The Future of
Arab
www.islamica-me.com • May 09
globaleconomy
The Morning After
Banking
The credit crisis is upon us, and, with it, a dramatic economic
decline, the likes of which has not been seen for decades. The
outlook for Arab banking the morning after the credit crisis
depends on a number of factors, each relevant to a specific
segment of the industry.
Sovereign Wealth
By Dr. M S S El Namaki Arab sovereign wealth will have a field day in
American and European markets and under cer-
tain conditions, the future could carry the potential
for measurable portfolio enlargement.
Sovereign wealth funds are strong in the Middle
East, especially the Gulf states. They command
massive resources and have strong capital clout.
They could dictate the market structure and prices
of financial assets for the coming years.
Abu Dhabi’s Investment Authority, or
“Mubadala,” is the largest, and the Qatar
Investment Authority is possibly the smallest and
youngest (established in 2005). Mubadala, which
was created in 1976, is the largest sovereign fund in
the globe, with near $875 billion in assets. Its
investments are broad and scattered. It has bought
a controlling stake in the Chrysler Building, an
icon of the Manhattan skyline, and is planning to
become one of the 10 biggest institutional
investors in General Electric. Past Mubadala deals
included a 5% stake in Ferrari, 7.5% equity in
Carlyle Group and a 4.9% capital input in
Citigroup. These moves highlight the growing self-
confidence and ambitions of Abu Dhabi’s sover-
eign investment vehicle and the effort by the emi-
rate to develop a balanced and diversified eco-
nomic growth model.
Middle East sovereign wealth funds have recent-
ly played a leading role in helping to recapitalize
the faltering U.S. banking industry, a risky
endeavor in today’s volatile capital markets.
These investments are not really performing.
Worse still, they are leading to the question of
who owns what and for what purpose. Put differ-
ently, there are those in the U.S. who are wonder-
ing whether government ownership of specific
American assets is a good thing, especially if it is
a Middle Eastern foreign government. There is
the concern that this could jeopardize interests
and undermine the traditional capital market
fundamentals of the country.
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www.islamica-me.com • May 09
globaleconomy
Islamic Banking
Islamic banking policies and practices will provide
a benign alternative to the “malignant” and
“greedy” practices of non-Muslim banking institu-
tions. The basic principle of Islamic banking is the
prohibition of riba, or interest. In Islamic banking,
sharing of profits and losses replaces interest.
A Shari’ah-compliant Murabaha mortgage trans-
action, to take the most common source of risk in
the current Western economic crisis, is carried out
through the intermediary role of a bank. The
bank acquires the asset from the seller and sells it
to the buyer, with the possibility of paying in
installments. Profit may occur as a result of the
buying and selling, and debtor default is nullified
through collateral. This arrangement nullifies the
malignant implications of securitization as it was
done within the American mortgage and invest-
ment banking industry.
Another innovative approach for home loans,
called Musharaka al-Mutanaqisa, allows for the
creation of a joint venture where capital is shared
and returns from eventual rental are also divided.
The bank and borrower form a partnership, with
both providing capital at an agreed percentage to
purchase the property. The partnership rents out
the property to the borrower and charges rent that
is shared between the two parties. The borrower
remains entitled to the purchase of the bank’s
equity share.
Again, this is a far cry from the securitization prac-
tice in which the property subsides in layer upon
layer of bonds created to exploit the purchase
process.
Dr. M S S El Namaki teaches and consults on strategic thinking, entrepreneurship and interna-
tional business. He is past founder and dean of the Maastricht School of Management,
Maastricht, The Netherlands (1984-2002). El Namaki has developed and introduced man-
agement degree programs into no fewer than 25 countries, including the Netherlands, China,
Egypt, Brazil, Poland, Canada and Indonesia. He has held executive positions with Philips
(Eindhoven), McKinsey (London and Dar es Salaam) and Time Inc. (Amsterdam). El
Namaki’s book Strategy and Entrepreneurship in Arab Countries was published last year.
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www.islamica-me.com • May 09
globaleconomy
Private Equity
The private equity industry will most likely face tur-
bulence within Arab countries. The basic assump-
tions do not hold as strongly as they used to.
Private equity players in the Middle East are few
and far between today. Their size and scale of
operations are modest by American standards.
The majority cluster around the capital reserves of
the GCC and Saudi Arabia and their presence in
a country such as Egypt is sparse. Abraaj, the UAE
operator, seem to be the undisputed leader and the
one to survive the crisis. But all Arab private equi-
ty operators, including Abraaj, will face serious
challenges in the coming years.
Competition from sovereign wealth funds, the
declining window of opportunistic deals, and the
increasingly blemished face of leverage will all
constrain operations. Sovereign wealth funds will
be urged from a political standpoint to play a more
pronounced role in reviving local economies, espe-
cially in the Gulf states, and this could happen at
the expense of private equity. A reversal of free
market thought on a global scale could reduce
sources of private equity deals, be it privatized
entities in countries such as Egypt and Syria or
family firms in GCC countries. And leverage will
prove more and more difficult under today’s cred-
it decline and deleveraging crusades.
Bank Management
The management of banking institutions in Arab
countries will likely demonstrate the same value
shifts one will see in North America. Yet they will
face another problem: talent. Talent is a core issue
that is undermining the performance of the sector
in Arab countries. This is not a short-term prob-
lem, but a long-term one. The volume and scale of
banking talent leave a lot to be desired in almost
every Arab country. Global supply is becoming
abundant following massive layoffs in North
America and Europe, but this may not provide a
genuine solution, as those are the same people who
have landed those institutions in the problems they
have now. They may also be bringing with them
the wrong culture, i.e., a focus on the short term
and greed. The problem could be compounded if
the level of policy making and control does not
match the dynamic needs of the hour.
China is a case in point. China’s massive reserves
are not put to full use because of the talent prob-
lem. The Chinese authorities recognize this as a
Arab sovereign wealth will have a field day in
American and European markets and under certain
conditions, the future could carry the potential for
measurable portfolio enlargement.
30
major barrier to their true entry into serious glob-
al mergers and acquisitions in the finance sector.
Business as Usual
Some Arab countries may experience little change
in their structure or practice of banking. Their lim-
ited exposure to the credit crisis will render dra-
matic change superfluous.
Among the Arab countries that escaped the most
serious implications of the credit crisis is Egypt.
The reasons are obvious: Banking institutions in
Egypt abstained from drinking the toxic brew con-
cocted by North America’s investment industry.
Structured finance was too risky to contain within
the traditional environment of those banking insti-
tutions. This might have also arisen from the sim-
ple inability of those institutions to deal with com-
plex investment vehicles. Today, their toxic waste
holdings are minor and their conservative
approach may, after all, be worthy of praise!
The near future may find growing interest in those
countries, especially Egypt. They combine limited
damage, safety and Islamic finance. Safety and
Islamic finance might attract the attention of other
Arab investors, especially in the Gulf. Those who
have lost significantly as a result of recent events,
as we have explained earlier, may seek the comfort
of a traditional, admittedly non-innovative but
safe banking and investment environment in coun-
tries such as Egypt, Libya or Syria.
Demonstrating Clout
Discussion of the credit crisis cannot be stripped of
its political dimension, especially when it comes to
Arab banks and Arab economic management.
Arab countries are substantial in capital resources
but relatively weak in terms of political economic
posture. One does not have to go far to substanti-
ate this point. Arab countries’ representation in the
G20 debates was modest. Arab influence on the
ongoing debate around the restructuring of the
global financial system is almost not there. Arab
contribution to China’s call to replace the U.S. dol-
lar with a global currency less susceptible to
vagaries of U.S. economic forces is muted.
Discrete measures might be there, but they do not
reconcile with the volume and scope of possible
Arab contribution.
What is needed are two sets of measures, a profes-
sional and a political one. From a professional
point of view, there is a need for a critical exchange
of views on the position and future of the industry;
a serious exchange of what the industry should do
tomorrow and who should carry the mantel. From
a political point of view, the need is there for an
initiative that can coalesce and demonstrate the
collective power of the Arab world when it comes
to economic policy.