Try as it might, it seems that the European Islamic Investment Bank (EIIB) has yet to find a successful formula for achieving a stable business. Having seen its financial performance go downhill following the last financial crisis and having reported losses since 2007, the bank has also gone through two CEOs in as many years as it retreated into restructuring mode.
In its latest move, the UK-based bank has now announced an investment in Rasmala Holdings (Rasmala Investment Bank), an investment bank with operations in Egypt and the GCC. The investment follows EIIB’s decision taken last year to focus on business in the Middle East via its Bahrain office: only to announce in October a halving of its headcount and the closure of the Bahrain operations.
The moving and shaking at EIIB has coincided with the entry of its new controlling shareholder, Dubai-based private equity firm HBG Holdings, which began buying up a 13% stake in the UK-based bank in the middle of last year. Expectations on HBG’s capabilities in managing EIIB have been mixed, amid questions over the firm’s intentions for the Shariah compliant investment bank and on the back of reports of tension between EIIB’s previous management and HBG (See Insider, Volume 8, Issue 39 of Islamic Finance news).
In yet another test of HBG’s plans, Islamic Finance news has learnt of market talk that EIIB has only just hired management consultants to consider the options for Rasmala’s business. “You would think that this would have been done before it (EIIB) decided to take up a stake in Rasmala,” commented an industry source.
As at press time, EIIB was unable to respond to queries from Islamic Finance news.
Meanwhile, Rasmala has faced its own share of ups and downs due to slowing business in the Middle East, and has itself undergone restructuring. With two strikes already to its name, can EIIB and Rasmala help prop each other up to make this new initiative third time lucky for EIIB?
Behind the scenes
EIIB’s entry into Rasmala involves a US$16 million investment to be completed over a 12-month period. The investment is pursuant to a financing facility convertible into newly issued shares of Rasmala, representing 35% of Rasmala’s enlarged share capital.
Rasmala has also issued a majority of its management shares to EIIB, allowing the UK bank to lead the management of Rasmala; where the management shareholders are afforded the right to appoint the majority of directors to Rasmala’s board. In addition, EIIB has acquired 7.4% of Rasmala’s existing share capital from Ali al Shihabi, the chairman of Rasmala.
The investment is seen as much as a shot in the arm for Rasmala as for EIIB. In May last year, Rasmala announced the closure of its UAE retail brokerage due to flagging business, opting to focus on its institutional brokerage business instead.
Islamic Finance news has also learnt that the general reaction from Rasmala employees to EIIB’s entry has been that of relief. “It’s been a long time coming,” said a source, who noted that news of EIIB’s possible involvement in Rasmala emerged on the Dubai-based bank’s grapevine “a while back”. He added that: “It’s a relief that it has happened,” putting some uncertainty regarding Rasmala’s fate to rest.
Questions remain
Despite EIIB’s emergence in Rasmala providing a slightly clearer picture for its stakeholders, the most pressing questions regarding the intentions of EIIB and ultimately, HBG, for Rasmala remain.
At the crux of the matter is whether EIIB will convert Rasmala, which has some Islamic business, into a fully Shariah compliant entity. As a Shariah compliant investment bank itself, this eventuality appears to be a logical goal for EIIB. However, the understanding is that this will not be required as long as EIIB’s shareholding in Rasmala does not exceed a pre-determined amount.
Another concern is whether HBG remains committed to growing the EIIB group’s business or if it is holding out for a profitable exit in the future, given its core business as a private equity firm. In addition, HBG’s capabilities in turning around struggling businesses have also been speculated on.
“There are several types of private equity firms; some are positioned to reap returns from turning around underperforming assets. HBG appears to be aligned with this objective, although it is unclear whether EIIB’s investment is aimed at increasing its presence in the Middle East or growing Rasmala in Europe.
“However, it’s a tough market in Dubai. Increasing market share is not going to make much of a difference (in responding to a flagging business),” commented a market player.
Striking out in Dubai
What is clear from EIIB’s latest move is that it is determined to make it in the Middle East; and is in line with its efforts to re-focus its business to the GCC. Zulfi Caar Hydari, its CEO, commented when announcing the investment that: “The GCC is growing in importance as an economic and trading hub, as its overall GDP is expected to reach US$2 trillion in less than 10 years.
“Our goal as a public company (listed on the London Stock Exchange) is to give international investors exposure via a London-quoted vehicle to this fast growing region, which provides nearly one quarter of the world’s oil supplies.”
He added that EIIB’s experience in international capital markets and asset management, coupled with Rasmala’s strong regional franchise, makes the partnership well placed to seize current opportunities in the GCC.
The acquisition may also not be EIIB’s last in the Middle East. In the statement announcing its investment in Rasmala, EIIB disclosed that it will continue to participate, albeit selectively, in consolidation opportunities in the region’s financial services sector: through organic growth, joint ventures and acquisitions.
It is still early days in the EIIB-Rasmala deal, however, and only time will tell whether the bank has finally found the secret to success or if its decision to move into Dubai will lead it to strike out once more. — EB