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Saturday, 9 January 2016

Islamic banking advances in Southeast Asia

In Malaysia, central bank data show the amount of outstanding Islamic loans grew 35 per cent from the beginning of 2014 to October 2015, while total loans expanded by 17 per cent.
Indonesians are less enthusiastic about Islamic banking but the sector still enjoys double-digit growth: Islamic loans increased by 13 per cent and total loans by 19 per cent respectively in the same period.

Islamic teachings forbid the charging of interest and investment in activities Muslims consider as sinful such as alcohol, tobacco and gambling. In response, Islamic financial institutions offer interest-free products and steer clear of un-Islamic industries.

A recent survey by FT Confidential Research, a Financial Times research service, found that 61 per cent of Indonesians and 73 per cent of Malaysians say that they either use Islamic banking services primarily or as often as conventional ones.

While religious obligation is the main driver behind the growth in Islamic banking, it is not the only one. The survey found that 60 per cent of those using Islamic banking services in Indonesia and Malaysia cited religious requirements as a factor.

Others were more interested by less divine incentives such as risk and cost. Islamic lending, for instance, puts a cap on effective interest rates — the so-called profit rate — while there is no legal or other imposed limit on interest rates under conventional lending.

Indeed, the appeal of Islamic banking can reach beyond the Muslim population. In the same survey, 13 per cent of Indonesian and 25 per cent of Malaysian Islamic banking customers were not Muslims.

But despite its broad appeal, Islamic banking still has only small market shares in the two countries.

At the end of the third quarter of last year, just 7 per cent of total loans worth $284bn in Indonesia and 27 per cent of loans worth $334bn in Malaysia were Islamic, according to Bank Indonesia and Bank Negara Malaysia, the central banks.

The market for Islamic banking is bigger in Malaysia than in Indonesia, even though Malaysia’s population is just 31m, compared with about 257m in Indonesia. One reason is the “soft infrastructure” installed by the Malaysian government to support the industry, including tax breaks and coherent regulation, since the 1980s. Indeed, Malaysia is a global centre of Islamic banking and finance, with 51 per cent of all outstanding sukuk (Islamic bonds) originated from the country in 2015.

Indonesia is playing catch-up, with various support systems still a work in progress. FT Confidential Research believes the long-term potential of Islamic finance in the country is immense and largely untapped.

About 88 per cent of Indonesians are Muslims, compared with about 61 per cent of Malaysians. The median age of Indonesians is just 29-years-old. Meanwhile, strong economic growth of 5 to 6 per cent for the past several years is enlarging the middle class.
Yet, Indonesians are severely underbanked compared to their regional neighbours. Only 36 per cent of adult Indonesians have a bank account, compared with 81 per cent in Malaysia, according to the World Bank.

Foreign banks are moving in. Large Malaysian banks with deep experience in Islamic finance such as Maybank and CIMB have set up in Jakarta and other big Indonesian cities as their home market saturates.

Emirates NBD, the largest banking group in the Middle East by assets, plans to acquire a stake in an Indonesian sharia-compliant bank to gain a foothold in the world’s most populous Muslim country. Other Gulf banks have expressed interest in doing the same, bypassing the competitive Malaysian market — usually the first Southeast Asian market for Middle Eastern banks.

(Emerging Markets / 08 January 2016)
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