SENEGAL'S ISLAMIC BANK IS READY TO EXPAND

UNCLAS SECTION 01 OF 03 DAKAR 000479

SIPDIS

SENSITIVE

DEPT FOR AF/W, AF/EPS AND EB/IFD/ODF
TREASURY FOR AFRICA DESK, OASIA/EBARBER

E.O. 12958: N/A
TAGS: EFIN EINV ECON SA SG
SUBJECT: SENEGAL'S ISLAMIC BANK IS READY TO EXPAND

REF: DAKAR 468 (NOTAL)

DAKAR 00000479 001.2 OF 003



1. (SBU) Summary: As reported in Reftel, Senegal's banking sector
will likely consolidate around a number of big, international banks
in the coming years. However, the Banque Islamique du Senegal
(BIS),is bucking that trend and has plans to gain market share
throughout Senegal. During an April 7 meeting, Azhar Khan, the
bank's General Manager, highlighted the BIS's sharia-compliant
products and services, and his positive outlook for the bank's
prospects in Senegal. The majority of BIS's business involves trade
financing. Real estate investments are also significant. Providing
financial services for the annual pilgrimage to Mecca has also been
a boon to the company. Many of the bank's customers and employees
are non-Muslim. The BIS has kept a relatively low profile, in large
part because Islamic banks have had a rocky history in Senegal.
Khan claims that his bank strictly follows reporting requirements
for suspicious transactions. The BIS has money transfer
partnerships with Money Express and Ryan Arabia, but its attempt to
secure a deal with U.S.-based MoneyGram appears to have failed. End
summary.

ISLAMIC BANKING, NOT AN ISLAMIST BANK
--------------

2. (SBU) During an April 7 meeting with EconCouns and Economic
Specialist, Azhar Khan, General Manager of the Banque Islamique du
Senegal (BIS),Senegal's only formal sector Islamic bank,
underscored that the bank offers its customers sharia-compliant
banking products and services, but is not catering solely to a
Muslim clientele. [Note: informal "Islamic banking" does exist
within Senegal's Muslim brotherhoods, mostly for trade financing and
real estate projects. End note.] Khan stated that the bank
welcomes all customers, regardless of religious affiliation. He
noted that his assistant is Catholic, and the bank staff includes 33
Catholics out of a workforce of 200 employees (in a country where an
estimated 95 percent of the population is Muslim). In fact, during
the visit, EconCouns did not notice any staff or customer wearing
obviously religious attire; most of the women were not wearing any
form of head covering. Khan (a French-nationalized Pakistani who
started his banking career with Bank of America in London) was also
critical of Islamic fundamentalists and terrorist tactics, claiming
that the proponents of this approach represent less than five
percent of the world's Muslim population. He added that he,
himself, wanted "to be allowed to practice his religion as he saw
fit."


3. (SBU) In Khan's view, Islamic banking is not easy, and is a
risky business compared to traditional banking, because the bank
must use the customers' money to finance specific ventures that will
turn a profit. While BIS's basic savings accounts do not pay any
interest on deposits, they may create a longer-term profit for
specific purposes (such as housing construction, equipment
purchases, or saving for the Hadj pilgrimage). Investment
opportunities are based on a system of sharing profits and losses,
using a "safekeeping" arrangement between the depositors and the
bank. For basic accounts, depositors can withdraw money at any time
and clients can request checking accounts that operate the same as
traditional banks. The BIS offers a number of other traditional
services, including foreign exchange, a broad range of payment
clearing mechanisms, guaranteed bank drafts, travelers' checks, and
soon, credit and ATM cards.


4. Investment accounts are based on term deposits which cannot be
withdrawn before maturity but pay a pre-negotiated rate of return.
The bank is responsible for using those funds for profitable
ventures. In theory, the rate of return could be positive or
negative, but according to Khan, in practice the returns have always
been positive and quite comparable to traditional rates offered by
commercial banks on their term deposits. Part of the success is due
to BIS's ability to renegotiate the terms of these investment
accounts with its clients. As an Islamic bank, the BIS does not
invest in the tourism sector.


5. According to Khan, the bank's main business is in equity and
trade financing (about 60 percent of the bank's activity) and the
bank supports a wide range of mostly small-scale traders. Importers
of rice, cooking gas, computer equipment, and other consumer goods
are a large percentage of the bank's customer base. Another very
profitable business line for the BIS has been financing Senegal's
participation in the Hadj. Khan explained that the GOS offers the
contract via public tender, and the BIS has won that tender for the
past six years, beating out the likes of Ecobank and Citibank. Khan
believes that the BIS is the only bank in the country that can now
handle this event, providing a network to efficiently monitor the
organization in Mecca, securing lodging, air tickets, and local
transportation for about 10,000 Senegalese pilgrims per year. Khan

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stated that the pilgrimage operation brings BIS as much as USD 20
million in profit per year.

ROCKY PAST BUT OPTIMISTIC ABOUT THE FUTURE
--------------

6. (SBU) Econ staff were surprised at the size of BIS's operation,
and asked why the bank did not have a higher public profile. Khan
replied that Islamic banking in Senegal had a poor history and that
he did not want to promote the bank too fast for fear of generating
a public backlash. Senegal's first experiment with Islamic banking
-- Masraf Faycal Islamic (MFI) -- was founded in 1983 following the
1982 visit to Dakar of Saudi King Mohamed Ben Faycal. MFI followed
with branches in Conakry and Niamey. MFI was owned by Saudi-based
Dar Al Maal Al Islam (DMI),which controlled 85 percent of the
shares, and the late Senegalese businessman Djily Mbaye. MFI's
activities were very limited, specializing in savings accounts and
consumer project financing, including housing. The 1980s banking
crisis in the West African Economic and Monetary Union (WAEMU) was
too much for MFI's small market share and the bank closed in 1989,
with many customers losing their savings and investments.


7. (SBU) In 1995, after the financial crisis and the devaluation of
the Franc CFA, the government of Saudi Arabia encouraged Senegal to
relaunch an Islamic bank. The DMI contributed 44 percent and was
joined by the Jeddah-based Islamic Development Bank (IDB) (33
percent) and the GOS (23 percent). In 2001, the BIS registered its
first positive results. In January 2002, the DMI fully divested
itself from the BIS and the IDB's new subsidiary, the Islamic
Corporation for Private Investment (ICV),assumed 77 percent of
BIS's capital, with the GOS retaining the remaining 23 percent.
From 2001 to 2007, BIS's total assets increased from USD 20 million
to USD 102 million, deposits increased from USD 18 million to USD 90
million, and credits to customers went up from USD 14 million to USD
80 million. Despite this growth, the BIS is still one of Senegal's
smaller commercial banks. The BIS is expecting an additional
infusion of cash from the IDB to spearhead a campaign to raise USD
20 million in new capital by December 2009.


8. (SBU) With the new capital, Kahn is optimistic about BIS's
future. The bank is planning to build a new headquarters in Dakar,
expand from its current four branches (three in Dakar and one in
Touba) to twenty throughout the country, establish new credit and
bank card services, and begin a new marketing campaign. The goal,
according to Khan, is to increase its customer base from three to
fifteen percent of the country's total banking clientele. When
asked, Khan said that the BIS has no trouble meeting the WAEMU
Central Bank's (BCEAO) higher cash reserve requirements for
commercial banks, with minimum deposits increasing from CFA 1
billion to CFA 5 billion (USD 2-10 million) by the end of 2009, and
further increase to CFA 10 billion by December 31, 2010. A good
contact at Citigroup opined that the BIS is probably too small to
survive the BCEAO's higher reserve requirements, but this is
evidently not the case.

BIS HAS ADVANTAGES IN THE POOR ECONOMY
--------------

9. (SBU) According to Khan, many Senegalese in Asian and Arabic
countries use the BIS network for sending money to their relatives
in Senegal via the Ryan Arabic service, Senegal Post's Money Express
service, or via wire transfers. With this connection, BIS has had
success linking incoming remittances directly to new local real
estate investments. However, Khan noted that since mid-2008 BIS has
been witnessing a drop of about 25-30 percent in remittance activity
as the result of the global recession. He feared that a continuing
decline could affect seriously Senegal's the construction and
housing sector, where, he believes, there is already an
unsustainable price bubble, particularly for high-end properties.
Khan stated that some commercial and residential real estate
investors are already having difficulties with low demand and that
many commercial banks will likely have to deal with higher rates of
non-performing loans in the near future. For the BIS, FY 2008 was a
good year, according to Khan, but he admits that FY 2009 is
difficult, largely because of the difficulties in the real estate
sector. Real estate investments currently account for approximately
10 percent of the bank's activity. At the same time, because of
BIS's good business in trade financing on important staples, like
rice and cooking gas, and its Hadj contracts, the BIS should be able
to weather the storm better than many traditional banks, in Khan's
opinion. As proof of the bank's stability, Khan noted that one of
BIS's large foreign partners used to require a 100 percent guarantee
to confirm a letter of credit, but now asks for only 30 percent.


10. (SBU) Regarding the current financial crisis, Khan noted that
the BIS, and Islamic banks in general, are not greatly impacted from
the collapse of the derivatives and other "paper" markets. "We

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finance the real economy, based on actual conditions, and are not
involved in the financing of money. We may lose customers, but we
are not losing money," said Khan. He pointed out that because some
of Dakar's large internationally-affiliated banks may be tightening
credit, the BIS hopes to attract new clients. Some projects that
are turned down by conventional banks for lack of collateral are
being financed by BIS on a profit-sharing basis. At the same time,
however, a contact at the IDB suggested recently that while the BIS
is performing well, it is likely "fudging" the sharia's no-interest
policy.

STRICT INTERNAL CONTROLS, COOPERATION WITH FIU
-------------- --

11. (SBU) When asked about monitoring for financial crimes, Khan
said his bank was rigorous, claiming that Islamic banks are
"required" to be good citizens, and follow the laws of the country.
In addition, Khan said he knows his bank is watched closely by
Senegalese authorities and would face a very difficult public
relations problem if allegations were made that the bank was aiding
money laundering or terrorism activities. He said the bank works
closely with Senegal's regulators and follows strict internal
controls. According to Khan, the BIS has a strong relationship with
Senegal's Financial Intelligence Unit, the CENTIF, which frequently
provides training to the BIS's employees. Following BCEAO and
Senegalese law, Khan claimed that the BIS reports all suspicious
transactions as well as all transactions that involve at least CFA 5
million (USD 10,000) to the CENTIF. "Efficiency, transparency, and
credibility are part of the Islam's principles, and we follow these
very closely. We must abide by strict ethics in the face of money
laundering and terrorism financing threats," said Khan.

WHAT'S STOPPING THE DEAL WITH MONEYGRAM?
--------------

12. (SBU) At BIS branches there are prominent signs for the
U.S.-based money transfer company MoneyGram. However, despite seven
years of negotiations, BIS has not been able to offer the service,
much to Khan's chagrin. Initially, the BIS had to work past
MoneyGram's demand that it be the sole provider of money transfer
services, eventually requiring a ruling in 2008 against such a
monopoly by the Ministry of Finance's Department of Money and
Credit. BIS then informed MoneyGram's Paris regional office that it
wanted to resume negotiations, but was told that there was "a
problem from the U.S." Khan claims to not have further information
on what is stopping the agreement, but he speculates that it is
based on the involvement of the Bin Laden family in DMI. Khan is
trying to demonstrate that DMI is no longer a shareholder in the
BIS, but hasn't yet received any encouragement from MoneyGram. Khan
noted that before coming to the BIS, he spent 14 years with DMI in
Geneva and in a number of African countries.

COMMENT
--------------

13. (SBU) Though it is still a small bank compared to the
international banks that dominate Senegal's commercial banking
sector, the BIS is larger and more vibrant than expected, given its
low profile. Even if one does not subscribe to Islam's injunctions
against charging interest, the BIS is developing products that are
attracting customers who also utilize traditional commercial banks.
As reported in reftel, the big banks are competing fiercely on
interest rates, but they may also be facing stiffer competition from
BIS's planned expansion.

BERNICAT