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IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 6 FINANCe exclusive Interview: Abdulrazzak m elkhraijy, NCb, saudi Arabia the Future is islamic banking in saudi arabia demand for islamic banking and finance products and services is set to increase steadily over the next few years in saudi arabia, the world’s single largest such market, especially from young customers, corporates and government entities. this includes retail banking, corporate finance and investment banking in particular for sukuk issuance. “once you bring a financial solution to your customers that is islamic and conventional, most of the time they will prefer to go with the islamic solution as long as it is shariah-compliant, efficient and price competitive. everything in terms of the process side is important - the procedure, the policy, pricing, efficiency - everything,” explained abdulrazzak m elkhraijy, executive vice President and head of the islamic banking development group at national commercial bank (ncb), one of the largest banks in the arab World, in an exclusive interview with Islamic Banker. “the young people are demanding alternative shariah-compliant financing complying with a modern offering. you see them using more of the alternative products today in our branches and about 90 per cent of the transactions are done in this way. it shows you that demand for islamic finance is good. the future of islamic finance in the Kingdom is indeed very bright,” he added. in a country where some 60 per cent of the population is under 25 years old, the youth are an important driver of the islamic banking market. this cannot be over-stated nor stereotyped. banks certainly cannot take the young saudi customer for granted, because in terms of products, technology and delivery they are demanding that these have to be modern and up-to-date with what is and how it is offered in the market. “you see,” explained ncb’s abdulrazzak elKhraijy, “more people are now not using the original traditional channel through the branches. they are using the alternatives, either online banking, telephone banking and the atms. by mushtaK ParKer ncb’s own retail banking operations is 99 per cent shariah-compliant driven entirely by customer demand. there are only a few conventional customers largely related to its credit card business. the bank’s entire retail branch network is fully shariah-compliant offering “everything” including online and telephone banking and a large atm network. the trend for corporate and structured finance in the Kingdom is the same. already some 50 per cent of ncb’s corporate financing business is shariah-compliant and increasing. DeFININg DePosITs “ncb since the start of its islamic banking business, has been involved in a banking revolution based on customer demand and needs. every time we introduced a new product we saw more demand and growth in the percentage of the customers who are involved in islamic transactions. hopefully soon we will be able to make our retail business a 100 per cent shariahcompliant,” says abdulrazzak elkhraijy. as far as market size in the Kingdom is concerned, he concedes that this is difficult to assess. if you take deposits, for instance, it depends on how you define deposits. “some banks define all their demand deposits as shariah-compliant, for instance. at ncb we do not define all our demand deposits as such, even though there is no interest paid or taken on demand deposits. if you consider the whole process, if the surplus of that deposit is not invested in a shariah-compliant way and it is not under the control of a shariah department and therefore board, we do not consider it as islamic although it is demand and there is no interest paid on that. so this is the difficulty of defining what is the percentage of islamic deposits in the banking system as a whole,” he added. he is confident that islamic banking constitutes more than 40 per cent of the total banking system and continues on an upward projection especially in terms of customer deposits, financing and assets. sutainability in financial services including retail banking comes with value-added product development and innovation, especially to keep the loyalty of a young and increasingly sophisticated customer profile who demand new products, new delivery mechanisms, maybe even new incentives. “to me,” he explained, “you use the word that is very dear to my heart and that is innovation. i believe that if you want to look at innovation, look at islamic banking. at ncb when we started our islamic banking, our vision and strategy was to be the innovators in the industry, because we saw the big gap between what is available on a conventional side and in the islamic space. and if we want to be competitive, we need to be innovative to bring products that could compete with the conventional ones and satisfy the customer need on the retail side. “and we are very proud with our achievement at ncb. We are the bank that established the standard for investing globally in equities that is shariah-compliant. nationaL commerciaL banK oF saudi arabia (ncb) seLected unaudited FinanciaL resuLts Q32012/2013 ‘000 saudi riyaLs eND 30/9/2013 eND 31/12/2012 eND 30/9/2012 ToTAL AsseTs sr367,080,620 sr345,320,133 sr320,803,112 NeT INvesTmeNTs sr127,182,521 sr116,427,793 sr115,007,336 CAsh AND bALANCes WITh sAmA sr33,070,059 sr40,298,428 sr18,676,663 CusTomer DePosITs sr294,775,091 sr273,530,090 sr251,326,413 PAID uP CAPITAL sr15,000,000 sr15,000,000 sr15,000,000 ToTAL equITy sr41,918,029 sr39,404,145 sr38,444,288 ToTAL INCome sr11,192,637 - sr10,356,200 ToTAL oPerATINg exPeNses sr4,906,980 - sr4,931,450 NeT ProFIT sr6,161,961 - sr5,180,863 LoANs AND ADvANCes sr184,412,738 sr163,479,092 sr157,212,261 ToTAL rIsK WeIghTeD AsseTs (PILLAr 1) sr250,980,123 sr232,098,061 sr233,083,898 Core CAPITAL ADequACy rATIo (PILLAr 1) 16.3% 16.5% 16.0% sourCe: NCb November 2013 214 6 Islamic banker november 2013 dhul hijja 1434 - muharram 1435
IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 7 We were the first to introduce an islamic credit card; capital protection and other investment funds; and we were one of the first banks to finance a big housing project in saudi arabia. today we are concentrating maybe more on innovation in treasury products to find solutions for corporate clients.” ncb’s pioneering leadership in islamic equity funds is proven. it was Freddie crawford at Wellington management international that structured the first islamic equity fund of substance for ncb in the early 1990s under the bank’s al ahli brand. in its heyday al ahli global trading equity Fund used to be the single largest islamic equity fund in the world with a net asset value of just under us$2 billion. at end june 2013 however, the total assets under management reached a mere us$264.93 million, which still made it one of the largest if not the largest islamic equity funds. the decline reflects a wider trend in global islamic finance of the poor relation that islamic asset management is. this has been confirmed by several recent study published including one to be piublished in the new year by the malaysia international islamic Finance centre (miFc). islamic investment funds, according to various estimates, have a total size of assets under management not exceeding us$75 billion in 2013. this despite the fact that the actual number of funds has grown to some 1,060 at the end of 2013. the issue is that the aum of most of the funds are very small. equities have generally been a less preferred asset class of islamic investors, who have tended to prefer investment in real estate and sukuk. saudi arabia is the largest islamic funds aum domicile accounting for just over 40 per cent of global islamic funds assets followed by malaysia with just over 20 per cent. asked why islamic asset management especially equities have not taken off as an asset class compared to retail banking and sukuk, abdulrazzak elKhraijy believes that is essentially due to customer appetite. “i would love to see more islamic investment funds,” he contends, “but i think a combination of customer appetite, the perceived risks of investing in equities, and the volatility and past experience of stock exchange crashes including in saudi arabia and dubai, have affected this. there may also be a cultural aspect that is why the market needs to educate investors about asset management especially shariah-compliant asset classes such as equities.” he strongly believes that islamic asset management including investment in equities is here to stay, albeit its growth maybe not be as fast as it ought to be. ncb’s own islamic asset management business is arounf us$15 billion. in terms of corporate finance, while the potential is huge, not all saudi corporates are aware enough of the islamic finance products available in the market, while some remain reluctant and sceptival about them. ncb’s elkhraijy classifies saudi corporates in three categories in relation to accessing islamic finance. some of them, he explained, insist on using only islamic financing instruments. there is also increasing pressure on publicly-owned companies from the market, the customers and shareholders, that they use only shariah-compliant finance because they want to invest only in a company that uses shariah-compliant financing. suKuK mArKeT other companies unfortunately are neither interested nor really keen to understand islamic finance, and there are others still who are in the middle - they do not understand it, but they are trying to find a suitable product that fit their needs, and they are using it. on the capital market and especially sukuk front, the situation is different. the reason is that both the saudi government and the saudi arabian monetary agency (sama) are keen for local corporates to access their funding requirements from the capital market in the Kingdom because it is a valuable diversification of source of funding for saudi corporates, who are deemed to rely too much on bank financing which is more expensive. in many respects the islamic capital market especially sukuk is the preferred option for many saudi companies. elkhraijy is very bullish about the local sukuk market in 2014 and beyond. “We now see that there is more and more demand from saudi companies to finance their activities through the sukuk which is a very positive sign. the market is there but we need to be more active and to move at a faster speed. i believe that with all the state-sponsored infrastructure projects that are going on in saudi arabia, the government is encouraging the financing of these projects through the sukuk. We saw a sukuk being issued by the general authority for civil aviation (gaca) to finance the airports in jeddah and makkah. in saudi arabia there are many transportation projects that have been signed. i expect the sukuk market to really move very fast in saudi arabia.” to him the increasing number of new entrants to the market including smaller issuers is a good sign that the sukuk market is moving in the right direction. some of ncb’s clients insist on using only islamic instruments. What is also unique, stressed ncb’s elkhraijy, is the pressure especially on publicly-owned companies from customers and shareholders alike, that the companies use only shariah-compliant finance. ncb itself is working towards issuing its debut sukuk. most of the issuances in saudi arabia is through private placement by companies who are hungry for value-added shariahcompliant assets such as sukuk. but there have been significant international issuances by companies such as sabic (saudi basic industries corporation) and saudi electricity company (sec) and some of saudi aramco’s subsidiaries. another saudi company, al bayan, last year even raised funds in the malaysian ringgit market through a local currency issuance, a trend which issuers in several gulf countries including bahrain, Kuwait and the uae have pioneered. he does not see a rush of international sukuk issuances by saudi companies because it is much easier and less costly for them to first to do it locally and not to take the different risks such as currency risks. similarly, international investors will only invest in sukuk from issuers where the legal aspects and procedures are clearly defined and there is certainty in recourse to law and regulatory treatment of sukuk. in saudi arabia, there has also been some confusion over the position and precedence of sukuk certificate holders as far as creditors are concerned in a issuing company that has defaulted and in administration. “according to the shariah if it is a asset-based issuance it is thesukuk holders that are the owners, and we need to see this. clarification and clarity on this are very important for the whole industry,” maintained ncb’s elkhraijy. he does not believe that the above situation puts a damper on the development of the sukuk market. on the issue of a saudi sovereign sukuk issuance he maintained that he is “not in a position to answer such a question. i do not know.” another major issue is that saudi investors in sukuk like most in the region tend to hold on to the sukuk certificates until maturity rather than trading them. Islamic banker november 2013 dhul hijja 1434 - muharram 1435 214 7
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