12/03/2009 00:00 AST
Dubai Islamic Bank claims to be the oldest Islamic bank in the world, but it also has a history punctuated by scandal. Its new management hopes the referral of seven defendants to court this week for allegedly participating in a scheme to defraud the bank of more than $500m will end the latest period of uncertainty, which has revived awkward memories of the past.
“We are pleased to close this chapter,” Abdulla al-Hamli, chief executive, said in a statement on Tuesday. The embezzlement case centres on CCH, an Islamic trade finance company, which received financing of about $440m, of which the bank says it provided about $330m. DIB has made provisions of $135m related to this transaction.
The seven defendants - mainly British and Pakistani nationals - are either linked to CCH or were former employees of DIB, and are accused of taking bribes to facilitate the alleged fraud.
DIB also says it has foreclosed on The Plantation, a polo-themed real estate development, which was being developed by one of the defendants in the case. It is also pursuing other assets and receivables in a range of countries. The bank says provisions and collateral already foreclosed or which it is pursuing will be enough to cover its CCH exposure.
“DIB remains a solid and trusted financial institution,” Khaled al-Kamda, group managing director, said in the statement.
“We continue to focus on enhancing our existing corporate governance structures and risk architecture.” Analysts, however, remain concerned about the potential of the exposures to The Plantation and CCH to inflict further damage.
“The trouble with The Plantation is that it may not be worth very much at all, and if realised now it would only generate a modest value, reflecting the lack of liquidity in the property market,” says one analyst who covers the bank but asked not to be named.
The analyst is also concerned about the bank’s property loan book for which he had previously forecast a non-performing loan ratio of only 2-3 percent. He says the strategic review is putting all property loans, amounting to more than a third of the total portfolio, into run-off - that is, not extending loans when they mature - which implies a higher rate of impairment.
“It seems unlikely that with that kind of loan quality [2-3 percent non- performing], DIB would put the entire book into run-off. Consequently, we are concerned we may see a ratio significantly worse than that,” the analyst says.
Kashif Moosa, head of investor relations, says the bank’s property financing portfolio is based on revenue-generating properties in “old Dubai”.
Here DIB focuses on leasing residential and commercial property in the city’s traditional commercial areas in Bur Dubai and Deira, rather than lending in the areas open to foreign ownership, the so-called “new Dubai” market that has seen precipitous price falls.
Moosa concedes, however, that the bank is moving away from real estate financing. Since 2007 it has rolled out more retail products, such as Islamic credit cards and personal finance products. DIB’s grand strategy now is to expand deeper into the retail banking market, he says. The bank will expand its branch network by 10 to 64 this year as it seeks to increase its customer base from 750,000 to 900,000.
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