This week, the Dubai Investment Group (DIG) completed its purchase of a major stake in Bank Islam Malaysia Bhd.
DIG is the global financial investor of Dubai Holdings, and focuses on long- and short-term investments in the industrial, finance, global securities, real estate and indirect investments.
The move is the first foreign buy into of a domestic Malaysian Islamic bank since more liberal rules for foreign equity ownership were announced last year.
The move constitutes the UAE-based conglomerate's largest investment in Southeast Asia's financial services sector, and involved the issuance of 845m new equity shares. DIG invested RM828.2m ($225.3m) in funds, and will control a 40% share - nine percent short of the maximum allowed to foreign investors. The Group will have three seats on the board of directors.
Malaysia's Pilgrim Management Fund Board (Tabung Haji) also purchased nine percent equity in the Malaysian operator.
DIG's move is the single largest foreign direct investment (FDI) in the Malaysian financial sector. The group is hoping it is now well placed to tap into Malaysia's booming Islamic financial services industry. Soud Ba'alawy, CEO of DIG, told local news that its investment in Bank Islam would "open a bridge" by which the excess liquidity of the Middle East and Gulf Countries could be channelled into the relatively-high return environment of South-east Asia.
Bank Islam, Asia's oldest Islamic bank, has struggled with its bottom line in the years following the Asian Financial Crisis of 1997, particularly due to a surfeit of bad loans on its books. It recently brought in new management and hopes that the fresh capital from the DIG investment will make it more competitive in an increasingly crowded market.
With the 40% share, Bank Islam will likely have direct access to DIG's diverse business interests around the globe. Insiders have also indicated the Dubai-based firm will support Bank Islam in the future when it looks to move into the overseas markets, including the Middle East.
Malaysia has been open to foreign Islamic banks since 2004. Since then, three Middle Eastern banks have entered the market. Kuwait Finance House began operations in February. Asian Finance Bank, owned by a consortium of Middle Eastern Banks, and Saudi Arabia's Al Rajhi Bank are both set to open shortly. Other foreign banks such as HSBC and Citigroup offer Islamic services as windows within their conventional operations.
The rules concerning foreign ownership in Malaysian Islamic banks were relaxed in 2005, when the percentage allowed was increased from 20% to 49%. Some observers had hoped that this allowance would be increased further as part of the new Malaysian Islamic Finance Centre, a host of new incentives to build Malaysia's Islamic banking industry, which was unveiled last month by Bank Negara.
But it appears that allowing less-than majority shareholding has not scared away investors, and it is apparent that DIG has big plans for Bank Islam. Soud Ba'alawy indicated to local press that he would like to create in the long run an "Islamic banking conglomerate that would be able to compete with conventional banks on a global scale." In the short-term, he indicated that Bank Islam would be the group's gateway to expansion in the region.
While the conglomerate mentioned may be some time in the making, it is clear that the industry, which for years has been largely concentrated on domestic markets, is starting to look globally. It is precisely this development that has led Malaysia to increase its efforts to become an international centre of Islamic finance.
By opening the market, Bank Negara hopes to attract not only capital but also expertise to Malaysia. The CEO of one local Islamic Bank told OBG that Malaysia was still lacking in IT and human resources in its Islamic finance industry, and that there was a dearth of scholars who sufficiently understood Sharia and finance.
He also cited that there were vexing regulatory requirements that sometimes hindered a bank's ability to offer new products. New Islamic products must often pass muster with government authorities, such as Bank Negara or the Securities Commission, the relevant Sharia advisory bodies, as well as consumers who are expecting substantial returns.
But Bank Negara seems to be providing the right environment for foreign investment in Malaysia's Islamic sector. As more and more foreign players enter the market, competition and increased market demand will likely spur more technology transfer and market innovation.
Bank Negara hopes that Islamic assets, which currently make up around 12% of Malaysia's banking assets, will constitute 20% by 2010. Total assets managed by Islamic banks are reportedly worth $400bn globally.