LONDON, 4 April 2005 — The Jeddah-based Dallah Albaraka Group (DAG), headed by Sheikh Saleh Kamel, has opened negotiations with Malaysia’s premier banking group, RHB Bank Berhad, with the aim of acquiring a substantial equity stake in RHB Islamic Bank, the dedicated Islamic banking subsidiary of the RHB Group, which started operations in Kuala Lumpur on March 16, 2005.
The negotiations follow the introduction in March of the latest financial sector liberalization measure by Bank Negara, the Malaysian central bank, allowing foreigners to own up to 49 percent of the equity in the Islamic banking subsidiaries of local banking groups. Previously, this ceiling was pegged at 30 percent.
Foreign equity participation in Malaysian Islamic banks, stressed Bank Negara Governor Dr. Zeti Akhtar Aziz, would enable the banks to tap regional and international business opportunities.
In fact, it was Dr. Zeti who gave the go-ahead for RHB Capital Berhad, the holding company of RHB Bank Berhad, to open negotiations with DAG’s Malaysian subsidiary, Dallah Albaraka Holdings (Malaysia) Berhad, to acquire a stake in RHB Islamic Bank. This stake according to local Islamic banking sources could be between 30 percent and 49 percent.
The two groups must have had the go-ahead some time ago, given the fact that Khalid Bhaimia, the managing director and chief executive of Albaraka Investment Company in the UK, has already been appointed the inaugural CEO of RHB Islamic Bank and has relocated to Malaysia. This move has taken the Islamic banking sector by surprise.
Bhaimia is close to Sheikh Saleh’s son, Abdullah, who is effectively running DAG. Albaraka Investment Company also relocated its offices to the offshore haven of Isle of Man from Friday.
This is not DAG’s first involvement in the Malaysian Islamic banking sector. In fact, of all the Gulf Islamic banking groups, Sheikh Saleh has been the first to enter the Malaysian market as long ago as in the early 1990s. DAG in fact until a year or so ago owned an 18 percent stake in Bank Islam Malaysia Berhad, the country’s pioneering Islamic bank set up in 1983. Albaraka also owned other companies in Malaysia.
However, despite this long relationship with Malaysia, Bank Negara has consistently refused to give Sheikh Saleh an outright Islamic banking license to operate in the country — an aspiration which DAG has always entertained.
In the last round of Islamic banking licenses in September 2004, it was noticeable that Bank Negara, according to Malaysian banking sources, refused DAG a stand-alone license. It also refused Kuwait-based The International Investor (TII) a similar license. Ironically, DAG’s banking holding group, the Bahrain-based Albaraka Banking Group (ABG) has a loose equity participation relationship with TII, following a failed full-scale merger between the two groups.
This is in contrast to stand-alone Islamic banking licenses to Kuwait Finance House, Al-Rajhi Banking & Investment Corporation of Saudi Arabia, and to a consortium of banks led by Rusd Investment Bank, Qatar Islamic Bank, and Global Investment House of Kuwait.
For DAG, the new association with RHB Bank Berhad, gives it a more high profile presence in Malaysia. Its relationship with Bank Islam was more benign, given Bank Islam’s overtly cautious and bureaucratic approach to banking per se. As Bhaimia stressed at the launch of RHB Islamic Bank, the initial aim is to concentrate on Malaysia, and the region including Singapore, Thailand, Brunei, and the Philippines, where RHB Group already has a presence.
The above developments must be viewed against the rapid liberalization of the Malaysian Islamic banking sector. Since the three foreign licenses approved in September 2004, Bank Negara has also approved licenses to domestic players including RHB Bank Group; CIMB Holdings; Affin Bank Berhad; and to the Malaysian Chinese-owned Hong Leong Bank Berhad.
The vision for the country’s banking sector comes from Malaysia’s Financial Sector Master Plan (FSMP) launched in September 2001, and in which, according to Bank Negara, “the financial sector has a vital role in promoting growth and economic transformation toward a more diversified economic structure.”
One may question the selectiveness of the financial liberalization policy which is at present confined to Islamic banking. But Bank Negara has in the past promoted the globalization of Islamic banking and sees the entry of qualified foreign players as competition to the local banks.
All these licenses to foreign players however come with a health warning — ignore the domestic market at your peril. Dr. Zeti, for instance, wants foreign banks operating in Malaysia to show more commitment to the country by integrating their activities with the domestic economy. For instance, if foreign banks wish to open more branches in Malaysia, this consideration will be balanced whether these branches are merely located in plum urban areas or whether they are also located on non-urban areas.
Foreign funds are once again flowing into Malaysia. These amounted to RM16 billion in first quarter 2004 slowing down to RM11 billion in 4th quarter 2004.