KUALA LUMPUR, 23 April 2007 — Analysts and customers almost instinctively like to compare the performance and the pricing between the Islamic and conventional banking systems.
In Malaysia’s dual banking system, where a thriving Islamic banking system operates side-by-side with a conventional one, the latest figures published by bank Negara Malaysia, the central bank, makes rather interesting reading.
Bank Negara, a pioneer in financial information inclusion, has significantly changed the way it is publishing its annual report and information of the financial services sector — both conventional and Islamic. Gone are the dedicated Islamic Banking and Takaful Annual Reports. Instead both systems are presented in two reports — the Annual Report which deals with monetary and fiscal policy; and the Financial Stability and Payments System Report, which fit in with the Basel II umbrella, especially calculation of regulatory capital and relative risk weightings.
According to Bank Negara, the number of branches of Islamic banks in Malaysia increased from 766 at end 2005 to 1,167 at end 2006. The number of authorized Islamic banks increased from 6 to 10 in the same period, including the wholly-owned foreign Islamic banks: Asian Finance Bank (a consortium bank owned by Saudi, Qatari, Bahraini and Kuwaiti institutions); Saudi-owned Al-Rajhi Bank (Malaysia), and Kuwait Finance House (Malaysia). This compared with 22 conventional commercial banks and 14 conventional investment banks. Similarly, The number of Islamic insurance (Takaful companies) totaled 8 compared with 42 direct conventional insurers.
However, Islamic banks only had 329 ATMs compared with 4,869 for the conventional commercial banks; and had 5,151 employees compared with 91,741 employees for the conventional commercial banking sector.
The total assets of the Malaysian Islamic banking system at end 2006 accounted for RM133 billion or 6.4 percent of the total assets of RM2,091.2 billion of the financial system. Similarly, the Malaysian Islamic bond market accounted for 31.3 percent of the total bond market.
Islamic financing in Malaysia accounted for 13.2 percent of total bank lending; Islamic banking deposits accounted for 12.2 percent of total bank deposits; and Islamic banking assets accounted for 12.2 percent of total banking assets at end 2006.
Malaysia’s official target is for the Islamic banking system to achieve a 20 percent banking market share by 2010, which most bankers said is achievable.
The 2006 Bank Negara Annual Report is accompanied by a Financial Stability and Payments System Report, which unlike previous reports are clearly aimed at complying with the reporting culture of the new Basel II capital and risk requirements. Disclosure, transparency and up-to-date financial sector data are the backbones of the Malaysian Islamic Finance Sector (MIFC), which makes the Malaysian market easy to analyze.
According to Bank Negara, the profits rates in the overnight Islamic money market in Malaysia were generally lower than that in the conventional money market. For instance the Islamic profit rate at end January 2007 was 3.4 percent compared with 3.5 percent for the conventional interest rates.
According to the latest Bank Negara figures, Islamic interbank investments based on the Mudaraba principle, totaled RM256.1 billion in 2006, slightly up from the RM254.7 billion in 2005. This compared with conventional interbank deposits RM876.1 billion in 2006 compared with RM887.6 billion in 2005, respectively.
Similarly, the base financing rates (BFRs) of the two flagship Islamic banks, Bank Islam and Bank Muamalat, move fairly closely to the base lending rate (BLR) of the Malaysian conventional banks.
“An understanding of the extent to which Islamic rate of returns change in response to changes in the central bank’s policy rate,” Bank Negara said, “will be crucial towards understanding how fast and effective the monetary transmission is via the Islamic financial system. Generally, the structure of Islamic financing requires the sharing of risks and profits in some pre-agreed ratios.
Most of the Malaysian Islamic mortgages are done under the Al-Bai Bithaman Ajil (ABBA) deferred payment contract, which is akin to a fixed rate mortgage. In the UK, Islamic mortgages in contrast are now based more on the Ijara and Diminishing Musharaka contracts, and no longer on the Murabaha (mark-up) contract which is similar to the Malaysian ABBA mortgage.
In the Malaysian context, especially as shown by the overnight Islamic profit rates and conventional interest rates, and the BLR and BFR, monetary operations to manage liquidity in both the conventional and Islamic banking system do have a similar impact.
