Q & A WITH NIKOLAUS RAFIQ SCHWARZ

CEO, DAWOOD ISLAMIC BANK LTD.

Sep 29 - Oct 12, 2008

CAN YOU TELL US A LITTLE BIT ABOUT YOURSELF AND HOW DID YOU BECOME CEO OF DAWOOD ISLAMIC BANK LTD.

My banking experience in various organizations in Europe, Asia and the Middle East spans now 25 years. I have started my career with Deutsche Bank (Asia), joined then after 10 years with DB, in Europea as well as Asia, Commerzbank AG in Tokyo and worked for C B after Japan in India, Bahrain and London in conventional and as well as in Islamic Finance. I am an Austrian national and Alhamd-o-Lillah' a Muslim and I am married with one 15 year old daughter

Now how did I come to know about Dawood Islamic Bank. Well it was through a common friend that I met with Dawood Islamic Bank's Chairman Mr Rafique Dawood. The challenge was unique: To lead a bank which will offer traditional as well as new innovative Shariah compliant financing, savings, investment and transaction products and services for individual customers as well as corporate clients.

Such an opportunity did not exist in the West or in the GCC; Islamic Banks in these geographies were predominately focused on Investment Banking, Asset Management or Private Equity.

I was more interested to play a role in an Institution where all the stakeholders have the same vision : To make the bank a leader in Shariah compliant banking in the consumer as well as the corporate sector.

In the last 1 1/1 years since inception, Dawood Islamic Bank's Shari'ah based financial products, services and business solutions have significantly expanded to cater to the fast-changing financial needs of all categories of customers.

ISLAMIC FINANCE SEEMS TO GROW ABOVE THE GROWTH OF CONVENTIONAL BANKS. HOW DO YOU LOOK AT THE DEVELOPMENT OF ISLAMIC BANKING IN PAKISTAN WHEN COMPARED WITH OTHER MUSLIM COUNTRIES?

You are right, during the last thirty years Islamic banking has emerged as a very viable way of financial intermediation. It has gained tremendous credibility and respect in international financial circles in the east and west. The practice of Islamic banking has spread to all corners of the globe, London tries to be Europes Islamic finance Center, even Paris Central Asia is slowly opening up to Islamic Finance and even in India the implementation of Islamic Finance has become a hot topic. More and more countries recognize the financial financial exclusion of Muslim communities. The size of the Islamic Banking industry has reached hundreds of billions of dollars. Rightly so, Shariah compliant banking should be the preferred if not the only way of banking for one fifth of the population on this planet.

But despite all the hype we need to see the reality: although in many countries Islamic Finance grows faster than conventional banking , total assets of the Islamic industry in Malaysia is at about 16% , Indonesia's - a country with more than 231 million Muslims - the Islamic financial industry has not more than 2 % assets , Turkish participation banks now hold roughly 3.5% of total assets in the country's banking industry and we here in Pakistan have about 3 % Shariah compliant assets.

Yes the industry is robust and in general profitable, but we are a far cry away from a situation where Islamic Finance is the consumer's or corporate first choice of financing.

HOW IS THE PROGRESS OF ISLAMIC BANKS IMPLEMENTING BASEL II?

I believe that we Islamic banks are slowly but surely handling risk in a much better way as we move towards adopting Basel II. However, before the banks get closer to adopting more advanced features of Basel II, there are of course hurdles ahead. There are of course unique risks in Islamic Finance starting from the Profit and Loss Sharing system to the fact that there are very limited liquidity management tools available.

The good news is that Pakistan has unlike for example the GCC, data available to calculate the probability of default, Basel II is widely understood in the country , actuaries and accounting firms in the market offer Basel II compliant enterprise risk solutions and consulting services. Dawood Islamic Bank was the first Islamic bank which bought a license for Alchemy's Basel II Risk Manager.

The IFSB has issued a paper called 'Capital Adequacy Standard for Institutions offering only Financial Services'. This is a very important tool when we are applying Basle II to Shariah compliant products.

WHAT ARE THE CHALLENGES FACED BY ISLAMIC BANKS IN PAKISTAN REGARDING GOVERNMENT AWARENESS TOWARDS THE INDUSTRY'S REQUIREMENT FOR A LEVEL PLAYING FIELD ?

Though some of the existing laws of the land support Islamic Banking, there are still certain tax and corporate and commercial banking laws which need to be modified to promote Islamic Banking. There is a great need to create awareness in the government as there is sometimes confusion in understanding the basic difference between Islamic and Commercial banking in the mind of the bureaucracy. SBP and Pakistan Bank's Association's Islamic Banking subcommittee need to play here a more important role and we are also hopeful to have very soon our own Association of Islamic Banks.

HOW IMPORTANT IS CONTINUOUS INNOVATION IN ISLAMIC BANKS?

Very important. Governor State Bank Dr Akhtar, gave recently an important speech on the importance of innovation as well as authenticity . The Islamic Finance industry needs to constantly innovate within the boundaries of Shariah in order to stay competitive. Extensive market research and product development not in isolation with our clients and our Shariah coordinator is one of our major strengths.

We have brought in the last 12months several new Shariah compliant products based on Ijarah and Musharakh to the market. There is also nothing wrong with imitation of conventional products as long as they are not compromising Shariah.

What we need to discuss more and more in future is that Islamic banking to some people implies a social responsibility. The industry has to come up with more Islamic product solutions which address this. This will be the next wave of innovation. Less technical but more ethical.

I am quite positive as far as the acceptance of Shariah compliant products is concerned. In Dawood Islamic Bank we conduct on a grass root level regularly question and answer sessions where we have a gathering of about 60 -80 people who live close to our branches. This is a great tool to have dialogue with potential customers, explain products and services from different Islamic point of views. I am very encouraged by the results of the Q&A session.

Of course there is skepticism in the market; but let's not forget that the industry is guided by very experienced scholars. Muslims need an alternative to the prevalent interest based financing system and we should all constructively work towards this goal.

WHAT DIFFERENCE DOES ISLAMIC BANKING BRING TO A CUSTOMER? WHAT HAS BEEN THE RESPONSE SO FAR FROM THE PUBLIC?

Very simple: Islamic Banking brings peace of mind to our customers. The injunctions in the Quran as far as e.g. riba is concerned are very clear. Our clients expect us to be 100% Shariah compliant. This is a very serious responsibility for all Islamic bankers.

The substantial growth per quarter in the assets, deposits and branch network of Islamic Banking indicates that the general public particularly corporate and retail customers have definitely placed their trust in Islamic Banking. Many customers demand now only Islamic Banking products and services, others move from conventional towards a moderate mix of Islamic and conventional banking products to meet their business demands as they are still working with conventional banks and it will take them some time to switch over completely to Islamic Banks.

ARE YOUR CUSTOMERS AWARE OF THE CONCEPT OF ISLAMIC BANKING OR DO THEY NEED EDUCATING?

Again, as I said before, the Quran is very clear about interest and the population of Pakistan is of course very much aware of this injunction and of the concept of Islamic Banking. Surely not in all of its details but I strongly believe that there is already strong awareness of the concept among the population of Pakistan.

What we as Islamic banks need to do is to create awareness that we as an industry offer genuine Shariah compliant banking.

Islamic Banking in Pakistan lacks inclusiveness. Many segments of the population does not bank with Islamic financial Institutions, and we do not only have to look at underserviced rural areas, the fact that only a small fraction of the younger urban generation bank with Islamic FI's is also alarming.

WHAT IS YOUR MARKETING STRATEGY IN PAKISTAN?

Our strategy is to be relevant for our clients, retail or corporate , in all aspects of their financial requirements. Our strategy is to ask what our clients want from us: How can we help you today ? Which services do you require ?

And you will be surprised that many bankers do not ask these questions. One think is very clear to all of us in DIBL: We can never take our clients for granted. If we do not service clients well and proactively, somebody else will.

Our growth and profitability in the last 1 1 /2 years is testament to this strategy.

How well are Islamic banks in Pakistan adopting Islamic accounting standards and what are the related challenges?

I believe - and I can only speak for my institution, that we are in a good position as far as our human resources, our core banking application and our overall operations is concerned to adopt SBP's/SECP's and ICAP's accounting standards. For the industry as a whole it is important is that all stakeholders fully understand these standards and that includes - and this is maybe a challenge- for example also professional educational institutions and external auditors.