The Will to Flourish

What were the challenges in creating Hong Leong Islamic Bank?

For any Islamic bank that is a subsidiary, the major challenge is managing a business that is fundamentally different to what you have been trained for. If you look at most banks that have a conventional parent, a number of the services, such as risk management and credit approvals, are centralized. From that perspective, risk and credit have always been skewed toward a conventional way of thinking, which requires a real paradigm shift in getting people to adopt a different point of view and believe that it will work. We managed to cross that in many ways when the question was asked about who would buy these Islamic banking products when conventional services were already being provided. We took the view 30 years ago, as a country, that we were going to introduce Islamic banking through windows, unlike in Qatar where Islamic banks are stand-alone in nature. As we grew stronger the government required us to corporatize and become a formal entity. Now, we have our own capital, and have to consider our own individual return on equity. We spent the first five years discovering the lay of the land, and managed to convince Hong Leong that Islamic finance was not exclusively the preserve of Muslims. In my opinion, most Muslims in Malaysia do not necessarily subscribe to Islamic finance because of faith; hence, we had to convince them that our services were compatible and competitive with conventional banking. We had to strive toward delivering a fundamentally different, yet still price competitive and comparable product. Along the way, the government had helped us to facilitate our business. It introduced tax laws and incentives to neutralize the system and kick-start business. We are one of the few Chinese Malaysian-owned Islamic finance banks where 50% of customers are non-Muslims; this clearly illustrates that the service is meant for everyone.

In 2014, you won an award for Best Sukuk Deal 2014. What was innovative about its structure?

We won a prestigious award in Washington for a sukuk, which was a cross-border transaction. We wanted to encourage foreigners to come and tap into Malaysia. Often, the structures are non-asset related. What we implemented was an ijarah structure, which is a leasing structure of an asset in Saudi Arabia. It was a complex document because we made the offer here in ringgit, and then would exchange it back into the riyal. People have done that before; the ringgit sukuk is, of course, sharia compliant, but the cross-currency swap, or the derivatives thereafter, is always conventional. What was different and innovative about what we did was that everything, from the primary issuance to the cross-currency swap from the ringgit to the dollar and then the reverse, was 100% sharia compliant covering several jurisdictions. Therefore, the innovation came from cross-border documentation or securitization of an asset somewhere else, into an offering into another capital market, and into a cross-currency swap, which was also Islamic.

Is internationalization something that Malaysia can focus on?

For Islamic finance to work anywhere else, the laws of those countries must change to enable Islamic banking. This alone is not enough, as you can see from the UK example; you also need central bank intervention on liquidity management. In Malaysia, we have a mechanism called the Islamic Interbank Money Market (IIMM), which does not exist anywhere else. IIMMs have to exist in order for Islamic banking to function properly, which is why we have been able to flourish in Malaysia. Indeed, the one distinguishing and defining moment for the market in Malaysia was the setting up of the IIMM.

What are your goals and expectations for the year ahead?

The coming year will not be so easy; the country is going through an economic slowdown. We have new taxes, such as the Goods and Services Tax (GST). Inflation is up, meaning people do not spend as much and deposit rates are high; therefore, people will hold onto their money. These are factors that generally make for a quieter year. Because of that, the entire market is under margin pressure, while the money supply shrinks. In addition, Basel III is also being introduced this year, making for a busy period. The coming year, overall then, will be a challenge for us. Several new sharia-compliant items, such as the IFSA, have required us to change our business model. The ringgit is also weakening, which is another factor pointing to a difficult year. It is important now not to lose money, but to remain prudent as longevity is the key. We have been through crisis before, and we still anticipate further opportunities.

© The Business Year – May 2015