In this section we will look into some of the Islamic Investment banks working in Bahrain, We will analyze and evaluate some ratios for each bank individually to measure the effect of 2008 crisis on those banks. There are 21 Islamic Investment Bank in the Kingdom of Bahrain; we have selected 8 banks as a sample of the sector.
Since the middle of 2008, the global economic environment has challenged investor fundraising industry-wide, as investors have built cash positions and waited for signs of stability before redeploying their investment portfolios. Similarly, overall investor appetite for risk fell considerably, leading to a difficult operating environment for alternative investment managers.
As a result for the crisis Islamic investment bank in Bahrain face difficulty in raising new capital for their new project which lead into liquidity issue, we will go through some of the financial figure and ration to exam to how extent the Islamic Investment Bank in Bahrain effected by the difficulty of fundraising ant what is the affect on those banks in term of profit generation, Cost Cutting strategies, capital restructuring, Balance sheet adjustments the effectiveness of using the bank assets to generate return.
Before we go into the financial figures and ratios we will take an overview on the selected bank to see in what business they are focusing, what type of product, size of their project and what geographical area. Size of the Bank in term of Capital and number of staff will be measured to see if there is any effect on them because of the 2008 financial crisis.
4.3.1. Arcapita
Arcapita operates four offices in Bahrain, Atlanta, London and Singapore. The paid-up capital of $311 million, to be held 70% in more than 300 eminent personalities and institutions mostly from the Arabian Gulf, which hold the remaining 30% use by the Management of Arcapita.
Arcapita has found the balance of $ 3.6 billion and the capital base of $ 1.1 billion. Arcapita has completed an investment of $ 28 billion in four lines of work and private equity, real estate, infrastructure and capital investment. It employs 265 staff in four offices. Arcapita is authorized wholesale Islamic bank by Central Bank of Bahrain (www.arcapita.com)
Arcapita paid up Capital and Net Profit
Arcapita has raised $ 400 million for fiscal 2009 with a focus on the first institutional investors. After 11 years of earnings growth continues and recording Arcapita loss of $ 87.9 million for fiscal 2009 were also affected by bank lines of business through the global economic downturn. However, once we have the effects of devaluation on the portfolio, recognized the different sources of Arcapita�s cumulative net operating revenue of 158.4 million during the year.
The combined effect of any activity of a new agreement, a market for the outputs dispersed in negative adjustments in the fair value of the portfolio and adverse currency movements contributed to a significant loss for the year. �For fiscal 2010, before adjusting for changes in fair value, fluctuations in exchange rates and other benefits, income loss record of 174.2 million.
Arcapita Bank recorded a provision of $ 68 million, and unrealized losses of $ 317 million, including 147.1 million in the fair value adjustments, and $ 169.9 million loss. Consider these actions increase the total net loss for the year ended $ 559.4 million.
Arcapita Income & Expenses
By end of June 2009, the Bank net loss was $ 87.9 million weighed against net income of $ 362.2 million was booked in 2008. In each of the four quarter of the year 2009 the Bank recorded a net profit before fair value adjustments. Net income before adjustments of fair value for the year total 2009 was $158.4 million. Total revenue for the year of 2009 was $423.7 million, down 32.2 percent compared with sales of $624.5 million recorded in 2008.
Arcapita Return on Assets, Equity and Paid up Capital
Arcapita face a major fall down in the return on average paid up capital, the above chart show that the return on paid up capital was touching the 250% in 2007 were it decrease to -200% in 2010. Comparing to the return on average paid up capital, Arcapita�s return on Average assets and return on average equity decreases since 2007 but not to the same level as the return on average paid up capital. Return on average assets decrease from 7% in 2007 to -16% in 2010 and the return on average equity decrease from 28% in 2007 to 42% in 2010.
Arcapita Assets, Liabilities and Equity
At the end of 2009 the Balance of Arcapita was $4.4 billion, down 14.9% from $ 5.1 billion at the end of 2008. Liabilities total assets of 25.2%, reaching $ 2.8 billion and the bank did deleverage its balance sheet. It has helped to decrease debt and a raise in equity of 11.8 percent to $ 1.6 billion, driven largely by the strong support of the bank shareholders through an increase in equity.
From Arcapita Table and Charts we can see the changes in the ratio measure the performance of the banks starting from 2009. In some of the ratio there is a huge reduction happened starting from 2009. For example, return on average paid up capital which reduced from 250% in 2007 up to -188%. Operation Income also falls down from $373 million in 2008 to $82 million in 2010. Moreover, the Net Profit $362 millions in 2008 up to -$559 millions in 2010. Return on Assets reduced from 7% in 2007 up to -16% in 2010.
4.3.2. Gulf Finance House (GFH):
Gulf Finance House (GFH) focus on the design and implementation of infrastructure projects with high economic value currently estimated at more than $ 20 billion of Gulf Finance House for another pivotal year. Based on these results, Gulf Finance House is developing its views on European capital markets. In addition to the inclusion of shares of the bank, Kuwait, Bahrain Stock Exchange and the Securities Market and Dubai Financial Market 2007 saw the inclusion of the Bank GDRs on the London Stock Exchange.
Gulf Finance House was established in the business philosophy of the concept and related infrastructure projects that exploit the enormous potential in the emerging economies of the GCC countries, Asia and North Africa. Since 1999, pilot initiatives including the launch of Energy Cities take in Qatar, Libya and Kazakhstan, GFH, a number of ports of Finance in Bahrain, Tunisia, and a broader concept of Gulf Finance House to date, $ 10 billion in economic development area of Mumbai. Designed the first bank to offer Islamic investment elsewhere, and Gulf Finance House announced First Energy Bank, and existing funding for energy. Finance House has won the Gulf of different local and international, as "Best Investment Bank" in 2005 and 2006 and 2007, awarded by The Banker Middle East, "Bank of the Year 2006" awarded by the Arabian Business Magazine and Best "Islamic loan Real "awarded by Euromoney (www.gfh.com).
GFH Paid up Capital & Profit
Gulf Finance House has focused its efforts to adapt to a turbulent environment and prepare for a new phase of growth and prosperity. The bank recorded the first loss since inception 728 million U.S. dollars in 2009, compared with earnings of U.S. $ 292 million in 2008. Results for 2009 include a non-cash amount of U.S. $ 656 million, property owned. This non-cash charge of activities is strictly on the books of GFH. The net loss for 2009, U.S. $ 73 million compared to net income of U.S. $ 332 million in 2008.
Recognized by the Gulf Finance House of the difficult economic environment, and has undertaken a program for managing capital and liquidity aggressively. GFH success to raised U.S. $ 302 million through rights issues, $ 100 million through a convertible Murabaha and U.S. $ 52 million from the sale of assets. These funds were used to support the liquidity position, Gulf Finance House to create the money to pay for our facilities-term debt. Given the crisis in the Gulf Cooperation Council (GCC) in the small fourth quarter of 2009, the debt markets and interbank transactions were closed, which led to the great migration of liquidity between banks and impact on the ability of banks to refinance its debt maturing in February 2010 along. This led to the Gulf Finance House to reduce the rank of S & P to "CC" with a negative outlook. In late 2010, GFH�s plan to improve its capital structure, strengthen its balance sheet and raise funds to pursue its aforementioned growth strategy were presented and subsequent resolution approved at the EGM held in November 2010.
The resolution covered a 4:1 share consolidation and other capital reduction measure and a capital increase of up to US$ million through a convertible Murabaha to strengthen GFH�s capital base and fund its growth strategy.
GFH Income and Expenses
Comparing US$618 million in 2008 to the total gross income for 2009 US$62 million. This is because of the income generated from the placement of Energy City Libya, which began in 2008. Examination of the financial environment and believes that Gulf Finance House that 2009 was not the best time to launch new projects and thus significantly reduce the flow of business, with development has become increasingly difficult. In 2010, the Bank launched a series of interesting investment opportunities for its customers.
As the business activity has been reduced sharply, the operating margin was 135 million compared to U.S. $ 286 million in 2008, a decrease of 53%. Staff costs saw the largest decline among all items of expenditure, and reduce by 79% from U.S. $ 135 million in 2008 to U.S. $ 29 million in 2009, as shown in Chart 17.
GFH Return on Assets, Equity and Paid Up Capital
GFH return on paid up capital made good improvement in 2010 after a major fall in 2009 this is because the capital reduction made by the bank by end of 2010. The return on paid up capital decreases from 152.02% in 2007 to -93.19% in 2010 although it was -168.04% in 2009. GFH�s return on average assets and return on average equity face similar reduction but it was small comparing to the return on average paid up capital. Return on average assets fall down from 18.33% in 2007 to -26.27% in 2010 and the return on average equity decrease from 44.37% in 2007 to -127% in 2010.
GFH Assets, Liabilities and Equity
Gulf Finance House focused on adapting and changing market conditions to achieve the best economic trends in the future. This includes maintaining a healthy balance sheet. Gulf Finance House examines the constant value of the asset and the last element of the initiative to strengthen its balance sheet and put the bank in a position to get slimmer and healthier in 2010. The erosion of the harsh realities of the crisis, particularly with the impact of the past in Dubai in late 2009, the value of real estate in all regional stakeholders, including assets held in the financial statements of Gulf Finance House.
Gulf Finance House clears the balance sheet by booking non-monetary provisions amounting to U.S. $ 656m of property assets. Critical load and wisdom is the only exclusively on books and GFH does not affect customers or cash flows. In 2010, GFH continued to budget to ensure consistency with low total assets of $ 1 billion at the end of the year, compared to $ 1.6 billion at December 31, 2009. Liabilities decreased by $ 1.2 billion at the end of the year 2009 to $ 900 million in 2010, at the end of the year. It should be noted that financial commitments have been reduced from 33% to a staggering U.S. $ 440 million compared to U.S. $ 653 million at December 31, 2009. In 2010, GFH has paid about $ 400 million of debt. The most important of which is U.S. $ 200 million placement of 300 million Murabaha financing. It was negotiated long to pay $ 100 million remaining for two years with an option for over a year until 2013.
4.3.3. Elaf Bank
The Bank is a closed company based in the Kingdom of Bahrain and licensed to operate by the Central Bank of Bahrain as a wholesales Islamic Bank and it�s paid up capital of 200 million dollars. Bank covers the entire spectrum of Islamic banking services with an added dimension Wholesale differentiation toward the development of secondary market instruments instructed to act as market makers. Elaf Bank offers a wide range of financial services to customers, which include fundraising consulting, mergers and acquisitions and asset management, capital markets, treasury and cash management, foreign exchange, investment and structured products and derivatives (www.elafbank.net)
Elaf�s Paid up Capital & Profit
The Net profit of Elaf Bank reduced from $4 million in 2007 up to $16 millions in 2010 with no changes in the paid up capital as we can see in Chart 20.
Elaf Income and Expenses
Elaf Bank performance in 2009 was effected and record less operating income in the statement as many others banks, the 2008 they record less net income that 2007 and its continues in 2009 but the changes in the operation income was not that huge however they record higher expenses in 2009 and 2010 comparing to 2008. In 2010 the operation income increases from $5 million in 2009 to $10 and the expenses also increases from $ 6 million in 2009 to $ million in 2010.
Elaf�s Return on Average Assets, Equity & Paid up Capital: Chart 21 shows huge drop in the return on average assets, return on the average equity and the return on the average paid up capital. The return on average assets dropped from 2% in 2007 up to -14% in 2009 with small correction in 2010 to -11%. The same with the return in average equity and paid up capital dropped from 2% in 2007 to 11% in -14% in 2009.
Elaf�s Assets, Liabilities and Equity
In Chart 23 we can notice that Elaf maintain almost same level of Assets, Liabilities and Equity. In 2007, the assets were $205 million and it is reduced to $160 million in 2010. The same changes happen with the liability and the equity; it changed from $3 million and $203 million in 2007 to $375k and $159 million in 2010 respectively.
4.3.4. Seera Investment Bank
Seera Investment Bank based in Bahrain, the Bank's operations covers the Gulf region as a whole, and in world markets. Paid up capital of over U.S. $ 291 million, the Bank's processes, the standards set internationally recognized and faithful to the principles of Islamic law. Seera and is authorized by the Central Bank of Bahrain (CBB) and the Islamic Bank 1 governed by the mass. The objective is to invest in shares and the main objective is to provide a diversified portfolio that provides risk-adjusted returns on the appeal and is good with the current economic climate they are adapted (www.seera.com).
Seera Bank Paid Up Capital and Profit
The year 2009 was very calm in terms of new services and investment therefore; the bank recorded operating loss of $ 4M. Bank continues to manage and monitor their investments carefully during the year, and reviews, based on large investments, either internally or by external parties. Although these estimates showed no lasting peace in the great weakness of Seera Investment wisely decided to take a look and apply a very conservative approach given the economic environment, and made some provisions for a total of 31M. Presented as a result of these provisions, the bank reported of loss of $ 35M this year represents nearly 90% of the provisions.
Seera improve performance in 2010 compared to last year, was among the investment banks in Bahrain, the few who have announced a profit for the year. And the bank to provide additional key investment performance reasonably well, and the bank balance and stability and improve the prospects of a number of these investments. Although some of the practical effects of the financial crisis, many believe that 2010 could represent a turning point. In any case, can take advantage of the economic slowdown Seera has been taken to improve the performance of its portfolio companies and improve the cost structure in order to provide new economic challenges.
Seera Bank Income and Expenses
The Bank is able to maintain the level of actual losses to a minimum and thus the impact of the crisis on stock markets, investors and shareholders. To mitigate these effects to the Bank's work in close collaboration with the management of portfolio companies, the effects of the slowdown manage their business operations and to review the revised action plans that focus on growth prospects in the future, including guarantee full satisfaction of their financial obligations. The ultimate answer to the pressure on the profitability of the bank is to adjust much, the cost base of the bank which led to the provision of 30% of operating costs for the group over the previous year.
Bank profits for the year is U.S. $ 7.2 million and is an important aspect to improve the performance and constant efforts to manage and control the cost structure of the bank which resulted in a significant reduction in operating costs of the Bank. While there was a noticeable reduction in the costs in 2010 compared to 2009, the full impact of these cost saving initiatives, which exceed 30%.
Seera Bank Return on Average Assets, Equity & Paid up Capital
Seera face a small decrease in 2009 in all three ratios. Return on average paid up capital, return on average assets and return on average equity. Its fall down from the level of 5% to the level of -11% but in 2010 it is increase up to the level of 2%. This show the capability to generate return from the available assets and equity and the bank did not increase the paid up capital and it keep it in the same level.
Seera Bank Assets, Liabilities and Equity
The assets underlying portfolio even though affected to some extent by the turbulent markets however, have continued the positive development in most cases. Due to a sharp drop in corporate profits and market valuations, and the effect is relatively modest in the Seera portfolio is a testament to the strength of such activities. On the other hand, the year in terms of access to liquidity has become the main problem for banks, through the management of Seera very careful with their financial liquidity and the level of liquidity could be kept relatively safe throughout the year.
Global Banking Corporation (GPCORP)
Start operations in Bahrain in June 2007. GBCORP has set itself the challenging vision to be a leading investment bank in the GCC. We intend to have a global reach and be able to merge international investment excellence with local expertise. We have an underlying commitment to provide Shariah compliant investment banking services for high net worth individuals and families, corporate and government clients. GBCORP pursues a dynamic business model, focusing on asset and wealth management, private equity, corporate finance and advisory, structured finance and investment placement and advisory services. GBCORP�s shareholders and members of the Board are prominent personalities from leading business families within the region and together they bring a wealth of financial strength and expertise to the organization (www.gbcorponline.com).
GPCORP Paid Up Capital & Profit
In 2010 and as we can see in chart 28, GPCORP has made ample impairment provision of US$ 19 million (2009: US$ 4.5 million, resulting in an overall loss of US$ 32.5 million the provision made because the market is struggling from the aftershock of decline in real estate market. We can notice how the net profit changed from $35 million net profit in 2007 to $32 million net loss in 2010. GPCORP increased their paid up capital to $200 million by end of 2010.
GPCORP Income and Expenses
As we can see in chart 29, the total operating income for the year ended 31st of December 2009 amounted to USD 9.3 million. Total expenses amounted to USD 28.2 million, inclusive of total provisions of USD 4.5 million, resulting in an overall loss of USD 18.8 million for the fiscal year 2009.
In 2010 GPCORP significantly cut operating overheads by limiting costs through prudent financial management, effective rationalization, cost cutting measure and rigorous expense management policies. The total operation income in the year ended 31 December 2010 amounted to US$ 5.9 million. GBCORP managed to reduce its operation expenses by 18% from US$ 23.7 million to US$ 19.4 million as compared to last year.
GPCORP Return on Average Assets, Liabilities and Paid Up Capital
Chart 30 shows the big falls in the three ratios, Return on average assets, return on average equity and return average paid up capital. The Return average assets fall down from 38% in 2007 to -17% in 2010. Same case with the return of average equity reduced also from 48% in 2007 to 20% in 2010. The return on average paid up capital reduced from 57% in 2007 to -17% in 2010.
GPCORP Assets, Liabilities and Equity
GPCORP total assets dropped to USD 197.7 million from USD 455 million in 2008. This is attributed largely to our investor funds being utilized in our key projects. During this same period, our liabilities have also dropped from USD 275 million in 2008 to USD 36 million in 2009. In 2010 the total assets stand at US$ 181.4 million. During the same period, the total liabilities have decreased from US$ 36.1 million to US$ 26.1 million in 2010.
4.3.5. Venture Capital Bank (VC Bank)
Venture Capital Bank is positioned to offer its clients a broad range of superior financial services and unique investment opportunities across a number of promising asset classes in the GCC and MENA markets. Through a robust business model, the Bank is established and operated as a venture capital based investment bank that is active in four principal areas. Venture Capital Bank (VCBank) is the first Islamic investment bank in the GCC and Middle East and North Africa (MENA) to specialize in venture capital investment opportunities designed to drive business growth in portfolio investment, and provide risk adjusted returns on investments. Established in the Kingdom of Bahrain in October 2005, VCBank operates under an Islamic investment banking license from the Central Bank of Bahrain. With an authorized capital of US$ 500 million and initial paid up capital of US$ 165 million, the Bank benefits from the financial backing and support of a selected group of regional shareholders, an experienced team of industry professionals, and a close-knit network of strategic partners, business associates and allies. VCBank offers clients a broad range of superior services and unique investment opportunities across a number of promising asset classes in the GCC and MENA markets (www.vc-bank.com).
VC Bank Paid Up Capital and Profit
In the first quarter of 2009, the Bank's AGM approved an increase of its capital from USD 165 million to USD 250 million, an increase of USD 85 million which will enable VCBank to continue its growth plan and enhance its investment and operational capabilities. During 2009, VCBank managed to realize good and positive financial results in comparison with the prevailing market conditions. Net profits reached to USD 11 million and achieved a return on equity of 5.4% for 2009. The Bank has consistently returned net profits since its inception in 2005, which is an excellent performance for a young investment bank, particularly given the turmoil experienced from the start of the current financial crises beginning in September 2008.
VCBank reported impairment provisions totaling US$ 31 million in 2010, in addition to recognizing a fair value loss of US$ 15.1 million on a real estate project designated at fair value through profit or loss, due to the market circumstances. Consequently, the Bank recorded a net loss of US$ 47 million for 2010 compared with a profit of US$ 11 million in 2009.
VC Bank Income & Expenses
VCBank continue to report income in 2009 and 2010 (US$ 34 million and US$ 2 million) although it is less than 2008 (US$ 82 million). On the other hand, VCBank also managed to reduce it expenses in 2009 and 2010 (US$ 15 million and US$ 16 million) comparing to 2008 (US$ 33 million). Staff cost cover the major part of this reduction, it�s almost 60% of the reduction as the staff cost is 66% of the total expense of VCBank.
VC Bank Return on Average Assets, Liabilities and Paid Up Capital
During 2009 VCBank achieved positive financial results where the net profits reached USD 11 million (2008: USD 47 million), leading to realization of returns on Shareholder's equity of 5.4%. The total income reached USD 32.4 million and total assets reached USD 356 million while the total Shareholders' Equity reached USD 286 million. The Bank also boasts a strong balance sheet as well as healthy cash flow and liquidity levels and strong capacity to place investments.
VC Bank Assets, Liabilities and Equity
VCBank balance sheet has grown from a modest base of USD 66 million at inception to a total balance sheet size of USD 356 million now; an increase of 5.4 times since inception and of 48% over last year. In addition, off balance sheet fiduciary assets have grown from zero at inception to USD 672 million as at 31 December 2009. This track record is further corroboration of VCBank status as the first Islamic investment bank specializing in venture capital investments in small and medium businesses (SMEs) in the MENA region.
4.3.6. International Investment Bank (IIB)
International Investment Bank was incorporated in Bahrain in October 2003 as an Islamic investment bank, with an authorized capital of US$ 200 million and a paid up capital of US$ 43 million. In December 2007, IIB concluded a combined rights issue and private placement offering that has increased the issued share capital to US$ 110 million and total shareholders� equity in excess of US$ 200 million. The Bank�s shareholders are high net worth individuals, business houses and institutions from the GCC states (www.iib-bahrain.com)..
I
Comprising an operating loss of US$ 2.6 million and unrealized impairment losses and provisions on four investments and one receivable of US$ 25.3 million, IIB has reported a net loss of US$ 27.9 million for 2009, the first since its inception in 2003. The purpose of capital management is to ensure the efficient utilization of capital in relation to business requirements and growth, risk profile and shareholders� returns. But the primary concern is capital protection from loss. The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may issue ordinary shares, buy back ordinary shares or adjust the amount of dividend payment to shareholders.
IIB Income and Expenses
The Bank�s total income for 2009 is US$ 6.3 million compared with US$ 35.0 million in 2008 and mainly comprises investment banking fees together with income on due from financial institutions. Investment banking fees of US$ 2.1 million are generated from the structuring, underwriting and placement of new investments, despite the difficult market conditions and from management fees earned on prior year transactions. In 2008, IIB concluded the sell down of two investment offerings that were carried over from 2007, fully sold down one transaction that was structured during the year and partly sold down another transaction.
Total expenses in 2009 aggregate to US$ 8.9 million, a decrease of US$ 7.7 million (46%) compared to 2008. Staff compensation and benefits decreased by 48% to US$ 5.0 million as a result of a smaller average number of employees and lower transaction-based benefits. Deal expenses including travel, legal fees and professional fees have also decreased significantly in 2009, as detailed due diligence costs were incurred on a smaller number of potential investment transactions. Non-deal related expenses, in particular business travel, professional fees and media/advertising costs are substantially lower in 2009 in line with the reduced business activity, but partly offset by higher IT costs relating to the core banking system that went-live during 2009.
The Bank�s total income for 2010 was US$ 3.5 million compared with US$ 6.3 million in 2009 and mainly comprises investment banking fees together with income on due from financial and other institutions. Investment banking fees in 2010 of US$ 0.7 million were generated from management fees earned on investments structured and placed with investors in previous years.
Owing to the challenging market conditions for the investment banking sector as a whole, IIB earned no income in the year from the structuring, underwriting and placement of new investments (2009: US$ 1.4 million). The Bank continues to hold two real estate investments that it acquired in 2009 and has decided to carry over to 2011 for possible sale to investors after accomplishment of significant value enhancing initiatives currently under implementation.
Income on due from financial and other institutions, being the profit on commodity Murabaha deposits, was US$ 1.6 million versus US$ 2.6 million in 2009. The reduction reflects the lower average funds placed partly offset by a higher average profit rate during 2010, together with the suspension of profit on facilities granted to IIB Investee Company.
Total expenses in 2010 aggregated to US$ 6.7 million, a decrease of US$ 2.2 million (24.7%) compared to 2009. Staff compensation and benefits decreased by 21.2% to US$ 4.0 million as a result of a smaller average number of employees and lower transaction-based benefits. Deal expenses including travel, legal fees and professional fees have also decreased significantly in 2010, as detailed due diligence costs were only incurred on a small number of potential investment transactions. Non-deal related expenses, in particular business travel and media/advertising costs, were also substantially lower in 2010 in line with the reduced business activity, but partly offset by higher IT and depreciation costs relating to the core banking system that went live in mid 2009.
IIB Return on Average Assets, Equity & Paid Up Capital
IBB�s return on average paid up capital dropped dramatically since 2007, it�s drooped from 27.59% in 2007 to -25.37% in 2009 but it start recovering in 2010 and it reached up to -18.86% and in similar way the return on average assets and return on average equity decreases from dropped from 12% and 15% respectively into -14% and -14.4% in 2009 but it went up in 2010 up to 12.2% and 12.4% respectively.
IIB Assets, Liabilities and Equity
Total assets at year-end 2009 aggregate to US$ 179.5 million and include cash and cash equivalents of US$ 57.7 million. Total equity at 31 December 2009 is US$ 176.5 million. Assets under management have increased during the year to US$ 422.8 million at the end of 2009. Cash and cash equivalents at year-end 2009 are US$ 57.7 million and represent 32% of total assets. These comprise cash, balances with banks and due from financial institutions comprising commodity Murabaha placements with financially sound banks rated A- or higher and located in the GCC region. With the addition of investments in quoted equities, liquid assets aggregate to US$ 73.5 million or 41% of total assets.
There are no borrowings on the balance sheet at the year end and no reverse Murabaha liabilities classified as due to financial institutions since January 2007. Other liabilities of US$ 3.0 million mainly comprise accrued expenses, payables to investors and payables to suppliers. Equity has reduced by US$ 34.2 million to US$ 176.5 million at the 2009 year end. The reduction is comprised of the net loss for the year of US$ 27.9 million and the payment of the 7% dividend of net US$ 7.5 million for 2008, offset by net fair value and foreign currency translation gains on investments of US$ 1.2 million.
Liquid assets at year-end 2010 were US$ 59.0 million and represent 36.9% of total assets. These comprise cash, balances with banks and due from financial institutions (including placements through a subsidiary company of US$ 25.6 million reflected in Receivables) comprising commodity Murabaha placements with financially sound banks rated A- or higher and located in the GCC region. With the addition of investments in quoted equities, liquid assets aggregate to US$ 71.0 million or 44.4% of total assets at the 2010 year end.
Receivables at 31 December 2010 of US$ 41.2 million mainly comprise three items. Short-term Shari�ah-compliant financing facilities of US$ 8.4 million (net of provisions) have been granted to three investee companies to assist with working capital requirements. Secondly, the Bank paid a deposit in 2008 to participate in a real estate project located in the Kingdom of Saudi Arabia. The project has subsequently been aborted and IIB has agreed to receive repayment of the remaining balance (US$ 4.8 million as at 31 December 2010) over a period of 18 months with the final payment due in August 2011. Finally, as referred to above, IIB has placed funds aggregating to US$ 25.6 million through a wholly owned company in order to enhance the return.
There were no borrowings on the balance sheet at the year end and no reverse Murabaha liabilities classified as due to financial institutions since January 2007. Other liabilities of US$ 1.9 million mainly comprise accrued expenses, payable to an investor and payables to suppliers. Equity has reduced by US$ 18.2 million to US$ 158.3 million at the 2010 year end. The reduction comprises the net loss for the year of US$ 20.7 million less net fair value and foreign currency translation gains on investments of US$ 2.5 million.
4.3.7. Unicorn Bank
Established in 2004 in Bahrain, Unicorn Investment Bank (Unicorn) is an Islamic financial services group, with an international presence in the United States, Malaysia, Turkey and Saudi Arabia. The Bank is also a major shareholder in Dawood Islamic Bank, Pakistan. Unicorn target markets are GCC region, the wider Middle East region, Southeast Asia, the USA and Europe. Investors base consist of high net worth individuals, family businesses, financial institutions, corporations, governments and quasi-governmental organizations (www.bankalkhair.com).
Unicorn Paid Up Capital and Profit
In 2009, Unicorn achieved a net profit of US$2.2 million, with an operating profit before impairments and fair value adjustments of US$21.0 million, reflecting the Bank�s conservative and prudent approach to the valuation of its investment portfolio in light of continuing adverse market conditions. Total income was US$101.2 million for 2009, down from US$141.1 million in 2008. The Board of Directors has recommended that no dividend be paid for 2009, reflecting the reality of the global financial crisis.
In 2010, the Bank made profits from its share of associates� activities of US$6.8 million, up from losses of US$3.7 million in 2009. This included share of a loss from T�azur of US$0.9 million, down from a loss of US$2.3 million in 2009, as the company continued to increase revenues from expanding its business and geographic market share.
Unicorn Income and Expenses
Operating expenses were US$80.2 million in 2009, an increase of US$16.7 million (26%) from US$63.5 million in 2008. Staff costs increased from US$ 41.0 million to US$ 47.9 million by US$6.9 million (17%). Salaries and employment-related benefits increased by US$18.1 million (61%), mainly due to headcount growth in late 2008 and early 2009, as the Bank added key hires in business critical areas and concurrently addressed downsizing, as a result of the restructuring of its organization and operational processes. Non-staff expenses from US$22.6 million to US$32.3 million increased by US$9.7 million (43%),. Unicorn Capital Limited (Dubai) was closed during 2009 and Unicorn�s activities in Kuwait have been significantly scaled back. During 2009, Unicorn received authorization from the Capital Market Authority (CMA) to commence its operations in Saudi Arabia. This will incur increased operational expenditure as the business model is established. This investment by Unicorn is essential in the development of this major market. Client receivables of US$5.0 million were provided for during 2009, which reflected a mutually agreed restructuring of a client mandate. During 2009, Unicorn also incurred US$6.6 million of research expenditure on deals which did not ultimately materialize.
Operating expenses were US$69.3 million in 2010, a decrease of US$5.9 million from US$75.2 million in 2009. Staff costs decreased by US$6.7 million (14%), from US$47.9 million in 2009 to US$41.2 million in 2010, mainly due to headcount reductions as the Bank addressed the restructuring of its organizational and operational processes.
The Bank initiated a restructuring program in 2010 and significantly streamlined management and support services in view of the lowered level of business activity. Furthermore, the Bank took the decision to exit the US market in order to focus on the Bank�s core markets in the GCC, Malaysia and Turkey. This resulted in the closure of the Bank�s Chicago office. The full impact of the cost reductions made in the second half of 2010 will be reflected in Unicorn�s 2011 operating results. Non-staff expenses marginally increased from US$27.3 million in 2009 to US$28.1 million in 2010 by US$0.8 million (3%).
Unicorn Return on Average Assets, Equity and Paid Up Capital
Chart 35 shows the huge changes on the Average assets, average equity and the average paid up capital in 2009. It�s reduced from 4%, 8% and 19% in 2008 to -26%, -73% and -106% in 2010 respectively.
Unicorn Assets, Liabilities and Equity
Unicorn�s statement of financial position increased in 2009, with total assets increasing by US$54.8 million, from US$978.8 million as at 31 December 2008 to US$1,033.6 million as at 31 December 2009. Total cash and cash equivalents marginally increased by US$16.7 million, from US$420.2 million to US$436.9 million. 2009 cash and cash equivalents with banks at US$135.9m included US$50 million cash in transit related to Unicorn�s issuance of Tier 2 capital at the statement of financial position date. As at 31 December 2009, Unicorn had total bank and non-bank borrowings of approximately US$521 million, in the form of reverse Murabaha and Wakala deposits. These borrowings included a US$125 million 3-year syndicated commodity Murabaha facility provided by regional and international banks repayable in February 2011.
Unicorn�s balance sheet decreased in 2010, with total assets decreasing by US$306.2 million, from US$1,033.6 million as at 31 December 2009 to US$727.4 million as at 31 December 2010. Total cash and cash equivalents decreased by US$92 million, from US$135.9 million to US$43.9 million. The 2009 balance sheet included US$50 million cash in transit relating to Unicorn�s issuance of Tier 2 capital. As at 31 December 2010, Unicorn had total bank and non-bank borrowings of approximately US$394 million, in the form of reverse Murabaha and Wakala deposits. These borrowings included a US$125 million 3-year syndicated commodity Murabaha facility provided by regional and international banks, which was successfully repaid by Unicorn on the due repayment date in January 2011. The repayment was achieved without reliance on refinancing, restructuring or the �fire sale� of assets. This is a very positive sign that the Bank has passed a major liquidity stress test, with the Board of Directors and Management of the Bank continuing to focus on closely managing the Bank�s liquidity throughout 2010.
4.3.8. Capital Management House (CMH)
Capital Management House is an Islamic investment bank dedicated to providing clients with tailor made investment solutions. The Bank delivers a range of services from private equity and venture capital to asset management, real estate, investment banking and Shariah transaction advisory services.
The primary focus of CMH is GCC and MENA as it already have existence in those markets. On the other hand, CMH try to attract global investor to invest in their investment located in GCC and MENA.
CMH targeting wide range of investors such us governments, well-known Organizations, financial sectors, family business and wealthy individual from GCC region (www.capitalmh.com).
CMH�s Paid up Capital and Profit
Chart 43 shows the changes in CMH net profit. In 2008, the net profit was $ 5 million to $1 million in 2009 and -$9 million in 2010.
CMH�s Income and Expenses
Chart 44 shows that CMH maintain almost same level of total expenses and staff cost but the operating income fall down from $ 21.5 million in 2008 up to 1.2 million in 2010. This explains the loss recorded in the 2010.
CMH�s Return on Average Assets, Equity & Paid up Capital
Chart 45 shows that CMH return on average assets, equity and paid up capital reach it maximum in 2008 but it start fall down in 2009 and more in 2010. In 2008 the return on average assets was 12.2% but it fall down up to -6% in 2010. Same situation with the return on average equity and paid up capital it reduced from 15% and 20% in 2008 up to -8% and -9% in 2010 respectively.
CMH�s Assets, Liabilities and Equity
CMH assets have been increased comparing to 2007. CMH assets increased from $94 million in 2007 up to $156 million in 2010. Same increase happen in the liabilities, Increased from $12 million in 2008 to $40 million in 2010. Chart 46 shows the changes in CMH assets, liabilities and equity.
Chapter 5: Discussion & Conclusion
The Islamic principles have helped shield Islamic Investment banks from the direct impact of the crisis. The Islamic investment banks which conduct their business with a lot of ethics and use the implement the risk sharing principle with the insistence of the liquidity to be available on hand before doing any transaction with strong restriction of selling debt and dealing in prohibited assets success in avoiding the first round effect of the financial crisis in 2008.
The impact of the financial crisis on The Islamic Investment Banks in the Kingdom of Bahrain was very minimum in 2008 because of factors related to the Islamic Investment Banks business model which helped contain the adverse impact on profitability in 2008 and this may approve that the Islamic Investment bank was shield by the Shari�ah principles although the profitability has been effected in 2009 due to weaknesses in risk management practices in some Islamic Investment Bank and lack of diversification.
Most of the Islamic investment bank in Bahrain record profit in 2008 which means they did not loss directly from investment in any of the product causes the crisis. As the Shari�ah principle prevent Islamic Investment Banks in the Kingdom of Bahrain from financing or investing in the instruments that was the mean reason for the global financial crisis and the banking sector was affected because of the this kind of instruments.
One reason for the weak performance in of the Islamic investment bank in the Kingdom of Bahrain is associated with concentration and lack of diversification because of the nature of the Islamic Investment Banks business model which require securitize the transaction with an assets, the lack of diversification mostly come because the Islamic investment bank in Bahrain securities their transaction with real estate and some of them they offer value those assets due to the booming in the real estate market. This may not happen in case of the availability of strict risk management and in other case clear regulation and supervision by the regulator in the Kingdom of Bahrain.
Finding of our research approve that the Islamic Investment Banks in the Kingdom of Bahrain did not adhere completely with the Islamic principles, one reason is the lack of the people works in those banks most of them have the conventional Banking and they have very limited skills and knowledge to innovate new product comply with the Islamic principle so those banks end with almost similar product with no diversification. As a result they were not immune by Islamic principle shield to the global financial crisis.
Some of the Islamic Investment Bank use a lot of leverage and have taken high risks. The risk management in those banks did not play their required roles; they allow their banks to have huge funding transaction with western corporations some of them have low credit rating and risky profiles without going throw the necessary due diligence to identifies they risks associated with those banks. Some bank was entre to these transaction motivated by the booming of the real estate which lead them to over evaluate the assets which has been securitize the transaction as per the requirements of the Islamic banking principles and some other banks had access liquidity The Islamic investment bank in Bahrain and they was eager to place those funds quickly and to maximize profits.
As a result, a lot of funds which was securitize by a real estate become junk which enforce some of the banks to sell those assets with lower value and in some case the assets was written off.
Analyzing the financial statement of the Islamic Investment Bank in the Kingdom of Bahrain approve that the Islamic Investment Bank in Bahrain have avoided the first impact of the financial crisis in 2008 but not the second round effect of the global crisis so the performance of those banks in 2008 continue to record good result. The second round effect start in 2009 when those banks start to record losses because of the falls in the real estate market and as those back use the real estate to backed their funds.
