As far as multinational Islamic banks go, Al Baraka Banking Group is an established name. Founded by renowned Saudi businessman Sheikh Saleh Abdullah Kamel, who is also chairman of the banking group, the Bahrain-domiciled Al Baraka boasts a presence in 12 countries with over 300 foreign branches.
However, a closer look at Al Baraka’s financials and its international strategy suggests the group still has a long way to go if it wants to compete with rivals such as Al Rajhi and Kuwait Finance House.
With total assets of US$16.3 billion, Al Baraka is small in comparison to Al Rajhi and Kuwait Finance House, who each have over US$40 billion in assets. This is despite Al Baraka having a wider global reach.
A missing link for Al Baraka could be an absence in key Islamic banking markets such as Indonesia and Malaysia. Although it has a representative office in Indonesia, the operation mainly serves as a marketing arm to promote trade between the republic and the Middle East.
Speaking to Islamic Finance news, Moes Mokhtar, chief representative of Al Baraka’s Indonesian office said that the bank sees Asia as an important part of its international strategy. Al Baraka is also said to be interested in one of the Islamic megabank licenses from Bank Negara Malaysia, the central bank, but the banking group and the Malaysian authority have remained tightlipped on the matter.
Moes said while the bank is “definitely interested” in Malaysia its focus now is to expand its presence in Indonesia which has a larger market.
The bank’s efforts to acquire a bank in Indonesia are still ongoing, added Moes, who in April told Islamic Finance news that Al Baraka had identified several takeover targets, which could be a state owned entity.
Meanwhile, Moes also highlighted that one of the directors on Al Baraka’s board is a Malaysian, showing the bank recognized the importance of the Malaysian market. He was referring to Anwar Ibrahim, a political leader of the country’s opposition party.
“There is a move to shift our concentration in the Middle East into markets like Indonesia and Malaysia,” he said.
The shift in focus would prove beneficial to the bank if it wanted to cement its position as a global Islamic bank. Currently, its net income is largely derived from its European markets, followed by the Middle East and then North Africa.
With Islamic finance still at a developing stage in Europe, Al Baraka would do well to refocus its business to Asia where the industry has shown more promising growth.
To its credit though, the group already has a presence in Pakistan, a significant market for Islamic finance. Al Baraka Bank (Pakistan) reported a net profit of PKR80.5 million (US$938,065) in the first quarter of 2011, compared with a net loss of PKR264.93 million (a US$3.09 million loss) in the previous corresponding period. However, even with total assets of PKR6.14 billion (US$724.12 million), the banking group may need a further push to consolidate its position in Asia.
According to its financial statements, income from its other markets, including Pakistan, only contributed US$16.12 million to its total operating income of US$169.86 million at the end of March this year. At US$1.41 billion, assets classified under its ‘other’ markets also contributed the least amount to its entire asset portfolio.
On top of this, the Middle East, where the banking group has US$7.1 billion-worth of assets, is still recovering from the recent financial crisis and now undergoing political turmoil.
As evidenced by Al Baraka Bank Egypt’s first quarter 2011 results, the bank has not been shielded from the recent developments in the country. Its Egypt operations reported a 43% decline in net profit to EGP25 million (US$4.2 million) from a year earlier while total assets increased marginally to EGP13.8 billion (US$2.32 billion) from EGP13.7 billion (US$2.3 billion) in the first three months of 2010.
Furthermore, according to a recent report by the Boston Consulting Group (BCG), the compound annual growth rate of retail banking revenue in the Middle East declined to 2% between 2006 and 2010 from over 25% between 2001 and 2006. “In fact, since 2008, the time of very strong growth is over in the region and even though the industry is recovering from the worst of the crisis, returning to pre-crisis development in the foreseeable future is unlikely,” said BCG.
On another note, investors also seem to have lost interest in Al Baraka’s stock, which is listed on the Bahrain Bourse. The counter has shown a steady decline since February 2010, when it was trading in the US$1.80 price range.
As at the 30th May, the stock traded at US$1.19. Its market capitalization has also been on a downtrend since 2008, falling to BHD447.03 million (US$1.19 billion) in 2010 from BHD675.8 million (US$1.79 billion) two years earlier.
The banking group’s financials, although recording steady growth, have also proven unremarkable. In the first quarter of this year, it reported net income of US$53.46 million compared with US$48.34 million at the end of March last year. In contrast, Al Rajhi posted a net profit of US$453 million in the same period.
Al Baraka did report higher provisions of US$14 million as at the 31st March 2011, against US$13.25 million a year earlier. However, it did not provide details on the provisions in its financial statements.
One bright spot that does stand out in its financials is its cash and cash equivalents of US$3.15 billion as at the end of March this year. Flush with cash, Al Baraka is in a strong position to undertake acquisitions, especially if it wants to follow through on plans to grow in Asia and compete on a more level playing field with its bigger rivals.