What is Hong Leong Islamic Bankâ€™s business mix?
TEH: We are largely a retail bank. Hong Leong Islamic is based on 60% retail and then the balance is wholesale. SME is also a very critical part. In Malaysia, probably 50-60% of our GDP is backed by SME. So that's a very big part of what we're focusing on; SME financing. We are also facilitating trade and supporting the government; that's a very big part of our business as well. So we've actually set up dedicated systems and we've actually poured a lot of money into technology to support the governmentâ€™s initiative to turn Malaysia into a digital economy.
There is a digital footprint to reduce cash in circulation and all that. So, multiple things, apart from the transactional and digital payments. We're still into the retail stuff, helping someone buy a home is still of paramount importance to us. Mortgage still forms a very large part of our asset portfolio. We're one of the largest mortgage providers in the country and that's a thing that's important to consumers. Cars, personal stuff, education, insurance, we are a conglomerate so we support all lines; insurance and everything else that you need.
What new initiatives is Hong Leong Islamic Bank currently involved in?
TEH: You know, the buzz-word today really is about digital banking. So that's something that we're working around the clock on. It's something that if we don't do, we'll probably be irrelevant, not just Hong Leong, but the banking industry as a whole. So we've acknowledged that market disrupters have come through, non-banking institutions are doing banking stuff. So at Hong Leong Islamic we focus largely today to ensure that we're up to mark, if not leading the market in certain ways in terms of digital transactions and payment.
The beauty of that is, actually, when you talk about digital payments, digital transactions, you're talking about cash moving but in electronic form, and that's actually extremely Shariah compliant because you're not talking about credit, you're not talking about borrowing, you're talking about providing or facilitating trade and commerce, which is really what Islamic finance is premised on. It's just that we want to make it easier. If you're in Dubai and you want to buy something in Indonesia, we want to create that marketplace to bring down the barriers by providing a border-less and electronic globalized payment. So that's what we're working on now.
How would you rate the soundness of Malaysiaâ€™s financial system?
TEH: We are actually very fortunate in this country. This is not specific to Islamic banking, but we had gone through our own crisis before the West and our Central Bank, and our Central Bank Governor, had instituted all these checks and balances and measures. So in this country, for instance, everything is electronic. I know exactly what you've borrowed for. So you're only allowed to borrow, say for the first house, you could take a 90% mortgage. The second house you could take say a 70% mortgage, by the time you buy a third property you can only take say a 50% mortgage. This is by rule, by law.
So it is a regiment, which has been imposed on the financial industry so that we don't end up in the same spot we were in before. What happened in 2007 and 2008, we were kind of shielded because that was already all in place. I mean we still had high household debts in the region, but you can see how the Central Bank reacts in this region, a lot more proactively rather than reactive. So there's always a balance between over-regulating or not regulating. But again when you come back to the financial institutions itself, if you look at the Islamic banks, they largely didn't get into trouble across the globe. They were somewhat affected because you know when the global economy is affected you get affected as well. But it didn't have toxic assets, so we weren't allowed to invest in those CDOs or swaps, we just don't. But some suffered tremendously through heavy investments in real estate and property. But there's a saying that a property can only get sick it doesn't die, right. So you still have something tangible. So that's what Islamic finance is all about. It has to be tangible financing.
The buzz-word today really is about digital banking. So that's something that we're working around the clock on. It's something that if we don't do, we'll probably be irrelevant, not just Hong Leong, but the banking industry as a whole. So we've acknowledged that market disrupters have come through, non-banking institutions are doing banking stuff.
What is your outlook for sukuk issuance in Malaysia?
TEH: I know that where Malaysia is concerned that the sukuk market continues to dominate the corporate bond market. So 73% in the first half of this year is Islamic bonds. And I do know that the government is also trying to move its government securities to do more Islamic. So in terms of government securities now, about MYR300bn ($90bn) is conventional and half of that is Islamic. There is a greater effort to move that, so that's about close to half of a trillion of government debt. Plus our local debt, well the world has seen the first cross of the one trillion mark.
The outlook is positive and the government is introducing the Murabaha contract for the government securities as well, so you will see a shift from more conventional. At least I'm seeing it go that way but of course in terms of corporate debt market here, the first half had been very good. It's like I said 73%. For Malaysia it is great because I mean our GDP prospect is still 5% to 5.5% growth and then if you take 3/4 of that being funded through the corporate sukuk, that's big, big money. Government infrastructure projects have come in all through the sukuk as well.
So it is good for us. But what I'm more encouraged from is the global scene that Iâ€™m seeing because for us, it is kind of like why would you not do sukuk in Malaysia because it's actually better in terms of pricing because purely on the economics of demand and supply. If you do sukuk, more people can buy. At the primary level, we were talking about spreads of three to five at primary level difference between conventional and Islamic. So that's kind of like a foregone conclusion, if you're in Malaysia you'd be tapping on the Islamic market, so it's rosy. And the government has got a target by 2020, that 40% of the banking assets shall be Islamic. We're now at 25% because of the development of financial institutions are in the process of conversion. So even if we don't do very much by 2020 almost half of our banking assets are Islamic.