You don’t need a crystal ball to predict the future of Islamic banking in Kuala Lumpur, according to HSBC Bank Malaysia deputy chairman and chief executive Zarir Jal Cama. “The growth in the Islamic banking industry in Malaysia has been phenomenal over the last few years,” Cama tells Emerging Markets. “Demand for Islamic banking products is on the rise and the market can only go one way – up.”
Twenty-three years on from its inception, the Islamic sector has grown to represent about 11% of Malaysia’s total banking industry assets, but Cama stresses there’s no room for complacency: “One must not forget that Brunei and Singapore are also trying to grab this role from Malaysia,” he says. HSBC is establishing a dedicated regional resource in Malaysia to handle the growing Asia-Pacific Islamic finance business transacted by HSBC Amanah, the group’s global Islamic financial services division.
The Kuala Lumpur authorities have been robust in their support. Bank Negara, the central bank, has been promoting Malaysia as a regional centre for Islamic finance – “and has been introducing the right measures and policies to support this decision”, Cama says. Encouraged by Bank Negara,the Islamic Financial Services Board was established in Malaysia in 2002 as a global organization of Muslim bankers in charge of banking regulation and supervision.
Just as bullish is Badlisyah Abdul Ghani, chief executive of CIMB Islamic Bank, which heads Malaysia’s Islamic debt capital market league table. “In 1983, the total share of Islamic banking was only 1%, in 1993 the share was 6%,” he points out. Now, in Malaysia’s Islamic debt capital market, an outstanding total of some RM105 billion ($29.1 billion) in corporate bonds are “effectively divided equally between conventional and Islamic bonds”, Badlisyah tells Emerging Markets: “Islamic bonds represented about 70% of total corporate bond issues in 2005 and it is expected to be 90% this year. More than 80% of the stocks listed on Bursa Malaysia are shariah-compliant.”
market expansion
So how fast can the market carry on expanding? Bank Muamalat – one of just two domestic-sector Islamic banks in Malaysia – expects loan growth of some 30% in 2006, versus 43% a year earlier.
Bank Negara’s 2001 Islamic Financial Market Masterplan targets Islamic banking assets attaining 20% market share by 2020. “If we are conservative we could say the share would revolve in the range of 12-14% in the next few years until 2010 to allow for market adjustment and the likes, and then later shoot up to 20%,” says Badlisyah. But momentum may be far quicker. Given the entry over the past year of three new Islamic banks from Saudi Arabia, Qatar and Kuwait, and the issuance of six new licences to Malaysian banks, “we believe the growth of the share would happen faster.”
Some 30 financial institutions are already licensed to undertake Islamic banking activities. Recent impetus has come from four new takaful (Islamic insurance) licences issued in 2005 to joint-ventures or local/foreign consortia. The takaful industry posted growth of 18.8% for combined contribution income, the highest in three years, according to the 2005 Takaful Annual Report released by Bank Negara on April 19.
Specialists shortage
Developing intellectual capital via new professionals and specialists “will be one of the crucial factors” in accelerating innovation in the market, according to Bank Negara governor Zeti Akhtar Aziz.
Bankers single out the dearth of trained Islamic bankers, lawyers and Shariah scholars as a key factor holding back Malaysia’s Islamic banks. Badlisyah points to “a lack of skilled staff”. The establishment of the International Centre of Education in Islamic Finance (INCEIF) is “an excellent idea as currently there is a shortage of people in the industry,” says Cama.
Other sources highlight obstacles to growth ranging from lack of consumer education to a need to enhance the Islamic institutional structure, regulatory framework, and Shariah and legal infrastructure.
The results of Bank Islam Malaysia – the country’s first Islamic bank, now in its third decade of operation – have sounded one particularly negative note. Bank Islam reported non-performing loans exceeding RM2.2 billion ($610 million) and a RM480 million loss in its year to June 2005. The government pointed to corporate governance failures, rather than any inherent market weakness.
To drive forward the market’s next phase, finance minister Tan Sri Nor Mohamed Yakcop has urged capital market players to take on greater responsibility.
Cama cites the need “for Islamic banks to offer competitive products, which are just as good, if not better, than what is available in the conventional space.” According to INCEIF governing council member Volker Nienhau, “if you want to have further growth in the Islamic banking sector, you must draw and convert or convince people from the conventional banking sector to use Islamic banking services.”
Bridging the divide
Malaysia, which created the world’s first Islamic interbank money market in 1994 and was the first country to trade Islamic-compliant securities on its stock exchange, has established a track record of innovation. This suggests it can retain and strengthen its regional hub status, and strengthen ties with Middle Eastern markets – helped on by the sharing of best practices and standardization in Shariah principles.
As Cama observes, in the world of Islamic finance, “there is a greater need to bridge the Shariah interpretation between various areas although we do not expect total agreement from everyone’s viewpoint.”
This should not be impossible. Badlisyah observes that Malaysia-based Shariah advisors “are very strict in their application of Shariah for Islamic banking and finance transactions, contrary to the wide perception that we are more liberal than the Middle East scholars”. Thus in Malaysia, “we do not allow proceeds in Islamic financing transaction to be used for non-halal activities”, while elsewhere, “commodity murabaha placements at conventional banks have caused leakages in the Islamic financial market into the conventional financial market.”