The Business Year

Jamil Ak El Jaroudi

OMAN - Finance

Level of Sophistication

CEO, Bank Nizwa

Bio

Jamil Ak El Jaroudi started his experience in the Gulf in the 1970s as a consultant with Booz Allen & Hamilton in the UAE and Saudi Arabia. He then went on to hold various senior executive roles with the al-Mawarid Group in Saudi Arabia. In 1996, he co-established the Middle East Capital Group in Lebanon, the region’s first merchant bank with a pan-Arab focus. Subsequent to this, Jaroudi held senior positions with DMI Trust, the Islamic Investment Company of the Gulf, and Shamil Bank, and was involved in the establishment of Arab Finance Bank in Lebanon and most recently Elaf Bank in Bahrain, where he was the CEO. He holds an MBA from Columbia University and a PhD in Finance from the Kellogg School of Northwestern University. Among other activities for NGOs and charitable organizations, he is a Board Member of Beirut Islamic University, a member of the Board of Trustees of the Lebanese American University Institute of Family Businesses, and a member of the Governing Council the Global University of Islamic Finance (INCEIF) in Malaysia. In April 2012, Jaroudi was appointed as the first CEO of Oman’s first Islamic bank, Bank Nizwa.

"There are many tools and instruments available in Islamic finance, ranging from the extreme pure trade to long-term equity."

How was the idea of Bank Nizwa formed and how successful has it been?

The founders of the bank realized that many people have aspirations to integrate their economic life with their religious beliefs. In Oman, the rules state that in order to establish a bank, it is necessary to put a minimum of a 40% stake in the public domain. Since the founding partners decided to start the bank with OMR150 million, they needed to raise OMR60 million. The indication of having 11.3 times oversubscription tells you the depth of the demand for Islamic banking. We had 37,000 subscribers in the shareholding issue and received about OMR680 million. We had a soft launch on December 23, 2012, and after testing all our systems, we opened the bank to the public on January 10, 2013. Since our opening, the success of the bank has been positively overwhelming. It has surpassed our expectations.

What has been the general response following Bank Nizwa’s launch?

We have been opening more than 100-150 accounts per day. We opened immediately with three branches: one in Muscat, one in Nizwa, and one in Sohar. The bank has received a huge number of visitors, and as we developed it to be one of the fastest in terms of opening accounts, we can complete the process in 10-15 minutes. This was a first in Oman. Nizwa Bank has made it possible to give clients a checkbook and ATM card before leaving the bank.

“There are many tools and instruments available in Islamic finance, ranging from the extreme pure trade to long-term equity.”

What advantage does the bank have as a first mover?

There are advantages and disadvantages to our position. The advantage is that we have become the “talk of the town” and made history being the first Islamic bank in Oman. Moreover, we confirm our position given that a number of people still have doubts about whether or not they want to deal with Islamic banking windows rather than a full-fledged bank, although we see windows as a good temporary solution because it helps to create awareness about us and develops interbank relationships. The disadvantage is that we face a lot of pressure and expectations are high. We have to create awareness because while many people demand Islamic banking, some people still lack a solid understanding of its functions or what they can expect from us.

How does Bank Nizwa promote Islamic finance?

Aside from the fact that all of our products that are sharia compliant are fully explained to our clients, we aim to set the example of an ideal Islamic bank. Our campaign is thus both commercial and directed toward the spread of knowledge. The most important aspect of our campaigns is that they do not rely solely on media or newspapers. We run conferences for other groups that are specializing in offering Islamic finance. We have already scheduled dates with Sultan Qaboos University for lectures for graduates and undergraduates about Islamic banking. We have also been in touch with the banking college here to implement training programs. In order to ensure the best service, we put people through our own sharia training programs. We also offer a refresher course for five days per month to our staff.

What are the fundamental differences between Islamic and conventional finance?

There are many tools and instruments available in Islamic finance, ranging from the extreme pure trade to long-term equity. The fundamentals are that deals are based on sharia structures, although to some looking at it from the outside feel that they do look similar to conventional finance, which is not altogether true. Nevertheless, a number of the same goals are achieved. Customers regularly ask about the difference between profit margin and interest rate. Essentially, the contract that guides the relationship makes the difference. The contract specifically contains the obligations of both parties. It also defines the rights of both parties very clearly. The crucial difference is that Islamic finance is based on assets, and we cannot advance cash. However, we can buy commodities for clients or finance them in order to obtain a product from which they can benefit, be it a car, house, or equipment for a production unit. This is why when the global crisis took hold in 2008, there was a swell of interest in Islamic finance, with many questioning whether it is better for an economy because it is more stable and based on actual assets.

How are you looking to expand the penetration of Islamic finance?

We are trying to work as fast as possible to expand geographically and reach more people. During the IPO road show, we interacted with people in different cities and villages. We could see from people’s questions that the market was looking forward to this opportunity. That is where the Islamic banking windows could help. Some of Oman’s conventional banks have windows, and they can say that tomorrow 10 of their branches are becoming Islamic. This means that it is possible for them to reach people and build a network quickly. Before our first year of operation ends, we are working to establish another five branches. Every year, we will work to open five or six new branches, depending on our ability to find the right location and people. The most important aspect of our work is our staff; we are training and preparing them to welcome, receive, and serve the clients. Islamic banking is intended to be a full-fledged banking service. Trade finance and consumer finance are only single activities, but there is also corporate banking and investment banking, which is the nature of the business. We have already been granted the license to practice investment banking.

How has the government encouraged the early development of the Islamic finance industry?

We have benefitted from certain relaxations in the normal regulations for banks in Oman. The Central Bank of Oman (CBO) has allowed us to invest up to 75% of our net worth in foreign currency-denominated assets in our first six months and up to 50% in the subsequent six months, which is against the normal 40% ceiling for banks. If the regulatory authorities believe in Islamic financing, which we believe they do, they have to help it to grow and make sure that it’s a successful exercise.

Where do you believe your customers will come from?

Considering Oman in general, the total banking penetration rate is 14%, compared to about 20% in the other Gulf states. This shows that there is a certain population outside of the banking sector. The question remains whether they are simply too conservative to utilize the conventional banking services currently offered. We also know from our relationships with other banks that there is a lot of Omani money deposited in neighboring countries’ Islamic banks. We expect that money to come back into the Omani economy at some stage. We believe there will be three sources of new Islamic finance in the Omani banking sector: money that will return from banks overseas, money that will be generated from conservative individuals who were previously outside the reach of the banking sector, and those in the conventional banking sector that may switch.

How important is technology going to be for the success of Bank Nizwa?

Technology is crucial because we want to persuade people that Islamic banking is a sophisticated industry as well. Time is very important in Islam. Some people are relaxed about it, but that is a social habit. As a religious discipline, it is very important. If you want to conduct transactions that meet people’s expectations, there must be a level of sophistication. When addressing the younger generation, we are aware that they are more adaptable and will prefer to use modern technology such as internet banking.

What role will Islamic banking play in Oman’s sustainable economic development?

Islamic banking relies on a system of development rather than the rentier economy, where people borrow and lend money for more money. Islamic finance is involved in a deeper level of the economy—particularly equity participation—from supporting SMEs to advancing production sectors. I am sure that we will be playing a very important role in sustainable economic development.

© The Business Year – May 2013

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