The Riyadh-based Al Rajhi Banking & Investment Corporation (ARABIC) is one of the leading banks in the Middle East and the flagship of Islamic banking in Saudi Arabia. In terms of size of balance sheet, it is the largest Islamic financial institution in the world.

ARABIC, whose Chairman and Managing Director are the respected brothers Sheikh Saleh and Sheikh Suleiman Bin Abdul Aziz Al Rajhi respectively, is characterised by its prudence, cautiousness and a low-key, almost secretive approach to banking, although perhaps this lack of transparency is changing as the nature of banking of worldwide changes.

ARABIC has flourished in the Kingdom thanks to its reputation as erstwhile moneylenders and the massive growth in demand by Muslim and Shariah interest-free banking. Backed by this mandate and the Bank's resources, ARABIC has emerged as one of the major sources of financing in the Kingdom and the Islamic world. The market, whether in the Gulf or in Europe, cannot afford to ignore the size and stature of ARABIC.

The corporation, which is in the process of building new corporate headquarters in  Saudi Arabia's capital, Riyadh, has sustained growth to become a major player in Middle East banking. This growth, according to ARABIC, "is in all areas of activity with an increase in assets and liabilities including shareholder's equity and current accounts", and reflects the confidence of ARABICS "customers in our management efficiency, enabling us to achieve good results despite the unfavourable developments in the world economy which depressed the average rate of return on investments."

For me first half of 1993, ARABIC posted a net profit of SR 373.70m. Its balance sheet was up 18.7 percent toSR31.l3b. This growth is further reflected in its investments which now total SR24.5b. For fiscal year 1992, ARABIC'S total assets amounted toSR26,526.1 m-a 12.2 per cent increase on the previous year. Shareholders equity totaled SR3.53b compared with SR3.33b in 1991. Total investment amounted to SR21.21b - up 9.6 per cent. ARABIC'S core business includes Instalment Sale and Deferred Sale, Istisna, Ijara (leasing), Salam, Wakala, Murabaha (cost-plus financing) and Mudharaba (trust financing).

Of this, its major activity is direct commodity trading which for the year 1992 totalled SR3.3b - up a massive 46.5 l per cent on 1991. Net profit was slightly down to SR6.44.5m from SR701.5m for the period. But with a balance brought forward from the previous year, total profitsamountcdtoSR779.3m. Proposed dividends to shareholders last year were SR30 per share.

However, ARABIC confirms dial it has phased out the use of the General Murabaha Trading Contracts at end 1992 in compliance with the rulings of the Bank's Shariah Authority, whose members are not identified in the latest annual report. In 1992 the Corporation introduced the Murabaha contract as an effective investment method to support Saudi business in accordance with Islamic principles offering them a wide range of techniques for finance of international trade.

Why the phasing out is necessary and on what Shariah grounds is not made clear, but the General Manager of ARABIC'S representative office in London, Mr. Nizar Al Shubaily, who is also on the board of ARABIC, stresses that the corporation docs not object to the Murabaha mode of Islamic financing in principle, but only to interpretation and application by some Islam commercial banks and the so-called Islam "banking windows" of conventional banks.

It would be useful for the Islamic bank  worldwide to reach some sort of consensus over the use of the Murabaha facility, which is widely used by Islamic bankers in Pakistan, Sudan, Malaysia, Turkey, Western Europe South Africa and the Gulf countries, to pro empt any confusion and detraction from the implementation of Islamic banking,  wherever it is practised. Adopting a high moral ground on the basis of a Shariah interpretation is no going to serve the Islamic banking movement. And in fact, it may further damage its acceptability in the short to medium term.

ARABIC'S corporate plan aims at improving and promoting its administrative and banking systems through developing its organisational structure and branch network with the introduction of the concept of the all-service Teller branch.

The bank has set up 200 Automatic Telle Machines (ATMs) in different parts of the country - the largest ATM network in the region, but its corporate plan aims to further develop its branch network, so as to make Islamic banking available in all comers of the Kingdom. ARABIC at end 1992 had 30 branches in me Kingdom and have plans to increase its network to 400. Despite the fact that some 126 branches and incurring operational losses, the bank according to Sheikh Suleiman will retain then since it wants to service as many people and possible, especially in rural areas. "The investment policies of ARABIC differs to that of others in that it focuses first on giving service and less on profits", stressed Sheik Suleiman recently.

ARABIC'S investment funds are also progressing well. The AI-Rajhi Current: Fund at end 1992 stood at SRI 18m and subscriptions to the Al-Rajhi Maritime Fun totalled SRI 112m. ARABIC also introduced new Shares Murabaraha Fund, in late 1992, and Al-Rajhi Local Investment Fund and Al-Rajhi Mixed-Leasing Fund during 1993.

The bank takes pride in the success of its Saudization policy. "Considerable success has been achieved in our policy of Saudization, with the percentage of Saudi employees reaching 47 per cent of the corporation's workforce in 1992, compared with 42 per cent in 1991". The percentage of Saudi's higher management level reached 84 percent, while Saudis at senior level represent 98 per cent of the total, confirms the bank's annual report for 1992.

The bank has a vigorous in-house training department, and ARABIC staff also attended specialist courses at outside institutions. ARABIC staff have some of the best perks, ranging from marriage subsidies of SR15,000 to Saudi nationals, cheap loans, accident cover, and excellent leisure and recreational facilities.

ARABIC'S London office has been transformed into a nerve centre, especially for its leasing (Ijara) and marketing activities. "The bank is in a position of great liquidity, and so is constantly looking for new markets in which to invest. It needs a presence abroad to carry out marketing for its clients, report  on potential European clients, as well as legal and credit issues. We see ourselves as the eyes and the ears of the Riyadh headquarters, performing an advisory role, but stopping short of taking decisions and trading",  explains Mr. Al-Shubaily.

ARABIC is fast acquiring an expertise for Ijara transactions especially for aircraft and tanker leasing, and this mode of Islamic financing is expected to increase substantially during this year. Leasing is an ideal Islamic financial instrument since it by ­passes the interest (Riba) element and in the case of aircraft and tankers there are no problems over the ownership of the equipment titles.

ARABIC'S current leasing portfolio includes investments in leased assets -MAS (Malaysian Airlines) CAPECO's Vessel and Weststar House Property, which at end 1992 totalled SR 309.3m. It has also financed aircraft leasing for Thai Airlines and Emirates Air. There is a great demand for leasing, which is natural business for Islamic banks, says Mr Al-Shubaily. He rues the fact that Islamic banking still lacks a unified theory and terminology including uniform accounting standards, investment products, and more trade and project finance instruments.

Al Rajhi is slowly increasing its international presence. Apart from London, it has a stake with the Jeddah-based Dallah Albaraka Group in Jami Corporation, which in turn has a 13 per cent equity investment in Bank Islam Malaysia (BIM), Islamic banking's pace setting   institution.    According to BIM’s source, Jami is in the process of increasing this stake to 18 per cent.

ARABIC also owns an 11 per cent equity stake in the new Kuwait Islamic institution International Investor (II), launched last year to offer private banking and investment management on a Shariah basis. Indeed, Chairman, Adnan AL-Bahar is the predecessor of Mr Al-Shubaily at ARABIC London office and still maintains a seat on the board.

ARABIC also has an exposure in Suda where together with Albaraka it launched Sudan Fund of $500m. The consortium of ARABIC/Albaraka invested $200m before the Gulf war interrupted and scampered and chances of the Fund really taking off. The consortium has since had part of the investment repaid by Sudan and the remainder has been locked into a debt equity swap with the  Sudanese.