By Ed Attwood
Set up in 1930 with just seven investors and 15,000 Palestinian pounds, Arab Bank is now one of the region’s biggest players. Executive chairman Abdel Hamid Shoman explains how — despite the crisis — the finance house has stayed ahead of the pack
One of the more enduring stories about Arab Bank is that when two of its offices were shut down as a result of the Palestinian catastrophe in 1948, the family behind the bank immediately promised that all deposits placed in those branches were guaranteed. Relieved clients vowed to stick with the growing outfit, and 60 years on, the same family still heads up the same bank, and it has also managed to retain the same level of respect from its customers.
Founded in 1930 by Abdel Hameed Shoman, who was born four miles north of Jerusalem, the bank was set up with 15,000 Palestinian pounds and seven investors. Aided by his son, Abdel Majeed Shoman, Arab Bank shifted its headquarters to Amman after the ‘Nakba’, whereupon the company began building out its operation with
Today, headed up by Abdel Majeed’s son, Abdel Hamid Shoman, Arab Bank is one of the largest privately owned banks in the Middle East (aside from its plc operation), and a genuine powerhouse in the local finance industry. Just a look at its footprint — with branches in five continents from the US to Australia — shows how quickly the bank has grown over a relatively small space of time. There is no doubt that Shoman has big shoes to fill, as he follows the legacy of his forebears.
“Being part of and leading a bank with the purpose of serving the Arab world is a great responsibility and honour, and for it to also be able to continue building on my grandfather’s vision and my father’s work, only makes it that much better,” the executive chairman says.
It would have been understandable for Shoman to have taken the easy route and stay in Amman during the early years of his career. However, the young banker trained for two years at various international banks before embarking on his journey with Arab Bank, which began in 1972. Even then, he was keen to establish himself outside the comfort zone of his family’s headquarters.
“At that time, I insisted that I should join Arab Bank away from Jordan, so that I could be more independent and build my character and career separate from my family,” he recalls. ”So I joined Arab Bank in Bahrain, where I established our regional management office, and spent four years of my career there.”
Fast forward to 2011, and the world of finance has changed a great deal in the intervening 40 years. And despite Jordan’s prudent handling of the financial crisis, Arab Bank isn’t having it all its own way. As the results of the ‘Arab Spring’ filter through to regional economies, the ratings agencies are taking their own views as to the likely effects on some firms’ bottom lines. In line with a downgrade on Jordan’s sovereign rating, Moody’s cut its rating on Arab Bank to ‘C minus’.
It’s not a reflection on Arab Bank per se, but more on the political situation in many of the countries in which the bank operates. The firm is operational in every Middle Eastern market, including Egypt, Libya, Tunisia and Syria. But even before revolutions began sprouting across the Arab world, Arab Bank had been forced — like many others in the region — to take account of loan exposure to troubled Saudi conglomerates. The executive chairman says that fiscal conservatism is still the key watchword for the bank.
“As part of the experience we have gained over the years and the culture it has built, we will continue to preserve our values and principles relating to liquidity, capital adequacy, risk management and excellence,” Shoman points out. “Because of our historical experience spanning 80 years, and understanding the region in which we operate, we maintain an ample amount of liquidity to support our operations and protect our shareholders and customers. This has always been and will continue to be one of the pillars on which Arab Bank is built, and has helped us survive various political, economic and social events.
“The advantage we have is that we are in continuous direct contact with our clients,” the executive chairman adds. “We have instilled systems whereby we regularly assess the clients’ situation, which help us help them in their needs. We also review our credit and risk policies periodically, and this has helped us over the years.”
As a result, the bank’s decision to apportion around $178m in provisioning last year hit its profits hard. But overall group profits still came in at $469m before tax and after provisions. Indeed, other results also seem to show that Shoman’s ‘safety first’ approach appears to be paying off. Net revenue only dipped marginally against the previous year to $1.76bn, while assets rose from $50.6bn to $51.1bn. The capital adequacy ratio — a key indicator of any bank’s liquidity — is at a more-than-healthy fifteen percent.
“We are committed to maintaining a high capital adequacy ratio that exceeds limits set by regulatory bodies, including the central bank and the Basel Committee, in all the countries where we operate at all times,” Shoman says. “We believe in taking calculated risk; we have not and will not enter into any business which we do not understand, cannot calculate and whose risks we cannot mitigate. And, of course, we continuously build upon and enhance our customers’ satisfaction, our shareholders’ return and operational efficiency.”
One of the lasting effects of the financial crisis is that most countries in the region are looking at banking consolidation. All over the Gulf, countries with smaller populations but significant numbers of banking institutions are taking a second look at their financial sectors. Take Bahrain, for example. Despite having a population of about 1.2 million, data from the country’s central bank shows that there are 133 players in the financial industry there.
In Qatar, there are eighteen banks servicing a population of 1.6 million. In Jordan, while the population is higher at six million, there are still fifteen major banks.
Shoman is one of many who believe that this number is too high. However, it won’t be easy. Many of the smaller banks are run by family businesses, who have thus far been handed a free rein by the low existing capital requirements of the central bank. That situation may well change in the future.
“I expect mergers to happen in the near future not only due to capital requirements, but also the high competition that the industry experiences,” the executive chairman points out. “Such has happened in larger countries in Europe and in the US — I believe that consolidation would be healthier for the industry.”
Overall, the performance of the Central Bank of Jordan has been generally regarded as praiseworthy. In 2008, the regulator stepped in to guarantee all bank deposits for a two-year period, as well as lowering interest rates and offering local finance houses more leeway in restructuring loans to corporate clients.
Shoman is in no doubt as to the benefits the central bank has provided to the country, and has been particularly impressed by what he calls “the proactive role” the regulator has played with regard to the financial crisis.
“While many global banks collapsed and many others received direct capital injections from their governments, there were no bank failures in Jordan, and no bank received direct capital injection, “he points out.
“On the contrary, Jordanian banks continue to open up new branches, provide credit and lending facilities, realise profits, albeit at lower levels, and pay due taxes.”
As a result, even during the most worrying moments of the financial crisis, Jordanian banks performed comparatively well. In 2009, all fifteen of the country’s major finance houses turned a profit, with four even seeing improvements on the year before, and the country remains the third-largest destination for foreign direct investment in the Middle East and North Africa. But Shoman is in no doubt about how hard 2011 will be, largely due to the civil unrest the region is facing.
“2011 will be a difficult year for the banking industry in the region, due to the current events we are witnessing,” he says.
“Therefore, we will continue to also focus on compliance and risk management, upgrading and enhancing our standards while efficiently adapting and responding to current events.”
As well as focusing on greater corporate governance — a watchword for the banking industry across the Gulf — the executive chairman also says the bank will focus on shoring up its relatively healthy capitalisation and liquidity, as well as strengthening Arab Bank’s credit policies and its risk management platform.
Right now, it seems, major expansion is not on the cards. While the bank may have a presence in 30 countries, with over 500 branches, Shoman says that a move into more international markets, such as Islamic finance hub Malaysia, would dilute the bank’s concentration on its core regions.
“Currently, we will continue to focus on the MENA region and strengthen our network and overall financial position here, before seeking any expansions,” Shoman says. “However, should the right opportunity present itself in terms of a good fit, the right time, the right price, and with great added value, we have no problems considering it.”
In terms of acquisitions, the bank has long pursued a strategy of organic growth rather than buying out competitors, and with capital in short supply, the executive chairman says that this option is not on the cards either, despite the expected consolidation in the Jordanian banking sector.
“Since our capital is considered sacred and is expensive to replenish, we will deploy it to our valued customers or to promising new clients for the time being, versus buying assets for yield purposes,” Shoman says.
Instead, Arab Bank will concentrate on building out its branch and ATM network in existing markets, alongside the ongoing development of electronic and online banking services. Shoman also says that it is also planning to tap up the Arab diaspora currently living in the Gulf.
“The bank will focus on developing the affluent, elite, customer segment through the enhancement of the current products and services provided to them,” he remarks. “In addition, the bank will strengthen its presence in the Gulf markets through the development of products catering to the Arab expatriate community living in the GCC.”
Why is Arab ban not diversifying to Islamic Banking system rather than conventional banking system as most of world biggest banks are running with with islamic banking system.
To my knowledge they have diversified," Arab National Bank offers a full range of domestic and international commercial and Islamic products and services to the retail and corporate sectors. ..." .
If you mean dedicated solely to value adding Islamic banking, I think several banks in the region are considering the merits, even prior to the 2008 downturn. Yet, Islamic banking needs solid global "Gist of Sharia" governance not to be caught in the trap of conventional creativity of margins without underlying real transactions.
My comment was merely thinking about to avoid promoting "RIBA-interest".