The traditional approach… a lesson for us all?

Europe Arab Bank (EAB) opened its doors for business in August 2006 and is a wholly owned subsidiary of the Arab Bank Group, an institution with a vast geographical presence. The Group has over 500 branches in 30 countries spread across five continents. EAB is authorised and regulated in the UK by the Financial Services Authority.

EAB has a highly practical operating structure with offices in strategic European Centres. There are four main business lines – Corporate Banking, Private Banking, Treasury and Islamic Finance. Chief Executive is Mr Antoine Sreih, who has 25 year’s experience of working for the Arab Bank Group.

EAB’s Corporate and Institutional Banking function is organised along industry-focused business and specialist product teams such as trade finance, with specialists grouped together in the same offices. For instance, the transport and logistic experts are based in France while the Frankfurt office is the home for specialists in construction, infrastructure, manufacturing and engineering. The busy UK Head Office, based in the City of London, focuses on hospitality and tourism, energy, power, natural resources and real estate. In 2006-2007 EAB’s corporate loan portfolio rose to €1.98bn, the volume of trade finance jumped by 42 percent and the average corporate lending margin nearly doubled.

EAB also has a highly experienced Treasury Team, headed by Moorad Choudhry who joined the Bank in July 2008, and a successful Private Banking operation with offices in Mayfair, Paris, Cannes and Vienna.

Liquidity pays
EAB has aligned its business model alongside its parent’s unapologetically traditional banking philosophy. “Arab Bank has followed a cautious stance since time immemorial,” explains Kazi Hussain, Director of Islamic Finance. “The original goal was always to preserve the depositor’s cash, whether it was in Palestine or in Switzerland. Arab Bank has always built its book carefully.”

That policy has carried both parent bank and its European subsidiary through the latest credit crunch. The lack of exposure to US-originated CDO vehicles or US sub prime debt, meant it was “largely immune” to the crisis. Inevitably EAB has suffered some of the ill effects in terms of widening spreads in the general tightening of liquidity, but its robust levels of reserves kept it well inside the safety zone.

“We will never sacrifice liquidity for short-term profitability,” explains Mr Hussain. Indeed EAB’s current liquidity levels exceed the requirements of UK’s Financial Services Authority, and the bank is aiming for an F-IRB rating under the forthcoming Basle 2 capital integrity standards.

The parent group’s risk-averse culture has rubbed off on EAB in the area of credit control. As business expanded over the last two years, the Bank took the precaution of doubling the size of the credit risk team which has a reputation for eagle-eyed analysis of projects put before it.

Sharia influences EAB strategy
The provision of Sharia-compliant services is a key component of EAB’s long term strategic plan. Not surprising given the market prediction that Islamic finance, already growing at a faster rate than conventional banking, will become a $4trn industry within the next decade. “EAB provides its clients with a choice of mainstream or Islamic banking solutions,” continues Mr Hussain. “In 2008 the Bank has enhanced its Islamic finance capabilities to serve the requirements of clients in this niche sector. We have appointed a strong Sharia committee, implemented a segregated Islamic accounting platform and have Sharia-trained staff. Our sector-wide specialists have the backing of dedicated financial-engineering teams.”

It is surely an underlying advantage that Sharia law explicitly forbids financial organisations from investing in the kind of asset∞backed paper that has brought down some of the biggest banking houses in the United States. “Islamic lending must finance real assets,” explains Mr Hussain.

Long-term relationships
Unlike many other institutions seeking to acquire assets at bargain-basement prices, EAB also prefers to align itself to the parent group’s philosophy of building long∞term relationships as the credit crisis unwinds. “We’re not out in the market charging 500 basis points more [than the market] to provide liquidity for somebody in trouble,” says Mr. Hussain. “Nor are we hunting distressed assets. We’re looking after our established customers. The last thing I want is a non-performing loan.”

An interesting reflection of EAB’s far-sighted outlook is the way it rewards staff. For instance, bonuses are assessed as much on the prospective deals that staff reject as on the ones they write. (This highly responsible form of remuneration may provide regulators with food for thought as they ponder the seeds of the current crisis.)

However the restrained bonus system hasn’t stopped the size of the deals mounting. Confirming the predictions of a $4trn industry in Islamic finance, the markets have shown consistently strong support for Sharia-compliant fund-raisings. At the time of writing, EAB’s team in London was raising $120m for one such financed project alone.

The fortunes of EAB are firmly tied to the continued development of the MENA region’s commercial ties with Europe. For instance, the rationale behind the establishment of industry-dedicated teams of experts in the European and UK offices was specifically to complement the nature of commercial relationships. “The alignments have particular relevance to business between Europe and MENA, explains Mr. Hussain. Similarly, private banking provides MENA-specific investment products and other services for wealthy, Europe-based clients of Middle East origins.

Inevitably, EAB’s Islamic finance division expects that most of the demand for products will come from Muslim regions in MENA, but Mr Hussain is also aware that there is also a demand from South East Asian nations such as Malaysia. “As time goes on, the Orient will want Islamic solutions,” predicts Mr. Hussain “Whilst this region is not a specific focus for EAB, our parent’s A-rating and extensive geographic presence mean it is well-placed to serve the needs of clients in this sector wherever they are domicile.”
 
A new version of Sharia
Meantime a more purist generation of Islamic finance could be around the corner. According to Mr. Hussain, this is Sharia-based rather than merely Sharia-compliant. As such, it is biased towards seeking asset-based partnerships and thus moves beyond mere lending. In practical terms Sharia-based banking means profit-sharing, equity deals anchored on real assets. This may not however suit some clients, in particular proud, family-owned businesses seeking standard funding arrangements. “It is the purest form of Islamic banking, but not all companies want this kind of finance”, Mr. Hussain explains. “However the scholars are moving towards this.”

Long-term strategy
EAB’s growth plans are based on the same strategy that underpins that of its parent, which is to enable clients to tap the collective experience of specialists grouped under one roof. It focuses relentlessly on its core geography of the Middle East and North Africa. And, in the certainty that banking will encounter crises at regular intervals, it cherishes a credit culture based on the linked virtues of caution, liquidity and long-term relationships. Mr. Hussain explains “It’s our prudent credit culture that has enabled us to avoid the fallout from the credit crunch.” Many other banks would like to say the same.