http://www.ft.com/cms/s/0/d1f716f0-0e5a-11de-b099-0000779fd2ac.html
Scandal-hit bank seeks fresh start By Simeon Kerr in Dubai Published: March 11 2009 17:01 | Last updated: March 11 2009 17:01 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 per cent. 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 per cent 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. Mr 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. Analysts raise questions about the impact that the upcoming trial could have on the bank's reputation, given the recent Plantation problems combined with other episodes in DIB's past. But they also applaud a significant boost to transparency and openness at the institution. The stains on its reputation extend back to the late 1990s when a west African witch doctor, the so-called "Cisco Kid", embezzled millions from DIB's vaults. The details of the tale are hazy but the Dubai government had to step in to recapitalise the lender. The government's holding company, Investment Corporation of Dubai, continues to hold a 30 per per cent stake in the bank, which is listed on the Dubai bourse where its shares trade at a discount to their book value, says Zawya, a data provider. Elsewhere, investigators are probing the affairs of Deyaar, a property developer in which DIB has a 41 per cent stake, and of Tamweel, a mortgage lender in which the bank has a 20 per cent position. Mr Moosa says there has been no discernable impact on the bank, with deposits rising last year even as news dribbled out about an investigation into financial wrongdoing. The bank's new management, which has replaced the executives and board members in place when the alleged crimes took place, is pushing ahead with new corporate governance structures. Mr Moosa says an experienced compliance officer has been appointed, with this executive also acting as secretary to the board, allowing him to sidestep management if needed and report concerns to directors. Copyright The Financial Times Limited 2009 [Non-text portions of this message have been removed]
