* Increasing number of banks converted to Islamic
* Costs are high, but cheaper than green-field start-up
* Kuwaiti asset sales could be M&A opportunity
By Frederik Richter and Shaheen Pasha
MANAMA/DUBAI, April 25 More banks in the Gulf
Arab region may convert to Islamic finance in a bid to tap
rising demand for sharia-compliant products and to avoid the
heavy investment required to launch new banks.
A source told Reuters this month that Qatari investors are
planning to buy a 25 percent stake in Ahli United Bank AUBB.BH
(AUBK.KW) from Kuwaiti investors and have plans to convert
Bahrain's largest retail bank, which itself plans to take its
Kuwaiti unit Islamic. [ID:nLDE63B171]
"Converting to Islamic is compelling in the region. In
Kuwait Islamic banks have rapidly won market share from
conventional ones," said Sayd Farook, senior consultant at Dar
Converting conventional banks would help the industry expand
its retail footprint -- for instance in countries where no new
licenses are given out but conversions are allowed --, which
experts say the industry needs to develop a more sustainable
The Islamic banking industry in the Gulf Arab region has
mostly relied on channelling the region's oil wealth into real
estate and private equity, and was badly hit by a regional
property correction late in 2008.
"I would say between 70 to 80 pct of the Muslim market (in
the region) would bank with an Islamic bank....if you are an
Islamic bank you get to capture that market," said Sameer Abdi,
head of Islamic finance at Ernst & Young.
Scholars have said they do not oppose converting
conventional banks as long as their investments and debt levels
are brought in line with sharia, which bans investments in
certain sectors such as alcohol, over a grace period.
"There is usually a two-year conversion gap from the moment
you convert....during which you need to give away to charity any
income from conventional instruments," said Farook.
Experts say that converting a bank comes cheaper than
launching a green-field retail bank, but costs associated with
revamping the bank's work-flow, accounting and core banking IT
systems are still high.
"Depending on the scale of the bank and the market in which
it operates, it could take two or three years before the
investment pays off," said Hatim El Tahir, a Bahrain-based
director at Deloitte & Touche.
Abdi said he estimated that up to 15 percent of existing
customers could leave a converted bank, not necessarily because
they disapprove of the switch to sharia, but because the bank
might struggle to maintain its service level during a difficult
Bahrain's Al Salam Bank SALAM.BH is converting Bahraini
Saudi Bank BSBB.BH, which it bought last year, as is Egypt's
National Bank for Development DEVE.CA after Abu Dhabi Islamic
Bank ADIB.AD partially bought the lender in 2007.
But the Gulf Arab region is rarely seeing mergers and
acquisitions due to cultural sensitivities and opaque ownership
structures, which could be the biggest obstacle to the
conversion of conventional assets.
Bahrain's Ithmaar Bank ITHMR.BH this month concluded the
transformation from an investment house to an Islamic retail
bank to improve its funding base, but could do so because it
fully owned Islamic retail bank Shamil.
But Kuwaiti banks and merchant families have been badly hit
by the financial crisis and are trying to sell down their
international assets, which could be a way in.
Their ownership in many banks in the off-shore banking
centre Bahrain, both Islamic and conventional, could migrate to
Qatari investors and banks that are awash with cash, bankers and
"Qatar is a small economy...the bigger banks are looking at
other markets," said Janany Vamadeva, banking analyst at HC
Brokerage, adding that Qatari companies would also be best
positioned to raise money in current capital markets.
(For a Factbox on how to convert a bank to comply with
Islamic law, click on [ID:nLDE63K1DO])
(Click on [ID:nISLAMIC] for more Islamic finance stories and
ISLAMIC for a speed guide)
(Reporting by Frederik Richter and Shaheen Pasha; Editing by
Dinesh Nair and Louise Heavens)