IFR Asia Malaysia Islamic finance report – Islamic banking
Islamic banks have been around for so long in Malaysia now it’s hard to recall a time when they weren’t there. There are 17 licensed Islamic banks supervised by Bank Negara Malaysia now, not counting a clutch of development institutions, investment banks, and offshore enterprises under various other licensing environments; between them they had RMB212.5 billion under management by July 2009, according to Bank Negara Malaysia.
All of Malaysia’s powerhouse banking groups have an Islamic subsidiary now, in all cases carved out as a legally separate entity: Public, RHB, CIMB, Maybank, Hong Leong, Alliance, AmIslamic among them. They are joined now by locally licensed Middle Eastern names like Kuwait Finance House, Al Rajhi and Asian Finance Bank; and entrenched foreign houses like HSBC, Standard Chartered and OCBC. And the field is going to get bigger still: by October 31 bids must be filed for the right to develop two Islamic mega-banks, which can be fully foreign owned but must have paid-up capital of over US$1 billion, aimed at taking the development of these institutions to a new, multinational level.
Today, Islamic banking assets compare to RM1.28 trillion among conventional commercial banks – so about 16% of the conventional total. It’s not clear what the likely ceiling is for the penetration of Shariah-compliant banking, but many institutions talk in terms of about 20%.
“We are now about 13 to 14% of the bank’s assets,” says Tuan Haji Yahya Ibrahim, CEO of Alliance Islamic Bank, which started out as a window concept like most Malaysian banks before becoming a fully fledged subsidiary in 2008. “We have to grow, because ultimately the target is expected to be about 20%.” At RHB Islamic, the first to move from the window model to the fully-fledged subsidiary, CEO Jamelah Jamaluddin speaks of a similar target. “We are about 10%,” she says. “But by 2012 we hope to contribute about 20%.”At CIMB Islamic, which made its name in investment banking and corporate banking and only really moved into balance sheet business about three years ago, the total today is 9%, according to Badlisyah Abdul Ghani, CEO.
These three chief executives illustrate how businesses have grown in different ways and with different objectives. Alliance started out with deposits products like Islamic savings accounts, moving into simple products such as housing loans and car hire purchase structures. From that, it has grown to a full range of consumer, commercial and corporate products including trade finance. Yahya Ibrahim says that 60% of the Islamic bank’s assets today are in consumer and the balance in commercial and corporate, with the profitability split around the same. Alliance Islamic does not have its own budgets, and instead operates branches within conventional branches: it has seven of these, predominantly in the Klang Valley. “We rely very heavily on the infrastructure of the mother bank,” he says. Like all Islamic entities, the funds must be kept scrupulously separate from the parent bank, but otherwise there is a lot of overlap: Islamic products are sold in tandem with conventional ones.
“In our business, normally when we have our annual budgets, a certain percentage of that budget will be for Islamic. So if you sell 100 housing loans, you’d probably have to sell 20 Islamic housing loans. In Islamic banking we make the products we sell Shariah compliant.” Since that means growth will be led by the conventional bank, consumer is likely to drive growth in the Islamic division since that’s the direction of the broader group.
RHB Islamic, too, is a heavy user of the parent bank’s infrastructure. Having the backing of that group has allowed it to reduce costs, and to pass savings on to customers. Jamelah says the cost to income ratio of the Islamic bank is just 44%, one of the lowest in the business. She says that the strongest growth at the moment is in retail and corporate. “The retail side is again because of the RHB bank infrastructure, so we’re able to sell our products through the branches of RHB Bank,” she says. For the future, she says she expects fee-based income to drive growth. “One area of attraction for fee-based income is cash management and transactional banking. More and more GLCs [government-linked companies] are compelling staff to borrow by way of Islamic structures, so there more and more reason for these corporations to use our transactions banking services.”
CIMB’s story is different since it built up in the investment and corporate banking side first. Badlisyah says the biggest area of growth is likely to be consumer banking. “One reason for that is because it is still very much a new business for us so in relative terms you should see more growth there: home financing, microcredit, things like that,” he says. He believes that in total assets and deposits CIMB Islamic now ranks third in the industry, behind Maybank Islamic and Bank Islam. “Investment banking and corporate continue to be a significant part of our business because they were our first core businesses anyway.”
In those core businesses, the global financial crisis obviously created major challenges, but Badlisyah says the work simply moved from one area to another. “During the height of the financial crisis when there were doldrums in the financial markets we saw more activities in corporate banking: bilateral or syndicated facilities, because it’s easier to do fund raising through that method rather than debt or equity capital markets,” he says. “Now that the momentum for debt capital markets is coming back, with quite a number of successful sukuk issuances in Malaysia and at the global level, the pipeline is getting much healthier for investment banking.”
Banks say that appetite for Shariah product is not just an Islamic phenomenon. Jamelah says that at RHB Islamic it’s 50-50. “For the retail side, I don’t think it really matters to the Chinese,” she says, arguing that it’s the return and the diversification rather than the underlying faith that matters to investors. At Alliance, the position is even more extreme. “80% of our customers are non-Muslims,” Yahya says. “From the perspective of the non-Muslims, it’s just another product, so what they count on is: is it competitive, is it cheaper? It sells on that basis rather than: is it Shariah compliant.”
As elsewhere in the Islamic world, there is much debate about whether the financial crisis was, in some measure, a good thing for Islamic banks, since they could not have exposure to the assets and securities that brought western banks unstuck. “There is a lot of talk on this,” Yahya says. “Islamic banks were not so much caught in the crisis. We did not have products as sophisticated as those in the conventional banks, for Shariah reasons. I remember before the crisis, in 2007, 2006, a lot of people were saying the Islamic banks are not complex or sophisticated enough: we don’t have options, futures and so on. Then when the downturn came, people said because we don’t have those things, we were not as badly hit. Now what I see is that, going forward, when everyone comes out of this crisis, the same arguments will appear.
“The fact is, under Islamic finance you are still asset based and you cannot run away from that,” he adds. “But unlike what some speakers say, Islamic banks are not smarter, we don’t have more sophisticated risk forecasting techniques. We didn’t have the products and therefore we were spared, it’s as simple as that.”
Badlisyah at CIMB: says “Islamic banking and finance has held up fairly well. We have benefited somewhat from the fallout in the conventional markets. More and more people are thinking and exploring about Islamic finance because they’re unable to find solutions to their financial needs in the conventional markets.”
Another consistent challenge for Islamic banks in Malaysia is human resources. Malaysia has set up numerous enterprises to help to deal with this – notably INCEIF, which bills itself as “the global university of Islamic finance” – and these initiatives are well thought-out and impressively resourced. But as Badlisyah says, “it will be some years down the track before any of the relevant bodies is able to make an impact in the industry.” The challenge is particularly acute with Shariah scholars, the people who make a judgment on whether something is Shariah compliant or not. At the best of times these people are hard to find: they need to have a sound knowledge of finance, of Islamic jurisprudence, and of the everyday mechanics of business, as well as being fluent in several languages. But in Malaysia, there is a requirement that no scholar can serve on more than one bank board, draining the pool still further.
Many have developed detailed in-house programs: CIMB has programmes which reach all the way to certification and all the group’s staff are encouraged to take them. It’s certainly a challenge. “There are going to be more players in this market, more and more banks going into Islamic finance, but the pool of people who are experts is not growing by the same number,” says Jamelah. “You will always find there is a gap in trying to get trained people to be experienced in Islamic finance.”
All three groups are watching with interest as foreign houses move into Islamic finance, with the two new mega-banks soon to be licensed. “We always look at it from the perspective of enriching the market, so the more players we have, the better the market will be in terms of products, the ability to have counterparties and things like that,” says Badlisyah. Yahya agrees. “We welcome it,” he says. “In most cases the competition is healthy, and you may see some products which we are not familiar with in this part of the world introduced. It’s a learning process.”