, leaving the big operatorsto wonder if they will be friends

or foes. We see a number oflocal banks pushing their pri-vate banking services. They arehiring again. I lost a couple ofpeople to local banks which nor-m al ly w ou ld n t h ap pe n, explains Rohit Walia, chief exec-utive of Sarasin-Alpen Middle

East.There was a bit of a lull twoor three years ago, when every-one was pushing commercialbanking and IPOs but, since allof thats at a bit of a low ebb,this seems to be the flavour atthe moment.

Expansion into private bank-ing comes as the number ofpotential clients is increasing.The Middle Easts population ofwealthy individuals grew 10.4per cent last year to 400,000,while wealth increased by 12.5per cent to $1,700bn, accordingto the Capgemini and Merrill

L yn ch 2 01 1 W or ld W ea lt hReport.

Most international privatebanks say their assets undermanagement have grown quiterapidly since last year, whilerejecting the idea that the Arabuprisings had played an impor-

tant role in boosting business.A relatively improved eco-nomic environment or expan-sion from a low base have beenthe main drivers, they say.

Dubais Emirates NBD is hir-ing 30 relationship managers atits private banking and smalland medium-sized businessesdepartment.

Banks such as Emirates NBDwill hope to join the ranks ofNational Bank of Kuwait andSaudi Arabias National Com-mercial Bank, two of the mostsuccessful private banking armsof the regions local banks.

The model of a number ofour competitors is to fly seniorbankers in, says Gary Duganchief investment officer at Emir-ates NBDs private bankingunit. They have people on theground, but they fly the senior

people in. We aim to have thesame quality of people sitting inDubai and talking to clientslocally.

In the UAE, the NationalBank of Abu Dhabi maintainsa separate Switzerland-based

private bank, while Abu DhabiCommercial bank is targetingthe mass-affluent market.

Abu Dhabi Commercial Bankbought Royal Bank of Scotlandsretail banking business in theUAE last year. It also set up aprivate banking partnership in

Switzer land together withSchroders.Michael Wrede, deputy chief

executive of NBAD PrivateBank (Suisse), says assets undermanagement have grown 20 percent since the start of the year,

This growth is a result of ourcontinued ability to attract newclients and additional assetsfrom existing clients, says MrWrede.

We have continued to makevery conservative asset alloca-tion, with significant allocationsin deposits and cash, and havefocused our investments on

corporate bonds, in particular ofGCC [Gulf Co-operation Council]issuers.

Even though the Middle Eastlooks richer, the number ofwealthy individuals in the UAEdeclined by 3.5 per cent lastyear because of the effects of a

fall in r eal estate p rices inDubai, the World Wealth reportsays. Countries such as SaudiArabia and Qatar are drivingbusiness, bankers say.

Many local banks are lookingat private banking, says BrunoDaher, co-chief executive andhead of private banking for theregion at Credit Suisse.

International banks are alsoexpanding their private bankingteams in the region while cut-ting back in other areas.

Almost every internationalbanks is hiring; some of thenumbers are crazy, says Ally

Ho head of financial services forthe Middle East and Africa atPedersen & Partners, a head-hunter. Ms Ho, a former banker,says that, as investment bank-ing deals have taken longer toexecute because of the crisis,banks have turned to private

banking for a more reliablerevenue stream.For now, there seems to be

enough room for both local andinternational banks in the pri-vate banking sphere, bankerssay. Whether that remains thecase is open to question.

Investment banking has losta lot of its appeal. There are nobig deals happening, becausepeople are worried. Theres nomore p ropr ietary tr ad ing,because its highly regulated.What is left? The good old pri-vate bank with its clients, saysone senior private banker.

Local groups join competition to service wealthy clientsPrivate banking

Camilla Hall reportson efforts to stealbusiness away frominternational rivals

As investment bankingdeals have takenlonger, private bankingis seen to providemore reliable revenue

At th e c ost o f aprincely $14bn, theS au di A ra mc oTotal Refining and

Petrochemical Company better known as Satorp isthe biggest project financ-ing the Middle East hasever seen.

When operational in 2013,

the refinery and petrochem-ical complex at Jubail willconvert heavy crude into400,000 b ar rels a d ay ofhigher-value refined prod-ucts such as diesel and jetfuels. It will also produce arange of petrochemicals.

The financing was com-pleted in June last year.About $8.5bn came frommultiple sources $4bnfrom international exportcredit agencies and SaudiArabias Public InvestmentFund, and $4.49bn fromcommercial banks, accord-ing to industry newsletters.The 16-year senior tranche

was priced at 1.85 per cent

over Libor.Most lend er s would

acknowledge that the mar-gins on the debt were insidethe market for equivalentproject finance risk, saysJonathan Robinson, head ofproject finance at HSBC inthe Middle East.

He adds: The reason thatit was below market riskwas that lenders attributeda great deal of value to and took a good d eal of comfort from the fact thatthe project was sponsoredby Aramco and Total.

For the sponsors and gov-ernments, project financing

is a way of raising debt that

does not sit on their booksand a means of introducingdiscipline into complexprojects.

For companies such asAramco, the mechanismsoffer ways of tying blue-chip partners into high-techschemes that produce goodmargins.

For banks and other pro-viders, this is good long-term business, providedthey can secure guaranteesthat revenues will come inas projected.

Saudi Arabia remains thesingle largest market forproject financing in the

region. Aside from refiner-

ies and p etr ochemicalprojects, it is estimated thatt he k in gd om n ee ds t oinstall up to 35,000 mega-watts of additional powercapacity to meet an ambi-tious industr ialisationagenda and the needs of agrowing population.

Tian Zhiping, Middle Eastchief executive at Industrialand Commercial Bank ofChina, singles out AbuDhabi as a big market.

However, he expects tosee more activity out ofQatar which has huge infra-structure ambitions aheadof the W or ld Cup , to b e

staged in 2022. He says: We

are confident China and theMiddle East will see morebusiness activity; throughtrade finance, investmentand manufacturing. Wewant to increase our partic-ipation in those areas.

He adds: Two years ago,you would have found a lotof projects in Abu Dhabi.[Now] in UAE, there arefew new projects but lookat Qatar.

Sarosh Mewawalla, Link-laters managing partner inthe Middle East, dividesproject finance into three.Two sectors oil and gas,and power have been suc-cessful, but a third, infra-structure, has failed to per-suade borrowers of its mer-its.

Others point to the prob-lems with Saud i L and-bridge, a railway scheme tolink Jeddah in the west ofthe kingdom to Riyadh and

to upgrade an existing linebetween the capital and theeastern province.

In the UAE, a scheme tobuild a road linking Mafraqa nd G hu wa if at i n A buDhabi has also failed toattract financing. In bothinstances, the risk alloca-tion between the public andp rivate sector s was notattractive.

Lenders were not willingto take any significantamount of ridership orp assenger r isk, mainlybecause there is insufficientdata to support revenueprojections.

By contrast, refineriesand power stations typi-cally benefit from substan-tial support from creditwor-thy offtakers, whether for agiven measure of output,price of output or both.

I n t he c as e o f p ow erp rojects in p articular ,offtakers are typically gov-ernment entities.

The power sector is fullycontracted. You have powerpurchase agreements fromgovernment-related entities

that are buying 100 per centof the power and so bankscan feel comfortable, MrMewawalla says.

Now attention is turningto Aramco Dow, anothervast refinery and petro-chemical scheme in SaudiArabia. When completed in2016, the joint venture, willbe among the worlds larg-est integrated chemicalfacilities with a capacity toproduce 3m tonnes a year.

Mr Robinson says: Thechallenge for Aramco Dowis that it is even b iggerthan Satorp.

We are seeing one ofthe biggest petrochemicaldevelopments in the worldapproaching the financialmarkets when liquidity is

Refineries win financiers favours

Project financeJames Drummondexplains why someschemes are morepopular than others

Jubail: biggest project financing the Mideast has ever seen

Islamic insurance A global market ripe for growth

Islamic insurance has enjoyed strong growthin recent years, although the period sincethe global financial crisis has proved difficultfor the rapidly developing industry.

Dominic Moody, senior vice-president atinsurance broker Marsh in the Middle East,says the market for insurance productscompliant with Islamic law known asTakaful is growing quite phenomenally,in spite of the downturn.

Expansion is being driven by two factors:Takaful is strongest in Muslim countries,where the take-up of insurance has beenlow historically; and availability is increasing,as more Takaful insurers are established.

Ernst & Young says global Takaful

contributions totalled $9.15bn in 2010, andare on course to reach $12bn at the end ofthis year. The professional services firmpoints out they represent only 1 per cent ofthe global insurance market, even thoughMuslims make up 20 per cent of theworlds population. The global market couldreach $25bn by the end of 2015, it says.

But most Gulf Co-operation Councilmarkets have seen a slowdown in Takafulgrowth, with only Saudi Arabias marketstaying strong because of the continuedroll-out of compulsory medical insurance.

According to Ernst & Young, SaudiArabia, with Takaful contributions totalling$3.86bn in 2009, Malaysia with $1.15bn,and the United Arab Emirates with $640m,were the top three markets.

Dagwood Ahmedji, head of Islamicfinancial advisory services at Deloitte, saysthere is plenty more potential in the MiddleEast, for example, from governmentsmaking insurance lines compulsory.

Analysts believe that for Takaful to reachits potential, it must make inroads intoEurope and the US, and into commercialinsurance products. Many internationalcompanies have moved into the market, but

more development is needed.One challenge is to extend the insurance

available for commercial lines. MohammadKhan, a partner at PwC, and its Islamicfinance leader, says that for this to happenthere needs to be well-rated Islamicreinsurance (the insurance that insurers

buy) as well as so-called retrocessionreinsurance (reinsurance of reinsurance).

Mr Moody says Islamic finance isradiating out from the Middle East to otherparts of the world. However, this is notbeing matched by equivalent insuranceproducts. Islamic finance is pretty much aglobal industry. There are challenges whenit comes to provide financing for a businessin Europe or the US, because there arelimited insurance options, so they have touse regular insurance. It is not a fullyIslamic financing solution, he says.

A number of Islamic banks, he says, aresetting up branches in Europe and plan tooffer complementary products, for example,

a personal accident insurance policyprovided by the bank.Islamic banks are working with insurers

to try to create a bancassurance productthat is sharia-compliant, says Mr Moody.

In the UK, Salaam Halal insurance, thefirst Islamic insurance company, launched in2008. Although it took off initially, it wasoperating in the ferociously competitivemotor insurance market and closed to newbusiness a year later.

PwCs Mr Khan says the tipping-point forTakaful will come when it also appeals tonon-Muslims. [Takaful] is ethical insurance,and that is the market to go for. Themarket in the US, in western countries isntjust Muslims, and shouldnt be restricted toMuslims, he says.

Other hurdles include making sure thatinsurance contracts comply with Islamicprinciples and evolving regulations.

The Islamic finance industry hasdeveloped its own body, the IslamicFinancial Standards Board, which hastackled issues such as solvency.

Despite the headwinds, analysts are stillupbeat on prospects.

According to Mr Ahmedji, while the global

financial crisis has damped confidence infactors such as investment returns, Takafulis a slow-burn industry. It was never goingto be an overnight phenomenon, because itis about introducing a new product to theMuslim community.

Andrea Felsted

comparatively tight. Manyof the eurozone banks areseeing the cost of fundsincrease significantly.

A tighter r egulatoryenvironment is having aneffect on the availabilityand relative price of capitaland liquidity in many juris-dictions. Japanese banksare going in the oppositedirection, deploying greaterliquidity, he says.

The expectations fromAramco Dow will be thesame as Aramco Total, butit poses an interesting set ofchallenges, size and com-plexity.

However, the feedstockis particularly attractivegiven the high ethane con-tent, he says.

banking in the arab world

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