Gulf Finance House: An innovator in Islamic investment

Gulf Finance House, under the able direction of Chief Executive Officer Esam Y. Janahi, has blazed an impressive trail in the international financial community in the less than two years it has been in operation. Gulf Finance House was inaugurated on October 16, 2001, with the goal of catering to the requirements of institutional and private investors. This is being accomplished through the development of value-added investment products and services fully compliant with the principles of sharia, or Islamic law. This devotion to sharia is in fact a cornerstone of the bank’s overall philosophy. The enhancement of Islamic banking through partnership with other Islamic institutions and the development of a wide range of Islamic investment products is integral to Gulf Finance House’s strategy.
Janahi explained that the focus of Gulf Finance House is the securing of direct private equity investment in companies. "The main activity for Gulf Finance House," he said, "is private equity investment, with 80 percent of our time here allocated to this. Gulf Finance House acquires a controlling stake in companies, creates a turnaround situation for these companies, holds them for three to five years, and then exits out of them. The geographical focus, as I have mentioned, is the GCC, the Gulf region, and then the Middle East and North Africa."

Esam Y. Janahi, Chief Executive Officer, Gulf Finance House

In 2000, Gulf Finance House made two such significant investment acquisitions. The first was a controlling stake in Bahrain Islamic Investment Company (BIIC). In making the investment, Gulf Finance House recognized BIIC's 19 years of experience in consumer financing and in-depth knowledge of the Bahrain market, its providing of products and services specifically developed for local customers and its sound financial record. Gulf Finance House is determined to build on this base by undertaking the necessary restructuring of the financial institution and creating for it a new image, while also enhancing productivity through the employment of state-of-the-art technology.
The second significant acquisition was a controlling interest in Bahrain Aluminum Extrusion Company (BALEXCO), one of the region's leading aluminum companies. The purchase demonstrated Gulf Finance House’s strategy of diversifying into different economic sectors and was integral to its desire to seek profitable opportunities in Bahrain's aluminum industry, second in importance only to oil in the nation's economy. Said Jenahi, "We changed their business model a bit, to keep it more in downstream areas, where it is more profitable."
In line with the aggressive strategy outlined by Jenahi for restructuring the companies Gulf Finance House invests in, on July 11, BALEXCO announced that it had obtained approval to establish an aluminum extrusion factory in Qatar with support from Qatari investors.
The results of Gulf Finance House’s investment strategy to date speak for themselves, with a return on average assets of 11 percent and a return on equity of 12 percent since inception in October 1999.
In the coming year, the bank aims to identify and develop opportunities in the information technology (IT) sector and to offer clients investment products that exploit the full potential of this still-growing field. Mindful of the risks associated with e-commerce investment, the bank will, in the short term, concentrate on opportunities of perceived potential within the GCC and MENA countries.
In pursuing this policy, the Injazat Technology Fund is being developed in association with the Jeddah, Saudi Arabia-based Islamic Corporation for the Development of the Private Sector. "The potential is there," said Jenahi. "Gulf Finance House looks at this area as its main territory, where it can generate business. We can bring in investors from this area who will invest here. In June, we started to sell shares in the Fund, and we are getting a good appetite from the market." The fund aims to provide clients with the opportunity to invest in small- and medium-sized IT companies within these two regions. By achieving a satisfactory spread of investments, the bank hopes to minimize the downside risk for the Fund’s investors.
Jenahi went on to explain Gulf Finance House’s investment strategy in the United States market. "We have applied our selection criteria to companies in the United States and Europe. We have good experience of doing private equity investment in the United States market. What we are trying to do is take advantage of the good appetite that is present for investments in the U.S. market. We decided that the timing is right to be there."

Symbol of Bahrain’s impressive financial stature

According to Jenahi, one of Gulf Finance House’s next major goals is the creation of what will become the first Islamic e-bank in the world and the first stand-alone e-bank in the Middle East. The e-bank is being created in partnership with a consortium of other investors, and will have a paid-in capital of $32.5 million. Applications for a banking license have been filed with the Bahrain Monetary Agency. Jenahi says that, "the virtual bank will provide a wide range of Islamic banking products and services to customers all over the world." Through the creation of this bank, Gulf Finance House plans to continue building upon its position as a major player in Islamic banking and investments. "We are pioneering online Islamic banking. This will not just be another dot com or portal site, rather it will be a completely independent entity which will serve a large spread of investors and customers seeking Sharia-compliant, reliable, professional products and services."
In summing up the financial strategy and purpose of Gulf Finance House, Jenahi said that "a lot of people right now have been in a sharp learning curve on Islamic finance, and adding Islamic facilities, which adds value to us. All in all, we are very focused. We are trying to tailor-make a product for our clientele base, which is in the GCC. In addition, we are trying to capture business opportunities in the GCC, Middle East, and even the international markets."
All in all, Jenahi has positioned Gulf Finance House optimally to continue to build upon its present success in improving the portfolios of its growing list of investors.

Interview with H.E. Shaikh Ahmed Bin Mohammed Al-Khalifa, Governor of the Bahrain Monetary Agency

Since assuming the helm of Bahrain’s central bank in April of this year, H.E. Shaikh Ahmed Bin Mohammed Al-Khalifa, formerly the head of the Bahrain Stock Exchange, has worked tirelessly to maintain and build upon Bahrain’s stature in the international banking and financial community.
Q: As Bahrain has worked to diversify its economy away from a dependence on the fluctuating revenues brought in by oil and petrochemicals, banking and finance have emerged as a shining jewel for the economy of Bahrain. What policies has the Bahrain Monetary Agency (BMA) employed over the years to achieve the world-class financial industry that exists in Bahrain today?
A: The BMA is an agent of Government, albeit with an independent role. Economic and fiscal policy remains the prerogative of Government and a central bank’s role is to be supportive of whatever objectives are established by the Government.

Esam Y. Janahi, Chief Executive Officer, Gulf Finance House

Within the parameters of Government policy, and its commitment to a market philosophy, the Agency has adopted and implemented a strong regulatory regime that embraces internationally-accepted standards of, and adherence to, prudential, and, some would say traditional, concepts of sound banking practice. From this foundation, individual institutions are allowed to follow their respective business preferences. The institutions, for their part, have prospered within this regulatory regime. It has been this mutuality of interest that has enabled the financial sector in Bahrain to prosper.
For the future, the Agency will continue to ensure that its regulatory role is discharged within this policy, through the insistence that its regulated institutions always adopt international best practice as the norm.
Q: How does the Bahrain Monetary Agency see the state of U.S.-Bahraini banking relations today?
A: U.S. banks, drawn to the region in the 1960’s by the increased revenues of the Arab states, chose Bahrain as the center of their operations because they found an acceptable banking environment and infrastructure already in existence. Their presence became a major stimulant to the continued development of Bahrain’s status as a major international financial center.
Today those institutions and their successors are involved in the whole range of banking and financial services, from commercial and investment banking, funds management, to Islamic banking and finance. Indeed, Citicorp became the first conventional bank to establish a subsidiary operating on Islamic principles.
Over the years these institutions have played major roles in assisting U.S. investment in Bahrain across the whole spectrum of economic activity, from petroleum, to manufacturing, to information technology, to financial services. In the opposite direction, the US financial markets have become the destination of a substantial volume of funds from Bahrain. At the end of March, our offshore and investment banks reported nearly 13 billion dollars, or around 14 percent of their assets, placed with US financial institutions.
Q: What does the BMA see for the future of the banking and financial industry in Bahrain?
A: Bahrain cannot remain immune to the forces of consolidation and globalization that have been unleashed. In particular and with regard to our own domestic banking institutions, the stance of the Authorities is one of encouragement of consolidation without recourse to mandatory action. Although, within a regional context, several Bahraini institutions are of a commanding size, this advantage is not carried through to the wider international scene. Corporate mergers and take-overs have been headline news in the financial press over the recent past, and in the banking world major new groupings have been formed to respond to these challenges. Here in Bahrain, capital limitation will undoubtedly be a constraint in the ability of Bahrain’s banks to compete for the financing of major international projects. Therefore, our financial institutions must view with the utmost seriousness the relativities of their size and influence. They must contemplate strengthening themselves either by capital injection or merger and consolidation. I cannot stress strongly enough that it is in the interest of the Gulf region in general, and Bahrain in particular, that our financial institutions extend their influence on the wider international stage.
Q: Islamic banking is quickly becoming a major player in the industry, both around the world, and in Bahrain. What is the current state of Islamic banking in Bahrain, the GCC, and globally? What does the future hold for this sector?

National Emblem of Bahrain

A: The growth of Islamic Banking and Finance has been an important and relatively new development. There is increasing awareness of the possibility of, and advantages in, conducting modern financial activities in conformity with the tenets of the Islamic Shariah. What is equally remarkable is that this growth seems to have been fuelled largely by otherwise dormant financial resources that had shied away from conventional financial activities for religious reasons. The Government of Bahrain was amongst the first to recognise the importance of the concept of Islamic banking and finance and has been in the forefront of this international phenomenon from the outset.
The strengthening and development of Islamic banking has been, and remains, an important aspect in the Government’s policy of maintaining and enhancing Bahrain’s status as the region’s pre-eminent international financial centre. The Authorities have been both supportive of the development of the industry in general and welcoming to the new institutions in particular. Consequently, Bahrain has gathered a concentration of specialist Islamic institutions to its shores. Recent estimates of the Middle East region commanding financial assets in excess of $500 billion bodes well for the continued expansion of Islamic banking and finance. However, this potential expansion will only come to fruition if the institutions develop financial service opportunities that attract customers and investors, and if the Authorities can construct a regulatory framework that, in satisfying internationally-acceptable prudential criteria, does not damage the competitive stance of those institutions. The BMA is very conscious that a delicate touch is required to balance these criteria which are so often in conflict.
Q: What is the primary message that the BMA would like to convey to the readership of "The Washington Times"?
A: Bahrain was the first Gulf state to produce oil, in 1932, and American industry and capital was in the forefront of that historical development. From that early and initial involvement, American industry and finance has continued to play a significant role in the development of Bahrain’s industrial and financial sectors.
The United States continues to remain Bahrain’s most prominent partner in non-oil trade. Last year the combined non-oil trade flows between our two countries approached $600 million and accounted for over 13 percent of Bahrain’s non-oil world trade.
These trade links are long established and I hope this necessarily brief summary will have demonstrated the depth and dimensions of the inter-relationship that has been built over a number of years; a relationship which we deeply respect and greatly value.