Ithmaar Bank, Islamic Investment Bank in Bahrain, CEO, Michael P. Lee
Sheikh Mohammed bin Isa Al-Khalifa CEO of (Economic Development Board) EDB said “the GCC will emerge from the global economic crisis faster and stronger than others.” What do you think of this assertion and how would you assess the situation in the Bahrain banking sector and its ability to overcome the financial economic crisis?
Ithmaar Bank, Islamic Investment Bank in Bahrain: I think that the Kingdom of Bahrain has a well established banking community that has been well regulated since the mid 1970s by indigenous regulators and the banking community has always been quite conservative in terms of its asset portfolios and funding. It has been able to weather the storm we have seen around the world and I think this is a reflection on both the quality of the regulation in Bahrain and also the high quality HR in the banking industry. This doesn't occur over night and for many years we have had the training of bankers in the community of Bahrain, not only through the Bahrain Institute of Banking and Finance which serves as a model for banking and training and human resource development, but also many of the institutions here and quite well disposed towards paying for their employees to pursue external courses overseas where needed and to encourage their staff to get the highest quality international banking and financial qualifications. We do that here at Ithmaar bank and were very proud of the record we have in bringing along particularly our Bahraini staff and making sure that they are fully qualified. This combination of government policy, regulation and in particular human resources, with a healthy dose of conservatism has helped us and another important ingredient in the Bahrain financial sector has been the emphasis placed on Islamic financing since the mid 1990s. Bahrain has become the leading international Islamic financial center in terms of the number of specifically focused licensed institutions in Islamic banking and finance and of course the conventional banks have also got involved in Islamic banking. Islamic banking is quite well positioned to deal with the sort of Islamic that have emerged from certain western countries where there have been fin instruments that wouldn't be acceptable to Shariah compliant investors. Entirely, there has not been any kind of direct impact on the Islamic banks of the sub-prime crises but obviously in some cases where they might have international real estate exposures the indirect effects may have affected some of their evaluation of assets for the time being. As you mentioned, the domestic economy of Bahrain has stood up well and the property market here has been much better during this crisis than in some other parts of the region. This of course, again, has a positive impact on the recovery prospects and whilst there may have been some impairment provisions taken in the Bahrain baking community these are unrealized losses and conservative prudential provisions so I’m quite optimistic about the recovery prospects.
What are the prospects for the banking sector in Bahrain for 2009-2010, what is your personal opinion?
Ithmaar Bank, Islamic Investment Bank in Bahrain: I think that wisely many of the banking groups here, ourselves included, have from an early stage in the evolution of the global financial crisis decided to concentrate attention on the protection on the bank balance sheets in the interest of share holders and depositors. So the main focus has been on the existing assets to protect those and to ensure adequate flow of funding so that the banks balance sheets are intact and will, of course, be in good shape when recovery occurs in terms of impairment provisions. That has been the focus as opposed to aggressive pursuit of new business at the present time. I think the national conservatism will mean the initial focus will be on local opportunities. Of course this region is, itself, in a relatively sanguine position during the global crisis due to the large financial resources and liquidity available in the region amongst some of the sovereign wealth funds despite their portfolios being subject to marketed unrealized losses and impairment provisions. Overall, basically they are in a relatively strong position compared to other regions around the world. Ithmaar Bank sees the oil price recovering somewhat already and I think the outlook is as soon as we see the more firm recovery conditions in particularly in the western and Asian markets the, oil price will recover more substantially and stabilize at a higher level. That of course, sets a very good tone for the banking industry in this region so I see a reinforcement of the trend that has occurred in the last several years whereby the regions investors are looking more than ever before at the development opportunities available in their own economies and regions. We see a lot of infrastructure development still needed in the GCC and the board of the Middle East and South Asia so I see that becoming a significant focus at the increasing interest at the defense of industries like agriculture. In the last couple of years we have seen the recognition for developing some kind of solution for the food security issue so likewise that is a sector that has a lot of attraction for investors and financial institutions that serve these investors. I think there is a lot out there that will be particularly relevant for the economic development of our region that will attract support from the regional banks and I am also hopeful that the big institutional investors in the region and high net worth individuals will recognize the strength during this recent crisis of the regional banks and that this will lead to more capital info into the regional banks. Whereas in the past there has been a lot of focus on frozen capital in banks outside of the region and some of those banks have had difficulty in the recent crisis so I see the outlook is for a steady return to asset growth fueled by both capital injections but also increased depositing within the region as regional investors see the relative strength of investment and banking prospects in their home region during the recovery period from the world recession.
You mentioned that we stand ready to seize opportunities for prudent business development in accordance with the group’s robust medium term strategy. Also in Feb. 2009 Ithmaar reported 85.2 million BD in consolidated profits for 2008. These are amazing numbers in the midst of global economic downturn, so what ability made you perform this well in the crisis?
Ithmaar Bank, Islamic Investment Bank in Bahrain: I think that a strength our group has is that we have diversity. Banking is all about risk assessment and risk diversification and it has been a long standing principle of this group to diversify in terms of the type of businesses we are in the financial sector. Ithmaar Bank has a presence across the whole range of sub-sectors in the financial industry. We are in leasing with the first leasing bank we are in insurance with the Islamic equivalent, through Solidarity. We are in corporate and retail banking through Shamil Bank, through Faysal Bank Ltd. (FBL) in Pakistan and through the Bank of Bahrain and Kuwait (BBK). We’re in real estate development through our 100% owned subsidiary Ithmaar Development Company. We are also in private banking through Faisal Private Bank in Switzerland which is the first Islamic financial institution to be granted a Swiss banking license. In terms of the types of financial industries were in we have a well diversified presence for our group and within those institutions we have good diversification policies in our asset portfolios and I would say we are relatively conservation (like many of the institutions in the Kingdom of Bahrain) in building assets. Of course, geographically we are also diversified. I mentioned that we are in the GCC and also the broader Middle East region and in Europe. We have an outreach policy; we don't see ourself as just a Bahraini or regional financial institution, we see ourselves as potentially a global financial institution but I don't say that in a grandiose way. What we expect to see now out of the crisis is mergers out of the mega financial institution. Were not talking about that and saying we are a global financial institution in our outreach but we are a smaller financial institution, a tight knit financial institutional group where are geography is unlimited in terms of the business that we will do. And as we get away from our center here in Bahrain and in the Middle East, North Africa, and South Asia and we get into other parts of the world, there, of course, we will not go alone into bus dev but we will go into joint ventures with other leading players in that region or that area with a specialty in international finance. For example, Ithmaar Bank has a sugar cane farm trust that Ithmaar Bank put together with ex-Rothschild bankers in Australia which is a pretty unusual piece of business to have been generated by a financial institution based in the GCC. We have already started to open up opportunities in Australia to our investors in the Middle East. We have four entry points already into China with joint venture partners, I won’t go into details but one of them is CITIC. We have a 20% holding in CITIC International Assets Management Company in Hong Kong which invests international funds in China. This is our strategy that makes us open to a lot of opportunities. Everywhere we are looking for quality, we are looking for good quality risk and obviously the best returns possible in that risk category. In order to get those opportunities for our own investments within the group and for our own credit extensions and of course for our customers through the funds that Ithmaar Bank manage on their behalf, we are looking at a global sweep. In today’s world in the aftermath of this crisis, there is a lot of asset deflation taking place and a lot of good opportunities out there. Now the problem isn't so much the opportunities in which to invest and the pricing for those (which people are fairly comfortable with now) but the problem is “have you got the liquidity and have your clients got the liquidity to invest?” I think Ithmaar Bank is in a privileged position because we all know that in this region there is still a decent amount of liquidity and people have been cautious and by nature conservative in this region which is a good thing. Now gradually Ithmaar Bank will see them open up and invest more and we will be there hopefully presenting them with the right opportunities.
With the fallen oil prices some say there is a liquidity squeeze in the region, is this a problem, how would you assess this?
Ithmaar Bank, Islamic Investment Bank in Bahrain: Obviously with the fallen oil prices, they went up very fast. They weren't that low in a plus 100 dollar a barrel level but they came down to around 40 dollars. I have been in the region for about 17 years and during that period I have seen the price go down to about 10.5-11 dollars and there were many years during the 1990s where all of the GCC governments were using 18 dollars a barrel for their budgets. It was relatively recently in the early part of this decade that the Kingdom of Saudi Arabia was saying that the target oil price was in the range of 20 to 25 dollars and in those days looking forward to 40 dollars a barrel was a dream world. I think that if we, as expected, see a 65-70 dollar a barrel stabilization in the next two years that that will be very comfortable for this region. In the mean time there may be some adjustments needed if people were looking towards 60-65 dollars a barrel and being at 40 dollars you have to make and adjustments to trim in the short term. This is only a short term adjustment and there has already been tremendous infrastructure development in this region during the run-up in the oil prices and that is going to continue, maybe not at the same pace in the next eighteen months, but as soon as recovery comes I am sure there will be an actual march on this. I think the great thing is that you haven't had an actual crisis of credit in the region. There have been any significant defaults.
What has been the main challenge for Ithmaar bank?
Ithmaar Bank, Islamic Investment Bank in Bahrain: I think that a main challenge to be global. To be global you have to continue to attract the supportive interest of your core investor base. We hope that whilst there will be a tremendous concentration on the opportunities in this region that we are involved in for the internationalization of our group in our strategy and aspiration that will depend on the continued interest in other parts of the world by our investors that aren't just investing here. Traditionally, heavy investors were very heavily focused (and still are) on Europe and the USA. Ithmaar Bank sees a growing shift in interest toward Asia and I think Asia will be a major engine of recovery from this crisis but also a major engine of growth on a sustainable basis going forward two or three decades. I see a much closer relationship developing between the Middle East and at least Asia but we need for that sort of understanding to be reinforced on the part of the Middle Eastern investor. There are a lot of opportunities for them to get familiar with the risks and rewards out in the Asian markets and that will help us develop our own aspirations for the group, we see a lot of potential there. The challenge is to sell this and to make sure that we make sure to introduce conservative opportunities to be invested in from investors from this part of the world because the most important thing particularly with the Middle East market is still that it is very much a relationship market which is unusual in today’s world of international finance. A relationship market means that the customers have to gain trust in the financial institutions so you have to invest a lot of time in building that confidence that can also be easily lost with one bad experience. The challenge is to constantly meet the expectations you set for yourselves amongst your client base. You can’t afford to get something wrong as much as you may be able to in transactional markets or misdeal. The customers here expect the banker to be very good and reliable advisor to them on investment opportunities. The quality of what we show has to be uniformly good. That’s the big challenge in being a banker in the Middle East where the clients are very (and rightfully so) demanding in terms of quality.
We are going to deliver an award for the “Greenest” company that we have interviewed and by “Greenest” I mean oriented toward sustainable development and environment and by award we mean to put this company in front of the others. I would like to know what is your strategy and policy towards this “Green” issue internally with your company and towards the investments that you are doing with your clients?
Ithmaar Bank, Islamic Investment Bank in Bahrain: Within the bank I think the concentration on IT and making sure that our IT is cutting edge we have the usual pleas to our employees not to print unnecessarily so we can try to conserve on paper through everybody being well endowed with IT equipment and that is something we take very seriously. I think that because of the past experiences of some of our investment professionals at Ithmaar Bank that have been involved in infrastructure funds and the Islamic development bank infrastructure fund (the first fund for this region) that both this group as an investor and then some of the people actually at the fund manager before coming to Ithmaar bank. So we have been involved with that infrastructure fund sponsored by the Islamic Development Bank. We have also been involved as a founder, investor, and on the board of the general partner of the infrastructural growth capital fund which is the largest infrastructure-related fund in this region- two billion dollars. In both of these funds we have had environmentally friendly policies when looking at the investments, particularly in infrastructure because of the participation by multilateral credit institutions whose policies all reflect the policies of the World Bank group. There is an big emphasis then on environmentally friendly projects so that is something that we are doing to stay “green.” We have a big group initiative with two partners from the regions in the GCC. This partnership has a much broader geographic vision called Vision 3. It brings together the institutional sponsorship of Ithmaar Bank, the Gulf Finance House, and of Abu Dhabi Investment House. All three have been quite active up until now in, amongst other things, real estate development- particularly high quality real estate development- the Barring Financial Harbor, the Gulf Finance House, there have been entertainment sitters by Abu Dhabi Investment House, energy sitters by Gulf Finance House. In Vision 3 we are bringing all of this together and we have three major investment platforms under Vision 3. One is the infrastructure platform for investment banking and fund management, there is one in agriculture (that I mentioned earlier with the food security desire on the part of regional governments) and then third, the entertainment and hospitality industry. These are the three platforms. In each of these it involves some real estate development obviously whether its in a building or tilling the land and in all of these areas there are going to be environmentally friendly sustainably energy type policies that you are referring to. That is an overriding objective of sophisticated financial institutions in today’s world. From this part of the world the investors have high ethical aspirations so that’s why Islamic banking and finance has such a strong following here. Many investors whose portfolios are so large that in this stage they don't find they can satisfy all of their investment needs through the Islamic Shari'ah compliant instruments. Thus, there is a strong demand for Islamic instruments so respect for the environment is an important ingredient in that. Even though this is a region that has developed energy in the conventional formats there is a lot of interest in putting investment into “greener” energy coming out of some of the regional sovereign wealth funds. That is something that we at Ithmaar bank should do to find the right energy friendly opportunities. We are, for example, in early discussions with somebody in Asia about a sustainable energy focused city but I can’t give anymore details at the time.
To finalize the interview, how would you define and characterize your expansion plans and your international and global strategy (basically going global) and what is your long-term vision for Ithmaar Bank?
Ithmaar Bank, Islamic Investment Bank in Bahrain: The long term vision for Ithmaar Bank is to be the leading financial institutional group based in the ME operating globally as an investment bank with its subsidiaries and associates focused in the Shari'ah compliant products and services. We see a tremendous opportunity to participate in the growth opportunities around the world and in supplying financing, whether its equity or complimentary financing from the ME. That’s where our main investment base is to the growth areas of the world in particularly those areas where I mentioned infrastructure, agriculture and the hospitality industry with our partners. We aspire to be the leading, not necessarily in terms of size, but in the quality of what we're providing both to our investment clients and to the users of their funds in the regional and international market.