We will need to codify Islamic bank principles

Ajman Bank commenced its operations as one of the newest Islamic banks in the region and the first Ajman-headquartered bank. Though there are eight Islamic banks already operating in the UAE, Ajman Bank's chief executive believes that being a late entrant into the market throws up a couple of additional advantages to his bank. "We have not built up toxic assets in our books as we started our branch operations after the recession struck the markets the world over. More than that, as most banks have exceeded their real estate financing limits, we are privileged to be selective in financing the real estate business in the country," said Mubasher Hanif Khokhar, CEO of the bank while talking exclusively to Emirates Business recently.

Ajman Bank is the only bank in the emirate of Ajman and is now more than two years old. How many branches does the bank have now?

The bank, as of now, has five branches. While two branches are in Ajman, one each is in Dubai, Sharjah and Abu Dhabi.

Does the bank have any expansion plans?

Ajman Bank will open at least five more branches within the next three months. This means that the bank will have at least 10 branches within three months from now.

Any plans to go outside the UAE?

There is no plan to go outside the UAE as of now. I believe there is a lot to be done here in the UAE.

The last few years saw several Islamic banks entering the market and the current tally is eight. Do you sincerely believe that the country needs this many number of banks?

Let me correct you. It is not just eight banks in the UAE. Almost all conventional banks have their own Islamic windows being run in parallel to the Islamic banks. Moreover, there are Islamic institutions operating from Dubai International Financial Centre (DIFC) as well. However, I still believe that the country needs more Islamic banks than what we have now. The efficiency in Islamic banking can be improved through competition and this can be achieved through the establishment of more Islamic banks. Islamic finance industry is only 30 years old and was started with the setting up of Dubai Islamic Bank (DIB).

We hear that different Islamic banks follow Islamic principles. When do you expect to see standardisation of Islamic principles?

I am coming to that. Before we get more Islamic banks up and running, we need to standardise and codify the principles on which the Islamic finance or banking is based on. This has to take place at the level of regulators – Central Banks. There are several Shariah boards and they issue different fatwas, of which many are at variance on so many counts. Having said this, I should acknowledge that 90 per cent of these fatwas are standard; only 10 per cent need further standardisation.

Which are the products and services that mainly face the lack of standardisation?

The products that face the challenge of standardisation include tawrooqs (which is close to Murabhaha), sukuks, arboun (options), etc. There are divergent views expressed on these products by different Islamic scholars through their fatwas.

However, I don't believe this is a big issue. And I am sure slowly this is getting sorted out. Though this may take a while before the issue can be resolved fully, I can say that things are moving in the right direction.

How do you find the competition in the Islamic finance market?

It varies from product to product. If your bank faces competition from Bank A on credit card, it will be from Bank B you face competition in sukuk structuring and Bank C in auto financing and mortgage, and so on. So there is no one institution that gives you competition on all products.

When it comes to innovative Islamic products such as sukuk, we find that foreign banks are the front-runners compared with Islamic banks established locally. Why is this so?

This is not because of the structuring capability of the foreign banks per se, but more importantly it is dependent on the distribution network and strength of those foreign banks. These foreign banks, with presence across the global markets, have the infrastructure to sell any product anywhere in the world through their global distribution network. And this is the reason why it is mostly a foreign bank that stands to win the mandate for structuring and selling of a sukuk or any other similar products for that matter.

You acknowledge that standardisation is an issue which is of paramount importance within Islamic Financial Institutions (IFIs). What, as an Islamic bank, have you done towards achieving this?

There are several discussions and forums taking place in different markets, especially in Malaysia, a major market for Islamic finance. However, I don't believe we will achieve the result unless the Central Banks of all jurisdictions come together and discuss the matter because the issue of standardisation has to be viewed from the f regulator's perspective. I believe that the standardisation has to be tackled on a global level. I am of the strong view that Islamic offerings should evolve to straight "vanilla" products so that they can be sold globally on the same uniform terms. It is impracticable to ask all markets to structure Islamic products and get fatwas from Shariah boards each time they sell these products.

You have been talking about absence of standardisation between two markets. What about standardisation within the country itself – within the UAE?

Informal talks are taking place on how to bring in standardisation in the UAE's Islamic finance industry. The only platform where these standards can get unified is the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), which already has 14 standards. The issue is that no bank will go forward and say that I am AAOIFI-compliant. If the regulator goes and tell all banks that they need to comply with the AAOIFI standards, then the banks will be required to do so. It is the role of the central bank to make sure these standards are followed by all institutions and also the windows of other conventional institutions.

Currently, what is the market share of Islamic banks?

In the UAE, it must be in the range of 12 to 15 per cent. The idea is to take this to 25 to 30 per cent by 2012 with the same number of banks. The way the economy is expanding and the Islamic banks are growing I believe this is quite a possible target to achieve.

Islamic institutions control a big share of mortgage finance in the UAE. Why is it so?

In fact, the mortgage finance was originally introduced to this market by Tamweel and Amlak, two Islamic finance companies. Together between Amlak and Tamweel, they control about 65 per cent of the mortgage market. Now, they are not very active, maybe, because of the funding model – borrow short term and lend long term.

What is the way out for them?

Deposits are not the only way of raising funds. If you remember, Badr Al Islami, the Islamic banking arm of Mashreqbank, had advised Tamweel on its first sukuk that raised Dh1.1 billion. These companies can still raise long-term money which may be difficult now. But when the market conditions improve, they can still go for that.

Islamic banks are said to be generally liquid. How liquid is Ajman Bank?

Our lending (financing)-deposit ratio is about 80 per cent as of now.

Until now you have not been able to report profit. When do you think Ajman Bank can break-even?

If you ask that I would say that we want to do this during this year itself. Let us see. We are making huge investments. We are young and we have not built up toxic assets. We are investing in our people, consultants, technology and our branches. The message is that our vision is to bring human touch to modern banking though the "present" is driven by technology.

How do you propose to bring in that human touch?

We want to encourage one-to-one interaction with our customers. We want our branch managers to be trained in a manner that they can deal with these challenges. If you notice you will find that we are moving towards our customers. We have kept our head office in Ajman, and at the same time have established the technology in Dubai. We have moved our deputy chief executive's office to Abu Dhabi and the retail operations to Dubai. We are also moving the corporate, investment banking and structured products' office to Dubai. We are making a lot of investments now, and there is obviously a certain payback period that we have to go past.

So you are happy with the progress Ajman Bank made so far. Aren't you?

The key is that we are comparing our quarter results to the previous quarter results and not the corresponding quarter in the last year. The regulation in the country is to compare the same periods in two years but for us this is not fair. We have started in the first quarter in the last year and how can we compare this quarter with the first quarter last year. If you compare our performance between two quarters, we have done well. Between the two quarters, our revenues have gone up by 27 per cent; our cost has come down by three per cent despite the substantial investments we made during this period. Our assets have grown by 58 per cent. We are all set to announce some big deals.

Don't you need more capital to aim big-ticket financing?

No, we can finance single party up to Dh70 million and this is good enough for us. We do not intend to finance big deals. Our strategy is to grow in retail segment and the trade finance segment. We do not eye project financing, big-ticket financing or cross-border deals. But we can participate in syndicated deals.

Do you think syndicated deals will start now?

I don't think the time has yet come for that.

Are you planning any new products?

First of all, we have already got almost all products in the corporate and retail banking – credit card, home finance, auto finance and all trade finance and corporate products. We are now working on Musharaka-based products.

Can you explain?

This is one product that is closest to Islamic finance principles as this is purely equity based. Musharaka allows banks to share the risk and reward of an investment with their clients, and this attribute is what makes this a pure Shariah-compliant product.

Where does Musharaka work best?

Musharaka is ideal for real estate financing. There are several construction projects in the market where a big portion of the investment is already made by the developers, but currently are in need of additional finance. This is where a bank, like ours, can enter to do the remaining funding of the project on the condition that the risk and returns will be shared proportionately. Here we get to share the return on equity, and not the return on debt. This is the right time for the banks to support such projects, as most of these projects are 50 to 70 per cent complete. We are eyeing small to medium projects – not big projects that involve hundreds of millions of dirhams.

So will you do this only in real estate projects?

This can be done with manufacturing as well, but is more suited to real estate as the manufacturing calls for long-term involvement which many managements are unlikely to be comfortable with.

There are instances, where [Islamic] banks may have reported loss for a particular period, but the depositors still get profit shares. Can you explain this phenomenon?

You are apparently referring to Mudarabha where the banks accept funds from the customers to carry out investments on depositors' behalf. There are certain expenses that are not deductible and the profit sharing is done at the revenue level, at the top level. In the case of Wakala, the bank functions as an agent to keep your money, and irrespective of what the bank does with the money and how much revenue has been generated from that money, the bank commits upfront a certain rate to be paid to the customers on completion of the said period. But in the case of Mudaraba, the profit or loss will be known after the period for which the money is committed to the banks.

Is being new in the market an advantage?

Of course, yes. We are able to initiate innovative steps as a new bank. More importantly, we are fortunate to capitalise on the inefficiency of other banks which have accumulated lot of toxic assets. We could go for the latest technology available in the market. Moreover, many banks, especially Islamic banks, have already touched their real estate investment ceiling.

Do you have plans to enter insurance?

We are open to insurance business, but for the time being we are focused on banking especially investing in real estate financing. We will have some innovative products in trade finance soon.

PROFILE: Mubasher Hanif Khokhar CEO, Ajman Bank

Khokhar is a highly experienced banker with more than 25 years in the industry. This year, he was appointed to lead Ajman Bank following a successful first year of operations and with plans in the pipeline for an ambitious growth. 

Prior to joining Ajman Bank, Khokhar was a key member of the MashreqBank team for more than 15 years, and most recently served as the CEO of Badr Al-Islami, the majority Mashreq-owned and independently managed Islamic bank. 

He also acted as a board member of Saudi American Bank (Samba), Pakistan, in parallel.

He began his career with MashreqBank as Pakistan's Country Manager before coming to Dubai in 1996.

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