A DEFINING MOMENT IN ISLAMIC FINANCE AND SYARIAH WITH CIMB ISLAMIC
Badlisyah Abdul Ghani, Chief Executive Offcer of CIMB Islamic Bank Berhad, is no stranger to the many facets of the banking industry. In an interview, with the Islamic Banker publication, the industry stalwart shares about CIMB Islamic’s foray into the market, the bank’s current successes and achievements as well as aspirations for the future.
IslamicBanker (IB) : Share with us your background in the banking industry and your entry into the Islamic fnancing sector.
Badlisyah Abdul Ghani (BAD) In 1997, fresh out of university, I joined Bank Islam Labuan Limited as a credit ocer. My focus was in structured and corporate finance but being in a new startup bank, I had the opportunity to be exposed across all other banking activities – trade finance, project finance, treasury, etc. I was transacting Islamic finance across about 30 different countries. Subsequently, in 2002 after completing the world’s first corporate and first soverign global sukuk respectively, I joined CIMB, when it was still a mere merchant bank as a manager in the Corporate Finance department before the Group CEO approached me to establish CIMB Islamic in the same year. To-date, I have had 16 years of experience in the financial industry.
IB: To what do you attribute CIMB Islamic’s numerous accolades and awards?
BAD: At CIMB Islamic, it has always been about quality of delivery and a superior product line-up. We believe in fully embracing Syariah to ensure that our products are up to our customers’ expectations and beyond. Key to our success is the introduction of new and innovative products that appeal to our customers from across diverse segments. Our products are developed with our customers in mind. As a result, CIMB Islamic has a comprehensive suite of products and services that surpass that of our competitors. One of the reasons for our success, is due to the way we are structured – we operate on a “Dual Banking Model” which allows us to leverage on the depth and breadth of CIMB Group’s operations comprising conventional as well as Islamic banking and finance activities. When we started in the industry in 2002, our Islamic bank entered the market overnight with the biggest treasury and corporate finance team in the country, and we did the same when we became a universal bank in 2005/2006 whereby we started immediately with 360 branches across Malaysia, coupled with a 20,000-strong workforce, all set to generate business. We became the fastest growing Islamic bank in the world for five consecutive years. This is the model that has allowed us to penetrate the market whilst protecting the Group from business attrition
IB: How can CIMB Islamic contribute to the nation’s vision of making Malaysia an international Islamic financial hub?
BAD: Our contributions have always been about doing business the right way and doing it well. At the end of the day, it is about being in the market and creating the momentum for growth in the sector in which we operate. We want to do our best for our customers and by doing that, we help put Malaysia on the map as an ideal market place for Islamic bankers.
IB: In your opinion, what are the current and future challenges in Islamic banking and finance?
BAD: In my opinion, there are three critical challenges, the first of which is the lack of regulatory and legislative framework in many jurisdictions globally that hinders the development of the industry. In Malaysia, we have a comprehensive framework but in general across the globe, there is so much more to do. Secondly, in countries where there is regulatory and legislative framework available, often there is a lack of understanding on the part of stakeholders on what Islamic finance is all about, which causes the industry to stagnate, and in a lot of instances debilitating market confusion, resulting in the loss of the industry’s competitive edge. Thirdly, the lack of skill sets and real knowledge on the crux of Islamic finance can be a major setback. If you don’t have bankers, lawyers, accountants and other professionals who understand Syariah and Islamic finance, it is bound to be a brewing problem. There are still people in positions of influence in the industry who do not fully understand. Amongst these three that I have mentioned, the second and third are pressing issues in Malaysia, although I do not feel it to be insurmountable as we have more experience in tackling the issues than most.
IB : How important is convergence and harmonisation in Islamic financial practices? What are your recommendations?
BAD : First, it is important to understand the basic concepts of Syariah in commercial transactions including banking which is to have mutual respect and acceptance of practices across different jurisdictions. For as long as different countries have different cultures, different social norms, different land laws as well as different economic and political systems, Syariah will always be applied differently according to the different local parameters. Don’t expect to sit in Kuala Lumpur, and say that what Botswana is doing with Islamic finance is wrong from a Syariah perspective, because we cannot apply the same parameters that exist in Malaysia in Botswana. Hence, stems the concept of Syariah harmonisation which is about acceptance of diversity across borders. In fact, I believe that we have wasted 30 to 40 years debating for no reason – in an effort to standardise these parameters when by right, they are meant to be overcome by the mere acceptance of differences. There are approximately 1.6 billion Muslims in the world today and the majority are below the poverty line in many nations. If we do not address this, we are creating a dis-service to our core target market. To me that is the biggest sin.
IB: Are they any Islamic banking and finance products that are exclusive to CIMB Islamic only?
BAD : In the finance industry, products are largely the same but the differentiating factor is the service delivery and product quality. Every product can be replicated. Ultimately, we are in the same industry and no financial institution is an island. In the past, we have introduced many new products into the market. Most of the Sukuk products in the market today were developed by CIMB Islamic but it has become a generic product that anyone can replicate. In fact, we want our products to be replicated because we are into building and pioneering an industry.
IB : There is now greater proliferation of cross border Islamic financial transactions. Do you see any obstacles in regards to this?
BAD: For instance, if I am an investor or financier based in Malaysia and I want to perform a cross border deal, I would want to base my transactions on the law of that land due to reasons of cash flow and assets in that particular country. If I practice mutual respect and acceptance, as a financier based in Malaysia, I should be able to undertake my transactions in a cross border deal with the country in question, in the manner that’s done there without any obstacle. Until such time that people fully embrace that concept of mutual respect and acceptance, we will encounter limitations with cross border Islamic finance deals. Anyone who says otherwise, does not understand Syariah and is an obstacle to cross-border financial transactions
IB: Islamic banking is often viewed as a niche or optional product and not as a holistic financial solution in today’s market. is has resulted in the fragmentation of the Islamic finance industry. What are prominent causes to this and how can they be overcome?
BAD : We need to consider this from various perspectives. In the debt capital market in Malaysia, Islamic bonds and Sukuk are not niche but (they are) in fact the main market. In the equity capital market, 88% of the stocks listed on the stock exchange is Islamic or Syariah compliant. Hence, in that sense, it is bigger than the conventional market. However, asset management in Malaysia has a long way to go in terms of marketing, building the right perception and brand image that sets it on par or even comparable with conventional asset management. It currently only stands at 16% of market. In the banking sector, Islamic finance is approximately 30% of the market and is expected to achieve 40% of total banking assets by 2020, based on conservative estimates. Beyond 2020, I foresee Islamic finance to grow on par with the conventional banking sector. In Malaysia, it is no longer a niche but a mainstream offering as it has benefits which are as good, or even better than conventional financing. However, looking at it from a global perspective, it can still be said to be a niche as it is only approximately 1% of the global financial market.
IB : What are CIMB Islamic’s plans to stay ahead in the industry?
BAD : CIMB Islamic will continue to improve, innovate and create new product offerings, whilst enhancing our capacity to deliver products and services in an effective and efficient manner. We are currently in the process of revamping our core banking system to eliminate legacy systems and introduce an integrated system that will allow us to operate on the same level of efficiency as the conventional banking business with the Group.
IB: What does CIMB Islamic expect in terms of future growth?
BAD : We expect CIMB Islamic in Malaysia to continue to be a predominant contributor to our overall balance sheet and profitability due to the effective regulatory and legislative framework found in the country. However, we also see greater contributions from our regional markets. Our in-country Islamic banking sub-brand, CIMB NiagaSyariah in Indonesia is making great strides and our Islamic window operations in CIMB Bank Singapore have shown reasonable traction. We also hope to see more regional Islamic wholesale banking activities post the Group’s acquisition of some of RBS’ Asia Pacific businesses. We have been No. 1 in sukuk and Islamic IPO for many years and we plan to continue to rank in the top 3 in the next few years. CIMB Islamic also hopes to continue to build the market and I am confident that we will remain relevant across the markets we serve due to our deep insight as well as foresight in the industry
IB : What are CIMB Islamic’s major milestones since its inception?
BAD : We began as a boutique investment banking franchise in 2002, and in our first year of inception, we became No. 1 in the world in terms of Sukuk. The Islamic business was also the first within CIMB Group which went international when we won mandates for global sukuk deals as well as international accolades. Then in 2006 we started our Islamic consumer banking business which represented our first balance sheet business, as we were primarily involved in the Islamic advisory business previously. That is a significant milestone as we evolved from a boutique investment banking house into a universal Islamic bank. Our entry helped increase industry market share, which stagnated at 11%, to about 30% today.
IB: In a recent interview with the press, you stated that CIMB Islamic expects moderate growth levels in the domestic market. What are the strategies in place to maintain profitability?
BAD : CIMB Islamic has remained one of the most, if not the most profitable Islamic bank in Malaysia since 2006 and we believe that we will remain so, based on sound capital management and
business growth. I’ve said earlier that our asset and deposit growth is moderating, but moderation in growth does not mean we are growing lesser. We have to be realistic about growth and expect a certain level of moderation, especially when our asset and deposit base becomes larger. If previously we grew by 100% because of a low base and now we are growing by 15% because of a bigger
base, then we are ok with that.
IB: Does CIMB Islamic have plans to expand further in the overseas markets?
BAD : We do not have specific plans to open branches under CIMB Islamic Bank Berhad in other countries, nevertheless, wherever any members of CIMB Group opens up a branch regionally, we will undertake the Islamic finance business as a window in that branch, thus allowing us to be effective and efficient in the expansion of our Islamic finance business. In whichever country that CIMB Group expands to, we will try to have some Islamic offering, subject to its viability. At the very least, we will offer Islamic wholesale banking such as advisory services, as that does not rely heavily on regulatory or legislative effectiveness in the respective country.
IB: Do you agree that the Islamic financial services industry enjoys government support and patronage, without which it will be almost impossible for the industry to achieve substantial growth?
BAD : The government should not limit what could be made available in the financial market. Any government that is serious in optimising financial inclusion should introduce Islamic finance and provide the necessary enabling platform in terms of effective regulatory and legislative framework, coupled with judicial competencies for dispute resolution. The government should be taking an overall stance in pushing growth and acceptance of this form of financing, and to help the market to be attractive so as to ensure optimal financial inclusion as well as ensuring that consumers get the best options that a financial market can offer. It is in their interest to ensure Islamic finance is competitive for the good of their people. So incentives are always good to allow the industry to play “catch-up” to the more established conventional banking industry. Having said this, I must say that the industry will not wither without incentives but incentives are always welcome wherever possible.
IB: How can Islamic investment funds oer value-added benefits to investors beyond just Syariah compliance?
BAD: In investment, what matters are the returns generated – everything else is irrelevant or secondary. A Syariah compliant investment that does not generate the right returns for the risk taken will not be taken up by investors. The differentiating factor of how it is managed in a Syariah compliant manner is an afterthought for most investors, and for specialised Islamic investors, it is something that goes without saying. To an Islamic investor, say an individual like me, the returns are important and in achieving that, I will make sure the returns are garnered in a manner that adheres to Syariah but I will not invest just because it is Syariah compliant. And do I automatically expect the Islamic investment to not only be profitable but also ethical? No, I don’t because I do not see Islamic investment funds to be ethical in the manner “ethical investment” has been defined in the market unless the Islamic fund is specifically identified as a fund chasing after ethical investment. To me it is wrong to classify that Syariah investment or Islamic fund management is automatically ethical in the first instance, because ethics is subjective in the eyes of the beholder and in the case of funds, in the eyes of the investors. Every society has different views of what is ethical although there are some that are seen as more universal than others. What we see as ethical in Asia may be seen from a different light in the West. Thus, Islamic investment funds are just alternative investments available to the consumer under different asset classes say equity fund, sukuk fund, balanced fund, etc; which need to provide the same competitive returns on investment compared to conventional investing in the same asset classes and can at times be in the form of ethical investment.
IB: It is reported that the Islamic finance industry is growing at a third of its potential. What are the reasons behind this phenomenon?
BAD : This is due to the absence of regulatory and legislative framework, and made worse by the other two challenges I identified earlier. In Malaysia, we have the platforms and have more or less got the other two challenges under control, but globally the growth is impaired due to these reasons.
IB : What are your thoughts on the competition between the conventional and Islamic financial sectors? From a national perspective, how does it benefit Islamic finance and contribute to national interests?
BAD : The competition offers consumers greater choice and pushes everybody to be better to win customers and market share. When Islamic banking first started, customers felt they were treated better by Islamic banks such as in debt collection as compared to conventional banks, which caused the conventional bank to replicate in order to remain competitive. Although I have said that Islamic finance has no exclusivity to ethics, it has a codified compulsory code of ethics and conduct, albeit outside of regulatory framework, which is critical for it to be considered Islamic finance of Syariah compliant. Such codifications are not similarly seen in the conventional banking system although they too carry the same ethical values. On an overall basis, Islamic banking and finance humanises the whole financial market through its practices so naturally it contributes to national interests. In Malaysia, there is no fear of cannibalising of the conventional business as practically all Islamic banks are part of larger financial institutions. An increase in market share on the part of Islamic finance remains within the same financial group so there is no tension between Islamic finance and conventional finance in Malaysia in the likes that could be seen in other countries. In Malaysia, we continue to practice conventional finance on a level playing field with Islamic finance, thus allowing Malaysia to stay as the best country in the world in terms of financial inclusion and amongst the best, if not the best, in poverty eradication. In my opinion, this is the best benefit and contribution to national interest that Islamic finance can give to Malaysia.