LONDON - Despite an earlier moratorium on the issuing of new Islamic banking licences, Bank Negara Malaysia, the central bank, has finally given two global banks, HSBC Malaysia and Deutsche Bank the go-ahead to set up dedicated Islamic banking subsidiaries in the country.
HSBC Malaysia pipped Deutsche Bank to become the first locally incorporated foreign bank to get a separate Islamic banking license in the MIFC (Malaysia Islamic Finance Center). The HSBC Islamic banking, in fact, complements the Islamic insurance (Takaful) license approved by Bank Negara in 2006 for an HSBC/local partner joint venture in Malaysia.
Both Nabeel Shoaib, the new global head of HSBC Amanah, and Dr. Hussein A. Hassan, director of global markets and head of Islamic banking at Deutsche Bank, were upbeat about the licenses and stressed that Malaysia and south east Asia play an important role in their global Islamic banking strategies. Hassan confirmed to Arab News that Deutsche Bank was awarded its license about two weeks ago and has recruited Mohammed Safri, a top Malaysian Islamic banker specializing in fixed income products including Sukuk, who will initially be based in Dubai and then reverting to Kuala Lumpur to head Deutsche Bank's Islamic banking activities there.
According to HSBC sources, the Bank plans to use the Malaysia operation to spearhead its Islamic banking business in the Asia Pacific region, especially in India, Pakistan, Hong Kong, China, Bangladesh, Indonesia and Brunei.
Foreign banking majors, which have had a presence in Malaysia for decades such as HSBC, Standard Chartered, Citibank and Deutsche Bank, have been lobbying to get Islamic banking licenses following the liberalization of the sector by Bank Negara in 2005, which saw the subsequent issuing of licenses to three new Islamic banks - Al-Rajhi Bank of Saudi Arabia; Kuwait Finance House; and Asian Finance Bank, which is owned by a consortium led by Qatar Islamic Bank, Global Investment House of Kuwait, Rusd Investment Bank of Saudi Arabia and Gulf Finance House in Bahrain.
Bank Negara sources confirmed in October 2007 in Kuala Lumpur that the regulator will no longer be approving Islamic banking licenses for either domestic or foreign players to do onshore universal banking in the Malaysian ringgit in the MIFC. The only applications that would be entertained would be for offshore Islamic banks on the condition that they only engage in offshore foreign currency business.
So is the granting of a license to HSBC Bank Malaysia Berhad in December 2007 and to Deutsche Bank at end January 2008 to set up fully-fledged Islamic banking subsidiaries a policy U-turn by Bank Negara and the MIFC? Will the new HSBC Islamic Bank Malaysia and Deutsche Bank subsidiary be treated as foreign-owned or Malaysian-owned banks? Will Bank Negara now be obliged to hand out similar Islamic banking licenses to the other banking majors such as Standard Chartered Bank and Citibank, should they wish to acquire them?
These questions are pertinent given the change in direction of Malaysia's Islamic banking authorization policy following the official launch of the MIFC in April 2007 by Prime Minister Abdullah Badawi.
Under the Financial Master Plan launched in 2001, the liberalization of the Islamic banking sector was brought forward by three years. Bank Negara authorized several domestic banks to set up dedicated Islamic banking subsidiaries including CIMB Group; RHB Group; and Hong Leong Group; and above three foreign-owned Islamic banks - Asian Finance Bank; Kuwait Finance House Malaysia; and Al-Rajhi Bank Malaysia. All these new Islamic banks are now operating in Malaysia, a move which some bankers have criticized because of apparent overbanking in the Malaysian Islamic banking system.
The latest Islamic banking licenses to HSBC Malaysia and Deutsche Bank brings the number of full-fledged Islamic banks in the country to 13, the single largest concentration of authorized dedicated Islamic banks any where in the world. These include Bank Islam; Bank Muamalat; RHB Islamic Bank; CIMB Islamic Bank, Hong Leong Islamic; Affin Islamic Bank; AMIslamic Bank; EONCAP Islamic Bank; Kuwait Finance House (Malaysia); Al-Rajhi Bank (Malaysia); Asian Finance Bank; HSBC Bank Malaysia and Deutsche Bank. A further one or two Islamic banking licences are in the offing for local banks.
Islamic banking is a core focus for HSBC Bank not only in Malaysia but also as a regional hub for growth in Indonesia, Brunei and Bangladesh - all countries where there is a significant customer base for such products. Stephen Green, group chairman of HSBC Holdings, the parent company of the HSBC global empire, during a visit to Kuala Lumpur in 2007 stressed that he hopes "the central bank will consider out application favorably. If granted the license, we will be very delighted to partner the country in this very important area. What we see as interesting is that in Malaysia, over 70 per cent of our Islamic products are taken up by the non-Malays because they find these products as more competitive."
Green, who during his tenure as Group CEO of HSBC Holdings was the prime sponsor of the establishment of HSBC Amanah, the dedicated Islamic finance division of the HSBC Group, was not overly concerned about the growing competition in the Islamic bank space not only in Malaysia but also in the Gulf Cooperation Council (GCC) countries. "In general, everywhere we go, we run into both the well respected international banks and also strong local competitors. That's a feature of life," added Green.
Local Islamic bankers such as Badlisyah Abdul Ghani, CEO of CIMB Islamic Bank, are sanguine about the growing competition in the Malaysian Islamic finance space. "The MIFC is a good value proposition which Malaysia offers to the rest of the world, in terms of capital raising and investment opportunities. Malaysia has had international Islamic finance activities for more than two decades. The government is now packaging all this into a brand - the MIFC. The market is big enough for all to operate and be successful. The value proposition of MIFC is simple - we have the most effective legal, regulatory and Shariah framework anywhere in the world. We have leveraged the institution of Waqf within the market, and have launched an Islamic derivatives market - the last component of a vibrant Islamic banking and financial system. Once the world knows what is possible in the MIFC, market players and investors will come."
The reality however is that the dedicated Islamic banking license will give HSBC much greater flexibility in the market, especially in opening branches. There are now no limits to the number of branches HSBC Islamic bank can open in Malaysia. In the past Bank Negara encouraged the banking majors to open branches other than in the main metropolitan areas - a policy which has largely been ignored by the banks.
HSBC hitherto has desisted in going down the dedicated Islamic banking subsidiary route. Instead the Group relied on HSBC Amanah. But following the sudden departure last year of Amanah CEO, Iqbal Khan, the division according to HSBC insiders, is being absorbed into the various core business departments of the group.
Nevertheless, in Malaysia, HSBC Bank's Islamic assets now account for 13 percent of the bank's total assets, with the target of reaching 20 percent by 2010. Perhaps more importantly, income from Islamic banking operations jumped a whopping 65.7 percent in FY2006 to reach RM179m - largely due to an increase in Bai Bithaman Ajil (BBA) installment financing. By September 2007, Islamic finance contributed 10.5 percent of the bank's total operating income in Malaysia.
HSBC Bank has also applied to open eight new branches in various locations in Malaysia.
