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HSBC Amanah's new strategy in Asia

The imminent relocation of Mukhtar Hussain, the global head of HSBC Amanah , the Islamic banking division of the HSBC Group, to Kuala Lumpur, the Malaysian capital, raises perhaps more questions about the future direction of HSBC Group's Islamic finance business.

Hussain has hitherto been located in Dubai, the traditional global headquarters of HSBC Amanah . Saudi Arabia, Malaysia and Dubai, stress Musa Abdul Malek, chief executive officer of HSBC Amanah Malaysia Berhad, a wholly-owned Islamic banking subsidiary of the HSBC Group and which was authorized as a stand-alone Islamic bank by Bank Negara Malaysia, the central bank, in 2007, are the core geographies for HSBC's Islamic banking business.

Dubai, of course, has taken an economic and financial beating in the last year and the current turmoil in the emirates finances with a possible delay in servicing debt payments by six months has sent the share prices of financial institutions exposed to Dubai World and the other state investment corporations into a downward spiral. A senior Dubai financial sector source welcomed the changes made in the board of Dubai World and the DIFC, stressing that it was time for a change of senior personnel and advisers, some of whom have been managing Dubai Inc.'s investment activities for more than two decades. He cast doubt over the past appointment of young Dubai executives who had neither the experience nor the know-how of how to run these huge investment corporations.

It is not clear whether the HSBC Group has exposure to the Dubai government corporations and whether the relocation of Mukhtar Hussain to Malaysia has anything to do with the crisis in Dubai. But does his relocation to Kuala Lumpur signal that the Malaysian capital is set to become the headquarters for HSBC's Islamic finance business?

Hussain, according to HSBC sources, will be the CEO of HSBC Malaysia Berhad in addition to being the global head of HSBC Amanah Bank and the chairman of HSBC Amanah Malaysia. How this scenario fits in with Musa Abdul Malek's position as CEO of HSBC Amanah Malaysia is not clear. Abdul Malek is sanguine about this. "We will have to work our way through this and see how it develops. Hussain's relocation to Kuala Lumpur is good for him and will further drive our business in Malaysia. It is also an recognition by the HSBC Group that the Malaysia International Islamic Financial Centre (MIFC) is one of the major hubs for Islamic finance and that Malaysia is an important promoter of the sector," he explained. HSBC Amanah , he emphasized, is very serious about its business in its core markets and elsewhere. The rationale for Hussain's relocation to Malaysia is also largely due to the systemic approach to Islamic finance by the Malaysian regulators and government.

The country has depth of expertise in Islamic finance structuring and product innovation; the latest technology including online banking; an ideal hub to allow the bank to work with different jurisdictions thus opening the way for market penetration in various countries in and close to the region; and is the benchmark for Islamic finance.

Indeed, HSBC Amanah uses the expertise at its Malaysia headquarters to assist its entities in neighboring Indonesia, Brunei and even Hong Kong. Abdul Malek believes that Asia has the potential to grow in terms of Islamic finance especially in sukuk issuances.

The demand for Islamic papers has started to grow and HSBC Amanah , he confirms, has quite a number of mandates -- both from the region and the Middle East. However, it remains a question of timing, economic stability and pricing. However, whether it is Asia or the Middle East that will lead the sukuk sector recovery will depend on economic growth and the response of governments to this.

HSBC is also starting to introduce shared ownership diminishing Musharaka home financing in Malaysia, where the market is dominated by the deferred payment Bai Bithaman Ajil-based Islamic mortgage. This is a major first mover market decision and it would interesting to see how HSBC Amanah 's competitors respond to this move.

Malaysia has a strong Islamic finance sector because of market demand, which in turns resonates local economic dynamics. Malaysia has a population of about 27 million of which 60 percent is Muslim. The country also has a strong middle class, the most likely group to uptake Islamic finance products initially. Malaysia also has a supportive legal and regulatory framework, but with no compromise and dilution of risk management in terms of Basel II provisions. The country also has a strong investor base including the EPF (Employees Provident Fund), Tabung Haji (Pilgrims Management Fund), Insurance and Takaful companies, the Malaysian sovereign wealth funds such as Khazanah Nasional Berhad.

He warned that Islamic finance has to be equal or better than conventional finance in terms of services, product offerings and pricing. If Islamic finance cannot compete with conventional on the above, the sector will inevitably lose business and market penetration.

Malaysia, he contended has a developed and robust Islamic finance market with 17 Islamic banks with two more international banks shortlisted by Bank Negara Malaysia for licenses which should be approved by the first quarter 2010. These banks will be mega banks with a minimum capital of $1 billion.

By Mushtak Parker

© Arab News 2009