AS THE NEW HEAD of Sharjah Islamic Bank (SIB), Mohammad Abdulla is more than aware that he needs to strike an even balance between tradition and modernisation in his plans for the future of the financial institution.
SIB is a groundbreaking bank and was the first in the world to convert from a traditional bank to an Islamic body leading the Gulf region into Islamic finance in 2002.
Yet in four years an increasing number of regional competitors have followed suit and aimed their products and services at the expanding and lucrative religious banking market — and the honour of being one of the leaders in Islamic banking is rubbing off. Abdulla, however, is more than aware of the need for the bank to move forward and continue generating new products and services to differentiate it from the rest of the chasing pack.
Abdulla previously served as deputy to Hussain Al Qemzi, the former chief executive of SIB and admits to realising that the new role has different demands.
“Where the difference comes is that previously I was a second officer sitting in the second officer’s seat, and the driver is the CEO,” he explains. “Once you change seat and become the driver, things need to be changed — you’ve got to concentrate more on everything.”
In his previous position, however Abdulla was involved in shaping the bank’s long and short-term strategies, and he says he is not planning any drastic changes. The CEO of SIB is calculated, logical and doesn’t take risks lightly.
“Previously I was active in the CEO team,” he says. “We used to work together and have the same understanding of targets, the same logic.”
However, Abdulla has seen major changes in his time at SIB. He was a part of the team that planned the finance house’s transformation, and says the benefits the bank has seen from the changeover have exceeded all expectations. The changeover itself was also completed ahead of schedule, allowing the bank to focus on other aspects of its strategy.
Abdulla says: “I remember when we decided to convert to Islamic banking, the Sharia committee had a meeting with us at the beginning and they said ‘you need not less than three years to succeed in converting the bank into Islamic banking’. Three years work that we did in only six months and saved almost two and a half years. With those two and a half years we concentrated on how to grow and not only how to convert to Islamic banking.”
The Sharjah-based chief executive is determined to ensure that the bank’s focus on traditional finance is balanced with a commitment to modernising where and when appropriate. “Being an Islamic bank doesn’t mean we have to be slack with modern banking,” he says.
“Today, in order to be in the market and compete you’ve got to understand the needs of the people around you for the retail customers and for international banking purposes.
“Once you understand what the needs are then you’ve got to modify yourself and your financing methods in order to reach and satisfy your valued customers.
The bank’s modern approach also extends to compliance and risk management. Abdulla believes that SIB is now well prepared for future regulatory firsts to establish a division called the risk management division, separate from credit and entirely segregated. “It always used to be credit and risk management, but today we have two separate divisions,” says Abdulla.
“From the beginning the risk division concentrated on how to come up with the method and terms and conditions of Basel II [the regulation created to promote greater consistency in the way banks and banking regulators approach risk management across national borders].
“Today, my team in that division are fully ready with Basel II terms and conditions of compliance. They have even given presentations to other banks. We prepared for this very early in order to be 100% compliant.”
SIB is also moving ahead of the game when it comes to using new technology in order to open up new channels for its customers to carry out their transactions. “We do have mobile banking and we also have implemented Interactive Voice Recognition. We are working now to have internet banking and it most likely will be launched in June 2007.”
The bank, however, still remains committed to its traditional roots. “Islamic banks have a different way of financing,” says Abdulla. “Today, for example, with my customers I am very transparent with them. I should not hide any information.
“I have hardly any pre-printed contracts, by the way. The only contract that is pre-printed is the account opening form. That’s it. Otherwise, when you come to us for financing today, I don’t have a personal loan contract form, I have a murabaha [a sale whereby the seller expressly mentions the cost he has incurred on the commodities to be sold and sells it to another person by adding some profit or mark-up which is known to the buyer] contract, and that contract has to be written in the way that we agree upon. It means that every customer has different requests, different demands. Therefore I have to prepare the contract according to that request.
“What does that mean? It means the customer will understand exactly what has been written in that contract. He will know because that was his demand, his request. It will reflect the transparency of Islamic banking activity.”
The bank’s Islamic offerings have also attracted a more diverse customer base than many would expect. “A big percentage of my customers are non-Muslims because they really like Islamic banking,” says Abdulla. “They like Islamic banking because it’s very transparent and they understand what their obligations are, they know what they have to pay and what they are going to pay in the future."
Abdulla says SIB provides its customers with full repayment details so that at any stage they are aware what their balance is and what they need to pay.
“Islamic banks are also not allowed to take any penalties on deferments, for example on instalments, while other banks charge for any form of delay. All of these factors have really encouraged non-Muslims to deal with Islamic banks.”
He adds that Islamic financial institutions are the “cheapest” in terms of credit cards charges. “If you compare Islamic and conventional banks, there are some conventional banks that are charging 24% on credit cards, but with Islamic banks the charges do not exceed 0.5% per month, which means on a yearly basis they are only 6%, which is among the lowest in the world. They are very flexible, and non-Muslims are very happy at having all of these features.”
SIB’s success is reflected by its balance sheet and was less affected by recent stock market corrections than many other banks in the region, due mainly to its relatively low exposure to Gulf markets. The bank reported net profits of US$14m for the third quarter of this year, up 16% on the same period last year, while in 2003, the bank increased its capital — which now stands at around US$272.3m — to finance its future growth.
“That increase didn’t come out of nothing, it came out of demand,” says Abdulla. “The bank has to grow, has to compete, has to be in the international market and has to be the best-ever Islamic bank in the UAE.
“Once we increased the capital we found that we still wanted to grow more and more and more to be able to achieve our hopes to be the bank of choice. Therefore, in four years [of operation as an Islamic bank] we achieved what would be achieved, in my opinion, in eight years.”
SIB, however, has further growth ambitions, Abdulla explains. “Our plan and my strategy specifically, is that I want us to be more of an international bank,” he says. “I want us to be available everywhere and this requires lots of effort. Today, we have attendance in so many countries through our participation in establishing companies, our participation in syndications, our participation in direct investments in those countries, especially in the US, UK, Turkey, almost all of the Gulf region, and I want to increase our presence.
“I want to be there with actual banking. Therefore my plan in 2007 to 2008 is to be available in two or three more countries outside the UAE, representing SIB.”
Abdulla believes that UAE banks have good prospects, but says that consolidation is required. “If they move towards merging I believe they will have a bright future, because the challenges which they are facing in the near future will be too difficult with a capital of only US$55m
“I believe that if banks in the UAE want to be good banks and compete in the future, they’ve got to be stronger than this. Stronger means bigger. They have to develop their footprints or they have to merge. These two options are open to them. Within the country or with, for example, a foreign bank merging with a national bank.”
He sees the UAE presenting an attractive market to foreign banks and creating increased competition for local banks. “To have big banks coming into the country, once the General Agreement on Tariffs and Trade (GATT) is open, it’s a big potential market,” he says. “The issue is that once GATT and free trade is there, there should be newcomers to the market. If we have the capital, the big customer base — I can be prepared for that.”
Sharjah Islamic Bank has no plans to acquire or merge with any other banks at present, but Abdulla does not rule it out as a long-term possibility.
In the coming year, the bank is planning to put particular focus on its investment products, and will also be continuing the expansion of its network of branches.
“I believe in contributing to our entire UAE community. Therefore I’ve got to be everywhere,” says Abdulla. “In 2006-2007 we’ll have three branches in Dubai, where we until recently used to only have one.
“We’re planning to be in other emirates where we don’t have business now, like Ras Al Khaimah and Ajman, and Al Ain just opened a branch recently. We have to be everywhere.”
Daniel Stanton is deputy editor of Arabian Banking & Finance.
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