Bank Aljazira on Saudi Arabia’s Islamic finance trends

World Finance speaks to Bank Aljazira about the increase in sharia-compliant institutions throughout Saudi Arabia

January 28, 2015

The global banking sector took a big hit in the 2008 crisis, as collaterised debt increased to concerning levels. Now in its wake, sharia-compliant institutions grew in number. One bank that has taken off in the region is Bank Aljazira. Its Senior Vice President and Head of Retail Banking Group joins World Finance to discuss.

World Finance: Khalid, now we saw how many banks around the world contracted as a result of the 2008 crisis. Can you tell me how Sharia-compliance helped Saudi Arabia and your bank transcend these global trends?
Khalid Al-Othman: Luckily in Saudi Arabia, under the supervision of the central bank, no banks were bailed out or anything.

For Bank Aljazira, since we fully transformed the bank in 2007 to a fully Sharia-compliant bank, that’s another governing board: the Sharia board.

The Sharia board passes or disallows certain activities or investment vehicles such as CDOs, and they ensure that the bank does its transactions and offers its financial services through the morality of the product offering.

So you have the Sharia board also governing the board on what it does, and cannot do. Especially on the mortgage side or on the asset offerings. They get involved also on pricing, they get involved in the target segments of our offering. So we were immune to what happened in 2008.

I think Saudi Arabia is underbanked

World Finance: Let’s talk specifically about international ratings of the local banking system. Fitch was able to reaffirm your bank, as well as some of your peers, in the market place: partly due to strong business growth. Your area of expertise is the retail banking sector; can you tell me about the growth there?
Khalid Al-Othman: I think Saudi Arabia is underbanked. We have about 50-60 branches a year coming in throughout the Kingdom. And Bank Aljazira is one of them. So in 2008, the bank decided not to be – as it was – a brokerage house, but to turn into a full-fledged commercial bank. Mainly in retail.

So we transformed from having only 25 branches in 2008 to 70 today. We invested heavily in our technology, our electronic banking channels, and that resulted in double-digit growth in our asset book, from $3bn to about $15bn today. And our customers grew from 50,000 in 2007 to 350,000 today.

We grew double or more the market growth in almost every aspect. And not only that; because we were one of the smaller banks among our peers, we realised that customers come to us for our products in particular. So we tapped into the sponsorship area of football clubs. That also increased the brand awareness, so that was our investment in our brand equity.

So I think we have been very successful in that regard. But again, Saudi Arabia will I think take more branches and business in retail.

World Finance: The advent of the mortgage loan market has meant a lot to the banking sector; can you tell me what it means for young Saudis?
Khalid Al-Othman: Well the mortgage business is in its infancy. So it only really started about five years ago, but it’s growing of course. Saudi Arabia requires about 250-350,000 units a year. The GDP of Saudi Arabia doubled since 2007.

So the economy’s booming; jobs are being created; the government is investing heavily in the infrastructure.

Almost one in every four mortgages passes through Bank Aljazira

On the mortgage side, we recently had a new law limiting the loan-to-value ratio to 70 percent. So there’s a cap on what we can do as banks. We expect in 2015 a slow-down in the mortgage business, but we anticipate that it will go back up and boom again.

I think we perfected the model, in terms of the mortgage business. Almost one in every four mortgages passes through Bank Aljazira. But we did not limit ourselves to that; we introduced other mortgage finance products: mainly investment real estate, such as buy-to-let and equity release.

This is how we’ve been successful: by looking at the competition, and what they are not doing. And then try to be unique in our offering there.

We have been quite successful; our book in equity release and investment real estate reached about AED 1.4bn today out of nothing in 2010. So I think there is a market; although it’s not a mass market product, it’s just catered or tailored for the affluent segment, but has been extremely successful.

World Finance: Okay; finally, can you tell me about the increasing diversification of investment products in Saudi Arabia? What do you think is on the horizon, and how is your bank going to satisfy that desire?
Khalid Al-Othman: I think in the future we will continue on the real estate development type of investment tools. Through Al Jazira Capital we have several successful funds that are investing in affordable home development throughout the Kingdom. I expect that to continue: Saudi Arabia needs 300,000 units, and that requires a huge investment. So I expect that to continue.

World Finance: Well it will be interesting to see how the local investment sector matures, and your place in it: Khalid, thank you so much for joining me today.
Khalid Al-Othman: Thank you; thank you.