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']

TMR: Saudi carrier flies to KL from April

WEEKLY JEDDAH-KL DIRECT FLIGHT S: (From left) Flynas CEO Raja Mohd Azmi Raja Razali, NAS Holding deputy group CEO Bander Al-Mohanna and Flynas marketing and communications director Wael Al-Sarhan at a media briefing in Kuala Lumpur. Saudi Arabian low-cost carrier Flynas is targeting between 4,000 to 5,000 passengers per month for its newly launched 3-weekly non-stop flights between Jeddah and Kuala Lumpur (KL) from April 2014. (Pic by Hafzi Mohamed)

By John Gilbert

Saudi Arabian low-cost carrier Flynas is targeting between 4,000 and 5,000 passengers per month, for its newly launched tri- weekly non-stop flights between Jeddah and Kuala Lumpur from April 2014.

CEO Raja Mohd Azmi Raja Razali said with over 229,000 Malaysians who travelled for haj and umrah from Kuala Lumpur to Saudi Arabia last year, the carrier sees good opportunity to tap into this growing market and into the growing influx of passengers from Saudi Arabia to Malaysia altogether.

“Over 73,000 Saudi tourists arrived in Kuala Lumpur last year, and with the growing number of haj and umrah travellers heading to Saudi Arabia, we believe we can hit a target of 330 passengers a week from Malaysia to Jeddah,” he told reporters at the launching of the carrier in Kuala Lumpur yesterday.

He said Kuala Lumpur is the inaugural destination of Flynas’ Global Flight Routes programme, which will feature an affordable international route network across Europe, Asia and Africa adding that all of Flynas’ international flights will operate out of its hub in Jeddah.

“As part of our Global Flight Routes programme, we are also looking at other destinations that are set to be rolled out namely London Gatwick and Manchester in the UK, Paris, Jakarta, Karachi, Düsseldorf, Moscow and Casablanca.

“The expansion of our network to include destinations that are seen as high-growth markets is a key element of our strategy to lead the airline into an aggressive development,” the CEO said.

Raja Azmi said Kuala Lumpur, being picked as the inaugural Flynas Global Flight Routes destination, underscores the strong ties the two countries have enjoyed for centuries stressing that ticket prices will be compe-titive, comparative to low- cost carrier model.

“We are also talking to several domestic airlines in Malaysia in terms of sharing basis whereby Saudi tourists can fly to several other tourist cities in Malaysia like Langkawi, Penang and to East Malaysia,” he said, pointing out the carrier will be operating from Kuala Lumpur International Airport (KLIA) for now and see viable options to move to KLIA2 later part of the year.

[THE MALAYSIAN RESERVE, 21 Feb 2014]

TMR: Stakeholders urged to explore trade financing

By Kazi Mahmood

Trade financing, one of the ready opportunities available for Islamic banks to tap, is among the many areas where the industry has not yet made its mark, said a report published by the Kuwait Finance House Research Ltd (KFHR).

However, one of the challenges to the Islamic trade financial sector is the readiness of the Islamic financial institutions to proactively develop products to meet the changing needs of the market players involved in global trade, the report said.

“By expanding this part of Islamic financial product, it will open up to wider sets of opportunities to Islamic finance eg the halal industry.” the report, entitled “Islamic Finance Outlook 2014” indicated.

The general preference of the Islamic banks is attributed to be a direct lending over trade financing, keeping transactions straightforward and simple, and they should move away from that by expanding into other areas of business.

According to the report, these are the sectors in which Islamic banking and finance could penetrate, as there are substantial market potential for industry suppliers to tap into. The sectors are:

• Infrastructure and government developmental plan in the Organisation of the Islamic Conference jurisdictions.

• Increasing participation of western financial centres to tap the industry and this will create a healthy competition and encourage greater innovation.

• Greater partnership among the regulatory and supervisory bodies to enhance regulatory frameworks for Islamic financial institutions.

• Low penetration rates of the various Islamic finance sectors in most jurisdictions.

• Strong support from various multilateral and international organisations.

• Increasing trends of cross-jurisdictions partnership and financial linkages to facilitate cross border financial activities of Islamic finance.

• Increasing awareness and familiarity among stakeholders on the value propositions of Islamic finance.

In order to be able to join these sectors, Islamic financial institutions need to demonstrate how Shariah-compliant products are economically feasible and competitive as per the conventional finance, in order to generate further growth and acceptance of the industry’s offerings.

Meanwhile the report noted that in 2013, of the top 10 largest sukuk issuances in terms of issue size for 2013, six of these sukuk were issued by non-Malaysian issuers domiciled outside Malaysia.

The increases in shares of other jurisdictions in 2013 were supported by some notable sukuk issuances in non-Malaysian domiciles.

In 2013, Malaysia once again led the primary market issuances with a 69% share of total issuances, followed by Saudi Arabia at 12%, United Arab Emirates (UAE) (6%), Indonesia (5%), and Turkey (3%).

In 2012, the respective shares of top primary sukuk market issuers were as follows: Malaysia 74%, Saudi Arabia 8%, UAE 4.7%, Indonesia 4.6%, Qatar 4.2% and Turkey 1.8%.

Compared to the previous year (2012), the share of Malaysia declined as a proportion of total issuances while those of others increased. The increases in the shares of other jurisdictions in 2013 were supported by some notable sukuk issuances in non-Malaysian domiciles.

Overall, Islamic finance in 2014, is set to experience another increased momentum, particularly in the sukuk market with the issuances by few sovereigns (eg) the UK and Luxembourg.

The Islamic banking sector is likely to witness a surge in demand underpinned by greater economic participation of Muslim nations as well as driven by stronger demand from the population towards Shariah-compliant or ethical financing solutions.

Instrumental roles played by multilateral organisations and regulatory bodies are expected to further benefit the Islamicbanking and takaful industry, especially to low-to-medium income customers as the financial inclusion objective has been strongly emphasised moving forward.

Thriving interest of key global/regional financial centres in developing Islamic finance, for instance London, Hong Kong, Singapore, Luxembourg, further adds weight to the strong prospects of Islamic finance as markets globally look for alternative sources of funding and investment avenues.

The industry will continue to grow, driven by both demand and supply factors, and further facilitated by government agencies and financial regulators. In the next few years, we foresee the industry’s focus into four key spectrums that will take the industry to greater heights, the report added.

[THE MALAYSIAN RESERVE, 10 Feb 2014]

Maybank to boost Islamic finance ops in Indonesia

Top lender Malayan Banking Bhd (Maybank) has obtained Indonesian authorities' approval to convert its unit PT Bank Maybank Indocorp into a full-fledged Islamic bank, its chief said.

The move allows Maybank to step up its Islamic banking activities in the world's most populous Muslim nation. It also fits in with the group's plan of becoming the largest Islamic bank in Asean by 2015, president and chief executive officer Datuk Seri Abdul Wahid Omar said, reports Business Times (30 Sept 2010).

THE REPORT GOES ON:

The group's wholly-owned Islamic unit, Maybank Islamic Bhd (MIB), is already the largest Islamic bank in Southeast Asia with total assets of RM44 billion. It is ranked among the top 20 Islamic banks globally.

"Within the context of Asean, our market share in the Indonesian Islamic banking market is still small. We just started ... we just got the approval yesterday," Abdul Wahid told reporters after Maybank's annual general meeting yesterday.

He said Bank Maybank Indocorp, once converted, would be known as Maybank Syariah Indonesia (MSI).

"We are now in the midst of executing the plan for MSI and the next stage will be to consolidate that with the syariah operations under Bank Internasional Indonesia (BII).

"With that, we hope to be able to increase our (Islamic) asset base in Indonesia and to command a big market share. We are starting from a relatively small base with about US$200 million (RM616 million) of assets in MSI," he said.

BII is an Indonesian bank that Maybank acquired in 2008. There are currently 294 BII branches and Maybank aims to raise this to about 450 by 2012.

The group also hopes that more activities will come out of its joint venture investment bank in Saudi Arabia, known as Anfal Capital, in which it owns 18 per cent. "It could serve as a conduit for business and deal flows between the Middle East and Malaysia," Abdul Wahid said.

In Malaysia, Maybank is implementing a new strategy this financial year that will see it offering customers Islamic banking products over conventional ones as the first choice.

It aims to expand its Islamic financing base so that it accounts for a third of the group's total domestic financing portfolio by 2015 from 24 per cent currently, according to its annual report.

On Basel III global banking rules, Abdul Wahid said the Maybank group should have no problems complying.

GIH on Al Rajhi

Al Rajhi Banking & Investment Corp's (RJHI) marginally improved results as compared to the sector performance signals encouraging outcome of the diversification strategy adopted by the bank in managing both its financing and investment portfolios.
The bank’s strict adherence to Shariah-compliant activities along with no exposure to the global mortgage market has largely facilitated it in escaping the severe repercussions, which could have arose if exposed to toxic financial assets.
Thus, better positioning the bank to be preferred by the market segment inclined towards Islamic over conventional finance. In addition, RJHI’s focus on overseas expansion will better enable the bank to more effectively diversify its income sources.
However, as witnessed across the sector, RJHI may not be able to escape the contraction in banking spreads (especially because the demand deposits constituting the majority of its funding base would allow less flexibility to adjust in a falling interest rate environment). Although the bank’s dominance in retail segment provides it with a chance of earning relatively better returns on its investment portfolio, it may not be in a very strong position to re-price its corporate investments. The slowdown in the economy also calls for greater attention to avoid deterioration in retail investments exposure. We believe that the bank’s near term focus will be towards better managing investment spreads rather than balance sheet growth.
Income Statement
RJHI’s profitability results posted an increase of 1.2% (from SR6.4bn in 2007 to SR6.5bn in 2008) as compared to the decline of 11.7% in 2007. The bank’s improved performance (attributable to income growth from both core banking and non-commission activities) was somewhat better than the listed Saudi banking sector that registered a marginal growth of 0.5% in FY08. The Saudi banks’ 2008 performance was mainly dampened by 4Q08 results that witnessed pressure due to setting aside of higher financial allocations by the banks in consideration to the decline in their investment portfolios.
The bank’s investments income (FY08) recorded an increase of 9.8% (from SR8.5bn in 2007 to SR9.4bn in 2008), while the investments expense during the period showed a rise of 7.6%. At times of the softening interest rates environment, RJHI’s successful management of its investments income and expenses led to an overall improved core banking performance posting an increase in net income from investments of 10% (from SR7.7bn in 2007 to SR8.4bn in 2008).
However, the higher impairment charge for investments and others in 2008 had a dampening impact on the net income from investments after PILs (provisions for investment losses), resulting in a decline of 0.8%. RJHI’s top-line performance was augmented by an increase (y-o-y) in non-commission income by 30.1% in FY08. The bank’s continued efforts to cope with the challenging capital market conditions (TASI decline of 56.5% in 2008), showed positive results as the net fees from banking services (supported by fees from share trading services, payment services, remittance business, etc) recorded an increase of 26.6% in FY08. It is noteworthy that an increase of other operating income by 265% (FY08: SR279.6mn) could be one-off, so even after taking that into account the bank’s non-commission income still showed an increase of 12.6% in FY08.
-- Extracted from an equity research report released in May 2009 by Global Investment House
(This story appeared in The Malaysian Reserve on May 18, 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)

Al Rajhi looks to widen customer reach

By Habhajan Singh

[In a new series called CEO ONE-ON-ONE, The Malaysian Reserve began its first in a series of one-on-one interviews with the CEOs of Islamic financial institutions with Al Rajhi Malaysia CEO Ahmed Rehman.]

IN the first two years of operations, Al Rajhi Banking & Investment Corporation (Malaysia) Bhd (Al Rajhi Malaysia) opened one branch after another. This activity is about to slow down this year as the subsidiary of the Saudi Arabia banking group eyes expansion through alternate channels.
This insight was one of the many that Al Rajhi Malaysia CEO Ahmed Rehman shared with The Malaysian Reserve in an exclusive interview recently.
"In retail, we have to increase our reach to customers. There is no debate on that. That can come in a variety of ways, including the increase of branches. "This year, we will perhaps see more of alternate channels like ATMs. It's a more efficient way of reaching a customer compared to the brick and mortar approach. Our emphasis this year will be more on alternate channels," he said. One of the 17 Islamic banks including Maybank Islamic Bhd and Kuwait Finance House (Malaysia) Bhd, licensed by Bank Negara Malaysia (BNM), its parent in Saudi Arabia represents itself as being the largest Islamic banking group in the world.

How did Al Rajhi perform in Malaysia last year?
It was our second year of full operations. We have now completely built up our full infrastructure. There will always be further developments, from a busines as usual perspective, rather than a rush to get to a minimum scale platform. We have arrived at that minimum scale platform. I'm referring to a platform for retail business, a network of branches that you can justify from a retail business perspective. You cannot be a two-branch operation and say I'm in the retail business.

What about your balance sheet position?
We have built up a minimum scale balance sheet. It has grown fairly aggresively. It has gone fairly geomatrically in terms of growth in a short period of time. It is important to grow geomatrically as you need a certain amount of scale to be able to conduct your business and have a certain amount of reach. We have arrived at that.

Where do you see your growth coming from?
Obviously, retail is our key engine. We will continue to drive on that front.

What kind of alternate channels are you looking at?
It will be ATMs, the Internet, SMS banking, these kinds of areas.

[FOR THE FULL INTERVIEW, PLEASE EMAIL TO habhajan.singh@gmail.com]

(This story appeared in The Malaysian Reserve on Mar 2, 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)