THE credit crunch and the global financial crisis may have put a dampener on the conventional financial market with both corporate and retail customers affected. But the evidence suggests that the Islamic retail and consumer finance sector has largely held its own in the core markets of the Gulf Cooperation Council (GCC) countries, Malaysia, Indonesia, Brunei, Pakistan, Bangladesh and Turkey.
Even in non-traditional markets such as the UK, Islamic banks and dedicated divisions such as HSBC Amanah, Alburaq of ABC International Bank and the Islamic Bank of Britain report steady growth especially in Islamic housing finance and hardly any repossessions, which have been such a feature of the conventional mortgage sector over the last year or so both in the US and the UK.
In Malaysia, where Islamic retail banking has a 14 percent share of the total retail banking market, Islamic banks never stopped lending even at the height of the financial crisis in the US and the EU. “But,” as Badlisyah Abdul Ghani, CEO of CIMB Islamic Bank, one of the largest Islamic banks in Malaysia stresses, “we remain cautious because when we finance we only do so with good credits. People who come to us for financing must come to us with their eyes wide open and complete with business plan, projections and assessments of the businesses going forward. There is growth in all segments albeit it is somewhat slower than before.”
A wider perspective of the progress in market penetration of Islamic banking in Malaysia is the fact that total Islamic banking assets at the end of the second quarter of this year now constitute close to 19 percent of total banking assets. Under Malaysia’s Financial Sector Master Plan (FSMP) announced in 2001 by the then government of Prime Minister Mahathir Mohamed and which set out the road map for the liberalization of the conventional and Islamic banking and insurance sectors in Malaysia, the target market share for Islamic banking of the total banking system was set at 20 percent by 2010. It is almost certain that the target will be surpassed during next year.
The lesson for other Islamic banking markets, including Saudi Arabia and the other GCC countries, Turkey, Indonesia etc., is that of a committed and well-thought out financial liberalization plan. Bank Negara Malaysia fast-tracked the liberalization of the Islamic financial sector under the FSMP by three years through the issuance in 2006-07 of dedicated Islamic banking licenses to Al-Rajhi Bank of Saudi Arabia, Kuwait Finance House, and a consortium led by Qatar Islamic Bank. All these banks specialize in retail Islamic banking services, although they have plans to widen their product offerings to other market segments.
“Retail banking is the DNA of Al-Rajhi Bank,” explains Ahmed Rehman, CEO of Al-Rajhi Bank Malaysia. “In my experience, while it is tough to launch such a base in a foreign market, once you have done that, the other activities such as corporate finance, investment banking etc. becomes much easier. There is huge amount of annuity in the retail business. We think that creating the franchise, the brand value and annuity income will stand us well in the long run. We started off primarily focusing on retail banking,” he added.
Al-Rajhi already has 19 branches and 35 off site ATMs in Malaysia. Within the next few months, it will also be the first foreign Islamic bank to join the local ATM Switch Service. The bank plans to increase its branch network in Malaysia to 50 over the next few years.
“This is a question of scale to have an effective retail business. We have to have a certain minimum footprint. This year we have started many off site ATMs. In fact, we are the only foreign Islamic bank in Malaysia that has been allowed to do this,” explained Rehman.
Al-Rajhi Bank in Malaysia has bucked the usual model of entry into a new market. It has forged a business plan that is committed to developing its presence and products in Malaysia. So much so that the bank is now venturing into areas in Malaysia, such as the outer suburbs of Penang, where its customer profile is predominantly non-Muslim Chinese.
In neighboring Brunei Darussalam, the market penetration has been even more impressive, albeit a smaller market. According to Javed Ahmad, acting CEO of Bank Islam Brunei Darussalam (BIBD), the total banking market in Brunei is about $12 billion, of which about $5 billion or 40 percent of the market is Islamic. Considering that Brunei started in the Islamic banking sector a decade after Malaysia, this is an impressive achievement. BIBD’s main focus is retail banking services including current and deposit accounts and home financing. BIBD has about 27 percent of the share of the total banking market in Brunei.
In Turkey, the total number of branches of participation banks (Islamic banks) has increased from 150 in 2002 to almost 500 today. The total deposit base of the four participation banks is $9 billion, which is about 4.5 percent to 5 percent of the total banking deposits in Turkey. According to Meliksah Utku, chief economist and head of investor relations at Albaraka Turk Participation Bank, a subsidiary of the Albaraka Banking Group in Bahrain, there is a good possibility that this market share would increase to between 10 percent and 13 percent by 2010. “Turkey,” he explained, “has a majority Muslim population of which a large part would prefer such banking services, but the participation banks cannot take them for granted.”
The deposit to GNP ratio in Turkey is 50 percent, which is much lower than even the Eastern European countries. As such, Islamic bankers in Istanbul believe that there is good potential for any system of banking especially participation banking because the retail and SME clients especially from the Anatolian heartland are usually more conservative, and therefore more likely to use such banks, although not always.
The mainstay of Islamic retail banking are the current and deposit savings accounts, housing finance, Takaful, small-ticket leasing, cash management products such as Tawarruq, and retail investment products including unit trusts, mutual funds, sukuk and exchange-traded funds (ETFs), and exchange-traded commodities (ETCs).
However, the product penetration and profiles differ from market to market depending on the regulatory and legal regimes, customer profiles, Shariah compliance culture, and the available product innovation and marketing expertise.
Take for instance, Islamic mortgages. These are well-established in markets such as Malaysia where 40 percent of Islamic financing of 118 billion ringgits (some 20.1 percent of the total financing portfolio of the banking industry), is allocated to residential financing, primarily home financing. In contrast, Islamic mortgages constitute only 5 percent of the financing of participation banks in Turkey. The reason is that in Turkey there is a mismatch between short-term deposits and the longer-term maturities found in mortgages. The typical Turkish mortgage is only about 3 years to 5 years compared with 25 years in Malaysia. Unless the Turkish Islamic banks can raise reasonably cheap long-term funds, say from foreign institutions or through money market instruments, the housing finance market will remain stunted.
In countries such as Saudi Arabia, the mortgage market is limited because of a lack of mortgage law and uncertainty over the legal position on transfer of titles and deeds. The draft mortgage law is in the process of being finally approved and adopted and it is only a matter of time before it gets royal assent.
In some countries, Islamic banks are setting the pace in retail banking product innovation. “In terms of the deposit products,” explains Badlisyah Abdul Ghani, “it is the Islamic space that introduced various new offerings such as ‘deposit with upfront payment,’ which is essentially done under the principle of Murabaha, which utilizes commodities to facilitate the deposit taking activities. This was the first time that a commodity Murabaha structure was used for a retail time deposit product. Later on, the conventional banks followed this product. We also have the paperless deposit products, which has no physical paying in books or statements. Everything is Internet based.”