Finance director Atif Raza explains why Islamic banking is a growing industry despite the extra scrutiny

Atif Raza

In Islamic banking there is, Atif Raza says, one ‘extra layer of corporate governance.’ The European Islamic Investment Bank, of which he is FD and chief operating officer, has to please the Financial Services Authority, HM Revenue & Customs and countless other public authorities well known to UK business. And added to this stream of authorities he also has to please the Sharia board.

All product development at the bank goes through these guardians of Islamic law and protectors of the principles of Islamic finance. The integrity of the bank and its acceptability to its investors depends on them as much as it does on the credibility afforded to other authorities. They are so important they even turn up in the accounts - the board charged fees of £136,000 in 2005, according to the bank’s offer document from earlier this year.

Islamic banking is becoming increasingly visible in the western world, as purely Islamic banks begin to set up in the UK. The Islamic Bank of Britain has already become the first Islamic retail bank to get FSA authorisation, and the EIIB’s approval to operate in the UK makes it the first in the UK and in Europe, according to Raza.

‘There’s an enormous potential to do something quite significant in an industry that’s growing,’ says Raza, who has been at the bank for only a few months.

‘There is around $700 (£369) to $800bn invested in the Islamic accounting arena. That’s not a lot in terms of conventional accounting, but it has grown from not even half that five years ago.’

The EIIB is hoping to get a slice of that market, which is growing fast. Indeed Raza suggests that the popularity of religious banking is ‘happening globally and not restricted to any particular geography’.

There are, however, various centres of Islamic finance. Malaysia is a big consumer, while the centre of the activities is generally in Bahrain and in Saudi Arabia. That might change with the EIIB proposition, which aims to pitch to the global market, and draw on the integrity and expertise of the City of London.

Raza is insistent on the protections afforded by UK banking. ‘None of the FSA requirements were relaxed for us. We had to make all of them,’ he says, perhaps a little defensively.

Faith in the business is growing as the investor base spreads. There’s now more interest from the traditional investors in Bahrain and elsewhere for UK investments. ‘It was very much a US-centred portfolio for much of the high net worth individuals. That is broadening out. The risk profile is changing.’

Growth industry

There are around 300 purely Islamic banks operating now, he estimates. That is on top of the Islamic offerings from many of the conventional banks. In the UK alone, several of the major retail banks have launched Islamic mortgages, and a whole suite of products, including Islamic insurance and basic bank accounts are on the way.

Not all such operations have the scale of the EIIB, though. ‘Most Islamic banks are not as well capitalised as the EIIB,’ Raza says. The company raised £108m at the end of last year, and then floated earlier this year on AIM, raising a further £75m.’

Even so, it’s not been the easiest of months. The float was launched at a very uncertain time for the London market. Also a downward correction to Middle Eastern markets saw investors lose confidence in the stock, as it staggered to a 45% dip on day one.

Originally floated at 25p, the shares are now trading at just over 10p. Some are questioning Europe’s appetite for Islamic finance. There is, however, an increasing volume of capital available for this kind of investment, especially in the Middle East. Rising oil prices and higher returns on equity investments should give the company something to pitch for.

The company is set to report interim results on September 20, however, and investors will be hoping that its activities are picking up and that it is beginning to make good money from its fledgling efforts in the Islamic investment banking market.

One of the key selling points of the purely Islamic banks is that they are Sharia compliant not just in their products but also in their financing, a requirement that the EIIB plans to keep to. ‘In terms of raising finance all that would be 100% Sharia compliant but we wouldn’t only deal with Islamic banks.’ In fact, he foresees teaming up with conventional banks to offer some products.

Raza trained at Peat Marwick Mitchell in London in the early 1980s, and has held a series of CFO jobs in banks in the Middle East, Pakistan, and Manchester.

His last role having been in the Middle East with the Unicorn Investment bank of Bahrain, he is now masterminding a family move back to London from Manchester. ‘I was the fourth person to walk through the door,’ he says, adding that it all began in a hotel, working on old tablecloths and in poor air conditioning. ‘A serious flaw in the Middle East,’ he says.

He has worked with large organisations such as Citigroup, but seems to have a preference for start-ups and untested ideas. A trained chartered accountant, he wishes he had got more qualifications on top of accountancy.

‘If I started again, I think I would have placed more emphasis early on in a front end business. I would have built in another qualification like a CFA, a corporate finance qualification,’ he says.

But his key skill as an FD, he thinks, has been his people skills – skills that are built into today’s accountancy qualifications.

‘Understanding people is what’s really important. Understanding the risks in a business is about understanding the people. In my late 20s I realised that managing people was something I enjoyed. I am convinced that is the essential element of success.’

He learnt the most important lesson about business when going through a merger and acquisition process.

‘The process of working through a merger programme like an acquisition, and being immersed in that, that’s very useful. I had a good mentor at Citibank in the CEO. It was a very intense experience but working with him I could see how to walk through that process.’

He emphasises that business is also often about working with small numbers of people too. ‘Small teams are really how you work. Even in an organisation with 150,000 people you only work with 20 to 30 and those are the people you need to energise.’

For UK FDs that are set to follow him he suggests: ‘I probably would have said you have got to be ravenous about acquiring the skills you need or would like. You need to be very patient in developing the experience needed to acquire those skills.’

Playing by the rules

Islamic finance is becoming better understood around the world. There are several basic principles to it, the best known of which is the proposition that you should not earn, or pay, interest.

Arrangements that contain uncertainty are also forbidden (which would seem to rule out a lot of what goes on in the City). That means uncertainty about the subject matter of a contract, the price or its time for delivery, for instance.

Speculating is not allowed, being regarded as akin to gambling, nor is ‘unjust enrichment,’ meaning where one party gains an unjust advantage over another.

It’s very much an intensive research and development driven business. Conversations with the Sharia board begin right at the beginning as financing structures are being developed.

The government has supported Islamic finance by removing the double stamp duty on mortgages. The aim is to try and get a level playing field, so that the products of conventional and Islamic banking can compete equally.

‘This is where it is happening, and that’s what I want to be a part of,’ says Raza.