Strategic Analysis of Al Rahji Bank (Essay Sample)

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Strategic Analysis: Al Rajhi Bank Saudi Arabia
Introduction
The emerging imperativeness of Islamic banking in most Middle Eastern and developing countries has created a niche for this unique form of financial services provision. A report by Nazim and Bellens (8) indicated that the top 20 Islamic finance based banks reported a 12.6% return on assets, compared to an average of 15% by conventional banking institutions. One primary factor in the prominence of these banks is the apparent resilience to economic crises, especially the 2008-09 crisis, which affected a large proportion of the global financial institutions. The adherence to Sharia law propagates the emergence of financial products which prohibits the payment of interest charges for loans. Certain prohibitions in the types of investments sought is also a primary reason why this form of finance survived the crisis. Recent developments have made it possible for application of semi-private and private institutional entities, thereby creating greater flexibility in Islamic finance. There are a wide range of institutions in the West that have adopted Islamic banking, although this form of finance has its roots in Saudi Arabia. Al Rajhi Bank (ARB) is one such bank, instituted in Saudi Arabia.
1 Company’s History, Development and Growth
ARB History
The bank was instituted in 1957, originally in Saudi Arabia, and has risen to become the largest Islamic Finance institution in the country. Originally, the company operated as Al Rajhi Trading and Exchange Corporation, and was later changed to a publicly owned entity in late 1980s through Royal Charter 57. Later on, the company was converted to an investment and banking corporation through ministerial decree 1398. The bank is closely associated with a wealthy commons’ family in Saudi Arabia although it has benefited from close associations with the political dynasty in the country.By a variety of metrics, the institution is considered the largest banking institution with a capital-funded base of SR 39 billion up from SR 750 million on registration of the institution. The bank has a total asset of SR 279 billion. The company 7600 employees, with a market capitalization of $4 billion. The Sharia compliant institution has fundamentally played a role in creating a link between the demands of modern and advanced financial institutions and the intricacies of Islamic banking. The bank has also spearheaded a range of developments and benchmarks for the banking sector and industry in the Middle East, creating a strong link with the contemporary banking systems. According to PWC (9), the institution adheres to IFRS requirements for fundamental accounting estimates in its financial statements, primarily in reporting the assessed liabilities and assets.
Bank structure
The company has a wide network with 21,000 point of sale terminals, 2750 ATMs and 470 outlets, distributed across the country. As a result, it is deliberated as the largest financial institution, with high potential for growth due to provision of multifaceted opportunities for bridging modern and traditional banking in Islamic finance. The strategic locations are designed to provide access to the large network of customers to financial resources conveniently, while ensuring that financial planning and management is easily achieved. As at 2013, the company had seven fully owned subsidiaries as indicated in figure 1.
Figure 1: Subsidiaries as at 2013
Source: PWC (8)
The bank owes its success to the oil based economy in the Middle East, which has accounted for the rapid growth over the 50 years it has been in operation. However, the management of the institution has also implemented strategies to take advantage of opportunities through aggressive marketing and promotion activities, aimed at expanding its market share. Fontaine and Ahmad (171) the company’s board is comprised of a CEO and Muslim clerics with a postmodern perception towards management. Under guidelines of Islam such as those contained in Sharia law, the institutions have flourished through socio-cultural and political tenets, considering that the company’s value, vision, mission and organizational culture are intrinsically instilled into the customers. Essentially, in addition to principles of management in the contemporary work place, the bank relies on honor, justice and respect across the various levels of management. The bank expanded its operations to the international market in 2006, with operational branches in Malaysia. As a novel product to the Asian market, Islamic banking quickly picked up, increasing to 19 in 2014. The bank has a branch in Jordan, and Kuwait among other locations, with the institutions acquiring fully fledged licenses to operate in these countries.
2 Company’s internal strengths
Strengths
Wide network of outlets
PWC (4) indicated that the Bank has established a wide network of service outlets, with varying products and services on offer. The wide network, which started domestically, has graduated to the international market place. Increase in the network provides a trajectory for enhancement of service quality, expansion of product and service categories, expansion of stakeholder categories, increased regulation and oversight, as well as access to highly qualified and effective employees. As a result, controlled expansion has created circumstances for the improvement of the internal and external environment for the banking institution (Fontaine and Ahmad (171). These wide networks have created double digit growth rates in financial aspects as discussed here under.
Wide range of products and services
Although the bank specialized in Islamic Banking, it has grown heterogeneously into an integrated financial services institution. Vayanos, et al (5) posited that from the range of outlets, it is clear that financial management and merchant services have joined deposit taking and loan provision as the range of services accessible from the banking institution. Currently, the bank operates over 21,000 merchant outlets which are accessible cross the globe, making it possible for domestic customers to enjoy the services regardless of the location they are. In addition, the bank provides credit cards and a variety of corporate and consumer loans.
Strong capital backing
Islamic banking has thrived through high level of capital adequacy at the backdrop of a highly lucrative oil industry, with over US$1.54 trillion is assets compliant to Sharia law globally (Nazim and Bellens, 8). The reliable source of income at the national level has propagated increased savings at the household level, creation of reliable public good, enhancement of social amenities and improvement of the quality of life. The increased income levels coupled with huge disposable incomes has made it possible for consumers to seek out banks for savings and loans, as well as other innovative products which propagate capital adequacy. Although there are varied jurisprudence on Islamic banking based on the different Islamic schools of thought
Strong financial performance
In 2012, Annual report (13), ARB was classified as the first in terms of profitability, return to investment ratios, volume of loans and assets, market capitalization in the Gulf region as well as profit efficiency. In 2013, the company reported improved financial records in spite of reduction of cash and cash balance, financing and net investments from the previous year as indicated in the following statement of financial statement. Total assets grew from SR 267 billion in 2012 to SR 279 billion in 2013. Over the same period, liabilities grew from SR 230 billion to SR 241 billion, primary fueled by the expansion of the banking institution. Shareholder equity grew to SR 38 billion from SR 36 in the previous year. Although profits grow to SR. 10 billion up from SR 9.6 billion in 2012, the returns on time investments for customers dropped to a loss of SR 465 million from SR. 345 million in the 2012 (PWC, 8). This is primarily driven to the no interest environment in the country. The total operating income (SR 14 billion in 2013 compared to SR 13 billion) and all other metric for profits changes positively. A slight reduction in the profitability at SR 7.437 billion in 2013 compared to SR 7.884 in 2012 resulted to a 0.30 reduction in the diluted earnings per share in 2013, from 5.26 in 2012. This is directly attributable to increasing operating costs directly and indirectly related to expansion. Due to this performance, Saradar (1) revised the fair value of the banking institution to SR 87 due to the recession in profit margins notwithstanding increased growth in loans. The downward trajectory in net profits were however expected to reverse due to the strong asset base, considering that the company’s past warrants valuation premiums, based on its reputation.
Customer oriented services
According to PWC (20), the rapid expansion of the banking institution is driven by the desire to serve a wide range of consumers. Vayanos, et al (18) agreed that the prominence of Islamic banking in the Middle East has gradually risen over the years, creating an impetus for spread to other locations. Most of the products, services and outlets are designed to meet the needs of the consumers, primarily based on Sharia Law provisions. As a result, in addition to protecting investments, shareholder wealth is increased sufficient over time, through focus on secure investments (Hardy and Puvost, 8). The bank has experienced a range of challenges associated with service delivery, which propagated changes in frameworks in customer service. The highly dynamic strategies applied by the bank to existing challenges makes it possible for rapid problem solution.
Heterogeneity of the principles and products
The...