More players chasing slice of Islamic banking pie


MODERN Islamic banking was first experimented clandestinely in Egypt from 1963 to 1967, so as to avoid being regarded as a show of Islamic fundamentalism, considered then to be a taboo.
Fast forward to four decades later, if there is one Islamic idea that has been well-accepted by all, it is its banking system - where the basic principle is the prohibition of interest.
And across the globe from New York to London, Dubai to Singapore, blue chip banking groups are aggressively chasing for a slice of this growing pie.
Within Malaysian shores, since the first introduction of an Islamic bank in 1983, Islamic banking has grown by leaps and bounds especially in recent years.
As it is now, there are more non-Muslim customers of Islamic banking products than Muslim themselves.
Regarded as one of the key drivers for the future of the country's banking sector, there are now 12 Islamic banks, nine local ones and three owned by Middle East investors.
And under the Malaysia International Islamic Finance Centre (MIFC) initiative, Bank Negara Malaysia is inviting more new players, local and foreign.
The question is, do we really need so many of them? Especially at a time when conventional banks are encouraged to consolidate as full financial liberalisation draws closer to home.
Just two decades ago, Malaysia had quite a number of conventional banks sprouting everywhere and in the end they had to go through painful consolidation exercises.
But in the case of Islamic banking, industry observers believe more players are definitely needed.
Rating Agency of Malaysia (RAM), in its recent banking bulletin, said the big number of Islamic banks may appear to be "counter intuitive to Bank Negara's vision of consolidating the Malaysia banking sector" but it would compel the domestic banks to become more competitive and innovative in their Islamic offerings.
Its head for financial institutions ratings, Promod Dass, told Business Times that Malaysia, although well praised for its commitment to develop an international hub for Islamic banking, is still at the foundation stage and needs more players in the marketplace to boost interest.
"It is not overbanked yet for Islamic banking. In fact it is only starting up," he said.
The fact that the Malaysian operations of global banks like HSBC Bank and Standard Chartered Bank have expressed interest to launch Islamic banking subsidiaries is a strong message of the potential for Islamic banking that Malaysia is offering, he added.
Kuwait Finance House (KFH) managing director Salman Younis agreed, stressing that the demand for Islamic banking and finance products is on the rise domestically and on a global basis.
"That is why you see international players like HSBC, Standard Chartered and Citigroup all talking about setting up their own Islamic banks because they all see the need and the supply is not enough yet."
He pointed out that global Islamic finance is growing 15 to 20 per cent annually and in certain countries like Saudi Arabia and United Arab Emirates at 25 to 30 per cent.
"Undoubtedly, there is global demand. Even the US is doing Islamic banking now and Islamic banks are also investing there and in Europe."
Jal Othman, a partner at Shook Lin & Bok, said Islamic banking in Malaysia still needs players as the industry needs both support and weight.
Recalling the history of Islamic banking in Malaysia, which started with Bank Islam in 1983, he said: "We tried to homegrow our own player and one cannot say that it was entirely a successful attempt as it was monopolistic with no real competition."
But just how many players do we need to ensure huge success?
Jal said not just anybody should be invited into the game.
"We must be very careful in our selection and pedigree counts a lot as we should only be interested in the big boys," he said, adding that with them, they must bring in the requisite skills.
He noted that at the moment, the fruition of quality banking by foreign players has increased, but not at a greatly enhanced level that is expected.
When KFH, Asian Finance Bank and Al-Rajhi Bank got their licences to operate Islamic banks here, they had expressed their desires to create the bridge between Malaysia, and to a certain extent, Asean countries and West Asia in terms of bringing in funds from the oil-rich Gulf states into the region.
To date, how far of this bridge has been travelled?
RAM's Promod said the presence of the three foreign banks would have spillover effects for Malaysia as Arab investors, due to the familiarity factor, would most likely prefer to deal with their own banks here.
Against the determination to make Malaysia the international hub for Islamic banking, he is confident that Malaysia's central bank would continue with its unwavering support to ensure that this "bridge" objective is attained.
"There is actual interest by the banking groups to pursue this area and if you look back at the Bank Negara's financial masterplan, quite a lot of what was outlined has materialised.
"The fact that the global international giants want to set up Islamic banking subsidiaries here, which shows there is a potential for Malaysia to become the international hub," he said.
In getting the attention of Middle East investors to park their money in Malaysia and the region, KFH group in Dubai recently launched its international research arm based in Kuala Lumpur devoted to generate and share knowledge on Islamic finance and capital markets within the Middle East and Asia.
Salman said it has been KFH's "declared position" to continuously seek deal flows not only from the Gulf region to Asia but vice versa and this research arm is aimed at narrowing the "information gap" between Gulf Cooperation Council (GCC) states and Malaysia.
"We have brought foreign direct investment into Malaysia and the region and we have been helping Malaysia businessmen do business in GCC. Tabung Haji is investing in Kuwait and we are helping them," he noted.
Jal, meanwhile, believed that to bring investors in from the Arab states, it is Malaysia that has to create the business opportunities worth investing in.
"We created the game and we brought in the players and so far we have been successful. These players have skills but money only goes where the projects are, so now we must focus on creating attractive projects," he said. Such projects would include the Iskandar Development Region and the Northern and Eastern Corridors, he noted.

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