Retaining a competitive edge in Islamic Banking

Nabil Nassief

Retaining a competitive edge in Islamic Banking
Islamic Banker, No. 2, Nov/Dec 1995, pg 14-15
- By Nabil Nassief


Over the last thirteen years, the Faisal Islamic Bank of Bahrain (FIBB) has played an important role in pioneering new Islamic financial products such as the morabaha (cost-plus financing) syndication. FIBB's growing maturity as a financial institution is underlined by its increasing independence from its parent entity, the Geneva-based Dar Al Maal Al Islami (DMI) Group. Its half-year unaudited results for 1995, shows that net profit has increased to $6.482mn from $6.173mn for the same period in 1994 - maintaining FIBB's remarkable record of uninterrupted profitability from the first year after its launch in December 1982. To retain a place at the competitive edge of Islamic banking, FIBB has launched a four-pronged strategy for the future. It is also on the acquisition trail, vying for a 26per cent equity with a management stake in Pakistan's state-owned United Bank. Here Mr. Nabil Nassief President and CEO of FIBB discusses with Islamic Banker the challenges that lie ahead. 

ISLAMIC BANKER: What are the prospects for FIBB in particular and for Islamic banking in general?

Nabil Nassief: With the vast changes that have already taken place in banking, we thought it was time that we evaluate our achievements, and see how we can meet future challenges. Being an Islamic finan­cial institution, we are not only a commercial bank, but one with a development objective. Our aim is to become a pan-Islamic financial institution, based upon four pillars - our philosophy and values; human resources; technology and speciali­sation.

 The main pillar is our philosophy and values. We have three layers of supervision to ensure that we comply with Shariah requirements; the Shariah board, the Shariah auditor who is a board member; and Shariah auditing, which is part of our internal control divi­sion.

 It is important to have professional commit­ted staff. We also have a yearly programme for our existing staff, to upgrade them and to provide incentives. We have established an advanced technology division, which has developed a unique software system and we are now selling it to otinsi1 financial institu­tions. The system is called Islamic Banking System (IBS), and covers all ranges of banking including retail, commercial and investment bank­ing.

We have set up Faisal Security and Financial Services (Bahrain) and are working on setting up companies in Indonesia and in Egypt, because we feel that the capital market for example, is an area we have so far neglected. We have plans to launch several funds in leasing, real estate, equity and privatisation as part of an overall policy.

Is your capitalisation adequate to cover your expansion plans?

Our equity is currently 90mn. In our three-year plan, our equity is increasing by $20 million each year. In Pakistan and Bahrain, our capital adequacy ratio is the required eight per cent. But we argue with the authorities that they should look at us in a different way. Especially on our bal­ance sheet, we are way above the Basle eight per cent minimum. We are also listed on the Bahrain Stock Exchange, although trading in our shares are limited.

The challenges ahead for the Islamic banking movement are indeed daunting. Do you agree?

These are challenging times. Conventional banks with huge resources are starting banking ‘windows’. One will start operating a full Islamic banking subsidiary soon. This calls for unity among Islamic banks and the pooling of resources. This needs bankers who look to the future. There is no doubt that we have the capacity to face these challenges if we pool together our resources and experiences. We could also extend a hand to the conventional banks. Despite the fact that they have different motives for offering Islamic banking services, I believe, we can meet them half way.

You have one on-shore branch in Bahrain. Do you plan to expand this? 

We applied for two more on-shore branch­es, and we hope by early next year, these branches will be operational. We had the option to have a subsidiary here, but we thought the branch would serve the pur­pose. We want to serve this community, so this branch will meet that objective.

What sort of resources are you allocat­ing to research and development?

It doesn't work that way. We have instead a programme and a schedule. The R&D department gets data from a particular market. The department carries out a sur­vey for each sector of the market, lets say, the industrial sector, and assess the needs of the market. The department then puts its proposal for products to the manage­ment. We have commissioned an external survey on people's habits and attitudes to Islamic banking in Saudi Arabia. This is part of the R&D programme.

You seem to be taking an active interest in privatisation funding?

We are building an international expertise in this area. We certainly have the capabil­ity, but we have to assess the management skills, and in some cases we have to con­sider the currency risk. There will also be IPO's (Initial Public Offerings). These are blue-chip companies which are coming up to stock market floatation. After thorough research we identify these high-value blue chip companies and invest in them.

There has been a big move towards pri­vatisation in the West, starting with the UK in this part of the world we see that there is going to be a need for privatisation for the same reasons as in the UK. We want play a part in the advisory work, where have a lot of expertise and knowledge, mainly in the Gulf, but also elsewhere like Pakistan, Egypt, Indonesia and Morocco.

Also we want to invest money if we feel companies are right for medium to long-term investment. Our policy is to go and book a transaction and then sell it to the client. So it would mean identifying projects in Egypt and Pakistan, analysing them, and then bidding for them. After that we go to the market with the liability side and mobilisation of funds.

Our privatisation portfolio currently totals $20mn with equity stakes in PTC (Pakistan Telecom) and Indosat (the Indonesian Telecom Company). We hope to float a $50mn energy fund which will be used to invest in energy utilities that are privatised.

You seem to be very Pakistan-focused with your risk spread in one market. Most of your Murabaha syndications have been for Pakistani utilities?

I am glad that our Pakistan structure has been sorted out. There was a change of top management two or three times, which would kill any bank. Our Pakistan opera­tions are very profitable, especially the corporate banking side.

We have carried out Murabaha financing in Turkey, and for the last three years we have been trying in Malaysia, which is a tougher market and where margins are more competitive. In Indonesia we have something in the pipeline. We have a lot of transactions in the Gulf area, where there is a big future for country risk.

In the light of the collapse of Baring, do you think that the western central banks could similarly have saved BCCI?

Unfortunately, BCCI was not treated in a fair way. The regulators are really to blame for such scandals. The victims are the depositors. Instead of standing behind the depositors by bringing in new shareholders and management,  the judgement was taken to kill the bank. We do not agree to any of the wrong doing that was going on, but we did want the monetary authorities to act responsibly.

Do you see a role for derivatives in Islamic finance?

Derivatives is a minefield. It is a form of speculation, of gambling, which has no place in Islamic banking. I can see a need for derivatives for hedging against currency fluctuations but not for speculation and making money.

What are your views on the high BIS country risk rating for the Gulf Cooperation Council (GCC) states (except Saudi Arabia) and its role in international banking?

The BIS follow the law of the jungle. They dictate rules against all norms, including, democracy.

You mentioned training and upgrading of the staff. How do you do this?

We have in-house training and through specialised bodies like the Banking Institute, through conferences and courses in derivatives and specialised area credit, senior management and different courses. We are developing our own training pro­gramme. We are taking new graduates. Our people have also attended the Islamic banking courses at the Bahrain Institute of Banking, run by the Bahrain Monetary Agency (BMA).

Can you clarify the restructuring of your operations in Pakistan?

We disposed our three branches in Pakistan to the newly-created Faysal Bank Limited (FBL), of which we own 60 per cent of the equity. The remaining 40 per cent, valued then at 1.3bn rupees ($43m) was bought by Pakistani institutions and the general public in the largest Pakistani public share offering. Trading in FBL shares has since then been buoyant. I am very glad that the Pakistan structure has been sorted out.

How important is the development of banking technology and software?

We have set up a subsidiary called Advanced Technology and Services (Bahrain). We have pioneered the Islamic Banking System (IBS) software for Islamic financial institutions. We have developed this in-house and we are marketing the product to other financial institutions including some conventional banks.

Uniform accounting standards are a major priority for Islamic banking. Are you involved with the development work in this area by the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOLFI)?

Developing uniform accounting and audit­ing standards for Islamic financial institu­tions is a lengthy process because you have to consider different angles of the Shariah view. AAOLFI has been restructured and now has a general assembly, which com­prises all the major players in Islamic banking and finance including central banks, Islamic banks, Shariah advisers, end-users, professional accountants and auditors. We are playing an active role in AAOLFI. Even Western auditing firms such as Price Waterhouse are members of the general assembly. We are very confident that once the system of uniform account­ing for Islamic financial institutions are formulated, they would be universally accepted.

FIBB Group Income for 1st Six Months 1995

$ Million






Net Profit





Faysal Islamic Bank of Bahrain (FIBB) Group Balance Sheet at 30 June, 1995

Unaudited Accounts




Total Assets








Share Capital






Shareholders’ Equity



Customers’ Accounts



Funds Under Management













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