What new initiatives is Bank Muamalat involved in?

MAJID: We have just completed our three year business plan in which we have three or four areas of growth and concentration. One is financing for halal products. We are also going to concentrate to provide waqf funding management, which is Islamic endowment. Another is al-rahnu, which is Islamic pawn broking. With al-rahnu we have gotten into a joint venture with Pos Malaysia and the Kelantan state government to achieve growth in that business. This will really kick off by June this year. Under this joint venture we will have 150 outlets using the Pos Malaysia network, and Pos Malaysia has just been acquired by our holding company, DRB-HICOM. We are synergizing with them and using their outlets to reach the consumer more widely. We are also looking into using Pos Malaysia as an agent bank. Given that we have 58 branches, with Pos Malaysia’s greater reach, we can have a larger customer base. This is still subject to regulatory approval. We have these growth and development plans and, of course, we have our core banking system IT improvement, in terms of infrastructure, which is a 24 month plan. These are the areas of new concentration for us.

Is al-rahnu a brand new concept in Malaysia?

MAJID: No, it has been happening quite a bit in Kelantan. Kelantan is an Islamic party governed state in Malaysia. One of the areas in which they have developed business is in al-rahnu. Islamic pawn broking is better than conventional pawn broking in terms of what you get for the asset. What you may pawn and what you may share out in terms of your future losses is better. In conventional pawn broking, if you’re not able to pay the monthly or quarterly payments, you would lose everything. In Islamic pawnbroking, however, you may sell that asset, for example a watch, and we will take into account what you have paid before the whole thing went awry. In conventional pawnbroking you lose the lot. Furthermore, the rates at which you are charged in conventional pawn broking are exorbitant. So with al-rahnu it is lighter and fairer.

What are the growth and expansion plans for the longer term?

MAJID: We have a small bank asset value of about $6bn, profits of $17m, and shareholder’s funds of about $500m, so we are a small bank. It will take a lot of organic growth to achieve size, reach, and expand our franchise. I think the future growth of the bank will have to be through M&A, otherwise it will take years. This bank has been in existence for about 12 years now, so it is not old but the market is getting very crowded. Now, everyone is into Islamic banking and finance. With consumer banking, as opposed to investment banking, there is a greater risk because you have more accounts and more competition. In the future, I would like to see us do more investment banking work such as fund management, zakat or waqf fund management. Zakat is a compulsory Islamic tax. The collection has not been very good across the Islamic communities across the world. The collection is best in a place like Saudi Arabia. If we use Saudi Arabia as a base for calculation of what could be collected in terms of zakat contribution worldwide, it has been calculated that it could be $100bn per year and that too assuming a 50% leakage! If you have such a sizeable fund and can put it under management worldwide, imagine the returns you can give to the community on that investment. We should be looking at the bigger picture areas in terms of investment banking. M&A and investment banking will provide the most growth.

How would you describe the banking sector in Malaysia as a whole? What is growing in the retail space?

MAJID: The area is crowded as everyone is into Islamic banking. It has become the flavor of the month, so to speak. Retail and consumer banking is also big. There is a squeeze in terms of yields. At the same time, deposit rates have gone up in Malaysia, so we have this double whammy coming in. More people are coming in and yields are coming down. Deposit costs are going up and everyone is trying to shift the deposit base. Now, they are looking at CASA (consumer and savings accounts) because they are lower cost. However, I’m sure as everyone concentrates on CASA, there will be higher costs coming up there as well. It is a tight market. Therefore, the kind of size we should achieve and the kind of diversification we should look for is a strategic way of trying to make sure we have other sources of income. With the main consumer driven source, individual or wholesale, there will be a yield squeeze.

What is Malaysia’s competitive advantage in Islamic banking?

MAJID: In a way, Malaysia has had a head start. The first Islamic bank in Malaysia started in 1983. Islamic type facilities of savings started as long ago as 1963, especially for the pilgrims. Now that fund has been formalized under the LUTH (Lembaga Urusan Tabung Haji). The first proper Islamic bank, Bank Islam, started in 1983. There has been regulatory and governmental support for the development of Islamic banking in Malaysia, so there is the advantage that Malaysia has had this support. Of course, at the same time, the outcomes of the support, such as more sukuks and having greater liquidity in the market of Islamic products, produce a challenge. One of the main causes of the Western financial crisis of 2008 and 2009 was a liquidity crisis and an inability to fund long term assets because everyone funded short. When there was a liquidity squeeze, nobody wants to lend to each other in the interbank market. This caused problems for banks, such as Northern Rock in the UK. Liquidity is both a plus and minus at the moment. It could be a minus in terms of future growth for Islamic finance. Of course, the third factor that helps is, ironically, the failure of conventional banking and finance. While one should not be crowing about it, it certainly does give Islamic finance a leg up. Hence, many people, even abroad, are going into Islamic banking. The largest fund management center for Islamic funds is actually London. Essentially, it is a commercial opportunity with non-Islamic countries insofar as Islamic finance activities are concerned. I think their main concern is for Middle Eastern funds to come in and be managed as it grows. There are the trends. However, I do not take a holier-than-thou approach about Islamic finance. Some people tend to be a bit like that, and I do not believe it should be like that. I would rather take a better-than-thou approach by competing and offering better products and services. At the same time, understand that Islamic finance is not just for Muslims. Therefore, when you take a holier than thou approach you constrict it and put off non-Muslims. I do not believe in this. I think we should modernize. This is one of the things I would like to see happen in this bank. That kind of approach and thinking must also change if you want to make real in-roads. Then, you can begin to achieve structural change. In Malaysia, as another advantage of government support, Islamic banking and finance is no longer a complementary form of financing. It was an alternative, complementary form of financing. Now, it is financing in its own right, so it has come of age and reached some sort of adulthood.

What was the impact of the Western financial crisis?

MAJID: I think the Western financial crisis, note I use Western financial crisis and not global financial crisis, has been a disaster for the world. It had global implications in terms of economic crises because of the drying up of available investment funds. It is a curse to the world and obviously has had an impact. The 2008 and 2009 crisis did have an impact, but it was somewhat well handled. One of the impacts the crisis has is in the export finance market. There was not export finance available, and therefore, importers could not import the exports of this region. The Chinese stimulus package did help to lessen that impact. However, now we are getting a second round with the European Eurozone crisis, and we are at the end of the Chinese stimulus package. Of course, Europe is likely to be in a mild recession, and the U.S. will grow at about 3% this year if we are lucky. China is having the jitters and some people say they are set for a soft landing. The final markets are still Europe, the U.S., and Japan. Also, China has developed into a great export market but the finished products were destined for the developed world whether the exports came from Taiwan, Korea, or Malaysia. There was a final market which is now weak, and Malaysia is affected by that. If you look at the Malaysian numbers, in 2010 we did 7% or so, and in 2011 we came down to around 5%. For 2012, of course government would like to say between 4% or 5%, but I think we may be looking at the lower end of 4%. Obviously export demand has had an impact. However, there has been a countervailing effort to increase domestic demand and the public sector. Consumption and investment will work to alleviate the impact of lessening the external demand. Therefore, there is a consequence on the Malaysian economy. At the same time, government is very conscious of this, so it has created many smart plans. Such as the Economic Transformation Program and it is very symptomatic of the Malaysian Prime Minister’s way of doing things. He is very organized, so he has the GTP (Government Transformation Program) and the ETP (Economic Transformation Programme). He also has KPIs (Key Performance Indicators) for Ministers, which is something that has never before happened anywhere in the world. There are all sorts of new business concepts being applied to the government and public sector. This is interesting to watch. They have also identified, as far as ETP is concerned, twelve key economic areas, or NKEAs. This is also interesting. They concentrate effort, and they try to invite investment and give full government support to try and make things happen. There are good prospects for us to keep above 4% in 2012, 2013 is uncertain because we have the general election coming up. It is best if it is put out of the way. I am in favor of an early election as to get it out the way so investors can have a clearer idea of what is going to happen next and how much they want to come in.

What do you think the best investment opportunities are in Malaysia?

MAJID: Malaysia recently came up with a report about becoming a higher income economy, adding higher value activities, and more value added activities. Without this step up the ladder, Malaysia would be caught in the so called middle income trap. Korea has negotiated successfully for getting out of the middle income trap. Now, Malaysia has ideas and plans to do it as well. There are two areas I think are important to look at. One, they have these Kuala Lumpur Klang Valley improvement projects. This is very infrastructure driven. For example, improving sewage systems, quality of life, and transportation systems. In Kuala Lumpur there is a lot of money to be invested and to be made from these kinds of projects. I think people should look to see where they can find these sorts of projects. Another area is in the Iskandar region, the Iskandar Development Region.  Here I would say education is the best investment opportunity. I would also say medical tourism, I do not particularly like that term but medical related things people come here for. With this there is a lot of synergy with Singapore. As Singapore goes up the ladder, they are passing some things down to Iskandar. So, this we can take up.  If we look at that region, look at tourism, education, medical science, and hospitals there is further opportunity. So there are two physical areas with potential for actual business investment. For overall Malaysia, I think the agricultural sector and oil and gas present the best investment opportunities. With agriculture, I am referring to the plantation sector and the palm oil industry. For the palm oil industry, we want to move up the ladder in ways such as technologies that will reduce the gestation period of the palm and technologies that will develop biofuels from the palm oil. This is very important. I was formerly Chairman of Malaysia Airlines, and biofuel is critical for industries such as the airline industry. Recently, Qantas announced that they are using half jet fuel and half biofuel. This sort of thing is going to be extremely valuable because the airline industry is hit hard by jet fuel prices. More than one third of their total cost is jet fuel, so if you give them something that lessens dependence and lowers cost, it will be great. The agriculture sector with high technology content in developing these sorts of products is very good. For Europe and America, I think it would be advantageous for the West to start selling technology. Because you have brains, you have technology, so you have to start selling. Of course, there is the concern of intellectual property protection and such. However, structurally, Europe and America must think how they can gain from their brain power and technology as an investment item for their own future good, now that their financial resources are depleted.