Dawn of the GCC Shariah superbanks

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Noor Islamic Bank’s launch on January 6 made it the largest Islamic institution in the UAE – for the moment.

The launch of Noor Islamic Bank in January could spur consolidation and mega mergers.

This year could be the year that Islamic superbanks shake up the GCC banking sector. After the launch of Qatar's Masraf Al Rayan last year with capital of US$2 billion, Noor Islamic Bank officially opened its doors in the UAE last month.

Noor, which is 25% owned by the Dubai government and 25% by the ruler of Dubai, launched with capital of US$1 billion. This will be followed by Al Hilal Islamic Bank, which was established by Abu Dhabi Investment Council in October 2007 with capital of $1.09 bn and will launch operations in June.

However, with a growing number of the UAE's conventional banks also switching to Islamic finance, as with Dubai Bank last year, or opening an Islamic window, as with National Bank of Abu Dhabi last month, will there be enough domestic demand for all of them?

Dr Ahmed Al Janahi, deputy group CEO of Noor, said that the bank was looking to launch in markets beyond the UAE in the next five years. "We have ambitious plans to operate in at least three continents," he said. "We have already identified a few hubs.

The mode of expansion is going to be a combination of greenfield, acquisitions and partnership.

This is a wise move, according to Sameer Abdi, head of Islamic finance, Ernst & Young Middle East. "I'm pretty certain that other institutions like Al Hilal will also follow suit, simply because there isn't enough capacity in the UAE domestic market to sustain a new $1 bn institution - or two, for that matter," he says.

"These institutions are definitely going to be looking abroad, outside the UAE at least, for business and expanding their footprints, for inorganic growth rather than organic growth.

Noor aims to become the world's largest Islamic bank, according to comments from Hussain Al Qemzi, the bank's group CEO. The prospects for growth are good, says Abdi.

If you look at the consumer base in the Muslim world it's still largely based on conventional institutions, so there is an opportunity there for Islamic banks that can offer products and services that are competitive with the best conventional services," he says.

There is definitely an opportunity to grow both in the retail and the commercial banking sectors.

He says that some corporations are financing themselves Islamically, at least in part, to make themselves more attractive to the Muslim investor base if they ever launch an IPO.

Although most of the appetite for Islamic finance still comes from the Middle East, Malaysia, and, increasingly, Pakistan, Abdi says that Europe is an attractive proposition for Islamic banks.

There is a two-pronged approach to Islamic finance in Europe - retail banking and takaful for Muslims in UK, France and Germany is a popular topic, but more importantly it's about bridging European assets with Middle East liquidity through Islamic finance mechanisms," he says. "It will be an interesting market to watch over the next few years.

It all depends what appetite Muslim investors or Islamic investors have for European risk.

European Union rules, which allow institutions to work across the EU once they are licensed in one of its member countries, are likely to see London become increasingly popular as a European base for Islamic institutions.

In the Middle East, the increase in the number of banks with more than $1 billion in capital could potentially benefit the project finance market, which has remained the domain of conventional financial institutions until now, says Abdi, since they will be better able to create capacity to finance large projects that were beyond the balance sheets of smaller institutions.

Abdi says the trend towards larger capitalised banks is likely to spur consolidation among the GCC banking sector - probably through mergers and acquisitions.

But some in the industry welcome the competition. Hussain Al Qemzi - who led the first conversion from a conventional bank to an Islamic one while CEO of Sharjah Islamic Bank - said at the Noor's launch: "Any addition of Islamic banks is a positive. I think any addition to the Islamic industry will be welcome, especially if it can add value to the industry.

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