EIIB makes a splash in sharia banking
Major investment banks are building their sharia business lines. And now London's sharia-dedicated European Islamic Investment Bank hopes to raise its profile as an innovative creator of sharia-compliant structured products
As the big international investment banks rush to soak up rapidly expanding demand for investment products that comply with Islamic law, an as yet little-known British start-up is looking to get in on the action. London-based European Islamic Investment Bank (EIIB) was set up at the start of 2005 to be the first independent, sharia-compliant investment bank to be authorised and regulated by the UK's Financial Services Authority (FSA). The bank received that authorisation in March of this year, opened for business in April, and now aims to punch above its weight in the Islamic banking market, concentrating on structuring a host of capital markets investor solutions as well as issuing sharia-compliant structured products.
"The focus up to this point has been establishing the business and its infrastructure, and having everything in place to become functional as a bank," says John Weguelin, the bank's managing director and a former chief operating officer and chief administration officer for Bank of America, covering Europe, the Middle East and Africa. The bank listed on London's Alternative Investments Market in May, raising £75 million, and completed its first banking transaction in the second quarter, handling a private placement that raised £108 million net of expenses.
EIIB hopes to attract a diverse customer base, says Weguelin, ranging from Islamic institutions and high-net-worth individuals to investors in conventional financial markets and international institutions hoping to transact business in Islamic countries. The bank's business activities will be spread across a range of treasury and capital markets transactions, asset management (including private banking), trade finance and correspondent banking, and advisory and corporate finance work. EIIB aims to have its first structured investment product on the market towards the end of this year.
The structured products side of the business is still very much a work in progress, Weguelin admits, so the exact structure and underlying of EIIB's first products have yet to be decided. "Right off the shelf you could choose the underlying equity in the form of an existing sharia-compliant fund. Alternatively, you could pick stocks from the Dow Jones Islamic Index, or you could even base something directly on one of the Dow Jones Islamic indexes," he says, adding that simply providing Muslim investors with principal protection is a significant achievement in what is still an underexploited market.
"To be able to have a capital-protected product run over a fixed period is of significant worth. The fact that so few exist in Islamic finance suggests to us that there is a market there, and it's a market that I'm sure will grow," he says. "This is right at the leading edge of product development. It is focused on the idea of hybridization of different Islamic financial instruments to achieve any prescribed pay-off, with the underlying investments made up of pretty much whatever you wish to include that is sharia-compliant."
Filling the void
"Investors wanting to ensure all their investments are sharia-compliant have not had anything like the opportunity that conventional investors have had in this field," adds Jeremy Beswick, the bank's head of asset management, who was recruited in June to focus on establishing EIIB's international institutional business. Previously, Beswick was head of business development for RMB MultiManagers, the international investment management subsidiary of South Africa's First Rand Group. "In fact," he continues, "it's almost impossible to build any sort of modern, sensible, global portfolio based on sharia products, because the asset classes simply are not covered. Neither are the markets of the world traditionally covered off to enable you to build a portfolio, so a sharia investor is operating at a significant disadvantage to anyone else, and that's a disadvantage we'd like to correct."
The big investment banks that have set up Islamic finance operations have been selling basic sharia-compliant principal-protected products, often combining a murabaha deposit, which provides a capital guarantee, with an arboun contract that acts as a proxy for an option. A murabaha contract lets an investor pay for an asset that the bank then sells at a certain price on a deferred date, with the investor receiving the assets at maturity, which are worth the same as the amount originally invested. An arboun contract lets the investor buy an asset at a fixed price at any point up to the contract's maturity. Institutions such as Deutsche Bank, SG Corporate and Investment Banking and HSBC - through its HSBC Amanah Islamic banking subsidiary - are active in the area, as are others.
Beswick is keen to stress that EIIB hopes to sell products to investors globally, and not just to those in the Middle East. "It's very important to realise that Islamic finance and the Muslim community at large is not synonymous with the Middle East. Outside of the very interesting opportunities for a business like ours in the Middle East, we have to recognise that as a sharia-compliant operation, we're looking to serve the interests of the Muslim community globally, which is completely unrestricted by geographical or political borders to a greater extent than any other community I can think of worldwide."
But in the Middle East itself there is currently a massive amount of liquidity waiting to be tapped. Last year the Saudi Arabian stock market saw gains of over 100%, and despite the emerging market volatility that kicked off in the second quarter, a significant amount of wealth continues to accumulate across the Gulf Cooperation Council countries, compounded by recent oil price spikes. "If you look at it from a macro point of view, each of these countries is taking its wealth and investing it in infrastructure, and therefore establishing sustainable economies as a result. I think that is very positive for the region as a whole, and it presents opportunities for institutions such as ours," Weguelin says. "A lot of wealth is being developed, not just as a result of the oil price."
Choosing London
Weguelin and Beswick hope that the bank's status as an independent, UK-quoted and regulated institution will make it a leading player in the Islamic financial sector, and perhaps also a leading issuer of sharia-compliant structured products. The decision to set up in London rather than a Middle Eastern financial centre was deliberate. "It gives us access to intellectual capital - to people," says Weguelin. "We want to bring in the people from conventional investment banking backgrounds and get them to focus on what I would describe as being the fifth dimension of investment banking, which is taking conventional investment banking products, stripping them back down again and seeing how we can rebuild them in a sharia-compliant fashion. To do that you really need to be here in the UK as opposed to being in a local market within the region."
The advantage of being in London is that it places the bank at the centre of deal flows. By keeping its ear close to the ground in the City, EIIB's bankers should be in a better position to observe the transactions that are taking place in the conventional market, with a view to then working out how they can be replicated in a sharia-compliant fashion. That means it should also be in a good position to bridge the gap between the two financial worlds, the sharia-compliant and the conventional.
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