By Nicolas Parasie, WSJ
Gulf investors, including members of UAE royal circles, are to set up the first Islamic bank in the euro zone, it was announced yesterday.
Here’s a bold banking initiative emanating from the Gulf: a group comprising of regional businessmen, a local lender and royal families are in the initial stages of setting up what they claim will be the euro-zone’s first Islamic bank that will compete for Muslim customers in Europe. The announcement was made at the Global Islamic Economy Summit in Dubai.
It will be first Sharia-compliant bank to operate in the euro currency zone. There are already several Islamic banks in Britain, which is not in the euro zone.
Named Eurisbank, the new venture has a modest start-up capital of €60 million ($81 million) and plans to open branches in Paris, Brussels, the Netherlands and Frankfurt. The bank’s backers, which weren’t named, have submitted their application to obtain a banking license in Luxembourg and aim to launch the new bank during the last quarter of next year. Eurisbank is looking to offer private, corporate and retail banking.
There’s no doubt that Islamic finance has been on an upward trajectory for the past few years and that financial centers around the world are vying to attract Islamic banks as demand for shariah-compliant products among the global Muslim community is growing. Ernst & Young in a recent report said the Islamic banking industry grew at around 16% per annum in recent years – outperforming the conventional banking industry – with assets reaching $1.54 trillion in 2012.
Ammar Dabbour, managing partner at Excellencia Investment Management, an Islamic fund manager that is working alongside consultancy Deloitte in setting up the new bank said: “A large untapped customer base with more than 20 million Muslims in the EU represent a significant market growth potential for Islamic Finance”.
Eurisbank could be competing with mainstream banks such as HSBC and BNP Paribas which already operate Islamic businesses.
The choice for setting up in Luxembourg is not unusual either as the country has been active in promoting itself as an Islamic finance center. The Luxembourg financial company Excellencia Investment Management is also advising on the initiative.
Marco Lichtfous, Luxembourg partner in the international accounting firm Deloitte, which is advising the new bank, indicated that the royal involvement consisted of a member of a UAE royal family.
Mr Lichtfous said the reason for the start-up was that “considerable potential exists for the expansion of Islamic finance. This will be the first bank in the euro zone and Luxembourg’s geographical position makes it the right place for the new bank”. Luxembourg is already a centre for Islamic bond and fund business, he pointed out.
The bank would initially aim to provide very wealthy people with private banking facilities and services.
The growth in demand for Islamic banking was also making itself felt within the Emirates’ borders yesterday.
Despite the seemingly huge growth potential of the Islamic economic industry, Eurisbank will need to avoid some of the pitfalls that have plagued the industry in recent years. Often starting as small niche players, many Islamic banks in the Gulf were unable to achieve sufficient scale and were forced into mergers or went out of business during the financial crisis. In addition, profits have been underperforming the mainstream banking industry.
According to E&Y, which estimates that profitability among Islamic banks is on average 18% lower than conventional institutions: “The rapid growth of Islamic banks over the years has also been costly due to increased operational complexity as the banks transform from operating in a single market to becoming multi-jurisdiction businesses”.
Noor Islamic Bank, a Dubai-based Sharia-compliant lender established in 2008, said it might sell some of its shares to the public within the next five years amid the rising demand.
“It will definitely be within the next five years,” said Hussain Al Qemzi, the bank’s chief executive. “If the market is growing then it’s something that comes naturally. It’s being discussed but there is no plan yet.”
Mr Al Qemzi, who is also the CEO of Noor Investment Group, said the Islamic banking industry is expected to capture 50 per cent of the total banking market in the UAE within the next 10 years. It currently has a 20 per cent market share, he said.
The bank, like many of its competitors, is increasing its efforts to make Islamic banking, where interest is prohibited, more appealing to non-Muslims.
Disillusionment with conventional banking following the 2008 financial crisis is one reason that has prompted non-Muslims to seek an Islamic alternative, Mr Al Qemzi said.
Instead of interest, Islamic banks use financial instruments like murabaha where the bank would buy the home of a customer seeking a mortgage and allow him to buy back the house in instalments at an agreed markup called the profit rate.
Noor Islamic, in which the Government of Dubai has a 50 per cent stake, has no immediate plans to raise other forms of financing like sukuk, the Islamic equivalent of a bond, because its growth is still organic and the bank is not in acquisition mode, Mr Al Qemzi said.
“We’re not seeking any acquisitions at the moment. If there is an opportunity we will consider it, but our focus has been on the bank, doing the basic ops and getting ourselves profitable and getting our roots strong, the bank the asset management, consumer banking.”
The bank is focusing on making consumer banking more efficient through the use of technology to replace visits to the bank, Mr Al Qemzi said. It’s also offering products, such as mortgages to non-UAE residents, that are not widely available at other banks.
Mortgages to non-UAE residents have been particularly popular with residents of Saudi Arabia and other GCC countries, according to John Chang, the lender’s head of consumer banking.