Khalid Abdulla Al Bassam Chairman of Bahrain Islamic Bank

United World: Mr. Al Bassam, when was the first time you heard about the concept of Islamic finance?

Mr. Al Bassam: Islamic finance started in the 70's when the Islamic Development Bank took the initiative, which was then followed by other banks, like Dubai Islamic Bank, Kuwait Finance House, Bahrain Islamic Bank (BisB), etc. Over the last 7 to 8 years, we have also seen the emergence of Islamic investment banks, which are making an important positive impact in the development of the industry. A good number of them are present in Bahrain. I am glad to see that the concept of Islamic banking is gaining greater recognition and acceptance not only in the Islamic World, but worldwide. We have seen that the Financial Services Authority (FSA) in the UK has been issuing licenses for both, Islamic retail and investment banks. Bahrain and the rest of the GCC countries including Malaysia have been in the forefront. Singapore opened up its financial sector for Islamic Banking, and other countries are following.

United World: Did you expect the sector would become what it is today?

Mr. Al Bassam: No, I did not expect that it would reach to such high levels of standard and market penetration.

United World: The profit performance of Islamic banks appears to be better than those of their conventional peers in the GCC. What would you think are the reasons behind this?

Mr. Al Bassam: By nature, Islamic banks tend to invest in real assets. For instance, a good part of their investment goes into real estate developments ie productive assets that generate added value to the economy, as well as to investors. A good part of the investment took place in the region over the last 7 to 8 years. Luckily, things have been quite smooth in the region when it comes to economic performance, greater government revenues and expenditures, and greater involvement of the private sector in the regional economies. Assets have appreciated in value and accordingly, the banks have been well rewarded. In addition to this, a new level of sophistication in products and services has been offered by Islamic banks. Now we are gaining a greater market share compared to what it was 10 years ago. Islamic finance has come a long way, so now we are able to compete across the full spectrum. There has also been better efficiency in the Islamic banks, and competition in the industry is helping to raise standards and customer service.

United World: Islamic banks share risk and aim to create equivalence in benefits and costs, distancing themselves from harmful speculation. Do you believe that Islamic finance could be better prepared to avoid the reckless lending and failure in risk management that we have recently seen in commercial banks around the globe?

Mr. Al Bassam: I would not call it reckless lending, as banks are usually quiet sophisticated and careful. Nevertheless, banking is the corner stone of the development of any economy, be it Bahrain or anywhere in the world. They tend to benefit greatly from economic growth, but when there is a slow down in the economy, they also get affected as well.

Banks in Bahrain tend to be careful when it comes to risk management. The Central Bank of Bahrain (CBB) regulations are quiet good in this aspect. The (CBB) is known to be on top of things and has been very supportive when it comes to laying the foundations and keeping pace with the development of the financial services in Bahrain.

United World: How has the regulatory framework put in place by the CBB helped develop an efficient and profitable Islamic finance sector?

Mr. Al Bassam: I am glad to say that the CBB was the first central bank in the world to take the lead in terms of developing specific regulations for Islamic banking. It developed a comprehensive set of regulations. It was also the 1st central bank to issue Islamic bonds (Sukuk) for both, short and medium terms. It has created depth in the industry and it has been proactive when it comes to addressing the needs and requirements of banks here in Bahrain. To summarize, it kept a very well pace with developments in the industry.

United World: It appears that scale is paramount for growth in such a competitive market, especially on the retail side. Seeking alliances could ensure banks are adequately positioned to take advantage of future opportunities. Do you expect consolidation to take place?

Mr. Al Bassam: This should have happened earlier, as it is in the best interest of all of us. You cannot expect to have too many banks basically doing similar activities. Running a bank is one of the most expensive issues. Its also challenging especially, when it comes to attracting, retaining and rewarding talent. The market is competitive when it comes to IT systems, and the overall expense incurred is quite high. There is good scope for banks to be cost efficient and, at the same time, build up complementary activities with each others. I think it is important to see consolidation taking place be it at local or regional levels as it would be healthier on the medium and long term to create a more competitive with stronger capital base Banks.

United World: As Islamic finance grows, experts are worried the training of scholars, which are essential for the banks' supervision, may not be able to keep pace. Are you concerned that Islamic financial scholars may be hard to find in the near future?

Mr. Al Bassam: There are always challenges in every kind of industry. There are people who were skeptical about the concept of Islamic banking and its ability to continue to do well. But what we have seen in past few years is the industry kept growing even more. For instance, Bahrain Islamic Bank has had record increase in net profits of almost 100% in 2005, 77% in 2006 and 92% growth in 2007. When it comes to Sharia'a scholars, there are limitations as there is only a limited number of scholars who can service the growing industry.

For any kind of business, the demand creates the supply. For instance, we started training, grooming and developing our people. I am quite positive that there are other banks focusing on the same issue. Almost all Islamic banks have specialized Sharia'a coordinators. With time, these can be groomed into Sharia'a scholars. So, I see it as a manageable challenge, and not as a major threat.

United World: How does Bahrain Islamic Bank confront the issues of increased competition and product innovation?

Mr. Al Bassam: The key to success is the ability to provide better services and a wider product range that meets the clients needs. Our top priority at the bank is to improve customer and client services, on both, corporate and individual levels. We have concluded a major implementation of our core banking system, which will significantly improve the operational work of the bank. We expect to launch in a couple of months our electronic banking system.

United World: In order to continue growing, more capital is needed. 85 million BD were raised last September in a rights offering which was oversubscribe. Could you share your future plans to raise capital?

Mr. Al Bassam: Bahrain Islamic Bank (BisB) had a small capital in the past, so with profitability and a better utilization of capital we decided to increase it. The raising of capital took place at the end of September 2007, and there was an oversubscription. We offered thru a right issue to the existing shareholders at an attractive selling price, which is usually the trend here in Bahrain. This comes as part of our strategic development which should help the bank to have greater market share and having the ability to participate in larger transactions. Now, we are in a good position to effectively utilize the capital in light of the positive market development to bring good returns to our shareholders.

As a matter of fact, this year we have given cash and stock dividends. The stock dividends were also given to those who subscribed in September last year. The capital base can be developed trough through the issuance of the bonus shares as well. We have been giving annual cash dividends and bonus shares for the last 4 years. We are quite optimistic as well for 2008, as the momentum and the fundamentals for growth still remains positive.

United World: Bahrain Islamic Bank has applied in the Gulf for licences as part of its plan to expand across the region. What progress has been made on this front?

Mr. Al Bassam: Bahrain is a small market, so it would not be fair for the Bank to depend only on Bahrain. It is better to think regionally. Bahrain Islamic Bank is the first Islamic bank in Bahrain, and we have the largest branch network among the Islamic banks in Bahrain. Its the flagship of Islamic banking in Bahrain. Our intention is to grow regionally, but depending on the available opportunities. The Gulf Cooperation Council (GCC) states Central banks have their own entry requirements, and so far these markets have not been very open when it comes to the banking sector, with the exception of Bahrain. Therefore, when an opportunity arises and entry barriers decrease, we will carefully study entering other markets on our own, through a joint venture, or thru a strategic acquisition.

United World: The bank has established its fully owned real estate subsidiary "Aba'ad", to benefit from the growth of property business in Bahrain and the regional countries. Do you believe that excess liquidity will continue to flow towards real estate, and how will you capture market share in this competitive sector?

Mr. Al Bassam: Bahrain Islamic Bank has concentrated on the development of all lines of business, including real estate. Real estate has been an integral part of the bank since the very beginning. The bank has the competitive advantage when it comes to understanding the local real estate market. With our know-how, background and best practices, I expect we will continue to excel in this area. We also decided to establish an independent fully owned Company by the Bank to develop the real estate business. It has its own board of directors and Management. We have been seeking opportunities in and outside Bahrain. It is worth to mention that Real estate has been an important part of the activities of Islamic banks in general.

United World: In terms of the more conventional aspects of the bank, will you be concentrating more on retail, corporate or private banking?

Mr. Al Bassam: Bahrain Islamic Bank has been stronger on the retail banking for a good number of years. We have our loyal customers and a strong penetration in the local retail market. In the last few years we have strengthened our corporate banking and its developing at a very good pace. We are now placing special emphasis to improve our investment and private banking capabilities. Investment and private banking is again an important area for us going forward. It is a specialized line of business which requires focus, attention and talent.

United World: Bahrain Islamic Bank plays an active role in giving back to the community through corporate donations such as Zakat. What areas are of special priority for the bank when it comes to corporate social responsibility?

Mr. Al Bassam: Bahraini banks have always had a strong commitment towards the development of the community. When it comes to Islamic banks, they have the obligation of giving Zakat, which means 2.5 % of our profits go to the needy. On top of this, we have several initiatives of sponsorship, training and scholarships. We are mainly donating to the major charities in Bahrain. We also have centers for teaching, memorizing and reciting the Holy Quran. All these centers are under the supervision of the government. We also carry out personal donations for those who are in need, but we do not publicize them. When it comes to social responsibility, I would rank Bahrain Islamic Bank among the high tier, paying special attention to this area.

For example, we sponsored among other things organizations which deal with cases of family violence and child abuse. We also sponsored workshops and publications to increase the awareness regarding these two issues.

United World: Islamic banking is growing in Europe, particularly in the UK. Do you believe a similar development could occur in the US, where there is also a sizeable Muslim community?

Mr. Al Bassam: Islamic finance is an ethical practice that forbids business involved in alcohol, drugs, pornography, and weapons, as well as the use of interest. It also involves sharing the risk of investment. The U.S. has always pioneered when it comes to innovation and creativity and can learn from the experiences in other countries in this aspect.

United World: You have declared that the ultimate objective of the bank is to become the best commercial bank in Bahrain over the next few years…

Mr. Al Bassam: Yes, the objective is to make sure we develop a bank that we are all proud of, a bank that will bring value to its shareholders, and satisfaction to its staff and customers. We should be amongst the best in the region. In fact, we lately received the prize for the best Islamic bank in Bahrain by an important International Islamic finance magazine, which is a reflection of our hard work.

United World: You are involved in running many banks in retail, asset management and Islamic investment banking. Which area in Islamic finance do you find most challenging?

Mr. Al Bassam: It really depends on each market. Retail banking is attractive, stable and there is always room for improvement on the products and services you provide. The excitement and the biggest challenge come with the more specialized types of services, such as asset management and investment banking. They are more sophisticated and I feel Islamic banking needs to do more in these areas.

United World: Would you like to send a final message to the readers of the USA Today?

Mr. Al Bassam:
It is an open invitation from Bahrain Islamic Bank (BisB), the flagship of Islamic Banking in Bahrain, to our potential investors in the States saying we will be happy to serve you.

United World: Mr. Al Bassam, thank you very much for your comments.