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Focus for Islamic banking.

AS PART OF ITS DRIVE towards becoming a truly international financial centre, Bahrain has been encouraging the development of Islamic banking. Over the last decade, Bahrain has become the hub for Islamic banking in the Gulf. At the latest count, there are nine Islamic financial institutions based in Manama in various capacities.

These include the Bahrain Islamic Bank, which is licensed by the Bahrain Monetary Agency (BMA) as a specialised financial institution; an offshore banking unit (OBU), Faisal Islamic Bank of Bahrain (FIBB); five investment banks, the ABC Islamic Fund, Albaraka Islamic Investment Bank (AIIB), Arab Islamic Bank, Bahrain Islamic Investment Company and the Islamic Investment Company of the Gulf (IICG) which is the flagship company of the Geneva-based Dar Al Maal Al Islami (DMI) Group; and two investment funds, Al Ameen Securities Company and Al Tawfeek Company for Investment Funds, both subsidiaries of the Jeddah-based Albaraka Group.

The Financial Institutions Supervision Directorate of the BMA keeps a close eye on Islamic financial institutions under its supervision and has regular meetings with them to discuss their overall financial performance based on the periodic prudential returns submitted to the agency. The directorate is also in the process of finalising a new quarterly reporting system for Islamic banks, which takes into consideration the capital adequacy guidelines issued by the Basle Committee.

The directorate is also a great promoter of common Islamic banking accounting standards and is a regular participant in the meetings of the Islamic Accounting Standards Board, which was established by the central banks of the Islamic Development Bank (IDB) member states with a view to promulgating common accounting standards in the area of financial reporting by Islamic financial institutions.

Manama's position as a major Islamic banking centre is in no doubt. The total balance sheet of Albaraka's three institutions there amounted to $543.8m at the end of 1991. DMI's flagship IICG alone accounted for $1.47bn funds under management in 1991 and last year this figure is estimated to have increased due to the repatriation of capital which fled the region during the Gulf crisis. IICG is also capitalising on its advanced information technology network, thus facilitating prompt retrieval of statements, speedy transfers, investments and withdrawals. Manama has also been an Islamic banking product innovation centre, especially the morabaha (cost-plus financing) syndication for commodity export financing and aircraft lease financing based on the ijara contract. In December, AIIB financed Gulf Air's purchase of an aircraft for $15m through an ijara syndication.

The Islamic bank setting the pace in Bahrain is FIBB, which has the distinction of maintaining its profitability since it started operations a decade ago. FIBB recently increased its capital by $20m, through a $10m rights issue and a $10m bonus share, taking the total to $70m. There are plans to increase this further to $100m through another share offer in 1993. FIBB's board has also agreed to increase the bank's authorised capital to $200m.

According to results approved in March, FIBB registered an 11% increase in net profits from $9m in 1991 to $10m last year. Total assets rose from $187.9m to $196.5m for the same period and the bank's funds under management rose by 4.6% from $1,140.1m to $1,199.1m. The underlying health of FIBB is illustrated by its reserves, which increased from $11.6m to $22.2m, and a decline in provisioning from $3.4m to $3.2m for the same period as above.

This year promises new challenges for FIBB, which is 60% owned by DMI and the rest by individual Saudi investors. According to its chief executive, Nabeel Naseef, the bank plans to have its shares listed on the Bahrain stock exchange following the approval by the BMA and by shareholders on a share split of five million $10 shares instead of the current 500,000 $100 shares. FIBB recently appointed Qasim Mohammed Qasim as executive vice-president in a bid to increase its management profile. Qasim is an experienced Islamic banker and ex-general manager of the Qatar Islamic Bank and of Al Ahli Commercial Bank.

FIBB's other major plans for 1993 include the reorganising of the bank's three branches in Pakistan, which are to be floated off as a separate entity, incorporated locally and paving the way for local investors to subscribe up to 49% of the $50m paid-up capital. Other priorities for FIBB will be to consolidate its Islamic morabaha syndications, leasing and other Islamic investment business.

FIBB has so far arranged some 17 morabaha syndication facilities - mainly for the cotton and rice export corporations of Pakistan - totalling $1.55bn over the last three years. The latest such syndication facility was a $100m morabaha facility for the Cotton Export Corporation of Pakistan signed in February. The facility is guaranteed by the State Bank of Pakistan (the Central Bank) and carries a maturity of six months.

FIBB is also managing two syndicated financings for the Jeddah-based Islamic Development Bank (IDB) amounting to $150m. Funds for the morabaha are provided by a syndicate of Islamic and conventional financial institutions, through their participation in a specially formed pool with FIBB acting as manager.
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Title Annotation:Special Report; Bahrain
Author:Parker, Mushtak
Publication:The Middle East
Date:May 1, 1993
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