Mergers and acquisitions, quality of talents and embracing technology are key areas for Islamic banks to move forward, in addition to focusing more on quality rather than percentage of growth.
“There are 13 banks that are big with more than US$1 billion [RM3.09 billion] each in equity whereas the rest of the industry is small, lacking scale,” Ernst & Young (E&Y) partner, Islamic banking excellence centre, Ashar Nazim told The Malaysian Reserve last week.
“There are too many banks out there. Therefore, consolidations and mergers is the way to go in moving forward,” said Ashar. “The industry is still young and it has learnt from its mistakes. It is emerging from a state of self-denial after the international crisis. There is a long way to go.”
Ashar added that Malaysian banks are ahead of the pack in terms of the scale some of them have achieved.
Commenting on talents, Ashar said: “Most Islamic banks are led by bankers that were previously conventional bankers and some have reached their retirement age. This industry is a young industry that needs entrepreneurial fresh blood to drive it forward.”
He added that the use of technology is sub-optimal because no information technology vendors out there are truly syariah-compliant and have been vetted or certified by the global standard setting board.
“They are mostly conventional core banking solutions which have been adapted for Islamic banks. That is a major limiting factor for Islamic banks and that drives their operating costs much higher than conventional,” Ashar said.
Regarding quality of growth, Ashar said: “Initially, it used to be important because it was a young industry. It was trying to establish itself and to prove a point that it is not a fad and is here to stay.
“Now, whether the growth rate of 19% or 20% or 22% is less relevant. What is more relevant now is the quality of growth.”According to E&Y’s World Islamic Banking Competitiveness Report 2013, global Islamic banking assets had an average annual growth of 19% over the last four years and are set to cross US$1.8 trillion (RM5.56 trillion) in 2013, up from the US$1.3 trillion of assets held in 2011.
Synthetic instruments
The report added that the top four market accounted for 84% of industry assets and Islamic banking grew 50% faster than the overall banking sector.
Nonetheless, the report said that the average return on equity at 12% was lower than the 15% registered for conventional banking.
“Islamic banks are 20% to 25% less profitable than conventional banks, but the more worrying factor is that this is because of all factors that are controllable,” said Ashar.
“Being syariah-compliant should mean that you are more profitable because you are better linked to the real economy and you are into socially responsible businesses,” he added.
Ashar said that for Islamic banks in Malaysia to grow from its current US$120 billion-US$130 billion industry to a 40% market share of the industry by 2020, banks have to “optimise the balance sheet to be more capital friendly”.
He added that Islamic banks have to understand the customers better because as the conventional banks “are bigger, well entrenched, understand their customers better and as everyone agrees, they have a better service culture.
That is where Islamic banks slacked. “Islamic banks have so far failed to penetrate the mainstream segments to its fullest potential.”
Ashar said Islamic banks should look at their retail banking business and how they acquire and serve their customers.
He added that many customers of Islamic banks are deposit bank customers and have not taken the financing part either because of lack of awareness or a number of other reasons.
“Clearly there is an opportunity to increase penetration with existing customers,” Ashar said.
Commenting on the new Islamic Financial Services Act 2012 which will statutorily enforce management of syariah-non-compliance risk and requires Islamic financial institutions to ensure at all times that their aim, operation, business, affairs and activities are in compliance with syariah, Ashar said: “It will help the international industry move towards harmonisation because the gist of the act is that Islamic banking business should be more syariah driven, syariah-based instead of just having synthetic instruments.”
According to Bank Negara Malaysia’s website, there are 16 Islamic banks operating in Malaysia, 10 locally-owned with the remaining six that are foreign-owned.
(F.M.T News / 18 Feb 2013)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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