HSBC has been offering Islamic financial services in Malaysia since 1994, with a 4% share of the Islamic financial services market. As of September, Islamic finance contributed 10.5% ($51.3m) of the bank's total operating income. The company launched HSBC Amanah, its dedicated global Islamic brand, in 1998. Yakub Bobat, managing director for HSBC Amanah in Malaysia, has indicated that the country will be designated as the regional centre for HSBC's Islamic banking business in the Asia Pacific region, providing services to markets in India, Hong Kong, China, Bangladesh, Indonesia and Brunei.
With a stand-alone Islamic licence, HSBC Amanah Malaysia will be treated as separate bank, with its own board of directors and balance sheets. There are no limits on the number of branches it can open, a significant factor as foreign banks to date have been limited to opening only a few new branches each year, especially in competitive urban locations. The rules state that Islamic windows are allowed to serve conventional customers, although they cannot cross-sell conventional products through the Islamic branch network.
The limit on branch openings for foreign banks has been a sensitive issue, with local banks arguing that exposure to foreign competition should be gradual, allowing them to build up the competency, size and expertise to compete.
Julian Wynter, CEO of Standard Chartered Malaysia, told OBG, "This is fair, as foreign banks need to contribute to community development. No country in the world would let foreign banks dominate domestic banks. The local banks are getting better because [...] we bring in competition and help consumers get improved standards."
In addition to bringing in international best practices and spurring innovation, international banks also offer global networks and can help further expand Malaysia's Islamic banking offering to international customers.
Standard Chartered, along with CitiGroup and OCBC, are all expected to be granted Islamic stand-alone licences within the next year.
Malaysia is considered a leader in Islamic banking, which accounts for 13% of the country's banking assets. The country is particularly strong in Islamic capital markets, with 50% of the sukuks (Islamic bonds) issued globally transacted in Malaysian currency. Other Islamic financial service offerings where Malaysia holds a niche leadership are takaful (sharia-compliant insurance) and education.
Malaysia's Islamic financial services market is aided by strong ties with the Middle East. Two years ago three Middle Eastern Islamic banks, Kuwait Finance House, Saudi Arabia's Al Rajhi, and Qatar-based Asian Finance, were granted licences to set up in the country.
Malaysia has established standard-setting institutions such as the international Islamic Financial Services Board and the International Centre for Education in Islamic Finance to cement its position as an industry leader. BNM and the securities commission have also jointly established the Malaysia International Islamic Finance Centre, which is mandated to liberalise the sector and allow for more foreign participation.
Keith Driver, CEO of HSBC Amanah Takaful Malaysia, the bank's Islamic insurance unit, told OBG, "BNM wants Malaysia to become an Islamic finance hub, and allowing foreign players will help to make an industry that in the past has been perceived as old-fashioned and reserved for Muslims, more commercially vibrant."
To tap into an estimated $1.5trn worth of funds floating in the Middle East and an industry that has shown 15% growth since 2000, Singapore, Hong Kong and Tokyo are all actively looking to capture a share of the pie. Before September 11th, many Middle East investors had funds in the US, UK and Switzerland. Today, with heightened security concerns, they are increasingly looking east and investing closer to home. As Islamic transactions must have underlying assets, an abundance of real estate and construction projects in the Asia Pacific region make for attractive investment options.
With Asia becoming increasingly competitive in the area of Islamic finance, liberalisation, as evidenced by BNM's decision to permit foreign conventional banks to operate Islamic subsidiaries, is seen as a key for Malaysia to sustain its leadership position.