Growing the Islamic banking business

Global Islamic financial industry has grown to register overall total assets of RM8.1t as at end-2015


Islamic BankingMalaysia has long been regarded as a leading country on the global front in Islamic finance (IF), after being around for over 30 years.

There are presently 16 fully-fledged licensed Islamic financial institutions in the country including several foreign-owned entities, while the nation’s sukuk market represents over 60% of the international sukuk market share.

These commendable statistics are not surprising, considering the government’s efforts to realise the industry’s full potential amid the rise of IF across the world.

The local sector is well-supported by comprehensive market infrastructure, a robust regulatory framework and dynamic market participants.

Over the past two decades, the global Islamic financial industry has grown to register overall total assets of US$1.88 trillion (RM8.08 trillion) as at end-2015, as per the Islamic Financial Services Industry Stability Report 2016.

The World Bank and Islamic Development Bank Group’s Global Report on Islamic Finance 2016 said Shariah-compliant financial products and services are now offered in 50 Muslim and non-Muslim jurisdictions worldwide.

Yet, it was only last year that Malaysia rose through the ranks to become the global leader in Islamic banking and IF.

As noted in the Global Islamic Finance Report 2016, the country surpassed Iran in the Islamic Finance Country Index (IFCI) for the first time since the inception of IFCI in 2011, largely due to the government’s commitment to use Islamic banking and IF as a policy tool and an integral part of the economic agenda.

Bank Negara Malaysia (BNM) in a recent strategic paper noted that the market share of Islamic banks in Malaysia quadrupled from 7.1% in 2010 to reach 28% in 2016. However, the industry’s annual growth rate slowed from 24.2% in 2011 to 8.2% in 2016, signalling a need to explore new opportunities for sustained growth.

BNM’s July 2007 statistics showed total assets of Malaysia’s Islamic banking system (IBS) — comprising Islamic banks, IBS of commercial banks, and IBS of investment or merchant banks — as at January 2007 stood at RM126.27 billion.

Some 10 years later, as at January 2017, the figure had risen to RM584.45 billion. By June 2017, the industry’s total assets reached RM610.52 billion.

Total loans applied to Islamic banks amounted to RM21.92 billion in January this year before declining to RM19.74 billion in June.

Total loans approved for Islamic banks in January stood at RM8.69 billion in January 2017 and rose to RM10.45 billion in June.

For non-performing or impaired financing, the Islamic banking system (Islamic banks, IBS of commercial banks, and IBS of investment or merchant banks) recorded a total of RM6.36 billion in January 2007.

By December that year, non-performing financing dropped to RM5.56 billion and remained relatively flat over the next few years, dropping to a low of RM4 billion in December 2012 before rising to RM5.54 billion in January this year.

For June 2017, impaired financing for the IBS rose to RM6.18 billion.

Malaysia has done much to develop a Shariah-compliant ecosystem, beginning with the institutionalisation of Islamic financial players in 1980, which saw the formation of the first Shariah committee by Bank Islam Malaysia Bhd, which then became the first Islamic bank established under the Islamic Banking Act 1983.

In 1997, a centralised Shariah advisory was created, including the Shariah Advisory Council, the dedicated Muamalat Court and several talent and knowledge institutions to nurture talents and generate knowledge.

By 2007, the diversification of Islamic financial business had begun, thus requiring legal and regulatory frameworks to ensure end- to-end Shariah compliance of such ventures.

Among these was the Islamic Financial Services Act 2013 (IFSA), a comprehensive legal framework building on the earlier Islamic Banking Act 1983, fully consistent with Shariah principles in all aspects of regulation and supervision from licensing to the winding-up of an institution.

Year 2017 has not been short of action either. Last month, the Securities Commission Malaysia (SC) said it would launch a sustainable and responsible investing (SRI) investment funds framework by year-end to capitalise on the values shared by SRI and IF. The framework comes on the back of the SC’s SRI sukuk framework, introduced in 2014 to continue pioneering the development of a Shariah-compliant SRI segment.

Moody’s Investors Service Inc also said in an April report that it expects Shariah-compliant investment accounts at local banks to display strong growth over the next three to five years, with an upward trajectory of Shariah-abiding investment accounts in the country already seen since July 2015, following the implementation of IFSA.

The local sukuk market has been registering increasing interest as well, as a source of funding alternative to the equity and conventional bond markets, in addition to being an option for Islamic investors seeking Shariah-compliant debt instruments.

According to RAM Rating Services Bhd, the global sukuk issuance reached US$22.2 billion as at end-March this year, of which, Malaysia led the pack with 38.5% of the lot.

Outstanding global sukuk amounted to US$346.7 billion as at end-March 2017, with Malaysia again holding the majority at 48% of the pie.

China-based property developer Country Garden Holdings Co Ltd issued a RM1.5 billion sukuk in Malaysia two years ago. Just last month, BEWG (M) Sdn Bhd, a wholly owned indirect subsidiary of Beijing Enterprises Water Group Ltd, issued a RM400 million sukuk in Malaysia to finance its water treatment project in Terengganu.

For all of Malaysia’s achievements, it needs to move quicker if it wants to maintain its pole position.

London, already a landmark financial centre, has been making efforts to challenge traditional IF powerhouses, while Dubai in recent years had announced its intention to become a hub for sukuk issuance.

As BNM has pointed out, the industry’s annual growth rate has reduced from double- digit to single-digit expansion. Calls have been made for greater broadening of the offering mindset — to extend beyond compliance, to deliver value propositions not just to financial consumers, but also to the wider stakeholders within the society and economy at large.

Malaysia’s IF sector also needs to move beyond short-term objectives to take a long- term view, with performance measurement based on both financial as well as non- financial aspects such as people and the planet (eg green sukuk).

Key stakeholders — consumers, employees and the public — should be more proactive in implementing an impact-based approach that fosters good conduct.

After all, a main principle of IF is to take on sustainable, interest-free projects with high returns to be distributed to shareholders, thus maximising the social benefits and bringing prosperity to the economy.