Malaysia’s Second Capital Market Master Plan (CMP2) has projected that the size of its Islamic capital market would grow by an average of 10.6% per annum to reach 2.9 trillion ringgit by 2020. Of the amount, the sukuk segment is expected to account for 46% or 1.3 trillion ringgit (US$406.25 billion).
For many market participants, the key to achieving this growth is the further internationalization of the Islamic capital market.
“The next phase of growth of the Islamic capital market will be characterized by greater internationalization which entails, among others, a growing number of product issuers and service providers expanding beyond their home markets, more investors seeking products or instruments with international exposure, as well as greater diversity in terms of currencies used in issuing Shariah-compliant instruments,” says Zainal Izlan Zainal Abidin, executive director for Islamic capital market at the Securities Commission Malaysia, on June 27 when he addressed the 7th Islamic Markets Programme in Kuala Lumpur.
The sukuk market is proving to be an important platform in international fund-raising, with the outstanding volume amounting to US$180 billion at the end of 2011, compared with just US$33 billion in 2006, of which 66% originated from Asia. In 2012, the global sukuk issuance is projected to be US$44 billion, with Malaysia accounting for 60%.
Underpinned by Malaysia’s status as a leading Islamic financial centre, the country’s major Islamic banks are at the forefront of this internationalization exercise as they step up their regional expansion. CIMB Islamic has taken the task of assisting the development of the Islamic capital markets outside of Malaysia, actively providing advisory services to various governments and government entities that are committed to establishing the Islamic finance frameworks for their respective domestic capital markets such as Indonesia, Thailand, Singapore, South Korea, Hong Kong and the UK.
Boosting presence in Asean
In Indonesia, CIMB is a member of a committee set up by the government to provide inputs on Islamic financing issues including the drafting of the sukuk law. It has been involved in the development of the Indonesian Islamic capital markets that included its participation as a principal dealer for Indonesian government securities and as a selling agent for the inaugural sovereign retail sukuk amounting to 5.56 trillion rupiah (US$584.34 million) in 2009 and another 7.34 trillion rupiah retail sukuk in 2011.
CIMB Islamic is conducting its Islamic banking business in Indonesia through CIMB Niaga Syariah, the Islamic finance window under Bank CIMB Niaga. It is now the sixth largest Islamic financial institution in the country in terms of assets.
“Our Indonesian business is growing from strength to strength,” says CIMB Islamic CEO Badlisyah Abdul Ghani. “Our business grew by 88% in 2011 and that shows you its growth potential. Our Indonesian platform is fully in place in terms of branches and Islamic products. We started with only 11 products in Indonesia, now we have close to 60 products. So we have put in place all the ingredients needed for future growth and we are ready to reap the fruits of our work.”
In Singapore, the CIMB group has expanded its business in 2011 to include Islamic commercial banking over and above its traditional wholesale banking business.
This should bring to three – Indonesia, Malaysia and Singapore – the countries in the Asean region where it has universal banking offering. “The growth of our small and medium enterprise business has been encouraging,” says Badlisyah. “We are aiming to approve S$100 million in Islamic financing in 2012. Our pipeline is fairly robust and we should meet our target – and perhaps even exceed it.”
In Thailand, the focus for CIMB Islamic is on wholesale banking and it is seeing traction in its potential with the changes in the government regulations. “We should see some pick-up in our business in 2012,” Badlisyah points out.
The bank is working closely with the working committee set up by the Thai government to deliberate on matters pertaining to the development of Islamic finance in the country. Various discussions have been held with representatives from the Public Debt Management Office, Securities and Exchange Commission (SEC), Revenue Department and the Islamic Bank of Thailand on the resolution of legal and tax issues with the aim of putting in place a legal and tax framework for Islamic finance. To this end, the SEC has issued sukuk guidelines in relation to the Thai baht market.
In the Philippines, where the CIMB Group has recently acquired majority control in Bank of Commerce, Badlisyah says the possibility of establishing an Islamic finance window must be looked at carefully.
“It should be done for the right reason and it must be done based on the viability of the business,” he says. “Just as in Thailand, there is a potential for Islamic finance in the Philippines, but we really need to make sure that when we launch such business, it should be sustainable in the long-run.”
Maybank Islamic too is keen on ramping up its regional presence. Its expansion plans focus on key Asean markets, though ultimately, it also aims to expand into the opportunistic markets of London, Hong Kong/China and the Middle East. “A lot of our key business is still in Malaysia, which accounts for between 90% and 95% of our profit,” says the bank CEO Muzaffar bin Hisham.
“Singapore and Indonesia are the next markets that we are working on. We were able to grow our cross-border financing to Indonesia to US$600 million after changes in the tax structure. We are echoing the drive by Bank Negara Malaysia on the internationalization of Islamic finance, in line with the CMP2.”
As the bank expands into Indonesia, it is eyeing to arrange syndication loans in an Islamic format. “If we feel the client is comfortable to proceed to arrange a transaction in an Islamic format, we will certainly do so and that is where the collaboration between Maybank Islamic and Maybank Investment Bank (Maybank IB) will come into play, as there are intricacies in Islamic finance on deal structuring that would require the expertise of Maybank Islamic,” says Michael Oh-Lau, regional head of debt markets at Maybank IB.
More competition coming
Maybank Islamic has currently two vehicles in Indonesia –Bank Internasional Indonesia (BII) and Maybank Syariah Indonesia (MSI). BII has its own Unit Usaha Syariah dealing mostly in retail financing, while MSI deals with the corporate and wholesale segments. In 2011, BII launched a traveller savings account-i based on mudaraba principles that provides travellers with both an ATM card and a debit card. (The ‘i’ suffix stands for ‘Islamic’.)
In Singapore, it launched its first Shariah-compliant savings account for pilgrims going on the Hajj to Mecca and an Islamic financing package for SMEs seeking financing for completed commercial and industrial properties.
Meanwhile, the Maybank group, through Maybank IB, has raised its stake in Saudi Arabia-based Anfaal Capital to 35.17% by acquiring another 17.17% interest in the financial institution in April this year. The acquisition represents a good opportunity for Maybank IB to increase its presence in Saudi Arabia and play a more significant role in unlocking Anfaal’s potential, especially in the area of syndication, sukuk structuring and project financing in the country.
Hong Leong Islamic Bank too is open to cross-border opportunities and the bank CEO Raja Teh Maimunah Raja Adbul Aziz has expressed interest in the China market.
“If there is an opportunity, I would really like to look at China because that is where the strength of Hong Leong is,” she points out. “China has a decent population of Muslims that we can tap into.”
Hong Leong holds a 20% equity in Bank of Chengdu Company, a commercial bank located in Chengdu, Sichuan. The two partners have a consumer financing joint venture called Sichuan Jincheng Consumer Finance, tapping into growing financial services sector in China.
But for Islamic banking to take off in China, Raja Adbul Aziz says it needs to have the tax regulations for the industry. “For me, the growth of Islamic banking is very much tied to tax laws,” she points out. “If you look at Indonesia, despite having the Islamic Banking Act implemented in 2010, Islamic banking did not quite take off because the tax laws were only addressed late in 2011.”
(The Asset / 03 Sept 2012)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com