This article first appeared in The Edge Malaysia Weekly, on February 22-28, 2016

Unlike some foreign Islamic banks which are still struggling to establish a firm foothold in Malaysia, local banking groups are going from strength to strength despite the rising competition.

From setting up small Islamic windows over two decades ago, a number of local banks have grown to become serious standalone global Islamic banking players today.

Maybank Islamic Bank is currently number one in the region and among the top three Islamic banking players worldwide, while CIMB Islamic Bank is the largest sukuk player globally, issuing US$5.2 billion worth of sukuk as at Dec 31, 2015.

Maybank’s income from its Islamic banking scheme grew 3% year on year to RM2.98 billion for its nine months ended Sept 30, 2015 ,while CIMB’s income from Islamic banking operations grew 6.4% y-o-y to RM1.15 billion for the same period. RHB’s Islamic banking business grew 20% y-o-y to RM639.1 million. Islamic financing as a percentage of RHB group’s total domestic gross loans and financing increased to 21.4% in September from 19.5% as at Dec 31, 2014.

Bank Negara Malaysia liberalised the Islamic finance system in the country in 2004 by issuing three new Islamic bank licences to foreign Islamic financial institutions. Today, six out of 16 Islamic banks here are foreign.

The Islamic banking playing field has become more crowded over the years as the Islamic banking landscape develops further and more players attempt to grab a piece of the pie.

Malaysia remains one of the front runners in the game today but some of the foreign Islamic banking groups that have set up shop here in the country have not exactly been as successful as they had hoped to be, industry observers say. Some are mulling an exit (see main story).

Industry observers say a reason foreign Islamic banks are finding it difficult to grow their business in the region using Malaysia as its base is partly because they find it tough to compete with local Islamic banking groups backed by larger balance sheets.

While the Islamic banking units of local banking groups declined to comment on this specifically, CIMB Islamic Bank CEO Mohamed Rafe Mohamed Haneef (picture) says Islamic banks need to scale up to compete not only among themselves but also to rival their bigger conventional peers.

“Banks operating on a smaller scale and balance sheet may have to consider inorganic expansion to sustain and compete further in the banking industry. This is applicable to both Islamic and conventional banks,” he tells The Edge.

Malaysia’a roots in Islamic banking can be traced back to 1969 with the establishment of an Islamic savings institution known as the Pilgrim Fund Board or Tabung Haji, as the first Islamic financial institution in the country.

Fast forward to today, the Islamic banking landscape here has since developed immensely. Malaysia has successfully created a dual banking system, established an Islamic interbank market and developed an Islamic capital market.

Just last week, six Malaysian Islamic banks launched the first bank-intermediated financial technology platform, known as the investment account platform (IAP).

The IAP is a strategic initiative of the Islamic finance industry to operationalise investment accounts and will serve as a central marketplace to finance small and medium-sized businesses. The Malaysian government is backing the scheme with an initial RM150 million in funds.

A rising star

According to Bank Negara data, Malaysia’s Islamic bank financing was RM389.9 billion at end-2015, equal to 27% of its banking system loans, compared with 25% in 2014.

Fitch Ratings notes that Islamic financing expanded 16.2% in 2015 while the conventional banking system grew 5.2%. It adds that Islamic finance had a compound annual growth rate (CAGR) of 18.2% since 2011, against conventional banks’ average of 7.0%.

It is obvious that Islamic banking is the rising star here.

However, industry observers say this could also be because of the low base Islamic banks are starting from.

Some also point out that the growth in Islamic banking business could be at the expense of its conventional business, resulting in a zero sum game. For example, some banks have an Islamic-first policy — market an Islamic product before the conventional product — thereby potentially cannibalising the conventional business.

This observation generally applies to any company that offers more than one product to the customer as economic demand and customer behaviour is very dynamic, states PwC Malaysia’s risk assurance services practice executive director Nik Shahrizal Sulaiman.

He points out that looking at the financial data in the Malaysian banking industry during the last few years, one can see that both conventional and Islamic banks have been growing their asset base at the same time.

“The only difference is that Islamic banking assets have been growing at a faster rate than conventional banking assets. So I would not strictly use the word ‘cannibalise’ as it would imply that the market opportunity is a fixed constant, when in fact it has been growing in various directions. The more plausible explanation I can think of is that many people and companies simply find Islamic finance solutions to be attractive, which drives the growth of Islamic banking,” he adds.

Meanwhile, both Maybank Islamic and CIMB Islamic say Islamic products are created to “complement” conventional products.

CIMB’s Rafe says Islamic banking should be viewed as complementing conventional banking products and adding to the suite of products and services with the aim of meeting customer’s banking needs.

“It is especially essential for certain customers (individuals and corporates) who choose not to or cannot bank with conventional banks. These include customers from the halal food industry and shariah-compliant listed companies on the exchange. Islamic banks must provide a comprehensive set of products and services to bridge any gap,” he notes.

“Islamic banking and finance is still nascent in terms of volume and scale compared with conventional banks. It is understandable that banks may choose selected product categories to achieve the needed volume and scale to be competitive and profitable. As Islamic banking and finance is an identified niche for Malaysia to distinguish itself internationally, various developmental initiatives and enhancements to its regulatory environment have been implemented over the past few decades to further develop the industry,” he adds.

Nor Shahrizan Sulaiman (picture), Maybank Islamic deputy CEO, shares that Islamic banking products and services in Maybank are designed not to cannibalise but to complement conventional products and services.

“The intent is to provide viable options and alternatives to all our customers, regardless of the segment they represent. Maybank Islamic currently has about 50% non-Muslim customers, which is testimony to the fact that Islamic banking products and services have been widely accepted by both the Muslim and non-Muslim population here in Malaysia,” he says.

Staying ahead in turbulent waters

While growth has been good for local Islamic banks, they are not disregarding the fact that the macroeconomic environment and the banking landscape today have become more challenging.

RHB Islamic Bank’s managing director Tuan Haji Ibrahim Hassan (picture) says economic headwinds remain a big concern for the industry.

A key focus in trying times is to sustain business momentum and to ensure the quality of service is not compromised amid operational cost rationalisation measures, he adds. An urgent strategy, going forward, is to maintain and strengthen the loyalty and satisfaction of customers.

Nor Shahrizan of Maybank Islamic says the bank remains prudent in growing its business and has always adopted a proactive risk management stance in dealing with the changing banking landscape and the economic climate.

“In managing the bank’s operations, all potential scenarios in the economy, both domestic and global, would have been taken into consideration. This includes undertaking various stress tests on the bank’s portfolios and analysing the impact such tests have on the bank’s liquidity, capital and profitability,” he notes.

Meanwhile, CIMB Islamic’s Rafe opines that competition is likely to intensify as banks compete to acquire customer deposits.

“There will also be continued opportunities to increase its market share in selected business segments such as corporate and commercial, where demand for Islamic finance is growing among the shariah-compliant listed companies,” he says.

“The bank intends to continue to look out for more opportunities in the region to grow the Islamic banking business through a series of strategic actions, including reasserting profitability of its core businesses, innovating products, deepening customer and client relationships, developing new fee income segments, and increasing the deposit franchise. To achieve the strategic goals outlined, the bank will rely on its investments in people, technology and processes to ensure effective and efficient delivery of its services in the region,” he adds.

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