Al-Rajhi Bank

This year Al-Rajhi Bank started operations in neighboring Kuwait and more recently in Jordan, where it was granted a license by the Central Bank of Jordan last year to open a branch in Amman. This is a far cry from only a decade or so ago when the bank was renowned for its insularity, parochialism and conservative approach to banking - both in terms of geographic expansion and product innovation. Even in more recent years, Al-Rajhi Bank was a notable absentee from the flourishing global sukuk market, for instance, both as an originator and as investor on the grounds that its Shariah Board was not satisfied with the structures of the sukuk on offer in the market.

The rationale then was that the bank's balance sheet was large enough and very profitable and therefore there was no need to venture beyond the shores of Saudi Arabia and into exotic products whose Shariah-compliance was contentious. This was symptomatic of an institution which had the audacity (or the folly some would say) to take the entire risk of the SR800 million Al-Shuaiba Power Plant (Eastern) on its books by refusing to sell down the financing to others or through a syndication.

However, the breakthrough came in 2010 when Al-Rajhi Bank collaborated with Cagamas Berhad, the National Mortgage Corporation of Malaysia and leading securitization house, to develop and launch the Sukuk al-Amanah Li al-Istithmar (Sukuk ALIm), which was the underlying structure for Cagamas's RM5 billion Islamic Commercial Paper (ICP) and Islamic Medium Term Note (IMTN) program.

This "first-of-its-kind" and "innovative" structure was sold to investors in Saudi Arabia and is a manifestation of Al-Rajhi's new-found strategy of bridging the gap and facilitating cross-border activity in the Islamic capital market between Malaysia and the Middle East.

Al-Rajhi Bank of course traces its roots to its trading and money changing operations established in the Kingdom in 1957 by the founder Saleh bin Abdul Aziz Al-Rajhi and his brothers. In 1987 the group's money changing business was consolidated into a joint stock holding company and a full-fledged Islamic bank, Al-Rajhi Banking & Investment Corporation (ARABIC), which is regulated by the Saudi Arabian Monetary Agency (SAMA). It has since then been transformed into a mega bank complete with name change to Al-Rajhi Bank with total assets of around $46 billion and a paid up capital of $4 billion, and employing some 7,500 people and serving more than 3.25 million customers largely in Saudi Arabia, Malaysia, Kuwait and Jordan.

The link with Malaysia has several important implications and will also impact on Al-Rajhi Bank's approach in doing business in Kuwait and Jordan. Over the last two years there has been much talk about setting up mega Islamic banks with a paid-up capital of between $1 billion to $5 billion. Saleh Kamel of Albaraka Banking Group (ABG) has been championing such an institution but without much success because ABG was expecting others to contribute much of the equity.
Saleh passed on the project to the Islamic Development Bank, which has commissioned Ernst & Young to do a third consecutive feasibility study on the viability of such a mega bank. Last year, Bank Negara Malaysia announced that it plans to give licenses for three mega Islamic banks to qualifying promoters on condition that the paid-up capital was a minimum of $1 billion and of course subject to the provisions of the Islamic Banking Act 1983.

The reality is that while these other projects are pretenders, Al-Rajhi Bank is the original Islamic mega bank. The fact that it is now creeping out of its shell and expanding abroad augurs well for the Islamic banking industry.

Its expansion into Malaysia is a unique success story of how a foreign bank can successfully penetrate a new market and take on some of the major domestic players in the commercial banking market. Al-Rajhi Bank's strategy in Malaysia was based on a sound strategy, patience, requisite resources and initial product offerings and the right leadership. In the space of a mere few years Al-Rajhi Bank Malaysia has expanded with over 24 branches and an ATM network with over 21,000 POS installed throughout the country. In terms of product innovation it recently launched a physical gold-based investment product and is expanding into the equities market - all with the aim of bridging the GCC/Middle East and Asia markets.

There are those who would like Al-Rajhi Bank to expand even faster as the torchbearer of a successful mega Islamic bank with the capacity, products and services, and the resources of the likes of the conventional banking majors. The other Islamic banks that have the potential of becoming mega banks include Dubai Islamic Bank, Kuwait Finance House (KFH), CIMB and Maybank. Dubai Islamic Bank has been plagued by two major scandals since it was established as the world's first commercial Islamic bank in 1975. KFH has the potential but it has had corporate governance issues and its business has been affected in the aftermath of the global financial crisis. CIMB and Maybank, while the two biggest banks in Malaysia, have not ventured abroad in any meaningful way.

Its foray into Jordan has other implications for it will compete with Jordan Islamic Bank (JIB), which was established in 1978 as one of the pioneering commercial Islamic banks, and with Arab International Islamic Bank (AIIB), a wholly-owned subsidiary of Arab Bank Group. Al-Rajhi Bank has already opened two fully operational branches in Amman - one in Shmeisani and another in Abdullah Ghosheh Street, with more branches expected to be launch in the near future at various locations nationwide.

With its edge in resources and product suites, the Bank threatens to provide stiff competition to the other two Islamic banks, JIB and AIIB. The bank, for instance, is now the only one in Jordan to offer a Murabaha-based personal finance product that also allows customers to consolidate debts in a single installment.

According to Tarek Akel, regional manger of Al-Rajhi Bank in Jordan, the bank is a manifestation of the group's commitment to establishing a global Islamic banking network, and is eager to bring its varied array of Islamic banking solutions to the Jordanian market. The aim is to introduce quality products and services specifically tailored to meet the demands of the local market.

]The dominant market position of JIB, one of the unassuming success stories of Islamic finance, is likely to remain uncontested over the foreseeable future. But once Al-Rajhi Bank Jordan consolidates its operations and position in Jordan (like the group did in Malaysia), the bank's market share inevitably will increase. JIB is a relatively smaller bank than Al-Rajhi Bank and AIIB is inextricably linked to the group Islamic banking strategy.

Jordan is also constrained by the size of its economy and financial services sector.
As such, with their huge experience in Islamic finance, Jordanian Islamic banks should be the natural gateway for Islamic finance in the Palestinian Territories and perhaps more importantly to Iraq and Syria. While the former two are still mired in political deadlock in their respective situations, Islamic finance is starting to make genuine inroads into Syria, where the Central Bank has already authorized five Islamic banks. However, with the street protests in Syria set to continue, the financial sector there is also in retreat.

The Rest @ Arab News