Minor impact from BBA ruling, says OSK

By Habhajan Singh
The controversy surrounding certain Al-Bai' Bithaman Ajil (BBA) contracts is unlikely to lead to an industry-wide fallout, says OSK Research.
In a research note, it said this view is further underpinned by the fact that Bank Negara Malaysia (BNM) has been pro-active in giving out new Islamic banking licenses to foreign Islamic banks to encourage further liberalisation and development of the sector.
It said this in a research note released last Friday commenting on a series of articles in The Malaysian Reserve last week on a recent judgement by High Court judge Justice Datuk Abdul Wahab Patail. One of his judgments, dated July 18 and running into 54-pages, has caused a stir in the fast-growing Islamic finance industry.
In the note, OSK said the impact of a potential fallout is much bigger for full-fledged Islamic banks. Total Islamic banking financing assets represents 13.8% of the total banking outstanding loan portfolio as at July 2008, while that of BBAs represent an even smaller 4.6%, it reported.
"If we were to solely focus on commercial banks' exposure to BBAs, the percentage contribution as a total of industry wide commercial and investment banks' loan books is 2.3% as at July 2008, significantly smaller than the exposure of full-fledged Islamic banks' of more than 40%," it said.
In an attemp to quantify the impact on the listed banks' earnings in the event of an industrywide fall out, OSK used the industry's BBA's earnings percentage contribution of roughly 40% to total the Islamic banking industry income as a benchmark for a worst-case simulation analysis. It discounted the individual bank's Islamic banking income by that percentage quantum.
Its "back-of-envelope calculations" indicated that the potential negative impact on banks could range from 6.5% to 18.7%, with the largest impact being on AMMB Holdings Bhd, EON Capital Bhd and Affin Holdings Bhd, as these banks have the largest Islamic banking income as a percentage of a total group income.
Although Malayan bank Bhd and CIMB Group are particularly strong in terms of the Islamic banking income market share, the report said the strength and size of their investments and conventional commercial banking income streams help to mitigate any downside risks.
It highlighted that certain banks will have different earning contributions from the various classes of Islamic banking assets, with Commerz being particularly strong in the sukuk market and Public Bank in the Islamic hire purchase segment (Ijarrah Thumma Al-Bai) and thus the actual impact will again vary among banks.
The BBA, in essence, is a contract of deferred payment sale (the sale of goods on a deferred payment basis) at an agreed selling price, which includes a profit margin agreed on by the customer and the bank.
It is widely used in various Islamic financing instruments, including bridging finance, cash line facilities, contract financing, project financing and letters of credit.
(The Malaysian Reserve, Sept 16, 2008)