Citi Woos Rich Muslims with Bank that Follows Koran

Citicorp has borrowed from the principles of a 1,300-year-old holy book to provide a new twist to its growing worldwide retail banking franchise.

Ten months ago it launched Citi Islamic Investment Bank, a Bahrain-based institution that is striving to serve well-heeled observant Muslims throughout the Islamic world.

But unlike Citicorp's other international subsidiaries, Citi Islamic is taking its orders from the Koran, which forbids charging interest. As a result, the unit is focusing on providing a mix of asset management services, debit cards, and even leasing arrangements.

"The standard finance practices in Islamic banking should be asset-based finance which is free from interest, deception, and unfairness," said Mohammed Al-Shroogi, Citi Islamic's chairman, in a phone interview. "There should be no exploitation of the weak party in any dealing."

While many bankers might consider such talk antithetical to normal business practice, Mr. Al-Shroogi said there is plenty of opportunity to build a solid franchise in the Muslim world using Citicorp's network of branches.

The retail market of wealthy Muslims has increased about 15% yearly over the past 10 years and is still expanding both regionally and globally, he said.

The potential size of Citi Islamic's market in the Persian Gulf region is $7 billion to $10 billion. The area includes oil-rich Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates, as well as Bahrain, the island nation where the bank is headquartered.

Mr. Al-Shroogi contends that the broader Islamic market, which extends to the Far East, could be as large as $80 billion of assets.

He said there is a growing number of wealthy young Muslims in the Middle East and the Western world who are eager to build fortunes while observing the Koran.

The retail market of Muslims with net worth of $1 million or more is "very large," he said, and "the youth are increasingly turning to Muslim products."

The centerpiece of Citi Islamic's effort is a soon-to-be-launched global equity fund, which will focus on blue-chip stocks in companies in the United States, Europe, and Asia that are deemed morally appropriate.

What is acceptable?

"Very selective equity," Mr. Al-Shroogi said. "Stocks like IBM, Coca Cola, and Pepsi." Interest-charging institutions, such as Western commercial banks and insurance companies, as well as liquor and tobacco companies are off-limits.

Investment criteria for the pending global equity fund typifies the business code that will shape other Citi Islamic products.

To make sure the bank is on upholding these ideals, Citibank officers sit side by side with scholars of Islam on the Citi Islamic board.

Citi Islamic has 15 employees. Most of them are practicing Muslims from Islamic countries. Mr. Al-Shroogi is a Bahraini national who has spent his entire career at Citibank.

Most bankers who keep a close eye on Citi's progress agree it's too early to determine how successful this Islamic policy will prove, given that it's untried as yet by any other Western bank.

"Western competitors are watching what Citi is doing quite closely. If there is any indication in the first two years that they're successful, I would expect others to emulate them," says Ben Lorenz, director of Middle East operations for New York-based Merrill Lynch & Co.

Merrill itself has been aiming for a bigger slice of business in the Muslim world. Last month it opened an office in Abu Dhabi to complement its offices in Dubai and Bahrain. The securities firm has also recently done a study on the growth of private wealth in this part of the world.

The report shows that Saudi Arabia is by far the wealthiest country in the region, with 78,000 rich individuals worth a total of $421 billion.

In the United Arab Emirates there are 59,000 wealthy people worth $160 billion in all, while in Kuwait there are 36,000 worth a cumulative $98 billion.

Western banks doing business in the Arab countries say there are fewer banks willing these days to identify themselves as purely Islamic, despite increasing demand from the younger generation for such products .

Merrill is planning to launch two new products tailored for Islamic investors. But Merrill, like other Western companies in the region for the long term, such as Chase Manhattan Corp., views this style of banking as financially feudal.

As far as Citibank is concerned, that kind of thinking leaves the field all the wider for it.

Mr. Al-Shroogi said Citi Islamic, which has a current capital base of $20 million and a potential for $50 million, is working on a variety of funds and gradually building its deposit base.

Meanwhile, the bank is offering Western products with an Islamic twist.

Mortgages, for instance, are handled like sale-leasebacks in the U.S. If a customer wants to buy a building and needs roughly 50% of the funding, Citi Islamic will buy the building and lease it to the customer for a time, rather than provide a mortgage loan and charge interest. The money paid to lease the building serves as gradual payment for the "loan."

Islamic customers are also offered a way to get around the problem of interest-bearing credit cards.

The bank simply calls them debit cards. These work like American Express charge cards; customers pay off what they have spent at the end of each month.

Observers say many of these banking concepts are still fairly new to this part of the world.

Also, they say, a younger generation of wealthy Muslims more used to Western habits will be looking for investment diversity, which is easier to find abroad. The equity markets of the Islamic Middle East are still hampered by illiquidity, and other hindrances include scant research on securities offers.

Western bankers argue say these are problems they are well suited to solve.

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