Getting to the top: The emirate’s Islamic banks are implementing expansion strategies

A measure of the success of Abu Dhabi’s Islamic banks is that both of them have managed to position themselves within the top three UAE sharia-compliant lenders in terms of assets: Abu Dhabi Islamic Bank (ADIB) saw its total assets increase by some 45% between 2008 and 2011, to reach Dh74.3bn ($20.22bn); meanwhile, the market’s newcomer Al Hilal recorded a 9.5% rise over 2011 to close the year with Dh28.3bn ($7.7bn), moving up one place from fourth in the UAE-wide rankings.

STRATEGY: Their success is part of a trend that saw the UAE Islamic banking segment grow from 6% of the total banking sector in 2000 to around 22% in 2010. The trajectory continues into the current decade as sharia-compliant lenders diversify their offerings and expand their exposure to the retail segment.

The rapid growth of Abu Dhabi’s Islamic banks also raises some interesting questions about strategy: whether to focus on consolidation in the home market, for example, or take advantage of subdued asset prices in foreign markets – or a combination of both. While banks are, as a rule, guarded regarding the details of their expansion plans, what is known of ADIB and Al Hilal reveals what might be considered a general similarity with a geographical divergence.

ADIB’S PILLARS: The senior of the two Abu Dhabi-based lenders, the largest sharia-compliant bank in the emirate and the second largest in the UAE, ADIB established its current expansion plan in 2008. The strategy is built around three pillars, the first of which is to embed itself as a market leader in the UAE by developing its primary customer service sectors – private, personal, business and wholesale banking – as well as the supporting activities of transaction banking, treasury, cards, investment banking and wealth management. Building up a physical retail presence also forms part of the first pillar, as does a greater focus on customer services. In 2011, the bank increased its branch network to over 70 units and relaunched a private banking business that previously had a limited range of services for high-net-worth individuals. The refurbished unit aims to establish itself as a fully fledged private banking operation.

The second pillar of ADIB’s strategy is to create an integrated financial services group and capitalise on the synergies and efficiencies to be found within its diversified offerings. The bank currently operates a real estate management and advisory arm (Burooj), a sharia-compliant insurance unit (Abu Dhabi National Takaful Company) and brokerage services (through ADIB Securities). The acquisition in early 2012 of a 51% stake in sharia-compliant consumer financing outfit Saudi Instalment House can be seen in the light of this part of the overall strategy.

LOOKING ABROAD: The final pillar as defined by ADIB is the pursuit of international opportunities. For Islamic banks, the past decade has seen an opening of potential new markets in line with the growing acceptance of sharia-compliant financing. Replicating its business model through systematic geographic expansion represents a useful route to growth for the bank.

ADIB’s international expansion began in Egypt with the acquisition of 49% of the National Bank of Development. The commercial lender was founded in 1980 with a mandate to assist in developing the private sector by supporting start-ups and providing finance to targeted sectors. Its purchase brought ADIB 70 branches distributed across all of Egypt’s governorates. As part of the ADIB group, the institution has been converted into a sharia-compliant lender, servicing a spectrum of clients from consumer to corporate.

A foray into the Algerian market followed the Egyptian move, but has since been rolled back. Instead, ADIB has focused its efforts in Iraq, where it became the first financial institution from the UAE to receive a full operations banking licence from the Central Bank of Iraq. In July 2012 it announced the opening of its first fully fledged branch in Baghdad. In doing so, it established itself as a conduit for UAE and GCC investment into the country. The first phase of its local market strategy involves it offering corporate finance, investment banking and treasury products, as well as traditional commercial banking services such as international trade finance, to the market.

The formation of ADIB’s strategy predates the global economic crisis, and the intervening period – which also saw its Egyptian operation exposed to a period of political unrest – has allowed it to test the plan’s robustness. To date, the bank finds no need to alter it. “Our plan allowed us to navigate our way through a turbulent region in last 18 months, and we showed positive growth throughout. Importantly, it allowed us to deal with legacy issues which the environment revealed. Our strategy therefore remains intact – it’s applicable and appropriate,” Andrew Moir, the global head of strategy and finance at ADIB, told OBG.

CATCHING UP: As a relatively new entrant to the market, Al Hilal has not had as much time to develop and deploy its expansion strategy. In its second annual report, Al Hilal’s CEO, Mohammed Jamil Berro, described 2008-10 as the bank’s period of infancy and announced that its first strategic objectives, which are to capture a sizeable portion of the UAE Islamic banking market and establish a profit within the first three years of operation, had been achieved. Berro said 2011 saw the bank enter the initial phases of its maturity, and it was a year in which the bank “gained greater traction, became more robust and scalable, and ready for our next strategic milestones”.

In the early part of 2012 the bank finalised its medium-term plan, another tripartite approach, this time built around “prioritising growth, health and development to enable the bank to capture greater market and revenue share in the coming years”. Nabil Mushawar, the executive vice-president of finance and strategic planning at Al Hilal, described to OBG how these aspirations translate into action: “Regarding growth and performance, we want the highest return on equity for our shareholders as a first priority. The health aspect of the plan is about building solid infrastructure, which covers all aspects of our business, such as our IT systems or our human capital. The development part of our plan is about developing our business, looking for business opportunities, of which there are many. Islamic banking is still growing fast.” Indeed, like ADIB, Al Hilal has sought to sell a diverse range of sharia-compliant products to the domestic market. In 2008 the group launched its sharia-compliant insurance operation (Al Hilal Takaful) with a capital of Dh100m ($27.22m), while in the following year it established a dedicated motor vehicle financing operation, Al Hilal Auto.

Al Hilal’s rapid rise since its opening has brought the question of foreign expansion to the fore at an early stage. As with ADIB, the desire to move into other markets is tempered by the need to firmly establish its position in the domestic sector: “A bank of our age should not expand too much before consolidating its position in the home market,” Mushawar said.

AT THE FRONTIER: Nevertheless, Al Hilal has already made an interesting foreign entry that has established it as a first mover into one of the world’s frontier Islamic markets. Al Hilal Bank Kazakhstan is the bank’s first international expansion, and with its opening of a branch in 2010 it became the first Islamic bank to operate in the country. The bank has corporate and retail services, as well as sharia-compliant products for small and medium-sized enterprises. By 2012 had opened its third branch in the city of Shymkent. In an echo of ADIB’s role in Egypt, Al Hilal Kazakhstan’s mission statement includes the facilitation of UAE investment in the country.

LOOKING OUTWARD: The geographical expansion of Abu Dhabi’s two Islamic lenders is likely to continue, although their next steps remain unclear. “We are looking at other foreign markets, but we can’t reveal them yet,” Mushawar said. ADIB, whilst affirming that its third pillar policy of international expansion remains in place, was similarly taciturn. Indeed, 2013 may bring some interesting new developments regarding the geographical footprints of these two institutions.