* Government sets ambitious numerical target for expansion
* But banks may be reluctant to move aggressively
* Critics see "leadership vacuum" in boards
* Few banks expanding overseas much
* Reliance on conventional networks may slow local growth
By Al-Zaquan Amer Hamzah and Bernardo Vizcaino
KUALA LUMPUR/DUBAI, Feb 21 Regulatory reforms
are underway to help Malaysia's Islamic banking industry expand
further, but for government plans to succeed, they will need to
be matched by action from some reluctant banks.
The government originally aimed for 20 percent market share
for Islamic banks by 2010, but despite double-digit growth in
both lending and assets, the sector has fallen shy of this mark.
Islamic banks have added 111.6 billion ringgit ($36 billion)
in assets over the past two years, bringing their share of total
banking assets in Malaysia to 19.6 percent in December 2012,
central bank data shows.
Their share of loan business crossed the 20 percent mark in
January 2012, reaching 21.3 percent last December.
Malaysia now aims for an even more ambitious target - a 40
percent share of Islamic domestic financing by the year 2020 -
and intends to make the industry more international, according
to the country's master plan for capital markets development.
To achieve this, regulators have introduced new rules over
the last two years and are preparing to release a brand-new
legal framework for Islamic finance this year.
But private-sector banks need initiatives of their own,
including steps to address a leadership vacuum and to strengthen
their overseas strategies, says Ashar Nazim, Islamic financial
services leader at consultants Ernst & Young.
"In the absence of these initiatives, these numbers are very
ambitious - 40 percent is very difficult from population
dynamics alone," he said.
Malaysia's proactive Islamic finance policies have made it a
global model, but regulators have refrained from directing the
strategy of Islamic banks.
"The market has to be demand-driven. We can put the enabling
environment, but we can't require banks to offer products and
services," central bank governor Zeti Akhtar Aziz said during a
September media conference.
That makes the issue of who decides banks' strategy
important, and critics believe bank boards often fail to give
"Board composition is very vanilla, very ordinary. The
quality of boards is under heavy criticism, that is where the
struggle is," Nazim said.
Few of Malaysia's Islamic lenders have ventured overseas and
only a handful have a significant regional presence. Some have
established presences in Indonesia, but the vast bulk of their
revenues remain domestic.
CIMB Islamic, the Islamic arm of CIMB, derives
around 10 percent of its earnings from business in Indonesia,
Singapore and Brunei, according to the bank.
"I don't think we'll see a significant shift...but we are
really endeavouring for our business overseas to contribute more
than the 10 percent," said Badlisyah Abdul Ghani, chief
executive of CIMB Islamic.
"There is no point in setting up business in a new market if
we can't be competitive; there are certain parameters that need
to be in place before we can operate effectively. Government
support is the main criterion."
Beyond Indonesia, Islamic banks see little chance for
expansion of the industry in Asia; although China has a large
Muslim population, there are major regulatory obstacles and a
lack of infrastructure in the country's Muslim areas.
That leaves the Middle East, but for many Malaysian banks,
that is seen as a step too far. With the exception of a few
representative offices, no Malaysian bank has ventured into the
"There are small markets in the Middle East such as Bahrain,
Qatar and Oman, but these are city states and they are already
well-banked," said Rafe Haneef, chief executive of HSBC Amanah
Maybank Islamic, the Islamic arm of Malayan
Banking, has said expansion plans will focus on southeast Asia,
with further plans for China, London and the Middle East. Its
Indonesian unit was converted into a full-fledged Islamic bank
At home in Malaysia, Islamic banks' expansion is hampered by
their structure, analysts believe: they are mostly subsidiaries
of conventional banking groups and leverage the branch networks
of their parents to reach out to customers.
For instance, Public Islamic Bank distributes its products
through the 248 branches of its parent, Public Bank,
the country's third largest lender. Bank Islam, the country's
largest standalone Islamic lender, has less than half the assets
of Maybank Islamic.
"Our model leverages on the joint network. I am personally
not so keen to set up branches," said the chief executive of
another Malaysian Islamic bank, noting: "We are bottom
line-driven." The executive declined to be named.
This contrasts with the Gulf, which has major, standalone
Islamic banks such as Saudi Arabia's Al Rajhi Bank,
Bahrain's Al Baraka Banking Group and Abu Dhabi
Using conventional bank branches reduces costs and risks.
But it can also reduce the appeal of Islamic banking to some
customers, while it may dilute management's focus on the Islamic
side of the business and constrain the Islamic operation's room
Malaysian regulators have been actively promoting the
concept of creating a very large, standalone Islamic bank, and
have even created a specific licence for such a "mega" bank. It
would be defined as having paid-up capital of $1 billion,
compared to 300 million ringgit for a regular banking licence.
The theory is that such a large Islamic bank could compete
because of its size and also because it would be able to choose
its strategy independently from a conventional parent. So far,
however, there has been little concrete interest in the
financial community to establish such a bank.
"If Malaysia wants to maintain leadership then this
initiative, under whatever name, needs to be done," said Nazim.
(Editing by Andrew Torchia)