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Malaysia islamic asset growth to rebound on deposit transparency

Thursday, June 4, 2015 - 13:47
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"We expect the growth to go back to the high-teens if not in the low twenties in the near to medium term," said Kuala Lumpur-based Badlisyah, who is also the chief executive officer of CIMB Islamic Bank Bhd.

[KUALA LUMPUR] Malaysia's Islamic banks see their asset growth rebounding closer to 20 per cent as lenders benefit from a two-year effort to improve transparency for depositors.

The nation's Shariah-compliant banking industry slowed to an average annual expansion rate of 13 per cent in the past three years, compared with 21 per cent in the previous four, central bank data show. Growth eased as lenders adjusted their products to better suit the risk appetite of customers and provide clearer insight into how their cash is invested, Badlisyah Abdul Ghani, who heads the Association of Islamic Banking Institutions Malaysia, said in a June 2 e-mail interview.

"We expect the growth to go back to the high-teens if not in the low twenties in the near to medium term," said Kuala Lumpur-based Badlisyah, who is also the chief executive officer of CIMB Islamic Bank Bhd. "We should see Islamic financial institutions refocus on growth. However, this is naturally subject to no Black Swan event occurring." Malaysian lenders have to comply with the Islamic Financial Services Act by June 30, part of a goal to boost Shariah- compliant banking assets to 40 per cent of the total by 2020 from about 26 per cent last year. The initiative will take on further impetus in 2017 when the nation's biggest pension fund plans to allow customers to choose an investment option that's in full compliance with religious principles for the first time.

The act was introduced to reclassify existing products based on the underlying contracts to differentiate between deposit and investment accounts. Shariah law forbids the payment of interest, while embracing the sharing of profit and risk.

The term Black Swan was popularized by author and investor Nassim Taleb in his 2001 book to denote unexpected financial events with transformational effects.

Islamic banking assets in Malaysia almost doubled to a record 625.2 billion ringgit (US$168.7 billion) in 2014, from 351.2 billion ringgit in 2010, according to the central bank's latest annual report.

The Employees Provident Fund will create the world's largest Shariah-compliant fund when it provides the new investment option, Prime Minister Najib Razak said in April. It currently manages 664 billion ringgit, of which 40 per cent comply with religious tenets.

"Naturally, such a fund will add some zing to the growth momentum but there are many other drivers in the market," said Mr Badlisyah. "The simplest and most important is the increase in demand from the retail consumer market as greater awareness of Islamic finance becomes more prevalent." The take-up rate should be encouraging based on a survey of 96,448 contributors, EPF's Chief Executive Officer Shahril Ridza Ridzuan said in a May 18 e-mailed statement. The poll showed that 71 per cent were in favor of such a proposal. Shahriz Ibrahim Sardar Mohamed, head of media at the fund, hasn't yet replied to an e-mail seeking additional comment.

Since EPF contributions are compulsory, subscribing to the Islamic fund will definitely increase Shariah-compliant assets, said Baiza Bain, a director with Islamic finance consultancy Amanie Holdings Ltd in Kuala Lumpur.

Angus Salim Amran, head of financial markets at RHB Investment Bank Bhd. in the capital, said the banking asset target can be met even without the EPF involvement.

"This is a realistic target" given the current growth rate, said Angus. "The rise in Shariah-compliant liquidity is the main driver of Islamic banking assets and this is expected to continue."

BLOOMBERG