AlBaraka Islamic Bank's ratings

The international credit rating agency, announced that it has affirmed Bahrain-based AlBaraka Islamic Bank (AIB)'s Financial Strength Rating (FSR) at 'BB', supported by its good capital adequacy ratio and comfortable liquidity.

The FSR remains constrained by a high ratio of impaired financings, asset concentration risks, weak profitability and sovereign risk exposure to Pakistan (through its Pakistan subsidiary). In view of AIB's strong ownership, the Long and Short-Term Foreign Currency Ratings (FCR) are maintained at 'BB+' and 'A3', respectively.

Accordingly, the Support Level is affirmed at '2'. The likelihood of official support from the Bahraini authorities in case of need is assessed as very high.

In view of the moderate improvement in asset quality and profitability in the first quarter of the current year, coupled with management's expectation of a further decline in NPFs and a sustained profit recovery in full-year 2013, the 'Stable' Outlook for the ratings is maintained. However, CI notes that in the event the anticipated improvements in profitability and asset quality do not materialize, and if sovereign risk exposure to Pakistan rises further, it is more than likely that the ratings will be adjusted downwards in the next review.

AIB is a member of the Bahraini Public Shareholding Company 'AlBaraka Banking Group' (ABG), which operates Islamic banking subsidiaries in the MENA region and further afield. AIB is still a small bank by all measures in Bahrain, but claims a rather significant market share of Islamic banking assets in Pakistan. Although the Bank's non-performing financings (NPFs) grew moderately in 2012, they declined in the first quarter of the current year and are projected by management to continue falling throughout the remainder of 2013 due to disposals and recoveries.

That said, credit risk remains elevated, especially in Pakistan, and a rise in NPFs is a possibility. AIB's financing-loss reserves are established in accordance with the regulatory requirements in Bahrain and Pakistan.

Notwithstanding the secured nature of most of the facilities, it is Capital Intelligence (CI)'s view that stronger loss-reserve coverage for NPFs would provide a buffer given heightened credit risk in Pakistan. This is particularly so since the Bank's capacity to build provisions is severely constrained by very weak operating profitability.

Although the Bank's unprovided NPFs constituted a rather significant proportion of free capital, the 'effective coverage ratio' (i.e., the total of a bank's free capital and loan-loss reserves in relation to its NPFs) calculated by CI was assessed as being more comfortable.

The Bank recorded a net loss in 2012 due to larger provision charges in Bahrain and Pakistan. Moreover, operating profitability remained very weak due to the effect of a large cost base compounded by modest gross income generation.

Operating profit recovered somewhat in Q1 2013, although it remained very low measured to average total assets (annualized). Management expect a sustained improvement in operating profit throughout the remainder of 2013 on the back of a significant reduction in the cost of funds. AIB's liquidity position continued to be comfortable.

However, a considerable part of that liquidity, primarily generated locally from customer deposits, is invested in Pakistan government Sukuk (Pakistan contributed to more than one-half of total assets at end-2012).

Customer deposits (largely Unrestricted Investment Accounts) are the principal source of funding and are well diversified. Despite the decline in the capital base due to net loss, and the consequent negative internal capital generation, the balance sheet is still well capitalised. However, unless the Bank is able to reverse the negative trends in profitability, it is more than likely that the capital base will come under pressure in the coming years.

Incorporated in Bahrain in 1984, AIB operates as a retail bank under a licence granted by the Central Bank of Bahrain (CBB). AIB is a 91.1% owned subsidiary of ABG, which is majority owned by Shaikh Saleh Abdulla Kamel in Saudi Arabia and Dallah Al Baraka Holding Company (E.C.). The latter is a subsidiary of the Jeddah-based conglomerate Dallah Al-Baraka Group. The principal activities of AIB include the provision of demand and investment accounts and finance and investment on the basis of Murabaha, Mudaraba, Musharaka and Ijara.

Through its subsidiary in Pakistan the Bank operates 89 commercial banking branches, situated in the major cities.

In Bahrain, banking operations are conducted from the head office and 6 branches. Total assets at end 2012 were Dhs1,418m and total capital was Dhs169m.

(Ameinfo.Com / 21 June 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Bankers urge people to adopt Islamic banking

KARACHI: 

While speaking at the Second Islamic Financial Expo and Conference (IFEC) – which was held here on Thursday – bankers, businessmen and economic experts enlightened participants about the potential of Islamic banking and its advantages over conventional banking. They also underlined the need for awareness and penetration of Islamic banking and Takaful services across the country.

The Islamic Banking Industry (IBI) is flourishing in Pakistan, despite the challenges faced in policymaking for the promotion and removal of misconceptions about its modalities among the masses, speakers agreed.

While speaking at the conference, Habib Bank Limited Islamic Banking Division Head of Product Development Faizan Ahmed Memon said that there are a lot of misconceptions regarding Islamic banking services among the masses, but people are reluctant to educate themselves about the Shariah-based banking system which is a much better alternative to the conventional or interest-based banking system.

He said that although Islamic banking has grown at an amazing rate in Pakistan, its pace is still slow keeping in view the Muslim population of the country, which reflects its low acceptability among consumers.

Memon urged the participants of the conference to switch to Islamic banking, which is completely free of Riba or interest.

(The Express Tribune / 21 June 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Malaysia: New legal set-up to pave way for syariah framework

KUALA LUMPUR: The new legal framework for Islamic banking and takaful, that will come into force this year, will pave the way for the development of an end-to-end Syariah-compliant regulatory framework for the conduct of Islamic financial operations, said Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz.

The new framework would provide clarity on the fundamental requirements of Syariah that must be adhered to for the contractual arrangements between the financial institution and the customer to remain enforceable, she said.“The framework also outlines the operational requirements for the effective application of Syariah principles in the conduct of Islamic financial institutions.“This aims to strengthen the risk management practices beyond the traditional credit, market and liquidity risks to also include inventory risk, ownership risk and Syariah compliance risk,” Zeti said at the opening of the Brunei Darussalam Islamic Investment Summit 2013.

The text of her speech titled, “Tapping and Expanding the Global Investment Opportunity in Asia’s Market”, was made available here today.

She said the legislation also provided for the resolution of Islamic financial institutions to be in line with distinctive elements of the relevant Islamic contracts, thus improving the legal and procedural aspects for the orderly resolution of Islamic financial institutions.

On the Islamic finance development, Zeti said the new wave of internationalisation for Islamic finance required increased collaboration across jurisdictions. — Bernama

to strengthen the international financial infrastructure of Islamic finance.“This is to ensure that the greater internationalisation of Islamic finance takes place in an environment of financial stability,” she added.

At the national level, Zeti said the first priority relates to trend for the domestic Islamic financial system to become more integrated, allowing for risks to be rapidly transmittal, across the financial system.“This requires the development of enhanced regulatory, supervisory and legal frameworks that are also adaptive and effective to the innovative dynamics and unique mix of risks in Islamic finance,” she said.

Zeti said the increased cross-border reach of Islamic finance has also underscored the importance of enhanced cross-border collaboration among the supervisory authorities.“Information-sharing and effective coordination among supervisors will enable a complete understanding of the entire risk spectrum of the risk taking activities undertaken across jurisdictions by the Islamic financial institutions,” she added.

Another key area is the evolution of the legal framework for Islamic finance to provide greater certainty and to build public confidence in the system as a whole, said Zeti.“This necessitates a legal framework that enforces end-to-end Syariah compliance in the Islamic financial services industry - through provisions and mechanisms that unambiguously define the conduct and governance of Islamic financial institutions,” she added.

Zeti also said with greater liberalisation, Islamic finance was increasingly supporting regional and international trade and investment flows, intermediating significant cross-border financial flows.“With its internationalisation, Islamic finance has become an increasingly more important channel for the efficient allocation of Asia’s surplus funds towards productive investments in the region,” she added.

Zeti also said efforts to strengthen the foundations for Islamic finance to ensure its continued resilience, amid the more challenging environment, must remain a priority going forward into the future.“Indeed, our commitment to act guided by this foresight will strengthen the prospect for Islamic finance to realise its potential in the region and beyond,” the governor added. 

(The Star Online / 21 June 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com