Hassan Jarrar, CEO, Bahrain Islamic Bank: Interview

Interview: Hassan Jarrar

What measures are being taken to improve the level of confidence in Bahrain’s banks?

HASSAN JARRAR: The region as a whole is experiencing low economic confidence, with unsustainable levels of spending, ongoing war and rock-bottom oil prices – all problems that have become more severe in the past year. That said, Bahrain has weathered these crises well, and Islamic finance has overall remained relatively insulated as an area.

Our priority should be to improve the perception of Islamic banking, for instance by attracting expatriates to emphasise that we are a commercial bank with a different kind of ethical approach. As a smaller segment, we are better placed to innovate quickly in technology and mobile banking than many traditional banks. Moreover, many young, smart people are hungry for change in the banking system. We are focused on persuading them both to work for us, as well as to bank with us, by emphasising our distinctive ethical practices. These cannot be reduced to a matter of religious conviction, and include environmental concerns and even dependable customer service. Confidence will increase once people are able to look past the religious frame of Islamic banking and become aware of the options available to them.

We are implementing this strategy in several ways. First, we are bringing in senior management from international banks to revamp our procedures and revisit our credit underwriting policies. We are developing our internal expertise so that we can stay in line with international standards. Additionally, we are cutting out non-banking activity by stopping new land purchases, and our involvement in the equity and liquidity markets. For example, banks should not be in the business of owning buildings. A return to banking activities for corporations, small and medium-sized enterprises, and high-net-worth individuals without any non-core investments will place us back on solid ground and earn greater confidence.

Ratings agencies look at Islamic institutions differently: for example, they see our capital charges as an unfair advantage because of the way capital is calculated. On the other hand, we have stricter rules on non-performing assets, as all projected profits on a non-performing facility must go to a charitable fund for zakat (Islamic alms) after 90 days. Navigating these differences and reacting accordingly will improve our standings with the ratings agencies.

What is the outlook for mergers and acquisition (M&A) activity look in the near term?

JARRAR: The Central Bank of Bahrain is a stable regulator and has pushed to see more M&A activity. Although Bahrain Islamic Bank complies with Basel III regulations, we need to strengthen compliance on international standards because we work with international banks. Before we look towards M&A, we are focused on strengthening our position. Just as our dependence on international banks necessitates compliance, regulatory measures in themselves are enough to encourage M&As and will be inevitable with the tremendous pressure that exists on capital.

How will the evolving economic integration of GCC members affect Bahrain’s financial sectors?

JARRAR: Significant integration between GCC member states is highly unlikely in the near term. Even so, Bahrain should work to streamline legislation in Islamic banking while continuing to improve the legal system outside of banking by speeding up processes. We need a more effective judicial system and digitisation to take advantage of our position, giving everyone access to our resources. At present, it can take more than five years to execute a judgement, which can deter investors. Rather than comparing Bahrain to Dubai, we should continue to build up our local talent and to attract foreign expertise. This will show that we are making progress in our own right.