After the recent merger with Bumiputra-Commerce Bank, the Malaysian investment bank Commerce International Merchant Bankers is in a period of transition to become a full-service bank. Robin Wigglesworth spoke to Badlisyah Abdul Ghani, head of CIMB Islamic, about the challenges ahead
Commerce International Merchant Bankers (CIMB) is South East Asia's largest investment bank, and recently acquired Bumiputra-Commerce Bank (BCB), the second largest commercial bank in Malaysia, in a significant step towards becoming a universal bank. CIMB Islamic is already well entrenched in the Malaysian market, and the integration of BCB's Islamic banking business will further strengthen the brand across Malaysia, South East Asia, and further field.
How will the acquisition of BCB will affect CIMB Islamic?
CIMB's Islamic window will be merged with BCB's Islamic subsidiary. What will happen is that our Islamic banking division will become a universal bank in its own right. Where previously we were a bank within a bank, we will now become a universal bank within a universal bank. The investment banking business will continue, and the level of service and number of products will be improved and increased. After that comes retail banking and business banking for the 2-3 million new client base we will acquire from BCB. This will be completed in January 2006.
What new products are you introducing?
I don't think we have been aggressive enough in the market in regards to share financing and margin financing, so we will definitely be introducing more products on this side. There will also be a greater emphasis on Islamic wealth management. Now that we are becoming a universal bank, we can offer a more complete platform, from the mass market to the affluent, as well as private banking. We can now grow together with our clients across the board.
While you are in the process of becoming a universal bank, do you still consider investment banking your core business?
When we were just an investment bank our core activities were essentially corporate finance, corporate banking, debt markets and equity capital markets, and things like that. Now that we are becoming a universal bank, when we describe our core activities, it would be retail banking, business banking and investment banking, as well as Islamic banking.
So it is a different way of depicting your core activities, because as a universal bank, you cannot say that at the core, you are an investment bank. As a result of the merger, the retail and business banking part is huge, and contributes a considerable amount of revenue to the group.
Both CIMB and BCB are primarily Malaysian banks. Are you thinking of expanding your Islamic business outside Malaysia?
Logically, now that CIMB is a regional bank, wherever CIMB is present, CIMB Islamic Bank will be present as well. It is just a question of when it will happen. We will do it progressively, as we don't want to go into every single market at the same time. We will go one step at a time.
Indonesia looks like the first market that we want to develop. Within the group, we already have PT Bank Niaga which has an Islamic window called Shari'ah Niaga.
Once we are done consolidating our enterprises, we will develop our Islamic business in Indonesia.
Despite being the most populous Muslim country in the world, Islamic finance seems underdeveloped there compared to the rest of the Muslim world.
Indonesia is essentially comparable to Malaysia in 1983. In 1983-84, only 1% of all banking assets were held by Islamic banks. Islamic banks in Indonesia hold roughly around 1-1.5% now.
If you look at the progress of Malaysia over the five to six years after 1983, when Islamic windows were allowed, the industry went from just 1% to 10% in a very short period of time. Indonesia is at the stage where it is going up. We are already in the market, although in a small way, relative to the size of the market. As the industry grows, we expect to see us grow with it.
Islamic banks have performed relatively well in Indonesia. At the time of the Asian financial crisis, there was only one Islamic bank, and it was the only bank that did not go through a recapitalisation financed by the government. They were of course affected, and went through a change of management, but they were the only bank that did not need to be bailed out by the government.
Do you think that Shari'ah convergence will continue to be an issue between Malaysia and other Muslim countries?
I don't see this continuing to be an issue, as we are already seeing quite a lot of convergence of Middle East and Malaysian activities. We have seen a Murabaha Sukuk done in the Middle East market, and it was done in exactly the same way that Murabaha is done in Malaysia.
We believe that this level of convergence is a significant signal that the Shari'ah differences will soon cease to be an issue. If you consider the Islamic Development Bank (IDB) Sukuk, you see that it is no longer a requirement to have 100% tangible assets to back the deal for it to be tradable. The GCC market has moved from 100% to 51% to 30%. There is currently a discussion on a particular transaction which will only be backed with 10% of tangible assets, and there is little practical difference between 10% and 0%, like the ones we do in Malaysia.
Bay Bithamen Ajil (BBA) still seem to be a bone of contention?
The problem is that GCC players are quite familiar with how things were done in Pakistan in the past, and Pakistan used to do quite a lot of BBAs. The issue with Pakistan's BBAs is that for a period of time, they just changed a conventional loan document into an Islamic one by changing the terminology 'interest' to 'profit'.
But essentially, it was still a loan document, in form and substance.
Their familiarity with the BBAs of Pakistan blinded them to a certain degree of how things are done in Malaysia. The name is the same, but in Malaysia, it is done as an actual trade, in both form and substance.
Malaysia does not just convert a conventional loan document to an Islamic document by changing the names. BBAs in Malaysia require an actual trade of an underlying tangible or intangible asset, and that is allowed under Shari'ah.
The shortcoming of a lot of the Shari'ah scholars, as far as the players in the GCC are concerned, is properly to evaluate how things are actually done in Malaysia, rather than how Pakistan used to do it. I think that a significant number of people in the GCC are beginning to realize how Malaysia does it, and at the recent International Islamic Economic Forum held in mid-2005, there was a separate Shari'ah forum where everyone discussed Shari'ah interpretation. A prominent Shari'ah scholar from the Middle East issued a statement saying that they now understood how and why Malaysians do it the way we do. This is another good indication that the Middle East is beginning to realize that the way we Malaysians do it is sufficient from a Shari'ah perspective.
Another way of looking at this is from an historical perspective on how the industry developed. The Middle East started its Islamic financial industry from an asset management perspective, whilst the Malaysian industry started from a purely banking perspective. When the GCC commented on Malaysian Islamic banking approach they were, to a certain degree, commenting from the perspective of asset management, which is typically done under Musharaka and Mudarabah. So they could not understand how banking can be done under principles other than Musharaka and Modarabah.
In the mid 90s and early 2000, when Middle East Islamic banks were coming up with Islamic credit cards, Haj financing, student financing, and they began to think of ways to do banking Islamically. They had never gone through that thought process before, and they only then started to think `Oh, that's why the Malaysians do it this way'.
Many Middle East scholars still seem doubtful over the Shari'ah compliance of many Malaysian transactions.
The Malaysian approach is very simple; we allow anything that is acceptable under Shari'ah, in whatever school of law. We do not dictate to the market, which consists of many followers of many different schools of law, that you can only apply Shari'ah the Hanbali or Maliki way. Muslim society comprises all the schools of thought, so the banking industry cannot be subject to just one school of law, as this would be unjust.
In Malaysia, we can do every single service and product the Islamic banks in the GCC can do, as well as our own products. This makes the Malaysian market more vibrant and exciting, because there are so many different products based on the Shari'ah principles accepted by the varied Islamic schools of law.
Are the large differences between the various Islamic schools of jurisprudence?
The principles are the same but the implementation might be different. So there are a lot of similarities, with a lot of differences in approach. For example, we now have Middle East banks starting up in Malaysia, and some of them have asked me how they can be competitive in the market. My answer is simple: When you enter this market, you must provide the products that the market demands. And you can do any product which is allowed by the Central Bank of Malaysia as Shari'ah compliant.
They can bring their innovative products from the Middle East and sell them here, but to compete and survive, they will probably have to provide whatever Malaysian banks are doing.
From a competitive perspective, you must do what the market wants. Similarly, if a Malaysian bank wants to enter the Middle East market, and CIMB will probably do so soon, we will do what the market wants. We are not going to go to the Middle East market and try to sell Malaysian products that might not be demanded there. It is purely a question of demand and supply.
But at the end of the day, we still have the supply of Malaysian products, which I can make available the minute the market becomes aware and receptive to them. I have that flexibility.
A lot of people claim that Malaysia is quite lenient, or liberal, when it comes to our interpretation of Shari'ah, but again, if you evaluate the issues properly, there is not a single Islamic transaction in Malaysia that allows an institution to raise Islamic funding, and use that funding to buy a conventional bond. That exists in the Middle East, so how can you define Malaysian scholars as more liberal than Middle Eastern ones, when they allow conventional bond purchases from the proceeds of an Islamic transaction?
At the end of the day, Shari'ah is flexible. It allows differences, so the debate on what is Halal and what is Haram has nothing to do with Shari'ah, but it has everything to do with competition and marketing.
One player might say, 'don't go to that bank, our bank is more Shari'ah compliant. Their products are Haram'.
It is merely labeling competitors. To me, there is no Shari'ah origin whatsoever to this debate, it is only marketing.
How do you think the Sukuk market will develop in the future? Will the trend towards more corporate Sukuk continue globally?
As far as Malaysia is concerned, between 80-90% of corporate bonds next year will be Islamic. We estimate that MR30-55 billion ($9-15 billion) worth of bonds will be issued next year, and 90% of that will be Islamic.
When it comes to global Sukuk, most of them will probably be Sovereign. But we will probably see more $2-3 billion Sukuk, in addition to the DP World Sukuk already announced.
What forms and structures of Sukuk do you expect to be most popular?
When it comes to financial institutions, they will probably be issuing a lot more Murabaha. I don't think there will be very many ABS, as a lot of Islamic banks are still in the process of increasing their assets, and I don't think that their framework is ready for them to do a lot asset securitization. But in terms of normal corporate issuance, I think that as far as Malaysia is concerned, a lot of project finance will be done through Istisna'a. But the majority of Sukuk in Malaysia will continue to be Murabaha and BBAs.
Where do you see CIMB in a couple of years?
CIMB is currently the largest investment bank in South East Asia, and our aim is to become a truly regional player, not just as an investment bank, but as a universal one. We now have a presence in Malaysia, Indonesia, Singapore, Brunei, Thailand, Hong Kong, Tokyo, New York, London and elsewhere.
We have been doing business in the GCC for the past three years, whenever a GCC client wants to come into South East Asia for investment. We have also done a few Sukuk deals in the GCC. The GCC is a market where CIMB Islamic is planning to have a physical presence, and we will do it with the right partner. We have found the right partner, and are in the final stages of formalizing the partnership. Watch this space.
Banker Middle East 2006
