Saudi Arabia largest Islamic banking market in the world

The Islamic banking industry in the Kingdom of Saudi Arabia (KSA) is set to achieve $683 billion of Shariah-compliant assets by 2019, according to EY’s World Islamic Banking Competitiveness report. 

KSA has been a key market for growth in the Islamic banking industry. The first Islamic bank with equity in excess of $10 billion is headquartered in KSA. A strong demand from customers, both retail and corporate, has led to significant growth in Islamic banking in KSA resulting in 54% of all financing being Shariah-compliant in 2013. Overall, the size of Islamic banking assets in KSA has nearly doubled from 2009-2013.

Ashar Nazim, Global Islamic Finance Leader at EY, said: “The Islamic banking industry is preparing to go mainstream globally. KSA is the largest Islamic banking market in the world, representing 31.7% of the global market share. The country has been a pioneer in the Islamic banking industry and we expect it to continue being a driving market for the industry, as Malaysia, Turkey and Indonesia also establish themselves as populous Islamic banking centers.”

Branch experience got the highest in terms of customer satisfaction, the EY report noted.

In the study, EY monitored 567,071 Islamic banking customer sentiments in KSA on social media as part of a wider study, which looked at 2.2 million customer sentiments dispersed across various online sources in nine key markets (KSA, Bahrain, Kuwait, the UAE, Malaysia, Indonesia, Turkey, Qatar and Oman).

Out of the sentiments analyzed in KSA, one in three of the positive sentiments were about branch experience, indicating that customers were generally satisfied in this area of service.

“The experience however varies by banks and types of customers. The younger customers are openly challenging the status quo and asking for more digital solutions,” said Muzammil Kasbati, Director, Global Islamic Banking Center of Excellence, EY.

While online and mobile banking services has taken off well in Saudi Arabia, its sustainability remains a cause of concern, the report noted. 

“The retail banking proposition of several banks was found struggling between the legacy people culture and the tech-savvy business model required to win new customers. Islamic retail proposition of conventional and Islamic banks still appears to be operating in silos, which unfortunately hampers their customer satisfaction ratings,” said Muzammil.

“Saudi retail banking customers like the fact that some banks are investing to improve the branch experience. There appears to be a healthy take-up of digital banking on offer, and there is anticipation for more. Islamic banks will need to increasingly shift their expenditure from running the bank to developing the bank. Learning from the customer’s journey can provide very important insight that can be applied in everyday operations. Digital adaptation will be vital when upgrading services,” Ashar noted. 

(Albawaba Business / 27 April 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Innovation to the fore in year of firsts for Asian Islamic finance

The headlines went to sovereign sukuk, most obviously Hong Kong. On September 18, the government of Hong Kong SAR launched a $1bn 144a/Reg S five year sukuk. Keenly awaited, the sukuk followed the legislative changes made in Hong Kong in July 2013 that created a level taxation framework between conventional bonds and sukuk, seen as a vital starting point for any Islamic capital market. 

The deal, the first ever by a AAA government and the first from East Asia, was not really about the money — Hong Kong has plenty of ways it can raise sovereign debt. But in a similar way to the UK’s debut issue in June 2014, it was to make a point, sending out a message that Hong Kong was serious about becoming a marketplace for Islamic finance.

It also created quite some benchmark for others to price against. At 23bp over five year Treasuries, Hong Kong's deal was the tightest spread ever achieved on a benchmark dollar bond from an Asian ex-Japan government. Notably, less than half the deal went to Asia, as global demand created a $4.5bn order book.

While Pakistan was not a debut issuer when it launched its $1bn sukuk in November, it was the first sukuk from the country since 2005, and a difficult sell given its economic and political challenges. After attracting $2.3bn in demand, the deal was doubled in size from a planned $500m, and priced 50bp inside its conventional curve.

Again, it’s interesting to see where a bond like this goes: not to Asia, which took just 6% of the paper, but mainly the Middle East (53%) and the UK (24%). Even US investors, whose relationship with Pakistan can be fractious, bought 12% of the deal.

Indonesia’s $1.5bn 10 year global sovereign sukuk, launched a week before Hong Kong’s, was not the first from Indonesia, but it did have significance nonetheless. For a start, it created the largest order book ever from an Asian sukuk, at $10.2bn; it was also the first single tranche 10 year sukuk from an Asian sovereign.

But its lasting impact is likely to be a more subtle point: the fact that it used a new structure for a sovereign sukuk, wakala, rather than the usual methods of ijara assets and murabaha receivables. This allowed Indonesia to underpin the sukuk with government-owned properties leased to the Republic, and project assets, including assets under development.

As always, Malaysia was the home of the greatest innovation, in the sukuk markets and elsewhere. Khazanah, the state asset holding company, has been a regular fixture with exchangeable sukuk into its various underlying holdings, and in September it launched its latest, a seven year put four $500m exchangeable into Tenaga Nasional.

Again, there was structural ingenuity here: this was the first such structure to be based on mudaraba and murabaha, and was also the first such instrument to price at a negative yield. But it was unquestionably aggressive — an earlier version of the deal had been pulled three months earlier, and some in the market felt the final trade still pushed too hard.

Only 20% of it sold into Asia, with 80% going to European investors, giving a further example of how the marketing of Islamic transactions has evolved over time.

The inaugural sukuk from Export-Import Bank of Malaysia (Exim Bank), a $1bn multi-currency programme, was a landmark of sorts, being only the second export-import bank sukuk globally and the first in dollars. Like the Indonesia deal, this one used the wakala model, underpinned by leasable assets, shariah-compliant shares and a murabaha receivables component based on commodities. The proceeds will fund Exim Bank’s Islamic banking business.

Perhaps more significant still was Malaysia Airports Holdings’ MR1bn perpetual non call 10 sukuk launched in December. It was the first rated deal of its type anywhere in the world, a rating that came about by structuring the deal to achieve a 50% equity credit from the rating agencies.

CIMB saw the success of the deal as testament to the increasing depth and maturity of the Malaysian fixed income markets, with investors beginning to be more receptive towards structured finance transactions.

A couple of weeks after Malaysian Airports there was a similar deal, a perpetual subordinated sukuk musharaka from DRB-Hicom, rated single A. Bankers highlighted the positive investor response to the subordinated perp, despite being in a rating category where many investors have investment restrictions even in senior papers, let alone in subordinated. The deal raised MR715m through two perpetual tranches, one a non-call five, the other a non-call seven.

Bank capital always spurs innovation, and a MR3bn subordinated sukuk murabaha programme for AmIslamic Bank in February 2014 brought Malaysia’s first Basel III-compliant subordinated sukuk. It proved to be an influential deal: in the following months Maybank Islamic Bank, RHB Islamic Bank, Public Islamic Bank, Hong Leong Islamic Bank and Bank Islam all followed with similar deals.

One of Malaysia’s singular achievements is making itself a hub not only for sukuk in ringgit but in other currencies too. This was illustrated in yet another September deal, a $500m multicurrency sukuk wakala programme from Bank of Tokyo-Mitsubishi UFJ (Malaysia), which included a yen tranche, the first ever yen denominated sukuk in the global market.

Another significant deal was a MR3bn IMTN and ICP programme for a real estate investment trust, KLCC, and the Sabah Credit Corporation brought a distinctive musharaka structure when it launched a MR750m ICP and MR1.5bn IMTN programme.

(Global Capital Asia Money / 24 April 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com