LONDON, 7 June 2004 — The approval of a banking license to Kuwait Finance House (KFH) by Bank Negara Malaysia, the central bank, on May 27, opens up Malaysian-GCC economic relations in particular and Malaysian-Middle East relations in general.
Under the Malaysia Financial Sector Master Plan (FSMP), introduced in 2001in the aftermath of the Asian financial crisis, the then Mahathir government outlined a road map for the future development of the financial sector in the country. Under Phase One (2001-2003), the task was to restructure the domestic banking sector, by enhancing their capacity and capability in competing with foreign majors. This phase has effectively been completed.
Under the current Phase Two (2003-2007), the aim is to issue new licenses to qualified domestic players to increase competition and performance. This to a large extent is “business in progress”. Under Phase Three (2007-2010), the objective is to issue new licenses to qualified foreign players to drive existing domestic players to better performance, efficiency, and innovation.
For a start, Islamic banking is experiencing similar growth in Malaysia as it is in the Gulf. In 2003, the share of Islamic banking deposits of the total banking deposits increased to 10.4 percent compared with 7.4 percent in 2000. Similarly, the share of Islamic financing of the total bank financing increased to 10.3 percent from 5.3 percent for the same period. Under the Financial Sector Master Plan, the target is for Islamic banking deposits to increase to 20 percent of the total banking deposits by 2010. Both Bank Negara Governor Dr. Zeti Akhtar Aziz and bankers in Malaysia are confident that this target is on course and is eminently achievable.
Post/911 there are signs that banks in the region in general are looking more toward business at home or in toward the East. After all, South and East Asia is by far the largest export markets for GCC crude oil. Indeed one of the drivers for the current oil price rises is unprecedented demand for the black stuff in countries such as China and India.
Islamic banking in Malaysia hitherto has been parochial and inward-looking. With the encouragement of Bank Negara and particularly Governor Dr. Zeti, Malaysian banks have been encouraged to look also to the Middle East for new business opportunities and to tap some of the huge liquidity in the Gulf countries. The Malaysian economy, which registered a healthy GDP growth of 5.2 percent in 2003, is expected to grow further over the next few years.
Despite a current low interest, inflation, and unemployment environment, and the fact that the banking system is flush with liquidity, Malaysia is virtually running out of oil and gas, and is looking toward building a knowledge-based economy to offset the effects of a “future without oil”. As such the importance of FDI flows will continue to be a major factor for the economy. The demography of Malaysian exports is also changing away from the US (and therefore dollar zone) to Asia and the Middle East. In 2003, for instance, Malaysian trade with the UAE topped $1 billion for the first time.
The KFH subsidiary in Malaysia will be capitalized at $100 million and will on establishment become the third dedicated Islamic bank in Malaysia after the two domestic ones, Bank Islam Malaysia and Bank Muamalat. KFH Chairman and Managing Director Bader Al-Mukhaizeem hopes that the new KFH subsidiary would be a trading and an investment bridge connecting the GCC with the Malaysian market and the ASEAN region in general.
KFH is a good choice as a first foreign player in the Islamic banking sector in Malaysia. It has shown through its Turkish subsidiary that it is not a fair-weather investor. During two banking crisis in Turkey, the most recent in 2000-2001, KFH supported its subsidiary Kuwait Turk, even though Kuwait Turk weathered the storm largely through its own resources, especially the prompt collection of dues on receivables.
Foreign players will find the Malaysian market a highly competitive, well-regulated, and potentially lucrative market. One major bonus is that the average Malaysian is much more aware and educated about Islamic banking products and services than their Gulf or Pakistani, or Turkish, or Iranian, or Egyptian counterparts.
With Islamic banking deposits currently at $13 billion, the sector has the realistic potential of at least doubling this over the next few years. That would then only constitute 20 percent of market share. If foreign players are committed; do their homework properly; and have the necessary distribution tie-ups, they are no reasons why they cannot effectively compete with the local players — both the Islamic banks and the conventional ones with Islamic windows.
