Talk to Mark Hanson, Chief Executive of Bahrain-based Global Banking Corporation (GBCORP) for a short while and you realise the steadfast resolve of a man on a mission – a challenge he says to effectively address and capitalise on the growing interest globally in Islamic banking.
Islamic banking is almost as old as Islam itself, says Mr Hanson. And this from a banker who is a recent convert to Islamic banking is a strong statement on the growing acceptance of Islamic banking – not as an alternative to conventional banking – but as an effective complement to the same.
Mr Hanson, a New Zealander and a London solicitor by training, typifies the growing Islamic banking trend of experienced Western investment bankers migrating from conventional banking environments to seek the more challenging and innovative aspects of Islamic banking – to help develop a range of ethical Shariah-based Islamic investment banking products and services to address the growing demand for Islamic banking products in the region, comprising the six Arab states of the Gulf Co-operation Council trade block – and beyond.
“There is a growing confidence, a growing respect for deals done on Islamic principles, whether it’s financing or investments,” says Mr Hanson. “Look at the UK: it’s also gearing itself up to support a demanding clientele seeking an option against conventional banking. This move should not just be seen as catering to the requirement of a minority target audience but in terms of providing alternative investment opportunities to both individual and institutional investors seeking a diversified investment portfolio, both in the established markets in Europe as well as emerging markets in Asia and the Mena region.
Leading contenders
GBCORP is a young bank – though Mr Hanson bridles at the ‘young’ adjective – “look at the extensive experience of the people who work for us,” he says in response – GBCORP anticipates being one of the Middle East’s leading investment banks in the coming years, with a broad range of services on offer from private equity to real estate to fund and wealth management. So, how is all this wealth, putative and real, being driven? Not every GCC citizen is a millionaire by any means. A high oil price, unsurprisingly, helps. “Though we are seriously looking at alternative energy sources, there is no replacement for oil or gas currently, so we are certainly dependent on oil for the near future,” says Mr Hanson. “Up until early last year oil prices were expected to remain above $50 a barrel. The reality today is hugely different. What does this mean? Growing budget surpluses. In the case of a place like Qatar, they have 20 percent of the world’s gas supplies while Saudi Arabia has 20 percent of the world’s oil reserves. The governments in these countries realise the importance of this surplus liquidity and the need to distribute the wealth downwards, to the common man.”
Mr Hanson continues, “The Bahrain Prime Minister, for example has gone on record saying that the surplus money generated will go towards ensuring housing amenities for all nationals. This is true for other Gulf States also. That means there will be large private sector involvement in infrastructure projects, be it the power and construction sector. Education, housing, infrastructure development – all these are core focus areas. All that wealth will therefore trickle down. A strong private sector will spur the need for innovative investment options and this in turn will drive the growing demand for Islamic banking services.”
Mark Hanson claims GBCORP’s shareholder base (though he’s too discreet to name names) does make GBCORP stand out from the competition, as well as using their substantial shareholder support to shoulder and co-invest in deals. “When we publish our accounts in February, you’ll be seeing proof of what we offer in terms of a track record, but we can’t talk about deals we’re working on currently.”
Savvy approach
What he can talk about now though is the real estate opportunities in Saudi Arabia, Bahrain and Kuwait and other GCC countries. Bricks and mortar, from an Islamic banking perspective, is an easily understood investment, as is some private equity investment he says. Yet the recent collapse of the Delta Two bid for Sainsbury’s is also indicative, Mr Hanson says, of an increasingly savvier approach from Middle Eastern investors who simply won’t pay over the odds for Western assets, however attractive. “Where we won’t invest is in hugely technical areas which people find difficult to understand.”
“Look at the commercial property market in the UK. That’s dropped 10 percent and could fall some way yet. I think the residential property market is also likely to drop. So the hot money will pour out of the UK. I think the UK, from a Middle Eastern perspective, could become more attractive in the next year or two.” In other words, when UK Plc is in trouble.
Mr Hanson certainly thinks fantastic opportunities in the US are just around the corner – if not already there – as the US sub-prime mortgage crisis penetrates deeper. But many bankers, even at this late stage, says Mr Hanson, seem to be collectively sleepwalking towards the crisis. They simply don’t get the scale of the problem he says.
“I was in the US five weeks ago attending a conference and then in another property commercial conference in London shortly afterwards and both places the banks still thought the party was going on. They still haven’t realised that there’s been basically a market collapse. People don’t seem to understand market forces. When you have Citibank losing $10bn and Merrill losing huge amounts, it does have a knock-on effect. People still view the sub-prime issue as an isolated event.”
The potential is there
Where then does Mr Hanson feel GBCORP’s core strengths lie? And what about future alliances? Obviously, he says, they are strong in the Middle East. GBCORP’s Chairman, Saleh Al Rashed, is a well known and successful Saudi businessman in his own right, Chairman of several large corporations. “I think we have the potential to also develop interesting strategic alliances in the Far East, particularly in Singapore, Hong Kong and China. That part of the world is obviously a major growth engine. Our head of investment banking has got excellent contacts in India.” And, on the flip side of the coin, where is GBCORP weaker? “Probably in places like Russia, but then I think that’s maybe not such a bad thing.”
Yet despite the bullishness of Mr Hanson’s words, he is well aware some in the West still perceive Islamic banking to be some distance behind in issues like governance and disclosure. “I think there is a growing transparency and an inclination to come up to international standards. I think it’s going in the right direction. But to say that Islamic banking has failings…. Well, you don’t have to look too far to the regulatory failings in the UK. You’ve just had the first run on a bank in 166 years. The regulatory system has failed there.” Mr Hanson, of course, refers to Northern Rock’s humiliating injection of emergency funds from the Bank of England. Thousands of worried savers flocked to Northern Rock branches, desperate to withdraw money in case the bank collapsed. It’s a slightly moot point though: the run on Northern Rock was exceptional. That’s the hope anyway.
Certainly Islamic banking transparency and disclosure environment continues to improve says Mr Hanson. Look at the regulatory environment developed in Dubai, Qatar and Bahrain where regulators from the SEC and FSA are helping develop a rigorous regulatory framework, he says.
“I think if you look at those three jurisdictions and the level of disclosure there, you’ll find they’re meeting international standards. In the West there is this wrong perception of a Muslim world that is very closed and inhibitive. Much of that is due to a closed mindset. The reality is totally different. And I should know – I speak from experience of having worked in Pakistan, Saudi Arabia and now in Bahrain, plus the extensive experience of having interacted with the populace within the region.”
Education and learning
Another issue Westerners struggle to comprehend about Islamic banking is how it operates without charging or giving clients’ interest – the concept of usury – and something Islamic law specifically prohibits. Is this about weaving legal formulas or restructuring payment methods that, perhaps, imply a fee instead? Mr Hanson says carefully it’s an issue about education and learning. “If it is structured in the right Islamic way then interest is not charged. Take, for example, funds placed with an Islamic banker where there’s an underlying asset, be it gold or coffee beans.
An underlying trade. The result may be the same, but the actual structure is different. There’s a clear difference about putting your money with a conventional bank where interest is still being paid and income from your money with an Islamic bank. I’ll be completely honest. Like I mentioned earlier, I’ve been involved in Islamic banking for a few years, and it does take a while to have a full understanding of this banking model.”
Meanwhile, Mark Hanson remains highly upbeat about business prospects – provided the political situation in the region does not go into a reactive mode based on other global or western equations. “Apart from that, in terms of our strategy, the way our products are structured and the potential for more clients, we’re very satisfied. For the bigger picture, we’re confident.”
