Albaraka International Bank in London has fallen foul of tighter rules imposed on international banks after the collapse of BCCI. No-one questions Albaraka's viability. Nor is there any suspicion that it being set upon because it is an Islamic financial institution. Nevertheless, writes Mushtak Parker, its problems reflect the changing environment in which many Arab-own banks overseas must learn to operate.
THE EFFECTIVE CLOSURE of the Saudi-owned Albaraka International Bank (AIB) in London has caused much controversy and once again puts the spotlight on Islamic banking. AIB's problems have surfaced in the wake of recent disclosures about the over-exposure of several Islamic banks, including Al Rajhi Banking and Investment Corporation (Arabic) in Saudi Arabia, Dubai Islamic Bank, Qatar Islamic Bank and the Faisal Islamic Bank of Egypt.
AIB can justifiably claim to be the unwitting victim of tighter international banking regulations imposed after the Bank of Credit and Commerce International (BCCI) debacle. Albaraka International is a highly liquid bank, a fully-owned subsidiary of the Jeddah-based Dallah Albaraka Group, headed by Sheikh Saleh Kamel, which has worldwide assets exceeding $6bn.
Therein lies the problem, however, according to the Bank of England. Dallah Albaraka Group, the sole owner of AIB, does not have a banking licence in Saudi Arabia (although it has tried hard to acquire one). Under stricter banking supervision laws introduced by the Bank for International Settlements (BIS) in Basle last July, AIB would have to change its ownership structure radically. So far it has been unable to find anyone willing to invest in the bank and dilute the Saudi parent group's monopoly holding.
As a result, AIB was obliged to surrender its British banking licence in April and cease taking deposits. The Bank of England confirmed that the need for ownership changes was not meant in any way to be an adverse reflection on Sheikh Saleh Kamel, the chairman of the Dallah Albaraka Group. Meanwhile, 43 of AIB's major depositors have pledged to leave their funds with the bank pending a resolution of the problem.
AIB's plight concerns issues fundamental to banking and reinforced last July by the Basle Concordat on banking. The implications for conventional banks and Islamic financial institutions under foreign jurisdictions could be significant.
AIB's problems can scarcely be put down to the Bank for International Settlement's new capital adequacy...