Cover Story: Rediscovering the spirit of Islamic banking

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on January 22, 2018 - January 28, 2018.

As financial institutions, we should look at why banks exist and what positive impact we can create for the people. Can we cater for their demands and improve their lives? > Arsalaan

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At 37 years old, Arsalaan Ahmed is the youngest chief executive in the local Islamic finance industry. As CEO of HSBC Amanah Malaysia Bhd, his vision is to change the industry’s narrative on Islamic finance and he hopes to play a role in helping the industry chart a new path forward.

In recent years, the narrative on Islamic finance has focused a lot on the technicalities of products and services, such as the kind of contract that should be used when providing a particular product or service and whether the contract is shariah-compliant. Consensus has been hard to reach.

Instead, these discussions should be focused on the principles of social justice and create a positive impact on society, says Arsalaan. This can be done by looking at the products and services that can meet the real demands of the people and improve their financial situation. 

“If you attended half a dozen Islamic finance forums last year, you would find that most of the topics panellists discussed were extremely technical. Yes, there are certain rules and regulations that banks are required to adhere to and contracts that should be used. But that is more of a regulatory standpoint,” says Arsalaan.

“As financial institutions, we should look at why banks exist and what positive impact we can create for the people. Can we cater for their demands and improve their lives?

“Let me give you an example. Financial technology (fintech) is an emerging trend and most of the discussions surrounding this topic are whether it is shariah-compliant or not. 

“I think the discussion should be focused on how we can provide access to people who really want access to banking and financial products and services in a shariah-compliant way. With innovation, how can we help them?”

Another oft-discussed topic within the Islamic finance industry is whether banks can offer products and services in the form of loans and debt. That is because some industry players argue that any form of debt is deemed non-shariah-compliant and should be got rid of. Instead, only equity-based financing, where the equity holders share the risks together, is allowed. 

Arsalaan does not agree with this viewpoint. He says loan and debt as a form of financing should not be mixed up with usury (lending money at an unreasonably high rate), which is prohibited in Islam. “Yes, there is this pointless discussion within the industry and it is irrational.”

After all, one of the key values of Islamic finance is to promote social justice and create a positive impact on society. Arsalaan does not see how the public can get financing and benefit if the debt financing option is taken away.

“Suppose you want to buy a house. Will you opt for a risk-sharing financing model that will see you make higher payments to the bank when property prices rise and vice versa, or will you opt to pay the bank a fixed sum money of every month, which is a debt profile product? Many people would prefer the latter as their salary is fixed and it provides them with more certainty,” he says. 

“So, if the debt and loan financing structure is taken away, how will banks serve the demand of these people and help them improve their financial situation or to own a house? Let’s not forget the core values of Islam, which includes promoting social justice. Thus, it is imperative that we structure products and sell them based on the needs of each customer and not on the ideals that the industry wants to impose.

“This argument flows to the investment side also.  There is a large number of people in the middle class globally who receive a fixed salary. They save their hard-earned money and invest it to achieve their long-term financial goals. They can only afford to lose a small part of their savings. 

“In this case, which is the better asset class that could serve their needs? Partially or fully principal-protected investments with returns that are stable and predictable would be more suitable for them.”

Offering sukuk to retail investors

Arsalaan is looking to undertake other initiatives as well. One is allowing retail investors to invest directly in sukuk.

Currently, most retail investors are unable to invest directly in sukuk because of the high initial investment amount. Individual sukuk, offered by banks to their high-net-worth clients, requires an initial investment of RM500,000. 

Thus, the more common way for them to invest in sukuk is via unit trust funds, which have a lower minimum investment amount of RM1,000. However, with unit trust funds, investors do not get to choose which sukuk to invest in as this is decided by the fund managers who invest on behalf of investors.

Arsalaan says by lowering the initial investment amount of individual sukuk, investors with sufficient knowledge of the market could invest directly. Last November, the Securities Commission Malaysia (SC) announced that it would further liberalise regulations in the first quarter of this year to facilitate greater participation in corporate bonds and sukuk among retail investors.

Malaysia’s sukuk market is currently the largest in the world. Based on the total issuances in 2016, the country accounts for 40% of the global market. The democratisation of the sukuk market will benefit investors as it opens up new opportunities.

Arsalaan says 2018 is a good time to democratise sukuk because of China’s One Belt, One Road (OBOR) initiative, which aims to improve the infrastructure of land and maritime routes across various countries, to drive trade and capital flows between the East and West. According to HSBC, the initiative involves US$4 trillion worth of investments and 900 planned projects.

“This is especially true for Malaysia as the country enjoys a good relationship with China. I would argue it is probably one of the strongest [relationships] compared with other nations. This is expected to spur more investments from China. [As a result] more infrastructure is expected to be built and companies will need to raise funds from investors,” says Arsalaan.

“Usually, funds are raised by institutional investors. An area to explore would be to look at launching retail sukuk to provide access to retail investors. It provides investors with new investment opportunities at low risk as it is usually backed by the government. This is a very specific thing HSBC wants to look at.”

However, he does not provide a timeline on when these retail products will be launched.

Social capital, which takes the form of private equity and venture capital investments, is another area Arsalaan is keen to explore. After all, there is a huge amount of money donated by the Muslim population out of religious obligation to support the poor and needy in society.

“What if this money is used to invest in social enterprises in a shariah-compliant way? Wouldn’t this create a bigger, positive impact on society? The population is more educated now than before,” he says. 

“You have people with great ideas and energy to start a business that can create positive impact on society. But they lack the capital needed. What if the huge amount of money given out by Muslims through zakat and sadaqah could be channelled to them to help them kick-start or grow their businesses that are focusing on social needs? Money given to charity is a one-off thing. But by investing in social enterprises, you can preserve the capital and multiply the positive impact it has on society.

“There isn’t enough discussion among [Islamic] banks and financial institutions on social capital and how we can deploy it efficiently in a shariah-compliant manner. This is one thing that I am exploring in the medium term.”

More innovation needs to happen within HSBC Amanah and the Islamic finance industry for it to thrive, says Arsalaan. The emergence of fintech and technologies such as blockchain are changing the way financing activities are conducted and how products and services are provided to the consumer. Tech companies are also competing with banks for business. One of the most cited examples is China-based technology giant Tencent Holdings Ltd, which is now selling insurance products on WeChat, a mobile app that has a billion users.

The Islamic finance industry has been lagging behind when it comes to innovation. Part of the reason is banks have been facing greater scrutiny from regulators since the 2008 global financial crisis.

“The problem is compounded as the industry has been focusing on what is right and what is wrong, on whether certain products and services are shariah-compliant or not [instead of trying to introduce innovation in the industry],” says Arsalaan.

The Values-Based Intermediation initiative

Instead of focusing on technicalities, Islamic banks should pay attention to the core values that underpin their business activities, says Arsalaan.

He points out that it is the culture of conventional banks, which focus on short-term profits and earnings, that caused the financial scandals of the past. It is more of a cultural issue than a technical one. Thus, with strong values underpinning business activities, the culture of the Islamic finance industry can be improved. 

Arsalaan’s beliefs led him to become a founding committee member of the Value-Based Intermediation (VBI) initiative spearheaded by Bank Negara Malaysia. “I didn’t know about VBI when I first came to Malaysia. It was only when I met with representatives from the central bank that they told me about it. It turned out to be a fantastic meeting and I thought this is something I can contribute to,” he says.

According to Bank Negara’s strategy paper, VBI “is an intermediation function that aims to deliver the intended outcomes of shariah through practices, conduct and offerings that generate a positive and sustainable impact on the economy, community and environment, without compromising the financial returns to shareholders”.

Among the benefits is greater innovation, enhanced efficiency and a more effective ecosystem for the financial industry, as well as an improved standard of living and fair and transparent treatment for consumers and the community at large.

A key strategy under VBI is to introduce a value-based scorecard to measure how Islamic banks conduct their business based on the triple bottom line of people, profit and planet. Arsalaan says that instead of referring to maximising short-term profit, the term “profit” is redefined as how banks conduct their business in a sustainable manner. This could be achieved by taking into account the positive impact financing could have on society and the environment. 

“People” under the VBI context means understanding people’s real needs while providing products and services that cater to them. It can also be interpreted as taking care of the welfare of employees, encouraging gender equality and more. “Environment” refers to reducing environmental pollution. This triple bottom line is formulated based on Islamic principles. 

Arsalaan says the committee is working with the central bank to introduce the scorecard this year. “In fact, we have launched a ‘light version’ of the scorecard. It means banks are already giving the scorecard a try. It will be finalised if all participants agree to it. Otherwise, some adjustments will be made.”

The VBI committee members include CEOs from eight other Islamic banks. Thus, it is expected that almost all the local Islamic banks will officially measure their business activities with the VBI scorecard when it is finalised. 

The VBI initiative has not received much publicity, but it is still an important initiative, says Arsalaan. “If local Islamic banks adopt VBI and successfully show that it has a positive impact on the Islamic finance industry and the economy, it will set a good example for industry players globally to follow suit. This will further establish Malaysia as a global hub of Islamic finance.” 

It is still too early to tell if the VBI will take off, but it is said to have shown early results. Takaful FutureSecure by HSBC Amanah and HouzKEY by Maybank Islamic, which were launched at the end of last year, were measured against the scorecard.

The Takaful FutureSecure product aims to assist high-net-worth clients, especially Muslims, to transfer wealth to the next generation while HouzKEY is a rent-to-own product that aims to help first-time homebuyers to own a property. 


Powering on

Arsalaan Ahmed joined HSBC Group as an international executive specialising in Islamic finance in 2004 and left in 2013 for Qatar-based Barwa Bank to be its head of capital financing. Four and a half years later, he returned to helm the group’s Islamic arm in Malaysia. 

It was during his time at Barwa Bank that Arsalaan found himself at a crossroads in his career and contemplated quitting the finance industry altogether. “While I gave my best to Barwa, I was also thinking of using it as a stepping stone to work my way out of the industry,” he says.

Why? Arsalaan says he could not see the positive impact that the global finance industry was supposed to have on society at large. Instead of helping the public save and invest to improve their lives, the actions of some banks contributed to the 2008 global financial crisis that caused millions to lose their savings and jobs. More scandals erupted in the following years, including the London Interbank Offered Rate (Libor) scandal in 2012.

Bank traders at multiple banks were found to have manipulated Libor — the benchmark rate that some of the largest banks in the world charge each other for short-term loans — to boost the short-term profits of their employers and put millions of dollars into their own pockets.

“While there were still people and institutions doing good things for their customers and society, I lost some faith in the finance industry,” says Arsalaan.

In 2016, he received three offers, with better remuneration, to work in the healthcare or education sector. However, to his surprise, HSBC Group offered him the role of CEO at HSBC Amanah Malaysia Bhd. It was an attractive offer and one that would make him one of the youngest chief executives in the Islamic finance industry.

Arsalaan’s immediate reaction was to feel insecure about receiving such an offer at such a young age. “I was involved in all the major departments of investment banking under HSBC Group. But instead of feeling confident, I felt like a jack-of-all-trades. I wondered if I was doing my job well,” he says.

After overcoming his self-doubt, Arsalaan had to deliberate on his decision. He wanted to make sure that his values in terms of Islamic finance were aligned with those of other board members of the bank. He also considered whether the new position would enable him to drive changes in the finance industry.

But it did not take him long to come to a decision. After all, as a global hub for Islamic finance, Malaysia has the world’s most established framework to govern the industry, which will allow it to continue prospering. If there is a place for him to bring change, Malaysia is definitely it.

Also, HSBC Group has a long history in Malaysia. The banking group is one of the earliest foreign banks to offer Islamic financial services in the country, having done so since 1994. 

In 2008, the banking group set up HSBC Amanah, an independent Islamic finance entity dedicated to serving its Muslim clients. This year marks its 10th anniversary.

However, there have been challenges over the years. In 2012, the HSBC Group announced that it would to pull its retail Islamic finance business in the UK and several other countries. It also stopped offering Islamic products and services in the United Arab Emirates, Bahrain, Bangladesh, Singapore and Mauritius. Instead, it would only focus on its Islamic finance business in Malaysia and Saudi Arabia while maintaining a limited presence in Indonesia. These moves, the bank said, were made based on a global strategy that the group had set out in 2011 to drive business growth and improve returns.

Arsalaan says Malaysia has always been a focus of HSBC Group and HSBC Amanah will be here to stay. He adds that the Islamic bank is a “strategic priority” under the banking group’s plans. This is reflected in the growing number of standalone HSBC Amanah branches in Malaysia. The bank now has 26 branches after opening its Bandar Sunway and Kajang branches last year.

“While we are not the largest Islamic bank here in terms of assets, we have the highest number of standalone Islamic branches locally compared with other Islamic bank subsidiaries. Not many people realise this. And it shows our commitment to stay and continue growing in Malaysia,” says Arsalaan.

He adds that the bank aims to strengthen its presence in the country via product innovation and service quality. “We are the first to roll out a new product (the Takaful FutureSecure) under the Value-Based Intermediation initiative and will continue to innovate and come up with new products and services. We are also competing in terms of service quality by meeting the real needs of our clients.”