The Amanah alternative

Published: 16 March 2009

Crisis offers opportunity to Islamic finance sector 

In a time when conventional financial institutions are experiencing financial troubles, Islamic banking has mostly been reporting profits and enjoying growth. Over the past five years, total assets of Islamic financial institutions have increased by 15-20 per cent annually, on average, and are projected to reach USD1 trillion by 2012*.

Recognising rich potential, conventional banks have quickly established Islamic banking operations as an alternative to traditional banking – and to help them grow and survive.

A new opportunity

This development did not surprise Musa Abdul Malek, Executive Director and Chief Executive Officer of HSBC Amanah Malaysia Berhad. "The current economic crisis has created a golden opportunity for the Islamic finance sector," he said. "The strong fundamentals and principles behind Islamic banking prohibit speculation and encourage ethical investment backed by strong fundamentals.

"Given the speculative nature at the root of this global credit crunch, there is minimum direct exposure to the credit fallout of bad assets in Malaysia's Islamic banking sector. This has enabled Islamic finance to remain resilient in the current economic turmoil.

"In the Middle East, this is mostly driven by market demand while in Asia-Pacific, the demand is being created by the legal, tax and regulatory changes and incentives offered by central banks.

"It is currently gaining favour with both Muslim and non-Muslim customers as it meets their needs. There is the possibility that more customers will now be seeking out Islamic finance as the preferred alternative banking solutions."

Regional Islamic finance hub

HSBC Malaysia is a key player in the banking industry of a predominantly Muslim country and has been providing Islamic finance services to clients since 1994 – a good four years before HSBC offered Islamic banking worldwide in 1998.

In August 2008, four years after the 2004 launch of HSBC Amanah as a global provider of Islamic banking services, HSBC Amanah Malaysia became the first locally incorporated foreign bank in Malaysia to be awarded a licence by the Bank Negara Malaysia to set up an Islamic banking subsidiary. It is also the first Islamic bank established by HSBC globally. Before the end of 2008, it opened a branch in Mainland Penang in addition to its first branch in One-Utama Shopping Centre in Selangor.

"HSBC has witnessed significant growth in recent years in Islamic finance business in Malaysia," Mr Musa said. "This has been supported by an ideal mix of regulatory push and market pull. Regulators have established a highly conducive framework particularly under the Malaysia International Islamic Financial Centre (MIFC) initiative which has spurred the development of the industry. We believe the existing framework is robust to position Malaysia as the Islamic Financial Centre and we are keen to support the Government's initiatives."

This blossoming of Islamic banking in Asia, with Malaysia as one of its key players, creates synergies within the region. Malaysia, home to the world's largest sukuk (Islamic bond) market, attracts investment and connects neighbouring countries on the lookout for deal opportunities.

"We play a significant role in supporting the Islamic finance industry's growth within the region through the sharing of best practices. We will continue to capitalise on our established infrastructure, network and expertise to further deepen our market penetration," he said.

He believes the increasing competition is healthy and will help boost the confidence of regional investors to seriously consider Islamic finance as an alternative. Mr Musa predicts the entry of more Islamic players will open the door to more innovative Shariah-based solutions.

He also expects the Singapore and Indonesia sukuk programmes to contribute to the increasing awareness of and interest in Islamic banking products and services within the region, adding: "In the current economic environment, Islamic finance has continued to demonstrate its evolution and strong growth. It is fair to say that we have yet to see the effects on Islamic finance from the crisis as it is still in its early stage of development."

One area where Malaysia could do well would be in Islamic investment funds. IMF quarterly magazine Finance and Development reported in 2005 that Islamic investment funds fared well in the Gulf countries, and in Malaysia where the number of Islamic investment funds reached 71 in 2004 (up from seven in 1995).

Source: Finance and Development, the IMF quarterly magazine, December 2005

Shariah-compliant, globally competitive

Mr Musa said the current uncertain times meant that "investors are more inclined towards products which can diversify their investment and at the same time have protection elements and higher returns, such as Islamic structured investment products. HSBC Amanah Malaysia offers innovative products which they feel could meet the market's demand and sentiments."

Islamic banking has been fast gaining new ground because of these sentiments. The main factor distinguishing Islamic banking is that it is a financial system whose principles are derived from the Shariah (Islamic law). A Shariah Supervisory Committee, composed of Islamic banking scholars, studies and reviews HSBC Amanah products before issuing a fatwa, or ruling, to ensure that these are fully compliant with Shariah law.

Social objectives, which counterbalance the profit incentive, are an indispensable component of Islamic banking. Profit is important to the operations of any financial institution but this is not the sole criterion in the performance of an Islamic bank, which needs to strike a balance between profitability and social goals to serve the interests of the community-at-large.

Euromoney has recognised the Group's commitment to raising the bar for Islamic products and tagged HSBC Amanah as the Best Sukuk House, Best Fund Manager and Best Takaful House for 2008.

HSBC Amanah Malaysia's products cut across a whole range of financial activities offered by conventional banks: from personal financial services, including credit cards and home financing, to wholesale investment funds, sukuk (Islamic bonds) and takaful (Islamic insurance).

"We hope to continue to lead the Malaysian Islamic banking market towards more groundbreaking deals for 2009," Mr Musa said.

Source: HSBC

Dovetailing with Group strategy

Is it such a big leap from the conservative Islamic principles of Amanah banking to HSBC's own Group strategy?

"The HSBC Group's tag line 'The world's local bank' is the main reason for it to undertake Islamic finance," Mr Musa said. "HSBC operates in many countries where a majority of the population are Muslims and Islamic finance is a platform that not only fulfils the local financial needs but also their religious obligations. As Islamic finance is inclusive, it will also cater to non-Muslims.

"The HSBC Group strategy focuses on sound practices backed by strong fundamentals with proper risk management, strict governance and supervisory frameworks that fit well with the principles of Islamic finance. Therefore, HSBC Amanah is in line with the HSBC Group strategy and will improvise on areas where Shariah compliance is required."

HSBC Amanah is confident that its market share will expand – as per the Group's plans and timetable. Mr Musa is confident about HSBC's contribution to Islamic banking. "I would say HSBC Amanah is well-positioned to enrich the growth of the Islamic finance industry within the region," he said.

* Introduction to Islamic Investing brochure, 2008. Produced by the HSBC Global Asset Management Sales Team