Monday, March 3, 2008

The making of HSBC’s Islamic banking subsidiary

AFTER a long wait, HSBC Amanah Malaysia Bhd has finally come on stream as a legal entity.

Last Friday, its parent, HSBC Bank Malaysia Bhd, announced the incorporation of the the new entity, a full-fledged Islamic bank, in its efforts to continue to capture a slice of the Islamic financial services market in the Asia Pacific region, with a keen eye on Malaysia. This follows HSBC Bank Malaysia becoming the first locally incorporated foreign bank to be awarded a licence in November 2007 by Bank Negara Malaysia to set up an Islamic Banking subsidiary. In its statement, HSBC said HSBC Amanah Malaysia will have universal banking scope, allowing it to substantially expand its access to Malaysia's Islamic finance industry, which currently accounts for 13% of the country's total banking assets. The local Islamic finance industry has witnessed significant growth in recent years, with assets now totaling close to US$34 billion (RM108.65 billion). The task to spearhead the new chapter falls on Yakub Bobat, currently the managing director of HSBC Amanah, HSBC Bank Malaysia. The Malaysian Reserve's Habhajan Singh interviewed him recently on the making of the subsidiary. The following is the first part of interview.

TMR: HSBC Amanah is the first locally-incorporated foreign bank to be awarded a licence by Bank Negara Malaysia (BNM) to establish an Islamic banking subsidiary. What made this possible?

Yakub: We really got to go back to the basic of the make-up of HSBC Amanah and the Islamic business within a window. We were the first foreign bank to be awarded the window license back in 1994. We have since grown to become the largest foreign player in the Islamic banking scene in this market and have evolved with some critical mass and scale in the last three or four years. If you look at the financials, you will see significant growth. If you look at the first half of FY07, as compared to the first half of FY06, we had 40% growth of total operating income. Business has gained significant critical mass and scale across all of our business segments. Also the fact that we have a proven track record and credentials, not only within the domestic business, but also within the cross border business because we have a business or functions within Malaysia that support regional cross border business in Asia Pacific. Long before MIFC (Malaysian International Islamic Finance Centre, the initiative launched officially in August 2006 to fortify Malaysia's position as a vibrant, innovative and competitive Islamic financial hub), we have been concluding regional deals using Malaysia as the base. With the critical mass and with the ability to support Malaysia and the MIFC agenda, given our global presence and the strength of our global customer franchise, collectively, all of those things put together, meant that we are able to get to this stage. At the end of the day, it will take global players in this market place to make MIFC a success. Players that are able to build the bridge across markets, the bridge that never existed, players that have connectivity in those markets, players with Islamic banking franchise across many global markets, which HSBC does. And the willingness to actually make it happen, the willingness to execute, a willingness of the market players to play their part. Given that those ingredients are in place, we feel that this is the reason why we have gone pass that, if you like, the finishing line first.

TMR: Can give us some examples of cross-border deals pre-MIFC?

Yakub: Two transactions are publicly available. One, the US$50 million syndicated facility for Krakatau Steel, a state owned Indonesia steel producer. The other was Indian company SREI Infrastructure Finance Ltd, also US$50 million. It was the first ever Islamic syndication to originate out of India, led by HSBC, advised and led out of Malaysia. We have the track record, prudent proven credentials, not just our time on the clock in the domestic business but it's the time on the clock for crossborder business. And, of course, we will talk about the capital market piece later on, but it is also our credentials there in terms of league table ranking and so forth. These are some of the critical steps.

TMR: It seemed that it took some time for HSBC Amanah to reach that milestone (of getting BNM approval). What were some of the key issues involved?

Yakub: If you consider, this is the first foreign bank application for an Islamic subsidiary license. Therefore, not only is it a major milestone for HSBC in terms of a shift in our overall structure, it is also a major milestone for BNM. If you consider, an application of this dimension for the business of our size and scale, it needs to have certain benchmarks and parameters established. It's only natural that the process takes a little bit of time. It has taken a little bit of time, we accept that. But time is needed to understand, time is needed to access the business case, time is needed to assess the contribution that an entity would make towards the MIFC which, I suppose, is a critical consideration for BNM, for there has to be a quid-pro-quo, and not just a one-way traffic. It's what HSBC is going to do to develop the industry domestically and also using its franchise globally to build the bridges and how we can put MIFC on the map. Clearly, there is a lot of work to actualise the MIFC agenda.

TMR: At some point, you may have thought that the process is taking too long. Were in you in constant touch with BNM?

Yakub: It was just a matter of discussion, a matter of understanding and helping each other to arrive at a point which is mutually acceptable. It is also beneficial to the country's agenda. It's only natural that this process takes a little bit of time. It's not something that is to be rushed into. We are delighted to be where we are today.

TMR: How did the idea come about to establish a locallyincorporated foreign Islamic bank? Why not just move on with the Islamic-window banking concept?

Yakub: We actually moved on with the window since 1994. There comes a point in time when you have to move on to the next stage of your evolution. A licence offers a much wider scope, in a number of different areas. The window itself has limitations in respect of the additional scope, as a distinct entity with dedicated channel, yet having an ability to leverage off the mother bank's conventional channels and to take advantage of the wider scope being offered. Consequently, being able to contribute to the wider MIFC agenda. This is basically the thought process that led us to where we are today. It's all part of our natural evolution to the next stage, the stage to take the business to different heights.

TMR: How does the HSBC Amanah set-up in Malaysia differ from the HSBC Amanah in operation in, say, the Middle East?

Yakub: This will be the first separate Islamic subsidiary, separate legal entity, anywhere within the HSBC Amanah world. All other businesses, across the HSBC Amanah world, are window operations, including the UAE, Indonesia and other markets. This will be the first, and only, legal entity for the HSBC Group.

TMR: So, will this be replicated anywhere else?

Yakub: The market in Malaysia is extremely proactive and the regulatory framework is extremely conducive. There are definitive benefits provided by the regulators for market players to move towards subsidiary status. We will continue to explore our options in other markets. Should the markets be as favourable and conducive as it is in Malaysia, and should the opportunity arise, we shall also move in that direction in those markets. TMR: What is your team's role here? Yakub: We are totally responsible for HSBC Amanah operations in the Asia Pacific region. That's entirely within my remit. Of course, as a member of the overall HSBC Amanah executive committee, and from a group wide perspective, clearly we have an ability to influence the business model and infrastructure. As a member of the Amanah senior team, across the globe, we have the ability to transfer best practice and discuss how the business model should be structured in different markets.

TMR: How does the team involved in Islamic banking here differ from that in the Gulf Cooperation Countries (GCC)?

Yakub: Actually, we are very fortunate in that we have several hundred professionals across the globe. It's the largest Islamic team any whwere in the world, across any organisation, dedicated towards this business. It's dedicated to service our needs of our business across all business segments, all the way from the retail segment through the commercial, corporate and institutional segments. We have a strong presence across many different markets. (The second part of this interview will appear next Monday)

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