HUMAYON: Malaysia's Islamic banking needs a big push

Based on the data available on the growth and development of Islamic banking in different parts of the world and with the help of an extensive research undertaking to construct Islamic Finance Country Index (IFCI), this year’s GIFR predicts that by 2020 there will be at least six countries in the world where Islamic banking and finance (IBF) will attain a market share of no less than 50% of the total financial sector in their respective countries.



These six countries, in addition to the Islamic Republic of Iran and Sudan, claims to have fully-fledged Islamic financial systems already in place. It is almost certain that Brunei Darussalam, the Kingdom of Saudi Arabia, Kuwait, Qatar, Malaysia and the United Arab Emirates (UAE) will have their financial sectors dominated by IBF by 2020.



Brunei Darussalam will be the first country to witness the share of IBF in the domestic financial sector exceeding 50% by 2020. Almost 45% of retail banking in the country already fulfills basic Shariah requirements. More impetus is needed for the capital markets, which requires a little guidance and support from the Ministry of Finance.

Given its small and overwhelmingly religious population, it will not be surprising to see Brunei Darussalam emerge as a nation where the IBF share is greater than conventional ones.



Similarly, the Kingdom of Saudi Arabia will have its financial sector predominantly Shariah compliant by 2020 since it currently has over 55% of its retail banking as Shari’a compliant. It will have to streamline Islamic banking and finance with official recognition, by the Saudi Arabian Monetary Agency and the Capital Market Authority. If Brunei Darussalam has not already achieved the milestone, Saudi Arabia could be the first country to boast of having Islamised the bulk of banking and finance practice in the country.



Since the establishment of Kuwait Finance House (KFH) in 1977, Kuwait has been at the forefront of IBF. It is expected that it will still be ahead of Qatar in achie-ving the threshold of 50% share.

With the current market share at 35%, Kuwait’s IBF industry will have to grow by 7.14% annually for the next six years to achieve the milestone of 50% market share. Furthermore, its existing Islamic financial institutions will have to take over 3.15% market share from the conventional financial institutions during the same time period.



Qatar is another country with huge potential for growth in IBF. Unfortunately, the likelihood of IBF reaching the 50% threshold was adversely affected by the government’s decision to disallow conventional banks offering Islamic banking through window operations.



Malaysia is another country that has made tremendous progress in IBF. With strong support from the government and the central bank, Malaysia has certainly taught other countries how government patronage actually brings wider economic benefits to the country.



The weakest link, however, in this list of six countries is the UAE. Despite the government of UAE’s strong support for IBF, the country will be able to just make the 50% mark by the end of 2020.



This brings us to the million-dollar question: How would Malaysia achieve the 50% mark, given that its financial sector currently has only one-fourth of it as Shariah compliant?

According to GIFR research, IBF in Malaysia will have to grow by 16.67% on an annual basis in the next six years (green field growth) in addition to cannibalising 5.56% of the conventional business annually (brown field growth) in order for it to have an equal share of IBF in its financial sector. Is it something achievable?



The table suggests that this is not only achievable but possible as well. Most of the conventional financial institutions involved in IBF have a lot of capacity to further grow their Islamic business. If the likes of Malayan Banking Bhd and CIMB Group Holding Bhd give a big (yet gradual) push to IBF as part of their expansion strategy, it will contribute significantly towards achieving the target of 50% market share for IBF in Malaysia.



Furthermore, this is perhaps the time for the government to consider converting Cagamas into a fully-fledged Islamic financial institution, as almost 50% of its business is already Shariahcompliant.



Agro Bank is already scheduled to convert fully to Islamic. It is worth considering to fully Islamise other banks like SME Bank, MIDF Amanah Investment Bank and similar government-linked financial businesses? Given the track record of the Malaysian government, it will not be surprising to see such a development in the next six years.


Prof Humayon Dar is chairman of Edbiz Corp London and a visiting professor of Islamic Finance at Academy for Contemporary Islamic Studies, UiTM

[This article appeared in THE MALAYSIAN RESERVE, 24 Feb 2014 under the title 'Need to give a big push to Islamic banking and finance in Malaysia']

REUTERS: Gulf ties could aid Islamic finance growth in Italy

Bankers and academics in Italy are stepping up efforts to develop Islamic finance in the country, a campaign which could benefit from growing economic links between Gulf countries and the euro zone's third largest economy, reports Reuters (18 Feb 2014).

Islamic finance has so far made only marginal progress in continental Europe, mainly inFrance and Germany. But Italy is seeking trade and investment with wealthy Gulf Arab states as a way to grow out of its debt problems.

Kuwait's sovereign wealth fund announced this month that it would invest 500 million euros ($685 million) in Italian companies in coordination with the Italian government's own strategic investment fund. Italy made a similar deal with Qatar last year.

Italy's trade ties with the Gulf are booming; its exports to the United Arab Emirates hit 5.5 billion euros in 2012, a 16.7 percent rise from 2011, government data shows.

Only about 2 percent of Italy's population of 61 million are Muslim. But the hope is that as Gulf companies and investors increase their activities in Italy, Islamic finance - which follows religious principles such as bans on interest payments and pure monetary speculation - will follow.

Italian firms raising loans could use Islamic structures to attract sharia-compliant banksfrom the Gulf, for example. Italian bonds and equities could become attractive to Islamic funds if they were certified as sharia-compliant.

"I think the development of sharia-compliant products is an important opportunity for Italy - it might become one of the drivers to get finally out of the economic crisis," said Enrico Giustiniani, analyst at Banca Finnat Euramerica in Rome.

"There is quite a big interest from Islamic funds and Islamic institutional investors to invest in Italy, especially in this period with many companies on sale."

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MARC affirms KFH Malaysia rating, long term downgraded

Malaysian Rating Corp Bhd (MARC) affirmed Kuwait Finance House (Malaysia) Bhd (KFHMB) long and short term financial institution ratings at AA+/MARC-1 while outlook on KFH's long term rating downgraded to negative from developing.

Accordingly, it said KFHMB's long-term rating outlook has been revised to negative from developing to reflect that of its parent.

The affirmation of KFHMB’s ratings follows the affirmation of the long-term and short-term financial institution ratings of its parent, Kuwait Finance House K.S.C. at AAA/MARC-1, said MARC in a statement yesterday.

This rating announcement comes two months afyer KFHMB discontinuing in June the rating services by RAM Ratings in what it said was a measure to 'be in line with the rating practices' of its parent in Kuwait and cost rationalisation.

In November 2009, RAM had put a negative outlook on the financial institution ratings of KFH, based on the deterioration in the financial metrics of both the bank and its parents.

Around that time, KFHMB chief executive officer Jamelah Jamaluddin, who was appointed in February, had requested several of its staff to go on leave pending internal investigations into transactions and contractual arrangements undertaken over the years.

In the latest report, MARC said KFHMB’s dependence on parent support has risen as the bank’s intrinsic financial strength has been visibly affected by asset quality challenges.

The near term impact of the bank’s weakened asset quality and operating performance on its capital adequacy was buffered by an injection of additional capital by KFH.

Meanwhile, KFH’s affirmed ratings reflect its systemic importance to the Kuwaiti economy as the second largest bank in the country as well as indirect majority government ownership.

KFH, the parent bank of KFHMB, is the second largest bank in Kuwait in terms of asset and is also one of the largest Islamic banks in the world with an extensive reach across the Middle East and a presence in Southeast Asia through KFHMB.

KFH also experienced asset quality deterioration amidst the global financial crisis with its NPF ratio weakening to 12.6% in FY08 with bulk of the incremental NPF accounted for by credit exposure in the real estate and construction and financial services (mostly investment houses) sectors which were badly affected during the crisis.

Although a marginal improvement in gross NPF was seen in FY09, which resulted in a gross NPF ratio of 11.8%, MARC notes that this was largely a function of an enlarged financing book, as absolute NPF remained relatively unchanged during FY2009.

Although a marginal improvement in gross NPF was seen in FY2009, which resulted in a gross NPF ratio of 11.8%, MARC notes that it was largely a function of an enlarged financing book, as absolute NPF remained relatively unchanged during FY09.

Meanwhile, high loss allowances, coupled with lower financing and investment income, resulted in lower profitability with return on asset (ROA) declining to 0.66% in FY09 from 1.81% in FY2008. At the same time, total capital ratio declined to 15.2% at end-2009 from 21.7% in the previous year.

MARC noted KFH’s capital ratios remain within Kuwaiti banking standards and above minimum regulatory requirements. Noting the pressure on KFH’s stand-alone credit profile, MARC continues to draw comfort from the very high likelihood of sovereign support for the bank.

The absence of a sustained recovery in KFH’s financial performance or a weakening in support from the Kuwaiti government would trigger a downward revision of the parent bank’s ratings.

At the same time, any weakening in support from KFH towards the subsidiary KFHMB may result in a downward revision of the latter’s ratings.

(This story, written by Siti Radziah Hamzah, appeared in The Malaysian Reserve on August 4, 2010. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)

KFH probing previous contracts, transactions

By Habhajan Singh

Kuwait Finance House (Malaysia) Bhd new boss, who came on board just under two months ago, has directed more than a dozen staff to go on leave pending internal investigations into 'transactions and contractual arrangements that have been undertaken over the years'.

In an email response to queries from The Malaysian Reserve, KFH Malaysia CEO Jamelah Jamaluddin said the bank is "taking a proactive approach and conducting a due diligence status audit, in light of the different and more challenging economic environment".

She added: "This is aimed at obtaining an accurate picture of certain transactions and contractual arrangements that have been undertaken over the years. Some employees have taken leave to help facilitate the exercise and the Bank will be guided by pragmatism and act accordingly as per the recommendations of the audit team conducting the due diligence status audit."

In a communication with staff on March 19, it is understood that Jamelah had asked a number of staff, including at least one head of department, to go on leave to enable the Kuwait-based Islamic banking unit to conduct its internal investigations.

Exactly a week later, on Friday, RAM Rating Services Bhd had issued a note putting the bank on what it calls a 'negative rating watch' in connection to the "on-going due diligence status audit, which required senior credit personnel to be on leave pending the completion of this exercise."

"This event heightens concerns on the potential for further deterioration in the Bank’s asset quality and credit fundamentals," the local rating agency said.

On Friday, RAM Ratings said it had met with the senior management of KFH Malaysia to seek further clarification on the matter. The rating agency was made to understand that an "internal reorganisation exercise has been put in place to strengthen the Bank’s credit team and processes, with the intention of improving asset quality."

People familiar with the bank told The Malaysian Reserve that the latest management move is putting a strain on staff morale, with word on the ground that more suspensions could follow.

Jamelah returned to KFH Malaysia as the new boss effective Feb 9 after a stint of just over two years at RHB Islamic Bank Bhd. She was the KFH Malaysia deputy CEO, a position now held by Ab Jabar Ab Rahman, when she left to helm RHB Islamic in August 2007.

Ab Jabar was designated acting CEO when Datuk Salman K Younis left as KFH Malaysia MD/CEO on June 1, 2009. Salman, who spearheaded the establishment of KFH Malaysia in 2005, was asked to return to head office in Kuwait "to assume wider responsibilities", but continued to act as a director of the Kuwaiti bank's unit in Malaysia.

However, the latest KFH Malaysia website no longer carries his name as a director of the board, which is chaired by Shaheen Alghanem. Alghanem joined the board in March 2007 and was appointed as chairman five months later. The other Kuwaiti on board is Abdul Wahab Al-Rushood.

The three other directors, all Malaysians, are Islamic finance lawyer Mohamed Ismail Mohamed Shariff, former Mesdaq Bhd executive chairman Khairil Anuar Abdullah and former Island & Peninsular Bhd MD Dr Radzuan Abdul Rahman.

On the management side, some of the key executives at KFH Malaysia, according to information from its website, are Annis Sheikh Mohamed who heads its corporate and investment banking, Mohamed Iqbal Mohamed Iqbal (international business and treasury), Nawaf Menayekh (international distribution), Siti Mariam Mohd Desa (real estate advisory), Maimunah Alias (commercial banking), Wong Kee Poh (retail and consumer banking), Amin Siru Abdul Rahman (credit risk management) and James Chong Wai Choy (risk management).

On the financial front, the latest KFH Malaysia results available are for the first nine months for 2009, which shows it posted a net profit of RM4.62 million on the back of RM364.92 million in operating revenue, at the group level.

In a note for the financial results, KFH Malaysia had noted that notwithstanding the ‘more difficult operating environment, the Group and the Bank will continue to focus on its business growth strategies through new and competitive product offerings, products cross selling as well as exploring new business opportunities within the region and the Middle East, while remaining vigilant on the impact of the global economic crisis to its businesses and profitability’.

(This story appeared in The Malaysian Reserve on 29 March 2010. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)

KFH scale down Singapore operations

by Habhajan Singh
Kuwait Finance House (KFH) has scaled down drastically its Singapore operations just over a year after opening the subsidiary to tap into the region’s fund management scene, sources say.
It is understood that the regional operations for the Islamic bank’s fund management act ivit ies in the island-state would be brought back to Kuala Lumpur and handled directly by Kuwait Finance House (Malaysia) Bhd. In May 2008, KFH Malaysia had announced that its wholly-owned subsidiary, Kuwait Finance House (Singapore) Pte Ltd that it had received the go ahead from the Monetary Authority of Singapore (MAS) to commence its fund management activities. It is understood that the Singapore operations, manned by about a dozen staff, had been reduced to just one staff.
"I think they have been a little impatient with the results from their Singapore operations. Perhaps they had expected a little too much, too soon," an executive at an Islamic bank told The Malaysian Reserve.

This is just one of the recent apparent bumps in the operations of the Kuwaitibased Islamic outfit. In mid-December 2009, KFH Malaysia had pulled out from a RM920 million deal to purchase 50% of Menara YNH from YNH Property Bhd’s unit.
In a statement on Dec 15, YNH had told the stock exchange that KFH Malaysia had informed it ‘in writing’ on that matter, and that it may seek damages from the Kuwait-based Islamic bank. In an emailed statement a day later, KFH Malaysia had said that that there was "no legally binding agreement between KFHMB and YNH Land Sdn Bhd." Explaining the rationale of the move, KFH Malaysia had informed its staff that KFH Asset Management Sdn Bhd (KFHAM), which was established in 2008, would "act as the strategic platform for the KFH Group for Asia Pacific".

In the memo, seen by The Malaysian Reserve, KFH Malaysia said: "As such, this consolidation exercise will affect the KFH Singapore office, since there is a duplication of business functions. We have had to make a painful decision in the employee and resource realignment in Singapore, and to minimise our workforce at the KFH Singapore office.
"The move is a necessary adjustment to ensure that our investments are tightly aligned with current and future revenue opportunities. The current environment requires that we continue to increase our efficiency. With the KFH Singapore decision, we optimise our employee deployment."
The bank also told its employees that the company had appointed a ‘reputable outplacement company’ to assist affected employees to find news jobs who, it added, were give ‘severance pay and other benefits’ which were ‘beyond the legal requirements’.

On the decision to eliminate jobs, the internal memo stated that it was ‘crucial’ to its ability to adjust the bank’s cost structure, so that we have the resources to drive future profitable growth’.
The memo, dated Dec 12, 2009, was signed by chairman Shaheen Al-Ghanem and acting CEO Ab Jabar Ab Rahman. In a statement when the Singapore subsidiary was established, Shaheen had said that the move the establishment of KFH operations in Singapore was a ‘testament of our commitment in the Asia-Pacific region’.

(This story appeared in The Malaysian Reserve on 18 Jan 2010. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)

Salman leave KFH Malaysia

It's official. The ever-approachable and smiling Salman Younis will be leaving Kuwait Finance House Malaysia to head back for an assignment at mothership in Kuwait. Below is KFH's press statement.

Official Statement from Kuwait Finance House (Malaysia) Berhad

Kuala Lumpur, Malaysia, 1 April 2009. Dato’ K. Salman Younis on secondment from KFH-Kuwait has successfully spearheaded the establishment of KFHMB in 2005. Subsequently, he was appointed as the Bank’s Managing Director and Chief Executive Officer. With the growth and achievements of the Bank over the last three and a half years, Dato’ Salman will return to the Head Office in Kuwait to assume wider responsibilities. Dato’ Salman will relinquish his position as Chief Executive Officer of KFHMB officially on 1 June 2009, but will continue to serve on the Board of KFHMB.
With immediate effect, Mr Ab Jabar Ab Rahman, Deputy Chief Executive Officer will be Acting Chief Executive Officer of KFHMB. He has extensive experience in the banking sector, having been in the industry for 30 years. As one of the pioneers of KFHMB, Mr. Jabar joined the Bank as Director, Commercial banking, in July 2005. He was then promoted to Chief Officer in March 2007. His portfolio was widened to include Commercial, Retail and Consumer Banking, with his promotion to Country Head on 18 September 2007. Mr. Jabar was appointed Deputy Chief Executive Officer on 1 August 2008.

‘AFB not affected by Global debt default’

By Habhajan Singh
Asian Finance Bank Bhd (AFB), the Islamic bank backed by shareholders from the Middle East, has not been jeopardised by news that one of its sharehodlers, Global Investment House (Global) from Kuwait, had defaulted on most of its debt.
AFB chief executive officer Datuk Mohamed Azahari Kamil said the bank's position and operations has not been affected in any way. Global, which is one of AFB's pioneer shareholders, has a 10% stake in the bank.
"It is a temporary setback (for Global)," Azahari told The Malaysian Reserve, adding that Global's shareholding in the bank had been shifted to an investment fund since November 2008.
On Jan 8, Reuters reported that the Kuwait's biggest investment bank had defaulted on most of its debt, in the first of several expected casualties for the wealthy oil-producing nation due, to the global credit crunch.
The news dealt a blow to Kuwait's efforts to restore confidence among investors after it recently rescued its fourth-largest lender, Gulf Bank — which was hit by huge derivative losses — and guaranteed deposits at all banks, the newswire added.
Global, with a 10% stake, was the smallest of AFB's three shareholders when the bank was established in 2006, with Qatar Islamic Bank taking a 70% stake and RUSD Investment Bank Inc of Saudi Arabia holding 20%.
Meanwhile, the Securities Commission (SC) announced in mid-November last year that Global, together with India's Reliance Asset Management, was the latest foreign investment players to receive approval to operate in Malaysia.
However, it has yet to set up office here. According to AFB's website, Global's 10% stake is held by Financial Assets Bahrain WLL, a limited liability company incorporated in Bahrain. The shareholders are listed as Financial Assets MENA WLL (99.9% holding) and Global Investment House KSCC (0.1% nominee holding).
"They (Global) are not even shareholders in our books. The shareholder is a fund managed by Global," said Azahari, adding that AFB is in communications with Global.
"If you look at what went wrong, it's just the whole economic environment. With values marked-to-market, the valuations have come down almost 50%.
"As a fund manager, be it equities or structured products, valuations have come down. No one is insulated, all are affected," he said.
"We believe in the able leadership of Maha ( Global's chairperson and managing director Maha K Al-Ghunaim) and Omar (Global's executive vice president for products and business Omar M El-Quqa) to effect the turnaround," Azahari added.
AFB, which began operations on Jan 17, 2007, became the third foreign Islamic bank to be established in Malaysia after Kuwait Finance House and Al Rajhi Bank of Saudi Arabia. Global and other shareholders play a role in helping the Islamic bank to reach out to potential clients in the Middle East to market funds and to tap new sources for funds.
This would benefit AFB, for example, in marketing the worlds first Asean Shariah Corporate Governance Fund. AFB signed an agreement with Corston-Smith Asset Management in December 2008 to be the distribution agent of the RM1 billion fund targeted at GCC countries.
(This story appeared in The Malaysian Reserve on Jan 22, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)