Bank Aljazira: embracing sharia banking principles

Nabil Al-Hoshan, Managing Director and CEO of Bank Aljazira, discusses his company’s sharia-compliant philosophy, and the products it offers therein


Bank Aljazira (BAJ) in Saudi Arabia has a long heritage that goes back more than 36 years. During that time, BAJ has undergone several key transformations to become the bank it is today.

Global Islamic banking growth areas

Despite global economic challenges, BAJ put in place a number of initiatives that resulted in strong performance for various sectors. In addition, we managed to implement our strategy of diversifying income sources, as well as seizing favourable opportunities in pursuit of strengthening our presence and competitiveness. Today, BAJ is recognised as a leading and fast-growing sharia-compliant financial institution, and we pride ourselves on being a professional, client-driven, service-orientated bank, where we provide customers with innovative sharia-compliant services and products.

Globally, the Islamic banking industry continues to record robust growth (see Fig. 1), with the top 20 Islamic banks registering a growth of 16 percent in the last three years and Saudi Arabia emerging as the largest market for Islamic assets, according to the Saudi Gazette. Moreover, figures from Ernst & Young’s World Islamic Banking Competitiveness Report 2013 show that global Islamic banking assets held by commercial banks are set to cross $1.8trn in 2013, up from $1.3trn in 2011.

Currently there are three other fully sharia-compliant banks, all of which are growing at a faster rate than their conventional counterparts due to market demand and elevated customer awareness.

Bank Aljazira: The first of many
It was strategic decision by BAJ’s board of directors to convert the bank’s operations from conventional to sharia-compliant banking. This transformation required changes to our infrastructure, offerings and legal environment, among other aspects; and in order to remain competitive we invested heavily in product development as well as branch and ATM networks so as to capitalise on being the earliest fully sharia-compliant bank licensed in Saudi Arabia. In 2007, BAJ’s conversion into a sharia-compliant institution was complete. It simultaneously increased its paid-up capital to SAR 3bn, which came entirely from the bank’s profits.

From the early days of the transformation, BAJ established a sharia group within its core structure to ensure compliance with all sharia banking and financing principles; this led to the formation of a Sharia Advisory Board, which is composed of a number of scholars specialised in sharia-compliant banking.

Recognising that the company had a social responsibility towards the community, in 2006 BAJ launched a SAR 100m programme named Khair Aljazira Le Ahl Aljazira; since then, BAJ has been engaged in providing financial support to various charitable societies, launching apprenticeship programmes to develop young Saudi women and men. Today, we can proudly say that we have been successful in stimulating community welfare by sponsoring a vast number of productive family projects and cultural events, and we are looking forward to more.

On the business front, we achieved great success in diversifying and expanding the scope of our sharia-compliant offerings, and at the same time succeeded in developing our infrastructure by laying the foundations for governance, transparency, sharia-compliance and financial controls. BAJ pays special attention to the small- and medium-sized enterprises (SME) sector, which represents 93 percent of total awarded project value in Saudi Arabia, as per the latest statistics.

Additionally, to reflect our keenness in expanding our presence in this sector, we established commercial banking services independently from other business units to be the pivotal point in developing and tailoring sharia-compliant innovative products to best suit the sector, which will ultimately contribute to the economic growth of our nation. To that end, BAJ has financed and supported a number of entities and projects in collaboration with Kafalah Programme (sponsored by the Saudi Industrial Development Fund). Today, those entities have grown into successful organisations in their respective fields and they continue to be part of our valued customer base.

Developing infrastructure
On other fronts of business development, BAJ reached high levels by enhancing its customer experience through its various alternative delivery channels, where it has adopted state-of-the-art banking technologies, infrastructure, and standards. Among other achievements was the expansion of our retail network, resulting in attracting new customers, in addition to ATM network restructuring, online banking, telephone banking, and credit card offerings.

We continuously develop our employees and aim to attract the best talent through extensive training programmes, a culture of innovation and out-of-the-box thinking

The Treasury Group’s focus in 2010 was to develop its infrastructure, which includes human capital, premises, systems, policies and procedures and we continuously strive to achieve a better understanding of our customers’ needs to develop sharia-compliant products and sophisticated solutions. Treasury Group embarked on a substantial leap and implemented a full treasury banking solution, which included market and credit risk systems. Also, in line with BAJ growth plans and to expand our reach to our customers, a full treasury branch was opened in Riyadh and a sales office in the eastern region.

AlJazira Capital, the investment arm of BAJ, has a long success story in the Saudi Tadawul market, and has been the market leader for several years. With an objective to maintain that market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across the MENA region and international markets, and a full suite of securities business.

BAJ was also the first bank in Saudi Arabia to introduce Takaful Ta’awuni (a system of mutual cooperation for financial assistance and insurance based upon the sharia principles) and therefore commits itself voluntarily to conduct such business in full compliance with sharia principles, to adhere to ethical and moral values in its insurance operations and to satisfy the legal regulations and regulatory guidelines.

Risk and reward
With regards to risk management, BAJ maintains a prudent and balanced approach to risk and reward across its business activities, and considers risk management to be an integral part of the bank’s decision-making process. Today, much emphasis is placed on the use of sophisticated techniques to identify, measure and mitigate risk. In addition, it is through a robust corporate governance structure and leveraging on the collective experience of a disciplined management that a bank can expect to minimise risk at its source.

BAJ’s overall success is due to the loyalty of its customers, whom it serves through a network of more than 60 branches offering private banking, corporate advisory, sharia-compliant insurance and investment banking. That loyalty is earned by the bank’s most precious asset, its human capital. We continuously develop our employees and aim to attract the best talent through extensive training programmes, a culture of innovation and out-of-the-box thinking.

The collaborated efforts of the BAJ team have resulted in the successful issuance of BAJ subordinated (tier two) Sukuk certificates on March 29, 2011, the proceeds from which were used to strengthen its capital base. It is also worth mentioning that BAJ’s financial strength rating has been set at BBB with a stable outlook by Capital Intelligence and the bank’s long-term foreign currency rating has been set at BBB+.

The continuous success of BAJ could also be measured by looking at its net profit during the first nine months of 2013, which grew by 24 percent to SAR 500m from SAR 403m for the same period last year. The bank’s total assets as of September 30, 2013 stood at SAR 55.5bn against SAR 47.8bn for the same period in the previous year, an increase of 16 percent.

BAJ’s objectives when managing capital are to comply with the capital requirements set by regulators, to safeguard its ability to continue as an ongoing concern and to maintain a strong capital base. In this regard, capital adequacy and the use of regulatory capital are monitored on a regular basis to ensure that the capital is adequate for the risk inherent in its business activities.

Finally, I must take this opportunity, on the behalf of the whole bank, to recognise our shareholders, the board of directors and our customers for the confidence they placed in us. We also extend our gratitude to the Ministry of Finance, the Saudi Arabian Monetary Agency, the Capital Market Authority and the Ministry of Trade and Industry for their supervision and guidance.