Ethical values remain the core of Islamic banking

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Y.Bhg. Dato’ Hj. Mohd Redza Shah bin Abdul, CEO of Bank Muamalat and President of the Association of Islamic Banking Institutions Malaysia

Islamic banking is growing in Malaysia at a rapid pace. Inside Investor sat down with Y.Bhg. Dato’ Hj. Mohd Redza Shah bin Abdul, CEO of Bank Muamalat and President of the Association of Islamic Banking Institutions Malaysia to learn about the driving forces behind the sector.

Q: How would you rank your bank in terms of customer numbers and/or assets among the competition in the Islamic banking sector in Malaysia?

A: There are about 20 Islamic banks in the country, including local and foreign banks and conventional banks with Islamic windows. We rank about 6 in terms of asset size, and in terms of financing we rank 5 or 6. We are amongst the top tier, but the difference is that we are a full-fledged Islamic bank as opposed to our competitors which also offer conventional banking as part of their group.

Q: Who are the current shareholders of Bank Muamalat? Are there any changes planned in the ownership of Kazanah?

A: The shareholders comprise DRB-HICOM, which holds 70 per cent shares in Bank Muamalat, while Khazanah Nasional Berhad holds the remaining shares. DRB-HICOM Berhad is among the nation’s largest conglomerate involved in three core business segments, automotive, services and property plus infrastructure. Khazanah Nasional Berhad is the investment holding arm of the government of Malaysia. A possible change in the ownership of Kazanah is something that cannot be ruled out, but I cannot speak for the shareholders. I think although there may be shareholding changes in the future, Muamalat bank is following its path of growth, both in organic and inorganic ways. One thing is for sure: Size does matter in the Islamic banking industry in Malaysia, and when a bank has enough size, it can take on bigger deals and bigger financing, for example for large infrastructure projects and the like. An Islamic bank here has to reach a certain size in order to be relevant for the industry, and also be ready for domestic expansion and internationalisation. This is what our shareholders are looking at in their strategic initiatives for the bank.

Q: Islamic banking is on the rise in Southeast Asia. In which countries in the region would it be worth to set up new branches for Bank Muamalat or other foreign Islamic banking institutions?

A: Most of the Islamic banks here, including us, are looking at Indonesia, primarily because the growth potential there is tremendous. Indonesia being a predominantly Muslim country also helps. We also see potential in China, where some Muslim provinces are expressing interest in seeing Islamic banking in some form. Bank Muamalat is currently assisting the Bank of Shi Zui Shan in Ningxia Province to offer Islamic banking products as window products to the Muslims and non-Muslims in the area. Our expansion is not limited to Southeast Asia, we are looking at other regions in the world also.

Q: What are the main products you are offering in China?

A: Mostly retail products at the start. When we have reached a certain threshold with retail products, it gives us a firm footing to offer corporate products and financing such as sukuks.

Q: What is the most popular product in your portfolio for retail customers?

A: The most popular product is personal financing for government servants via a salary deduction scheme where the rates are deducted at source. We do it on a commodity Murabaha basis. It is the fastest growing product, followed by house financing. We aim to make a difference when we create our products.

Q: How would you define the real difference between conventional and Islamic banking? Many people believe it’s just interest-free banking.

A: If it is just reduced to interest-free banking, than we could boil down the difference to the fact that conventional banks pay interest and Islamic banks pay out profits at similar rates. Telling someone that Islamic banking is just interest-free banking is not convincing. Thus we always point out the ethical side of Islamic banking. Part of it is that we are treating loan defaulters in a different way by drawing guidelines for certain parameters, for example if a borrower dies and his wife is not working then the Shariah council may pardon her. We are treating our customers after the principle of Ehsan, the Islamic sense of social responsibility.

Q: What are the challenges in terms of skills training for the Islamic banking industry in Malaysia?

A: Malaysia is very advanced in this field. There are a lot of Islamic finance scholars and people studying liquidity management, Islamic finance development and else. Malaysia has got this drive that comes from the government to make the Islamic financing sector a success. To allow conventional banks to have Islamic windows was driving the sector further and also brought in the good values of conventional banking to the Islamic banking industry, for example risk management.

Q: Islamic banking has shown some sort of resilience during the latest global financial crises. What is the reason, in your opinion, that Islamic banking and finance is obviously not that much exposed to economic volatility as non-Islamic products?

A: Islamic banking is in its infancy. The sector is a lot smaller than the conventional market and thus is not that exposed to global volatilities. Another reason is that in the sector of corporate and government financing, Islamic banking is tied to the tangibility of the underlying assets of the economic activity. There are no things such as unsecure zero bonds or the like. Our products being tangible and transparent probably saved us from the financial crisis. Furthermore, on the global financial market the element of speculation is very dominant, for example in currency trade. At our bank, we tell our dealers no to speculate, but to trade as per customer requirements.

Q: Analysts speak of a $1 trillion market for Islamic finance globally in the near future. Do you think this is realistic?

A: I would not be surprised, and I think we will see it sooner than later.

Q: However, where do you see the challenges for Islamic finance?

A: The challenge lies in educating the people on what Islamic finance brings to the table. Many people see it just as a hybrid of conventional finance. We have to undertake efforts at lengths to convince people and educating the public. Islamic finance should be taught at school, this would make things much easier.

Q: In the West, Islamic banking is not part of the culture, but is becoming more popular, for example in the UK. Where do you see the reasons for this?

A: There is some element of carefulness in some countries which see Islamic products probably as negative and solely religiously driven. But the ethical nature and the values that come with it is something that everybody can accept. Thus we should sell the principle of Islamic finance in the West according to its ethical values and not as something that needs religious backing. It actually can sell itself as an ethical way of banking.

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Reading Time: 5 minutes

Y.Bhg. Dato’ Hj. Mohd Redza Shah bin Abdul, CEO of Bank Muamalat and President of the Association of Islamic Banking Institutions Malaysia

Islamic banking is growing in Malaysia at a rapid pace. Inside Investor sat down with Y.Bhg. Dato’ Hj. Mohd Redza Shah bin Abdul, CEO of Bank Muamalat and President of the Association of Islamic Banking Institutions Malaysia to learn about the driving forces behind the sector.

Reading Time: 5 minutes

Y.Bhg. Dato’ Hj. Mohd Redza Shah bin Abdul, CEO of Bank Muamalat and President of the Association of Islamic Banking Institutions Malaysia

Islamic banking is growing in Malaysia at a rapid pace. Inside Investor sat down with Y.Bhg. Dato’ Hj. Mohd Redza Shah bin Abdul, CEO of Bank Muamalat and President of the Association of Islamic Banking Institutions Malaysia to learn about the driving forces behind the sector.

Q: How would you rank your bank in terms of customer numbers and/or assets among the competition in the Islamic banking sector in Malaysia?

A: There are about 20 Islamic banks in the country, including local and foreign banks and conventional banks with Islamic windows. We rank about 6 in terms of asset size, and in terms of financing we rank 5 or 6. We are amongst the top tier, but the difference is that we are a full-fledged Islamic bank as opposed to our competitors which also offer conventional banking as part of their group.

Q: Who are the current shareholders of Bank Muamalat? Are there any changes planned in the ownership of Kazanah?

A: The shareholders comprise DRB-HICOM, which holds 70 per cent shares in Bank Muamalat, while Khazanah Nasional Berhad holds the remaining shares. DRB-HICOM Berhad is among the nation’s largest conglomerate involved in three core business segments, automotive, services and property plus infrastructure. Khazanah Nasional Berhad is the investment holding arm of the government of Malaysia. A possible change in the ownership of Kazanah is something that cannot be ruled out, but I cannot speak for the shareholders. I think although there may be shareholding changes in the future, Muamalat bank is following its path of growth, both in organic and inorganic ways. One thing is for sure: Size does matter in the Islamic banking industry in Malaysia, and when a bank has enough size, it can take on bigger deals and bigger financing, for example for large infrastructure projects and the like. An Islamic bank here has to reach a certain size in order to be relevant for the industry, and also be ready for domestic expansion and internationalisation. This is what our shareholders are looking at in their strategic initiatives for the bank.

Q: Islamic banking is on the rise in Southeast Asia. In which countries in the region would it be worth to set up new branches for Bank Muamalat or other foreign Islamic banking institutions?

A: Most of the Islamic banks here, including us, are looking at Indonesia, primarily because the growth potential there is tremendous. Indonesia being a predominantly Muslim country also helps. We also see potential in China, where some Muslim provinces are expressing interest in seeing Islamic banking in some form. Bank Muamalat is currently assisting the Bank of Shi Zui Shan in Ningxia Province to offer Islamic banking products as window products to the Muslims and non-Muslims in the area. Our expansion is not limited to Southeast Asia, we are looking at other regions in the world also.

Q: What are the main products you are offering in China?

A: Mostly retail products at the start. When we have reached a certain threshold with retail products, it gives us a firm footing to offer corporate products and financing such as sukuks.

Q: What is the most popular product in your portfolio for retail customers?

A: The most popular product is personal financing for government servants via a salary deduction scheme where the rates are deducted at source. We do it on a commodity Murabaha basis. It is the fastest growing product, followed by house financing. We aim to make a difference when we create our products.

Q: How would you define the real difference between conventional and Islamic banking? Many people believe it’s just interest-free banking.

A: If it is just reduced to interest-free banking, than we could boil down the difference to the fact that conventional banks pay interest and Islamic banks pay out profits at similar rates. Telling someone that Islamic banking is just interest-free banking is not convincing. Thus we always point out the ethical side of Islamic banking. Part of it is that we are treating loan defaulters in a different way by drawing guidelines for certain parameters, for example if a borrower dies and his wife is not working then the Shariah council may pardon her. We are treating our customers after the principle of Ehsan, the Islamic sense of social responsibility.

Q: What are the challenges in terms of skills training for the Islamic banking industry in Malaysia?

A: Malaysia is very advanced in this field. There are a lot of Islamic finance scholars and people studying liquidity management, Islamic finance development and else. Malaysia has got this drive that comes from the government to make the Islamic financing sector a success. To allow conventional banks to have Islamic windows was driving the sector further and also brought in the good values of conventional banking to the Islamic banking industry, for example risk management.

Q: Islamic banking has shown some sort of resilience during the latest global financial crises. What is the reason, in your opinion, that Islamic banking and finance is obviously not that much exposed to economic volatility as non-Islamic products?

A: Islamic banking is in its infancy. The sector is a lot smaller than the conventional market and thus is not that exposed to global volatilities. Another reason is that in the sector of corporate and government financing, Islamic banking is tied to the tangibility of the underlying assets of the economic activity. There are no things such as unsecure zero bonds or the like. Our products being tangible and transparent probably saved us from the financial crisis. Furthermore, on the global financial market the element of speculation is very dominant, for example in currency trade. At our bank, we tell our dealers no to speculate, but to trade as per customer requirements.

Q: Analysts speak of a $1 trillion market for Islamic finance globally in the near future. Do you think this is realistic?

A: I would not be surprised, and I think we will see it sooner than later.

Q: However, where do you see the challenges for Islamic finance?

A: The challenge lies in educating the people on what Islamic finance brings to the table. Many people see it just as a hybrid of conventional finance. We have to undertake efforts at lengths to convince people and educating the public. Islamic finance should be taught at school, this would make things much easier.

Q: In the West, Islamic banking is not part of the culture, but is becoming more popular, for example in the UK. Where do you see the reasons for this?

A: There is some element of carefulness in some countries which see Islamic products probably as negative and solely religiously driven. But the ethical nature and the values that come with it is something that everybody can accept. Thus we should sell the principle of Islamic finance in the West according to its ethical values and not as something that needs religious backing. It actually can sell itself as an ethical way of banking.

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