ELAF Bank is a wholesale Islamic bank incorporated in Bahrain in 2007. Its shareholders include Aref Investment Group of Kuwait; Kuwait Investment Company (KIC); Sukuk Holding Company; Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank; and Qatar Islamic Bank.
It started with the original objective of developing a secondary market in sukuk and to be a market maker. In fact its original name was the cumbersome Sukuk Exchange Central Bank. But the oncoming global financial crisis forced the bank to retreat into more vanilla investment banking to generate enough income to cover its expenses and to prepare for the recovery in the market in 2010-2011.
The CEO of Elaf Bank is Jamil El-Jaroudi, a seasoned Islamic banker who previously worked for Shamil Bank of Bahrain, then a subsidiary of the Dar Al-Maal Al-Islami (DMI) Group, and subsequently worked as CEO of Arab Finance House in Lebanon. Here El-Jaroudi discusses with Mushtak Parker the latest developments at Elaf Bank, the state of the sukuk market and why he is optimistic about the future of the Islamic banking industry.
Why did you divert from your original mission to create a secondary market for sukuk and to act as a market maker?
During the second half of 2007 we started noticing the signals of the crisis to come in the global financial system. Many sukuk issues that were scheduled to come to the market in the second half of 2007 were postponed or canceled. Although the first half of 2008 was an excellent time for sukuk issuance and showed an upward trend equal to that of the previous two years, we felt that the market was getting difficult and most of the banks that held the old sukuk issuance were holding on to them because they were getting good returns.
We felt that to play only the market maker and to create a secondary market would not be feasible under these circumstances. We subsequently focused on all sorts of investment-banking activity — advisory services, corporate finance, etc. We invested our capital in a way that would allow us to invest in sukuk in the next few years. We are hoping the market will recover and that is what is already happening.
What is the size of your capital and the focus of your business?
We have a paid-up capital of $200 million and a nominal capital $500 million. Before asking for a capital increase from our shareholders, we are first creating more value for the present shareholders and for those to come in the future. As such we are focusing on building our infrastructure, team and networking. We are also building a good portfolio of private equity investment. We have executed several investments which have given us good returns to cover our expenses.
These investments cover several countries, mainly Turkey, Sudan, Malaysia, the UK and Indonesia. In Turkey we have a leasing company and we financed a development project in Istanbul. We are also looking at launching a number of Islamic trade finance funds for the Turkish market. Turkey is a very strong Islamic trade finance market especially for commodity Murabaha.
We are well positioned in Turkey, where we have the people on the ground and the connections. This goes back to the days when I was at Shamil Bank. I worked a lot with the Turkish banks at that time in 1999 and 2000, when the profit rates were very attractive in Turkey to everybody.
We are also in Sudan where we financed a cement factory and where we established a leasing (Ijara) company. Both are doing very well. We also have a leasing company in Indonesia. In the UK In the UK, we are investors in the Bank of London and Middle East (BLME), one of the five Shariah-compliant financial institutions authorized by the Financial Services Authority (FSA). The bank is now on the right track and is doing well.
One of our strategic objectives is to create business and value between the two Islamic financial hubs — Bahrain and Malaysia. In fact, we have applied for a license to open a branch under the Malaysia International Islamic Financial Center (MIFC) Initiative. We have also several deals in the pipeline in Malaysia and Indonesia. In Malaysia we are involved in two projects — a $1.3 billion toll road project and in a company servicing the oil sector. We plan to issue a series of sukuk to finance the activities of this company. We are looking at the possibility of originating the first issuance of $75 million out of Labuan. In Indonesia we are involved in two projects with a collective value of $100 million — one a $75-million investment in a hydroelectric project and the other a $25-million investment in a liquefied natural gas plant. These are real economy activities which are what Islamic finance is all about.
The planned trade fund in Turkey, on what structure will it be based?
This fund could be a Wakala structure but we have the option of several Shariah-compliant structures approved by our Shariah board. Eventually it will depend on the legal aspects especially in Turkey. We expect the size of the first fund to be around $15 million.
What about returning to your original mandate of creating a secondary sukuk market?
We hope to do things which would allow us to take sukuk into the secondary market. Our original mandate is still very much alive. We are not ignoring it. It is a question of market conditions and timing. We are concentrating on primary issues which can lead themselves to the secondary market later.
For instance, we have our own piece of land in Bahrain on which we are going to build our own tower. We hope to generate an Ijara portfolio by renting out much of the space. This will be a good source of primary sukuk which can later be securitized and traded.
How do you see the sukuk market evolving?
The sukuk market is coming back. Although its is dominated by sovereign and quasi-sovereign issuances, we are seeing a small number of corporate issuances coming to the market. We expect an improvement in the sukuk market in the second half of this year into 2011. But the slight dip in the market in first half of 2010 suggests that investors are still cautious.
I am confident that we may see the volume of sukuk reaching $30 billion in 2011 — the same size as before the crisis, although the market will continue to be dominated by sovereign and quasi-sovereign issuances. Perhaps in 2012, corporate issuances will start equaling origination activity in the sovereign market.
How will the GCC countries fare in the sukuk market?
GCC markets suffered the most through defaults. The defaults awakened everybody — the regulators, Shariah boards and the investment bankers — all to do a better job. Whenever there was a sukuk default, the media immediately started to speculate about the future of the sukuk. But in the conventional bond industry there has been tens of defaults and the media never asked about the future of the bond industry.
Sukuk is a tool and an instrument. It is not a means by itself. It will continue forever as long as people need money, and in the Islamic structure this will be the future trend. Whenever people decide to come to the market they will do it primarily through a sukuk. The sukuk structure is not responsible for the defaults. This was mainly due to the issuers having solvency problems or cash flow problems. It was a credit issue and nothing to do with the Shariah structures.
Are regulators in the GCC countries rising to the challenges?
They seem to be now, but not in the past when they were over-reacting in a self-defeating way. It takes time to develop a top regulatory regime. Kuwait especially has not done much. The problem to tackle the financial crisis was exaggerated because it was politicized especially in the National Assembly. Also investment companies were in the last three years behaving as if they were banks. The crisis has given the regulator the opportunity to rein them in.
Source : http://arabnews.com/economy/islamicfinance/article182707.ece?service=print - Nov 7, 2010
