Lebanon is a potentially lucrative market for Islamic banking in view of its diversified community, according to many Lebanese bankers. However, the country still notes a shortage of Islamic financial operations vis-à-vis growing conventional transactions.
“In Lebanon, Islamic banking is still new and requires awareness and a marketing campaign,” said Mutasim Mahmassani, general manager of Bank Al Baraka Lebanon, adding that he expects a fast growth for Islamic financial operations in Lebanon.
Four Islamic banks are currently licensed to operate in Lebanon: Al Baraka Bank, Arab Finance House, Lebanese-Islamic Bank, a unit of Credit Libanais, and BLOM Development Bank, a unit of BLOM Bank. All four focus mostly on retail banking and concentrate on consumer finance.
Al Baraka Bank has been in the market since 1992; Arab Finance House, or AFH, since 2003; Lebanese Islamic Bank opened in 2005 and effectively became operational in 2006; and BLOM Development Bank in 2006.
“We are holding conferences and forums to inform people about Islamic banking,” AFH General Manager Fouad Matraji said.
Bankers from three of the country’s four Islamic banks agree that Lebanon is still an infant market for this banking specialization, but they all say it is developing and will play an important role in Lebanon’s financial market.
This is not an easy task in a country where the commercial banking sector plays a massive role in the economy and regularly achieves growth even when other sectors are lagging. Total assets of commercial banks increased 7.6% year-on-year to $74.3 billion at the end of October 2006, which is almost three-and-a-half times the national GDP.
Very few assets in Lebanon
With less than $250 million in assets, the two larger sharia-compliant banks make up a tiny fraction of Lebanon’s banking sector. The total assets of Al Baraka Lebanon stand at $130 million, Mahmassani said.
According to Matraji, the total assets of AFH are $100 million. He said that the bank achieves a yearly profit of 7% to 8% and he expects a return on equity between 12% and 14% in 2007.
Islamic banks are expansion-minded in Lebanon and Al Baraka and AFH both have capital increases in the works.
In a recent general meeting of Al Baraka, shareholders agreed on a capital increase by 150% to $50 million from $20 million.
Mahmassani said that the capital increase will help the bank develop its expansion plan, which includes setting up new branches and expanding its activities, including devising investment funds.
According to Matraji, Arab Finance House is currently the largest Islamic bank in Lebanon in terms of capital. “Our capital is $60 million and expected to become $100 million in 2007,” he said.
Khodr Temsah, general manager of Lebanese Islamic Bank, said that the bank will soon increase its capital by 150% to $50 million from $20 million to fund its expansion.
Mahmassani declined to estimate the market share of Al Baraka in Lebanon, saying there are no official statistics. “The market share of Al Baraka is relatively low with respect to the overall banking market, but we expect to occupy 50% of the Islamic banking market share in 2007,” he said.
Matraji expects Arab Finance House to occupy between 15% and 20% of the country’s Islamic banking market; however, he said it is still early to speculate on total market share.
The size of global sharia-compliant assets is estimated today at up to $400 billion, whereas the potential market for Islamic financial services is believed to be closer to $4 trillion, meaning that Islamic finance currently has only a 10% market share among the Muslim community globally and still a long way to go, according to a report by Standard & Poor’s in October.
Coming from behind
There are around 800 branches of commercial banks in Lebanon compared to only 8 branches of Islamic banks.
Al Baraka, which is a unit of the region-wide Al Baraka Group with headquarters in Bahrain, has six branches across Lebanon. AFH has two branches in Beirut and Lebanese Islamic Bank has one branch. All three banks are planning to open new branches in 2007.
The Islamic banks have an ally in Lebanon’s central bank, whose governor Riad Salameh said, during the launch of a new certification program for Islamic banking professionals in October, that the Islamic finance industry “is not restricted to Muslim countries and could benefit from Western and Middle Eastern experience as well.”
The central bank initiated the Islamic finance qualification program in collaboration with British and French-backed institutions in order to streamline in the competencies of employees in the Islamic finance industry, Salameh said.
Islamic banks in Lebanon have already led several development initiatives in producing new sharia-compliant products that found their way into other regional markets. With further development of specialized competencies in the sector, banks said they could use Lebanon as basis for new cross-border expansion, despite the size limitations of the local market.
Complement instead of compete
AFH said it might open up a sharia-compliant bank in Syria by the end of 2007, with a capital of $100 million. A major shareholder in the new Syrian bank will be Qatar Islamic Bank, which also owns 70% of AFH.
Mahmassani said he cannot compare Al Baraka Lebanon to other Al Baraka banks in Arab countries, because these banks are present in Islamic countries and target Muslims. “Their characteristics and the general performance are different, Islamic banking laws have been in effect there for years,” he said.
He added that he doesn’t look at other Islamic banks in the local market as competitors, “but we complement each other to develop and further promote Islamic banking in Lebanon.”