BLC Administrator Shredd Chat 4/12/2013
A private bank in Iraq has become the first among its peers to launch a local fund that will be marketed to foreign investors and regulated outside the country.
Iraqi Islamic Bank for Investment and Development, the country's oldest Sharia-compliant private lender, has teamed up with a Bahraini bank to develop an investment vehicle that will target one of Iraq's lucrative and promising sectors - food.
With a population of more than 31 million people, the fund has already acquired sizeable interest from Arabian Gulf and European investors, prompting the Iraqi lender to increase the size of the vehicle from US$50 million (Dh183.6m) to $75m.
In partnership with Baraka Islamic Bank, based in Manama, the fund will provide financial support to an affiliate company of Iraqi Islamic Bank that has a three-year track record of delivering contracts on sugar stockpile to Iraq's ministry of trade.
According to the bank's prospectus, seen by The National, Baraka Islamic Bank will act as a manger of the fund, while Iraqi Islamic Bank will act as the issuing entity, providing the Iraq lender's affiliate a diversified source of funding and access into the international market.
The Bahraini lender will also market the fund, regulated by the Central Bank of Bahrain, through its own platform at its units in the region, including Algeria and Sudan.
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The fund will be sold in tranches of a minimum investment of $100,000 in a roadshow planned to take place from the end of this month to early next month in Manama and Dubai.
"It's the first time we see something from Iraq's private banks of that magnitude," says Ahmed Al Fawz, the chairman of Islamic Bank of Iraq.
"Bahrain's central bank is one of the strongest, restrictive and conservative regulators in the region, so its a merit for us to have the fund monitored by them."
A decade after the US-led invasion of Iraq, private banks are expanding their services in a country where growth is expected to top 9 per cent this year, according to IMF estimates, amid a surge in consumer power as petrodollars trickle down to businesses and consumers.
There are 37 banks in Iraq, with the sector dominated by seven state-owned institutions. There are seven foreign banks, with seven more in which foreign banks hold stakes in Iraqi counterparts.
The remainder mainly comprise small private banks owned by affluent Iraqi families.
Iraqi Islamic Bank was set up in 1992 by AbdulMajeed Alani, a prominent Iraqi banker who served as the chairman of two government-owned lenders, Rafidain Bank and Rasheed Bank.
He was also was a founder and served as the deputy general manager at Bahrain's Gulf International Bank.
The lender illustrates how Iraq's old-money elite are playing an active role in growing the banking sector and reconstruction of the country. Two years ago, a group of investors acquired a controlling stake in the bank, in a bid to inject liquidity and boost the company's profitability.
The shareholders come from old and rich Iraqi merchant families, with the likes of Al Sarraf, whose bread and butter has come from foreign exchange for more than a century.
"We brought different people who are known for being the best in their [different fields]. The wealthy families are well known in Iraq. They were offered positions on the board with a role in developing the bank's business in their respective industries of expertise," Mr Al Fawz says.
The lender's history and track record has helped it acquire preliminary approval from the UAE Central Bank to establish a representative office in Dubai. Bank officials are considering locating the office near Emaar Square, a business centre that houses branches of HSBC and Barclays.
"We met the initial criteria. We are the first Islamic private bank in Iraq, and more than 10 years old," Mr Al Fawz says.
"Today's Iraqi merchants have become regional and need to be able to transfer money in and out of Iraq. At the same time, there are a lot of Gulf investors that need information of Iraq so we plan to have a business centre to provide information and support."
Private banks, whose activities comprised holding deposits under the former dictator Saddam Hussein's rule, are now introducing an array of products such as credit cards, retail and project financing. The lenders are enjoying a surge in activity as traders move from a cash-hoarding culture.
"The size of the transactions have increased," Mr Al Fawz says. "Prior to the removal of the [Hussein] regime a typical transaction would be about $200,000 but post-2003 transactions range from $15 million to $20m. They can't have $20m in their house, forcing many businessmen to open bank accounts."
However, the potential for these lenders is yet to be unlocked as state entities favour government banks, the activities of which account for a majority of the sector's market share.
"Developing a stronger financial sector development will require moving away from the current model in which weak, state-owned banks dominate the financial sector and enjoy favourable treatment vis-a-vis private banks," the IMF said in March.
"A solid banking system that can support growth and employment will require the full financial and operational restructuring of state-owned banks and creating a level playing field for both private and public banks."
It is little wonder foreign banks are rushing in to capitalise on the country's growing oil and gas, retail and property sectors. Several foreign banks, including Capital Bank of Jordan, HSBC, National Bank of Kuwait and Ahli United Bank of Bahrain, have already set up in Iraq but they have entered through partnerships with local banks.
In the past, foreign banks shied away from opening branches under their own names because of security concerns.
"The opportunities are in Iraq today," Mr Al Fawz says.
"The banks are at the vanguard of the country's reconstruction process because the businessmen and contractors depend on them for performance bonds, guarantees for all the projects introduced by the government."
Abu Dhabi Islamic Bank, the second-biggest Sharia-compliant lender in the Emirates, opened its first branch in Baghdad last year.
Standard Chartered, an international emerging markets lender, expressed intentions to set up operations in Iraq in a bid to service the power, oil, telecommunications and infrastructure sectors.
"We are already working with the regulators to open three branches in Iraq," a Standard Chartered spokesman says. The bank plans to open branches in Baghdad and Erbil during the second half of this year,and another in Basra next year.
"Large-scale infrastructure projects are being planned by the government and these will require international financing solutions. Standard Chartered Bank is ideally placed to provide the necessary leadership, support, skills and access to international markets to enable these initiatives to be undertaken," the bank's spokesman says.
[player46] Shredd .. did you like the private banking one ?
[Shredd] player46 the fund launch one ?
[player46] Shredd ... yes... what does that mean exactly ?
[Shredd] well, this is exactly what we have been talking about that would come from the banking and investment laws being passed last fall
[Shredd] this fund is an investment product that is marketed to global investors the fund has already acquired sizeable interest from Arabian Gulf and European investors, that gives us the proof that the interest is there..........just like we have been saying
[player46] yes... old ME money invested also...
[Shredd] setting up these funds takes a little bit of time but we will see more and more of these and what a sweet fund it is ! (sugar) I could go on and on about this article....
[player46] The fund will be sold in tranches of a minimum investment of $100,000 in a roadshow planned to take place from the end of this month to early next month in Manama and Dubai. "It's the first time we see something from Iraq's private banks of that magnitude," says Ahmed Al Fawz, the chairman of Islamic Bank of Iraq.
[player46] does that mean it becomes tradable ... or just taking in money?
[Shredd] the structure and how it is coming to the street is exactly the same as any of the investment products we work with very structured the tranches, or levels are differing levels of investment choices into the fund
[player46] oh ok.. wondered about that...
[Shredd] so, this addresses investor diversification needs. Yes, so say you were interested in investing in this fund as an investment management firm you would have choices based on risk tolerances, this is great to see, as it is structured like the market wants it to be. Makes is much easier to sell once it goes to roadshow which is an official process by the way. Many funds will come behind this and in many different sectors and remember, at the base of this is borrowing and lending bringing in capital ahead of growth which is key for growth for iraq no more will they have to nurse on the outside world 100% iraq is breaking out before our eyes, breaking out into the financial market space
[player46] reconstructing the country...
[Shredd] yes and the pinning of the capital to do it, very exciting !
[player46] yes it is..
[Shredd] The lender illustrates how Iraq's old-money elite are playing an active role in growing the banking sector and reconstruction of the country.
[Shredd] see that ? like you said above....that old money, sittin stale for so long is being put to work most people won't realize the significance of this news but folks, this is a great sign and one we knew would come after seeing the banking and investment laws being passed late last year as soon as this closes and the returns start coming in, it's going to be crazy
[Shredd] when the housing market was on fire in 2006 to early 2008, we say how quickly the market responded to a bubble, the same will be for iraq
[player46] Shredd what is a "roadshow"
[Shredd] a roadshow is where the fund is marketed or sold to potential investors. The prospectus they mention is the governing, legal document that specifies all the requirements of the fund but is made in more of laymen's terms than the Indenture or Debenture. This is a structured fund and so the investor pool will be a bit different Iraq is sliding into second gear ! So exciting to see
[player46] and takes place the end of this month going into the first of next month... it is upon us..
[Shredd] so glad we don't rely on guru rumors and hype....only to be disappointed each day.....I love how we have studied this from all sides which allows us to see this kind of progress
[Shredd] yes player46 it is and the growth will really pick up
[player46] this is exactly what IMF told them to do.. nice to see it coming together...
[lightingcslt] Shredd ty once again for your brain we really apprieciate it
[player46] Shredd ... yes tyvm for your knowledge and explanations... I would be lost without it...
[Shredd] player46 It is little wonder foreign banks are rushing in to capitalise on the country's growing oil and gas, retail and property sectors.
[player46] I like that...
[player46] and no doubt... it is going to explode and probably happen quickly...