In less than a decade, Bank of London and the Middle East (BLME) has risen from relative obscurity to become Europe’s largest standalone Islamic financial institution.
Set up in 2006 by investors in Kuwait’s Boubyan Bank, BLME’s mission statement was to take advantage of lucrative capital flows between the UK and the Gulf by providing services including wealth management and asset-based lending.
The bank, which has around $100m in assets under management, is now betting big on future growth in the region, with the opening of its first Dubai office and a listing on the NASDAQ Dubai bourse. It is now looking to take advantage of exponential growth in the Islamic bonds market, as well growing inflows of capital from the Middle East towards the British capital.
Its success, today, however is a far cry from 2006, when its founder sat down with the intention of creating “the pre-eminent Islamic bank in London”.
“We started off with a blank piece of paper with just ‘BLME’ on it,” recalls founder and CEO Humphrey Percy.
One of the lender’s first points of order, he says, was that it was not going to go out and hire seasoned Islamic bankers, of which there is something of a dearth in London, despite its unofficial status as one world’s capitals for Islamic finance.
“I thought, ‘if I’m going to build a bank, where am I going to get the people from?’. Do we go to Dubai or go to other Middle Eastern centres and find them just waiting to be picked up at the bus stop as it were? I knew already from my experience in the Middle East already that that wasn’t going to happen.”
Instead, Percy chose to build the company around bankers with solid expertise in conventional finance, whose skills were then converted to Islamic finance. BLME’s management team today consists of veterans of both conventional and Islamic flavours of banking, while Percy himself spent more than 30 years at institutions including Barclays Merchant Bank and J Henry Schroder Wagg.
Percy says that BLME’s philosophy is to “provide a bridge between London and the Middle East”. “The idea was and remains to be a modern merchant bank providing services and products both in the UK market and also into the Middle East,” Percy says. “So we can then harness and get involved in capital flows and savings, investments and also provide finance in both directions.”
Its clients include high net-worth individuals in both markets who wish to invest according to Islamic sensibilities, such as avoiding speculation and practices prohibited by the religion, which is often extended into other services such as prime property sourcing and corporate banking. “Those same individuals have their own private businesses, and what can start as a private banking relationship can move into a commercial banking relationship, or vice versa,” Percy explains.
The region’s richest individuals, be they in UAE, Qatar or Kuwait, are increasingly eager to put their wealth to work, he continues, which is one of the reasons why BLME opened an office in Dubai, its first overseas, in June last year.
The recovery of Dubai, particularly, has been remarkable over the last year. During 2013, the emirate saw its primary stock market rise by close to 100 percent while property prices rose by more than 20 percent in some cases.
“The region, and indeed the UAE is doing a lot better than it was immediately after the crisis, people do have surplus liquidity and they’re looking to put their money to work and that puts pressure on people to get some real returns,” Percy believes.
One of the ways that BLME puts that money to work is through its mutual funds. Currently on its books the bank has a US dollar income fund with just under $70m in assets under management and a global sukuk fund with approximately $13m. The former invests primarily in short-term money market instruments and longer-term Islamic bonds priced in US dollars, while the higher-yielding latter invests primarily in Islamic bonds, although has a higher proportion of below investment grade assets.
“Our funds we’re selling and promoting in this region, which perform quite well and have a decent track record over the last four years,” Percy says.
The funds include exposure to regional sukuk issuance by corporates including Dubai real estate giant Emaar Properties and Saudi developer Dar Al Arkan. Their investment in these could be taken as a vote of confidence by BLME’s fund managers in the robustness of Dubai’s property rebound as well in Saudi Arabia, which is currently embarking on a huge home-building programme.
“We feel very comfortable with what’s happening [in real estate] particularly given the developments in Saudi Arabia, which is promoting wider ownership, but also we’re mindful as always of overly fast property asset growth in this region because that’s been a problem in the past,” Percy explains, tacitly referring to the bursting of Dubai’s property bubble in 2009 which caused prices to crash by up to 60 percent. “But we think it’s OK at the moment.”
According to credit ratings firm Fitch, global issuance of sukuk declined 12 percent to $120bn last year, partly due to jitters over the impact of the US Federal Reserve’s tapering of its massive bond-buying programme.
However, there are pleasing signs for the sharia-compliant debt market this year, such as Qatar’s recent $3bn issuance, as well as Dubai winning the right to host World Expo 2020, which will require significant investment in infrastructure. Percy agrees that the market is likely to grow again this year. “We do [see more sukuk] and we think that’s very healthy for the region. You also have to remember that a lot of sukuk are maturing in the next year or two, which will need refinancing,” he says.
One knock-on effect of rising economic confidence in the region would potentially be longer tenors for new sukuk issuance. Percy says that he does not see this as a trend any time soon, however, due to the lack of sufficiently highly-rated issuers.
“Most Islamic banks are not particularly well-rated, or not sufficiently large to be rated, so therefore while there may be more maturities between five and seven years, broadly the majority of issuance will still be up to five years,” he believes.
One development that may spur the local sharia-compliant debt market is Dubai ruler HH Sheikh Mohammed Bin Rashid Al Maktoum’s recently announced intention to turn the emirate into the world’s capital for Islamic finance with its own dedicated centre.
According to a decree issued in December, the plan will see the centre handed legal and financial independence, as well as develop parallel markets such as Islamic insurance, known as takaful.
Percy has his own ideas of what will make the initiative successful. “There’s a lot of discussions about increasing calls for standardisation and more transparency in terms of the rules and homogenisation as we saw in the conventional markets, and that’s the basis of a successful market,” he says. “Dubai has an opportunity to lead the way.”
Dubai is not the only contender vying for the crown as the centre of the world’s Islamic economy though.
At the World Islamic Economic Forum in London last year, British prime minister David Cameron announced plans for the country’s debut sovereign sukuk, which would make it the first nation outside of the Muslim world to sell a sharia-compliant bond. The statesman said he wanted the UK to stand alongside Kuala Lumpur as the one of the world’s centres of Islamic finance.
“It’s been discussed and BLME’s been involved in those discussions for the past seven years, and there have been several false starts. The previous government, Ed Balls in particular, was extremely supportive to do it, but then that ran out of steam when they were no longer in power,” Percy says. “What one mustn’t lose sight of is how much investment flows through London as a financial centre, and that’s a large part of the thinking behind having a UK government sukuk.”
“One of our clients bought a house in Belgravia, but he decided it wasn’t quite big enough so he bought the house next door, but then he decided that wasn’t big enough so he bought a flat next to that,” he recalls. “He’s ended up with a magnificent residence, and we helped him with all of that. That happens quite a lot.”
“There’s what we call ‘golden post code’ London, which is always going to be of interest not just to Middle Eastern people but also to the Chinese and Russians — international investors who want to put their wealth into a politically stable, safe and appreciating market,” Percy believes.
“I’m asked a lot whether things changed as a result of the crisis and the markets, and it actually it hasn’t. If anything it’s underpinned our business model,” Percy claims. “Some of the aspects of Islamic finance, such as strong ethics and transparency, are now deeply fashionable in conventional finance, and so therefore the market has moved closer to Islamic finance.”For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.