Interview with Dato’ Sri Zukri Samat, Managing Director, Bank Islam

IslamicBanker (IB) Share with us a brief recollection of your background in the banking industry and how you embarked on a career with Islamic banking.
Dato’ Sri Zukri Samat (ZS) I started my banking career with Bank Bumiputra Malaysia Bhd before joining Public Bank Bhd where I served for seven years in various capacities, both at head office and branches. I then spent another seven years in Commerce International Merchant Bankers Bhd (CIMB) – the last position being the Deputy General Manager of Capital Markets, where I spearheaded transactions involving corporate finance, private debt securities, project finance, corporatisation and privatisation of state-owned companies. However, leading an Islamic bank, such as Bank Islam is a different ball game altogether, despite my earlier experience in two of the biggest banks in Malaysia. In 2006, after spending seven gruelling years in Pengurusan Danaharta Malaysia Bhd (Danaharta) – the government-owned asset management company formed in the 1997/1998 crisis to manage the non-performing loans in the banking system – I was requested by the then-Prime Minister, Tun Abdullah Ahmad Badawi, and Bank Negara Malaysia (BNM) to lead Bank Islam. I was roped in to lead the transformation and to turnaround the bank from its financial turmoil and the threat of a potential bank run. Admittedly, I was hesitant at first. However, I felt that it was my duty to impart the knowledge and experience that I have by rebuilding the bank. As the first Islamic bank in Malaysia, the very existence of Bank Islam is important. Failure to manage it may have caused systemic risk to the banking system, in general, and Islamic banking, in particular. These were the compelling reasons that made me decide to take the plunge and give it my best. The rest, as they say, is history.

IB  As a pioneer in the field of Islamic banking, share with us some of Bank Islam’s most significant challenges and how did the Bank overcome this to be where it is today?
ZS When I took the helm of the bank, the problem back then was the heavy losses incurred in 2005 and 2006 caused by high non-performing financing (NPFs), and if not handled carefully, could have caused stress on the banking system in general. More importantly we had to keep the confidence level of the stakeholders intact by assuring them that the situation was under control and that the bank would be able to overcome the problems. We met and explained our plan and strategies to our shareholders, the regulators, our large depositors, as well as politicians. We also managed to raise new capital which was successfully completed in October 2006 by bringing in Lembaga Tabung Haji (TH) and Dubai Investment Group (DIG) as two new shareholders. The total amount raised from these two shareholders was about RM1.04 billion. It was not an easy task. The shareholders kept a close eye on us to ensure things were on track. During the difficult period, the “Turnaround Plan” (TP) was executed, under which were five pillars, namely 1. Recapitalisation and balance sheet restructuring, 2. Information technology (IT) infrastructure revamp, 3. Transformation programme, 4. Cost rationalization and 5. Human Capital Development. One of the most difficult to implement was changing the mindset and culture of the organisation. New policies, such as pay-by-performance, sales culture and injecting new blood from other organisations, received a lot of resistance at the beginning. We had to put in the time and effort to ensure the organisation embraces the new culture. The staff also needed to believe that the chief executive officer (CEO) and management can drive the bank back to profitability with the new strategy.
Eventually, the hard work on restructuring and refocusing the business as well as reinventing the brand perception of Bank Islam paid off and alhamdulillah, within 12 months the bank managed to turnaround and the new management team eventually gained the confidence of the shareholders. Of course, as the banking landscape evolved over time, new challenges emerge, such as intense competition – from both conventional and Islamic banks, international regulatory requirements and macro prudential measures. BIMB intends to continue its growth momentum mainly in retail banking where it has an edge, leveraging on innovation and efficient Islamic financial solutions. Service excellence is what we aim to achieve by understanding customers’ expectations better and delivering consistent experience through multiple channels, old and new.

IB Bank Islam has achieved significant progress over the last five years. To what do you owe this aggressive thrust in your strategic directions and achievements?
ZS Clear strategic direction – It is always important to have a clear strategic direction. Following the TP which ended in June 2009, we wanted to ensure that growth is sustainable and so we set off with “Sustainable Growth Plan” (SGP) in July 2009 to December 2012, which focused on Business Innovation, Robust Risk Management, Strengthening Enabling Infrastructure, Building
Capability & Capacity, Franchise Development and Inorganic Growth & Corporate Expansion. Alhamdulillah, with this plan, we managed to transform the Bank into one of Malaysia’s leading Islamic banks today, which is valued at almost RM6 billion. Stakeholders’ support – We owe it to the shareholders and the central bank that have been supportive of our strategies and development in the past, and we hope that this will continue in the future. Like I mentioned before, the shareholders were initially apprehensive about our plan to turnaround the Bank. Once we convinced them that the plan was workable, the two major shareholders kept a close watch on us and monitored our progress. Our journey has not been an easy one but I believe we are moving in the right direction. Committed workforce – Equally important is the commitment of the management team as well as the entire Bank Islam workforce without which the bank could not have made remarkable progress. And for that I am always grateful

IB In your opinion, how has the Islamic banking industry changed since Bank Islam’s early days as a lead arranger for Shell MDS Sdn Bhd and Malaysia’s first ringgit denominated Islamic corporate bond issuance?
ZS As the lead arranger for Malaysia’s first ringgit-denominated Islamic corporate bond issuance, we are very proud of our achievements by playing an important role in the early days of the development of Islamic finance in the country. In fact, the enactment of the Islamic Banking Act 1983 has enabled us to become the country’s first Islamic bank to be established and thereafter, with the liberalisation of the Islamic financial system, more Islamic financial institutions have been established. Today, Malaysia has a significant number of full-fledged Islamic banks, including several foreign owned entities; conventional institutions who have established Islamic subsidiaries and also entities who are conducting foreign currency business. Malaysia’s Islamic banking assets reached RM428 billion as at June 2013, with an average growth rate of about 20% annually, contributing approximately 20.8% of the country’s banking assets. The Malaysian Islamic financial market in particular is one of the fastest growing capital pools and one that is quickly being drawn into the mainstream financial system. As it happens, the success of the domestic Islamic bond market within a relatively short period is a further testimony to the widespread acceptance of Islamic financing principles which is seen, for instance, when the Malaysian Government issued the first global sovereign Sukuk, raising US$600 million in 2002. As at June 2013, about 60.4% of the global outstanding Sukuk, or US$148.2 billion, originated from Malaysia. In addition, the development of the Sukuk market has led to the development of the other key components of the Islamic financial system, i.e. the money market, banking and takaful sectors. As for Bank Islam, we have been involved in several transactions and these were accomplished despite the constraints, in terms of balance sheet size. One of them was when we became Joint Lead Arranger, Joint Lead Manager and Joint Shariah Adviser for the RM5 billion Islamic Securities Programme of TNB Janamanjung Sdn Bhd, which was awarded Project Finance International’s Asia-Pacific Bond Deal of the Year 2011 and Cover Story Islamic Finance New’s Ijarah Deal of the Year 2011 awards. In 2012, we were involved as the Joint Lead Manager for Turus Pesawat Sdn Bhd’s RM5.3 billion Government Guaranteed Islamic Securities Programme to fund the acquisition of aircrafts by Malaysia Airlines and Joint Lead Manager for Danainfra Nasional Bhd’s RM8 billion Islamic Commercial Papers/Medium-Term Notes (ICP/= MTN) to fund the development of Klang Valley Mass Rapid Transit (MRT) project. We also acted as the
Islamic Principal Dealer, currently maintaining the pole position in providing market liquidity for securities specified by BNM for Islamic government Sukuks and bills. All these only mean that the Islamic bond market has successfully evolved out of its infancy and has become a vital component to Malaysia’s Islamic financial system. I believe that the Islamic banking assets growth will continue to gain traction especially with the supportive measures put in place by the Malaysian government and authorities.

IB  As a leading banker in Islamic finance, you have been honoured with a string of accolades. Please share with us the driving force behind your success.
ZS Again, I wish to attribute the recognition that the bank has received via awards and accolades to all the staff of Bank Islam. The Bank’s success is attributed to the commitment from its management team and the entire workforce.

IB  In August last year, Bank Islam reported a rise in profit before zakat and tax (PBZT), underpinned by an overall improvement in business activities across the Group.What drove this success and what strategies did Bank Islam have in place that helped the Group achieve such significant improvement?
ZS The Sustainable Growth Plan resulted in the highest PBZT ever achieved by the bank at RM600 million for financial year 2012. Since then, Bank Islam has embarked on another three years
strategic plan, “Hijrah to Excellence” (H2E) covering the period 2013 to 2015. H2E hinges on six pillars, namely
1. Robust organic growth,
2. Service excellence,
3. Shariah-led innovation,
4. Resource optimisation,
5. Employer of choice and
6. Regionalisation.
As at end-June 2013, for the six months period, the bank continued with its strong earnings trend, reporting PBZT of RM323.8 million, or 15% year-on-year growth. As I mentioned earlier, innovation and service excellence will be key for us especially under adverse economic conditions and increased customer sophistication. We also acknowledge the need to formulate and implement a fluid strategy that is flexible and dynamic to accommodate abrupt changes.

IB In the past, many consumers have viewed Bank Islam as rather conservative and unequal to the conventional banking industry. How did you change this perception as shown by the excellent results and growing popularity in the Islamic banking industry?
ZS I have always viewed that Bank Islam’s competitors are not only Islamic windows or subsidiaries, but also the conventional banks. For that, we have to work extra hard. And I certainly cannot deny the fact that Bank Islam then was not seen to be at par with the conventional banks. However, one important advantage that we have is the fact that Bank Islam is the pioneer Islamic bank in Malaysia, and with that, it carries a strong brand name. The public also has this perception that Bank Islam is the purest Islamic bank in the country and this attracts customers who are banking on convictions and do not compromise on any Shariah issues, such as co-mingling of funds and operations. And for that we pride ourselves to the highest level of adherence to the Shariah principles, in terms of ethical business, corporate responsibility and perfecting product offerings. When I came on board in 2006, among the earliest tasks Bank Islam: 3 decades and growing stronger undertaken was to reinvent the brand perception of the bank, for instance, by changing the bank logo and revamping the outlook of the branches to give them a more modern look and feel. It was also important to stress that Islamic banking is not only confined for the Muslims, but for all. Having said that, innovation is crucial and I am proud to say that Bank Islam has been the pioneer for so many products that are available in the market today. The other advantage the bank has is the branch network. Among the Islamic banks, Bank Islam has the biggest number of branches, which currently stands at 133 and still growing. Bank Islam also has more than 1,200 self-service terminals currently.

IB What is Bank Islam’s significant contribution to the Islamic banking industry that is an outstanding testament to the Group’s status as a pioneer in the industry?
ZS Some of the significant contribution by Bank Islam to the Islamic banking industry: • Innovation – New products. Living up to our pioneering heritage as the first Islamic bank in Malaysia, Bank Islam has unwavering focused on constantly expanding and enhancing its portfolio of Shariah compliant products and services to provide more choice and value to its customers. The Bank is purposeful in maintaining its position as the flag-bearer of the Islamic banking industry by being the first to innovate and market new Islamic offerings, such as TAP Mobile Banking-i (TAP-i); Al-Awfar Investment and Savings-I; and unique benefits, such as Payment Holiday for our house financing customers. We enjoyed the first mover advantage for personal financing based on floating rate launched on March 8, 2012 – the year in which we booked in more than RM3 billion, representing around 50% of personal financing portfolio. • Source of reference – Bank Islam has become the source of reference for Shariah-based banking and finance, and has been instrumental in the rapid development of the Islamic banking and financial industry inside and outside the country. In the past, we received delegations from various central banks, such as those from Nigeria and Oman, and banking representatives from other countries, such as Saudi Arabia and Indonesia, requesting to learn from us. We took the opportunity to share our practical knowledge and experience, and assisted them in setting up Islamic banks and forming the respective framework. In line with this, it is our intention to move away from Shariah-compliant to Shariah based banking products and services in our continuous effort to further promote development and innovation of universally accepted Islamic financial solutions. • Shariah – One of the steps taken to uphold Shariah principles in the bank is our zero tolerance to Shariah non-compliance. Under this policy, Shariah non-compliant income derived from Shariah non-compliance events are not recognised as Bank Islam’s income and are subsequently channelled to charity upon approval by the Shariah Supervisory Council. For transparency purposes, a detailed report on the Shariah noncompliance income, i.e. amount and recipients of the funds for charity purposes, are included in our annual reports. We also took proactive steps in relation to our Shariah governance structure and framework when we established Shariah Audit and Shariah Risk Compliance in 2005 well ahead of time.

IB  What are Bank Islam’s future expansion plans in view of the growing Islamic finance industry?
ZS Regionalisation is one of the six pillars under the H2E plan. So yes, in order for Bank Islam to grow from strength to strength, we are definitely looking at making a footprint outside Malaysia, in particular, Indonesia, which I believe is one of the biggest markets for Islamic finance. At the moment we are still looking for the right opportunity that would offer synergies to our business and create value for our stakeholders. Ideally, we would like to have a substantial stake in order to make our contribution and presence effective

IB  What is Bank Islam’s outlook on the international Islamic financial market, and what are the Group’s contributions?
ZS Global Islamic finance industry recorded a compounded annual growth rate of 16% from 2006 and 2012. Although it is small compared to the conventional finance industry – Islamic finance is approximately 1.6% of total world financial assets, with as many as 600 financial institutions across 75 countries offering Shariah compliant products and services, the potential is immense. However, I would also like to point out that the market dynamics are changing, and Islamic banks must improve their strategic positioning and operational efficiency. There is, perhaps, a need for further consolidation among small banks, which are struggling to compete with the big conventional banks. Mergers and acquisition will allow greater economies of scale. I also believe that the listing of Islamic banks in their local bourses should be encouraged to create a new class of assets that provides a stable dividend yield. Listing also creates a platform for banks to raise capital to meet regulatory requirements and support growth. At Bank Islam, adherence to Shariah principles is of the utmost importance. We want to play an important role in promoting the expansion of Malaysia’s brand of Islamic finance Bank Islam: 3 decades and growing stronger into other markets, especially in the region. That is why Bank Islam wants to continue to become a source of reference for Shariah-based products and services. Advancing in Shariah capabilities is one of the main thrust of the H2E Plan, developing resources and infrastructure to ensure Bank Islam continues as a “Centre of Reference” for Islamic banking and eventually, achieve our goal to become a “Knowledge Centre” establishment of a “Shariah Centre of Excellence”.

IB  What motivated the Group to introduce the Ar-Rahnu pawnbroking scheme?
ZS Ar-Rahnu is not a new business line for Bank Islam as it was part of the bank’s spectrum of offerings back in 1993. Recognising its huge market potential, we re-launched the Ar-Rahnu business in 2010 with a refined business model and market strategy as part of our new agenda for financial inclusion and micro-financing targeting small business operators, such as women entrepreneurs. Ar-Rahnu was introduced as an alternative and easier source of credit or capital, with gold as collateral in exchange for cash. Furthermore, ArRahnu is a less risky business as gold collateral is liquid, high in demand and its price is generally stable most of the time. We currently have presence in Kelantan and Pahang, and our customers are mainly petty traderslooking for short-term working capital. Our robust growth of more than 200% per annum is mainly due to the benefits of Islamic pawnbroking principles, which promote fairness and transparency, compared to the conventional pawn-broking business. We will continue to educate the public and create awareness of the Ar-Rahnu benefits, especially the underserved community.

IB  Has the rising competition in Islamic banking altered your perspective of the market? How do you plan to play a bigger role in the Islamic finance market in Malaysia?
ZS Competition has indeed become a catalyst in setting our perspective of the market. In fact, competition has also led us to the discovery of changing consumer behaviour, such as lost loyalty to existing banking relationship, and the emergence of alternative banking channels such as mobile and internet banking. • Lost loyalty – Banks across Asia have seen a dramatic drop in customer loyalty since the 2008 crisis and Islamic banking is no exception. So, we need to drive loyalty by improving the quality of the customer experience and services that the bank offers. Consumers value banks that are more personal, flexible, proactive, and most importantly, where employees go out of their way to help resolve issues. That is why servicing our customers well is the cornerstone of the H2E plan under “Service Excellence”. • Emergence of alternative banking channels – Consumers now use new channels, such as the Internet and mobile devices, for their banking more often than traditional ones. Our award-winning TAP-i mobile is a further demonstration of the Bank’s dedication to making the latest banking innovations and products available to a wider segment of the population. With TAP-i, customers are able to partake in electronic banking transactions only by using a typical mobile phone and requiring no Internet access; ensuring that customers without Internet access are not left behind when it comes to accessing the latest in mobile banking trends or solutions. Saying all these, it is also important
to go beyond the dollar and cents. As I mentioned earlier, Bank Islam intends to continue its role as the leading light of the Islamic banking industry. Becoming the centre of reference will allow us to promote Malaysia as an international Islamic hub in line with the country’s aspiration. With “Shariah led innovation” as another critical agenda in our H2E, we strive to provide new Shariah based products and services while continuously perfecting product offerings in line with the “risk reward” concept under Islamic finance. Moving forward, our aim is for the products and services to be globally accepted.

IB  What are your views on collaboration in the Islamic financial market in order to stay above the conventional banking industry?
ZS I think collaboration in the Islamic financial market is necessary for some of the players in order to be competitive. It is a fact that many Islamic banks are competing head on against their conventional peers, and mergers and acquisitions (M&A) can offer attractive opportunities to achieve scale-related synergies from larger operations. However, there are also other considerations as well. Competing against conventional banks means attracting customers who place less importance on Shariah compliance in their financial dealings, and more importance on competitive products and efficient services visa-vise the banking market at large.So, it is not just about the size, but about targeting the right segments as well. At the end of the day, it still boils down to meeting the
customers’ needs.

IB  Could you tell us what are the human resource requirements and needs for the present and future progress of the Islamic finance industry?
ZS The market needs to develop a pool of talent and expertise in Islamic Banking. For Bank Islam, as the pioneer in Islamic banking in Malaysia, the most important factor will be to attract the right talent. In fact, much emphasis has been given in recruiting, retaining and developing the Bank’s talent pool, which is an essential element in sustaining the Bank’s leadership position in the Islamic banking industry. For instance, the fast-tracked “Young Leaders Programme” and “Financial Sector Talent Enrichment Programme” are some of our initiatives in attracting fresh talents to be a part of Bank Islam’s workforce. For these programmes, we have looked beyond banking and finance, welcoming ideas and perspectives from talented graduates of all fields. Strong focus on talent development through training and education. This is done by training and retraining talent from the industry on Islamic Banking thus creating a larger pool of specialists and experts. We also need to invest in developing competent Shariah scholars who are equipped with sound knowledge and expertise to deal with innovative Islamic products. I believe in promoting the development of a learning organisation. In 2012 alone Bank Islam spent a total of RM8.3 million in comprehensive training and developmental programmes for all levels of employees. There is also a need to attract and retain the talent and build a pipeline of skilled and talented workforce to enhance their potential for innovation and superior performance. I am a strong advocator of putting the right people in the right jobs, and nurturing them, which will lead to leaders creating more leaders. This is important especially in the current condition where talent in Islamic banking is scarce. “Growing our Own Timber” is what we focus on by identifying and grooming potential successors for the Bank’s critical positions and management team to become our future leaders through rigorous leadership developmental programmes, on-the job trainings as well as job rotations.

IB  What do you think are the roles of educational institutions to produce a pool of competent human resources for the Islamic finance industry?
ZS Provide the much-needed foundations for preparing professionals and researchers who can be the backbone of the Islamic Finance industry. The relevant entities in the Islamic financial sector, the regulators and the universities need to come out with a comprehensive educational programme in creating awareness in Islamic Financial System, and to develop a well-coordinated programme for education in the area of Islamic Finance, which among others, include Takaful, Islamic Banking Operations, Islamic Fund Management, Marketing of Islamic Financial Services, Islamic Trade Finance, Islamic Treasury Management and Taxation in Islamic Finance and Bank. Education has to follow the market. Hence, forging educational alliances with financial industry players, foreign institutions and international community will meet the future challenges of the Islamic finance education.

IB Lastly, what do you think are the major challenges and issues facing the local and global Islamic financial industry, and what can be done to address them?
ZS Some of the major challenges currently facing the local and global financial industry are competition, international regulatory reform and introduction of macro prudential measures. For Islamic financial industry, there are additional issues, such as strict adherence to Shariah principles to ensure financial stability. • Competition from both conventional and Islamic banks for financing and deposits – As the market continues to mature the Islamic financial landscape becomes more competitive. “Banks offer the same services and chase after the same clients” is a good case in point. With intense competition, the industry is currently experiencing margin compression. • International regulatory requirements – International regulatory reform via Basel III requires strengthening of capital and maintaining an adequate level of unencumbered, high-quality liquid assets that can be converted into cash to meet its liquidity needs for a 30-calendar day time horizon under a significantly severe liquidity stress scenario specified by supervisors. • Macro prudential measures – In retail sector, the continuous introduction of macro-prudential measures, such as requirements on responsible financing coupled with increased customer sophistication will also pose additional challenges to the industry. • Adherence to Shariah principles and the lack of public’s understanding of Islamic finance – The agenda to promote fair, responsible and professional conduct by Islamic financial institutions and more empowered consumers must be equally pursued. The new legal framework for Islamic banking and takaful that recently came into force is set to pave the way for the development of an end-to-end Shariah compliant regulatory framework, reinforcing the effective application of Shariah principles in the conduct of Islamic financial institutions. For Bank Islam in particular, I see the need to move towards a customer-centric organisation. That is why I am emphasizing on excellent service delivery across all customer touch-points. With all the challenges that we face now, I think strong customer orientation is crucial especially in the wake of intense competition with high customer expectations and low loyalty levels


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