Adnan Ahmed Yousif, the head of Al Baraka Banking Group, one of the foremost experts in retail, corporate and investment banking and treasury services in compliance with Islamic principles, said Turkey, and especially Istanbul, had the potential to become a hub for financial services. Yousif, who is the president and CEO of the Bahrain-based group, said Turkish economic administrators were aiming to broaden the services offered to customers, with special focus on participation banks. He also said Turkey's huge potential might facilitate the interest of investors from the Gulf countries as well as create new opportunities for the recently expanding sukuk market in Turkey.
In an exclusive interview with Daily Sabah, Adnan Ahmed Yousif, the president and CEO of Al Baraka Banking Group - a leading international Islamic banking group providing services in countries with a population totaling around 1 billion - drew attention to the importance of Islamic finance, which has increasingly been trending globally. As the head of Al Baraka Banking Group, licensed as an Islamic wholesale bank by the Central Bank of Bahrain and listed on the Bahrain Bourse and Nasdaq Dubai stock exchanges, Yousif evaluated the potential of Istanbul, which is vying to become a financial center in the near future to rival Dubai and Frankfurt.
Daily Sabah: The Al Baraka Group is one of the first companies that come to mind in Turkey at the mention of Islamic finance, as referred to internationally or as interest-free banking in Turkey. Can you give us some information about the Al Baraka Banking Group?
Adnan Ahmed Yousif: Although the Al Baraka Banking Group is about 14 years old, its antecedents go back almost 38 years when one of the oldest Islamic banks in the world, the Jordan Islamic Bank, was formed in 1978. The group came about as a result of the consolidation of various interests of Sheikh Saleh Abdullah Kamel in 10 Islamic banks with the objective of adding strength and purpose to his vision of creating a global Islamic banking group.
Following its establishment in 2002 and having established strong centralized corporate governance and management infrastructure, the group achieved a combined private placement and public issue in 2006. This was designed to draw the attention of investors and the market at large as well as raise additional capital to strengthen its subsidiaries and position them for expansion in their home territories. It was also meant to enable the group to commence its wider geographic expansion. The successful flotation on the NASDAQ Dubai Stock Exchange and the Bahrain Bourse set the stage as a precursor to further expansion worldwide.
Since 2006, the Al Baraka Banking Group has witnessed impressive and steady growth - even through the recent crises of a few years - strengthening its presence in its existing markets through organic development as well as venturing into new markets such as Indonesia and Libya by way of representative offices as a prelude to further expansion. The group established a strong presence in Syria by commencing retail operations under the name Al Baraka Bank Syria and enhanced the capital resources of Al Baraka Turk Participation Bank in 2007 followed by a sukuk issue that served to give it considerable impetus for business growth. The operations in Pakistan saw a substantial increase when we acquired the Emirates Global Islamic Bank in 2010.
Based on an edifice of a strong strategy and governance culture, Al Baraka Banking Group over the years has established niches for itself in key markets that are non-correlative and therefore present it with natural risk diversification, a phenomenon that few banks in the region possess. With group strategic direction and management being articulated at the group headquarters in Bahrain, the individual components of the group have all developed into significant contributors to its overall success.
DS: In how many countries does the Al Baraka Banking Group operate? Can you also give us information about the total size of its assets and the number of employees?
AAY: The group has a wide geographic presence in the form of subsidiary banking units and representative offices in 15 countries. Al Baraka currently has a strong presence in Turkey, Jordan, Egypt, Algeria, Tunisia, Sudan, Bahrain, Pakistan, South Africa, Lebanon, Syria, Iraq and Saudi Arabia, including two representative offices in Indonesia and Libya. With regard to the group's plans to expand its branch network, the group added 30 new branches in the first nine months of 2015 to bring the total number of branches to 579 with total staff of around 12,000. The net profits of the group reached $214 million for the first nine months of 2015, up 3 percent compared to the same period in 2014. The group's total assets increased 2 percent to reach $24 billion as of the end of September 2015 compared to the end of December 2014. Moreover, total shareholders' equity amounted to $2 billion at the end of September 2015.
DS: The interest-free banking system grows by 15-20 percent every year around the world. It reached a total size of $2 trillion in 2015. What do you think could be the reason for this fast growth?
Islamic finance offers the ideal platform to boost "green financing" and promote social responsibility investment. As Sharia law prohibits participation in businesses involving alcohol, pork and gambling, Islamic banks only support businesses that adhere to ethical and moral natural values when it comes to investments. Even non-Muslim investors see the potential for profit in Islamic banking. Islamic financial products, as a rule, carry lower risk investments, while enabling them to earn a profit and at the same time diversify their portfolio to further reduce risk. Moreover, Western investors can track the Islamic financing industry through international rating systems. When purchasing sukuk (Islamic bonds), they can easily assess the strengths, weaknesses and risk of the bonds by simply referring to benchmarks that track the financial industry. Islamic financial products, though they might also come with their own set of complex rules, are far simpler to understand than their conventional counterparts. For one, they are stricter with contracts but also more focused. Islamic financial institutions also have scholars that offer consumers guidance with every venture and proceeding. They follow strict principles that ensure every transaction is conducted according to Sharia law.
DS: Interest-free banking has been popular in recent years in Europe, the U.S. and the Far East. Have you have any plans for Europe, the U.S., the Far East, Russia and Turkic countries?
Al Baraka announced its plan to launch operations in France in 2009, but we had to postpone it due to the financial crisis. This crisis also revealed that expanding in Arab, Middle East and African countries is frequently safer than Europe countries. Therefore, we are focusing more on those countries. Recently, we completed the procedures for obtaining the necessary licenses to operate in the Moroccan market. We already have operations in Libya, Tunisia and Algeria. Al Baraka is also planning to establish a software company in partnership with European and Indian investors with $15 million in capital under the name Al Baraka Banking Software. We also have plans to expand to India and Indonesia. We already have a representative office in Indonesia.
DS: How do you see the future of interest-free banking?
There are several factors pointing to a better growth scenario for Islamic banking in the rest of the current decade. Signs of revival of the global economy, which reflect a good possibility of global acceleration in growth in the banking sector in general, is one factor. Islamic banks will also benefit from the recovery of the global economy, and hence, their growth may be even higher than the current percent. While the global economic outlook certainly influences growth in the Islamic banking sector, Asia's economic expansion is an even more relevant factor in projecting the development of Islamic banking. There are indications that growth in Asia during the rest of the decade is likely to be higher than the growth in the "developed" world.
DS: Large international banks went bankrupt with the onset of the global economic crisis, whereas interest-free banks survived this period with less damage. What do you think could be the reason for this?
Islamic finance is run by Sharia rules, and Islam maintains a unique system that protects investors and financial institutions from potential risks. Islam forbids "riba," "maisir" and "gharar." According to the Islamic system, income generated must be an outcome of productive economic activities based on the principles of profit and loss sharing. It is so because the absence of interest-based transactions under Islamic finance helps financiers and borrowers understand the framework of profit and loss sharing in business. Islamic finance promotes fairness in payoff and reward structures, and it promotes socio-economic justice in society. The principal of "no pain, no gain" in the Islamic financial structure says no one has a right to get a reward if they do not equally share the risk of incurring loss in business. Sharia principles are not to sell debt against debt; this means you cannot sell or lease until you possess some real asset. Islamic finance is based on equity rather than debt, and transactions that involve lending are based on the concept of asset backing. Islamic finance offers an adequate and effective regulatory control system that monitors and consequently ensures the interests of investors. Islamic finance is characterized by the true and honest implementation of profit and loss sharing transactions in accordance with the principles of Shariah law.
DS: You are the executive of a bank that has been operating in Turkey for the past 30 years. What do you think about the economy and the interest-free banking system in Turkey?
Turkey's economic growth rose sharply in the second quarter of 2015. Gross domestic product (GDP) expanded 3.8 percent from April through June compared to a year earlier above a market forecast of 3.5 percent. The rapid expansion of the economy was fueled by consumer spending, which soared to its fastest pace in two years, and rising government expenditures in the lead-up to the national elections in June, according to economic data. The economy has a huge growth rate, and while its economy expands, its economic and political roots become stronger. Thus, it is quite possible that Turkey will attract more capital from Middle Eastern countries, and this capital is likely to be collected by the participating banks in Turkey due to their "interest-free" feature. In five years' time, we expect that the steady growth will continue, and the market share of Islamic banks will increase. However, Islamic finance in Turkey is a relatively new and developing sector for the economy. The country became acquainted with the Islamic banking model while it was shifting its closed economy to a liberal and open economy in the 1980s. During those years, Turkey was trying to enrich its economic system in terms of financial instruments and institutions. Hence, participation banks, formerly known as private finance houses, were included in the financial system as a result of these efforts. Islamic finance in Turkey was introduced to attract people who are not willing to engage in the conventional banking system due to their religious beliefs. From a broader perspective, another purpose was to attract foreign capital, particularly from the Gulf, by establishing these Sharia-compliant financial institutions.
DS: Sukuk has received huge interest in Turkey and around the world. What are the objectives of Al Baraka with respect to sukuk?
Sukuk issuance reached $116.4 billion in 2014 compared to $111.3 billion in 2013, and we expect total issuance to cross the $100 billion mark again in 2015.
Supporting sukuk issuance is the still-positive economic performance of core markets, such as nations in the Gulf Cooperation Council (GCC) and Malaysia, the implementation of new regulatory requirements, such as the Basel III liquidity coverage ratio, and increasing interest in sukuk from countries that have not yet tapped into the sukuk market, looking to diversify their investor base.
DS: Turkey is trying to realize giant projects such as highways, bridges, dams, fast trains and airports. What do you think about exporting sukuk at this point?
The first formal provisions for sukuk in Turkey were laid out in the Sukuk Communique titled "Principles Pertaining to Lease Certificates and Asset Leasing Companies," which was issued by the Capital Markets Board of Turkey (CMB) in April 2010. In June 2012, the government amended Public Finance Law No. 4749 to support sukuk issuance by the state, and Turkey made its maiden issuance in September based on a portfolio of state-owned real property assets. The landmark $1.5 billion transaction was well-received by investors around the world, resulting in a final order book of almost $7.5 billion at advantageous terms. Alongside the regulatory framework and tax incentives, Turkey's fast growing and resilient economy, the size of its population, its low level of public debt-to-GDP ratio, its diversified export markets, its strong banking system, its wide-range of infrastructural project investments and its strengthening political ties with the Gulf states might facilitate the interest of investors from the Gulf countries as well as create new opportunities for the recently expanding sukuk market in Turkey.
Istanbul has economic and social features to become a financial center
DS: The government has been working on making Istanbul a financial hub for some time. Do you think that Istanbul could also be the hub for Islamic finance?
Turkey's economy administrators have plans to make Istanbul one of the regional financial centers. In this broad plan, one of the pillars is to make Istanbul a participation-banking center. And when you look at the geographic location of Turkey and especially Istanbul, you see it is very close to participation banking markets, such as the GCC and Europe. From Istanbul, you can fly to most of the financial and trade centers, such as London, North Africa or Dubai, in three-to-four hours. In addition to geographic advantages, Istanbul is also attracting people with its history and natural beauties. Istanbul provides both economic and social features, which is very important to become a financial center. Experts say capital markets in Turkey will function more effectively with the increasing effect of participation banks paving the way for innovation in the capital markets. Shares of participation banks are expected to increase with the entrance of public banks into the market with projections of shares reaching 15 percent to 20 percent by 2023.