National Commercial Bank is the biggest bank in the Kingdom of Saudia Arabia and a leading financial institution in the GCC. The Head of the Islamic Banking Group, Mr. Abdulrazzak M. Elkhraijy, sits with us to discuss the approach of NCB to Islamic banking.
What is the importance of having a fully-fledged Islamic bank as compared to an Islamic window within a conventional bank?
A fully fledged Islamic bank would be the most ideal situation that can happen at any place provided there is wider acceptance of this model by the bank’s targeted customers as well as by the policymakers and central monetary institutions. From a control and operational perspective, a fully fledged Islamic bank can offer a wide range of Shari’a-compliant products and services. It can achieve better economies of scale, have IT systems which suit an Islamic bank’s operational needs and availability of knowledge and expertise in all areas. Needless to say, fully fledged Islamic banks can create a better customer perception of a bank’s Islamic image.
As against this, Islamic Windows provide a fair number of Islamic banking products and ensure customers peace of mind. However, such windows within a conventional bank have certain limitations such as the following:
- Possibility of co-mingling of funds at the treasury level for managing the liquidity requirements of the bank as a whole. This can be overcome by having separate funding pools, one for the conventional and the other for the Islamic, but the problems may still persist in terms of achieving operational efficiency, economies of scale etc, due to possible asset-liabilities mismatch between Islamic liabilities & Islamic asset and conventional liabilities & conventional assets.
- The constraint of maintaining dual systems and processes affecting the accounting framework.
What plans do you have for the NCB’s Islamic banking operations in the next twelve to eighteen months?
We are focusing on several areas to grow Islamic banking at NCB. Specifically,
- Product development in all areas of business especially in the Consumer, Corporate and Treasury fields. These are our immediate focus areas. We are working aggressively to meet the gaps in products and services in these sectors to meet the grow- ing expectations of our customers.
First, we are offering the instant approval of Shari’a-compliant financing, helping us to grow our personal finance business by 20 percent in a flat market. We are also developing a complete suite of Islamic home finance products to meet every type of customer need to ensure consistent leadership in the consumer finance market.
Second, while expanding the product range, NCB is also committed to improving customer service and ensuring faster turnaround time in product delivery without compromising on the stringent requirements of Shari’a. One such example is the introduction of customer ownership of the commodity in a tawarruq transaction and then instructed to sell the commodity through the telephone banking/IVR process.
Third, we are developing risk management policies for Islamic consumer and corporate financing activities.
Fourth, we ensure high-quality customer experience across the channels with friendly and trained staff.
Finally, we participate in CSR activities to improve social bonding which is an essential value of the religion of Islam
You have recently won the Global Islamic Finance Award (GIFA) in the category of “Best Islamic Bank”. Tell us about the journey towards this achievement.
NCB launched its first pilot branch offering Islamic-only services in 1990. Since its modest beginning, Islamic banking has emerged from being a niche offering to become part of NCB’s mainstream business. NCB has a proud history of leadership in Islamic banking and finance, having pioneered the innovation of various tools and products that are now widely adopted by the industry worldwide.
In 2005, NCB made a commitment to convert its entire retail branch network to Islamic banking. NCB’s leadership in Islamic banking and finance, particularly since the time of this commitment, has been rewarded by rapid growth in the Bank’s customer base and higher levels of customer loyalty.
In December 2006, after the successful conversion of the retail network to Shari’a-compliant banking, NCB established the Islamic Banking Development Group (IBDG). This was intended to become the centre of excellence for all of NCB’s Shari’a-compliant offerings and to support business units in achieving the Bank’s Islamic banking strategy by ensuring full Shari’a compliance of their Islamic offerings.
NCB was the first bank in the region to develop:
- A Shari’a standard for investing in equities
- A Shari’a-compliant equity fund
- The tawarruq process to facilitate cash fi- nance needs
- A Shari’a-compliant credit card
- An Islamic capital-protected fund
- The first Islamic investment certificate
listed on an international exchange (in association with Deutsche Bank)
- Different types of musharaka based in- struments
- Islamic securitization
- A murabaha fund to finance automobiles
- Creation of a donation fund
The journey continues unabated and the Bank is not only accelerating its ef- forts in product development but also working in other areas such as establishing appropriate risk policies for the Islamic portfolio and strengthening its control mechanisms through Shari’a audit.
What are the challenges faced by the Islamic banking and finance Industry?
The main challenge for the industry is to achieve size and scale, both in terms of geography and depth of the market. We believe for the progress of Islamic banking, our products should be attractive to non-Muslims as well.
Other obstacles which need to be overcome include:
- Lack of an entire range of products as available in conventional banking.
- Lack of regulations and prudential norms.
- A shortage of Shari’a scholars qualified enough to understand complex banking products especially treasury and corporate transactions including structured finance.
- Disagreements across the various schools of thought.
- Creating an adequate legal and accounting framework.
- Technology constraints.
- Lack of standardization.
In your opinion, what has been the impact of the ongoing financial crisis on Islamic banking & finance?
It would be naïve to say that the ongoing financial crisis did not have any impact
on the growth of Islamic banking and finance. Firstly, we have seen the examples of UAE and other markets where due to the concentration of assets on real estate projects, there have been defaultingand delinquency issues, court cases, etc.
Secondly, the ongoing financial crisis has had a negative impact on customer trust in the banking industry in general. Today, customers do not view bankers in the same light as they viewed them be- fore and they have become extremely cautious while dealing with the banks, especially when buying investment products.
Thirdly, due to the reduction in business activities, banks are facing problems both in mobilizing deposits as well as in providing financing.
Despite these generic issues impacting the global financial market, relatively speaking, Islamic banking has performed well and has grown to be a $1 trillion dollar industry. The most important observation is that the Islamic finance industry caught the attention of global financial institutions, planners and policymakers, even of the detractors, as a possible and viable alternative which can support
and strengthen the global financial system.
What factors are needed for the further development and growth of the Islamic banking and finance industry?
The main driving factors for further growth of the Islamic banking and finance industry would be:
- Improving customer service, especially through customer-friendly staff and adoption of the latest technology.
- Expanding product offerings, especially for treasury and corporate customers who have more sophisticated needs.
- Developing products for the lower end of the market, such as SMEs and remittance customers.
- Regulations to govern the industry, especially the involvement of central banks.
- Issuing risk management policies especially in mitigating Shari’a risk.
- Developing instruments for liquidity management.
- Strengthening Islamic banking implementation areas (accounting, processes, technology, and legal documentation).
- Talent enrichment programme.
- Customer education.
What is your opinion on the form versus substance de- bate? Do you think Islamic finance will suffer from replicating the economic substance of conventional products? What does the industry have to do to move past this debate?
This is a very challenging question which has surfaced with the rise of the issuance of sukuk and subsequent asset-backed vs. asset-based controversy.
In my personal view, Islamic fi- nance needs to stand on its own legs and reduce its dependence on conventional products for ideas. The industry should in- vest time and effort in product research and idea generation and move towards the development of unique Islamic products in conformity with the requirements of Shari’a.
Ambition, timing or talent: which matters more to success? What has contributed most to the success of your business at NCB?
It is a combination of all three elements though ambition to be the global leader in Islamic banking has contributed most to the success of NCB Islamic Business.
From the geographical point, what are the countries that are on your radar?
We are a Saudi bank with a regional focus. We already have retail branches in Bahrain and Beirut. In addition, we have representative offices in other places. NCB Capital has a presence in London and Dubai.
Turkey is a rising power sitting on the edge of Europe and Asia. Islamic banking is fast growing in this country though subsumed under the category “participatory banking”. We are already present in this market through our subsidiary, “Turkiye Finans”.
In addition to Turkey, we are looking at other centres for possible opportunities.
What are the aims of NCB in this tough market climate and how would you achieve it?
To hold market leadership in every customer segment of the Saudi market, maintain profitability and ensure growth and shareholders’ value. This will be achieved through developing efficient products, rendering excellent customer service, adopting of latest technology and talent management.
What distinguishes NCB from its competitors?
Its heritage, nationwide distribution network supplemented by a state-of-the-art call centre and electronic banking network, wide variety of products & services to meet the differentiated needs of various customer segments, consistent policy of providing the best customer service and, above all, availability of an expert human talent pool, are the factors which make NCB stand apart from its competitors.
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