Islamic banking ‘on right track’

By MUSHTAK PARKER | ARAB NEWS Available at: http://arabnews.com/economy/islamicfinance/article61981.ece

Malaysia’s Islamic banking system is well on track to achieve the stated goal of the Islamic Financial Services Master Plan of 20 percent of total banking market share by the end of 2010. Currently the market share of Islamic banking of the total banking sector is about 19.6 percent, but judging by the latest figures published by Bank Negara Malaysia, the central bank, the Islamic banking sector is growing strongly again as it leads the rest of the banking sector out of recovery as a result of the global financial crisis, which has affected the Malaysian banking sector far less because of measures taken during the Asian financial crisis in 1998.

First quarter 2010 figures for various market indicators show strong growth compared with the same period in 2009. Total Islamic banking deposits, according to Bank Negara, for instance, increased from 156,580.5 million ringgit at end March 2009 to RM192,141.1 million at end March 2010. Similarly, total assets of the Islamic banking system increased by some RM46 billion for the same period from RM194,450.9 million to RM240,565.2 million.

Similarly, total Islamic banking financing for the above period increased from RM110,281.7 million to RM141,253.3 million with an increase of RM40 billion, suggesting that while Malaysian banks did cut back on lending and financing, it was not as severe in other countries especially those in the West and in the GCC countries. The two largest financing segments were higher purchase (Ijara of Bai Bithaman Ajil) financing especially of cars and housing financing. Higher purchase in first quarter 2010 accounted for RM40.91 billion of financing extended, while housing finance accounted for RM24.361 billion.

In this respect the three most popular modes of Islamic finance in first quarter 2010 were Bai Bithaman Ajil (deferred payment) comprising RM45.936 billion; Ijara Thumma Al-Bai comprsing RM40.232 billion; and Murabaha (cost-plus financing) comprising RM23.427 billion. Musharaka financing (equity partnerships) accounted for a paltry RM2.837 billion while trust financing (Mudaraba) was even more woeful at RM295 million for the first quarter of 2010.

The total capital of the Islamic banking sector in Malaysia increased from RM16.977 billion at end March 2009 to RM 20.903 billion at end March 2010, with TIER 1 capital increasing from RM14.281 billion to RM17.305 billion for the same period. The total risk weighted assets similarly increased from RM115.126 billion to RM140.452 billion respectively.

In terms of capital adequacy ratio, Malaysian Islamic banks remained steady and strong. Risk weighted capital ratio changed slightly from 14.7 percent to 14.8 percent, while core capital ratio (CAR) decreased marginally from 12.4 percent to 12.3 percent for the above period.

Not surprisingly, because of tough market conditions, the performance returns of Malaysian Islamic banking sector for savings deposits at commercial banks decreased to 0.91 per centon investment accounts at end March 2010 as opposed to 0.95 percent in 2009 and 1.15 percent in 2008.

The Takaful (Islamic insurance sector) also grew but modestly once again suggesting that the sector is finding it difficult to penetrate the general insurance market in Malaysia. There are eight Takaful providers licensed by Bank Negara in Malaysia. Their number of offices fell by 157 in 2008 to 104 in 2009, reflecting the impact of the global recession and the financial crisis. Even the number of Takaful sector employees hardly increased by much totaling 2,499 in 2009 compared with 2,411 in 2008.

Total Takaful fund assets increased from RM10.569 billion in 2008 to RM12.445 billion which is modest compared to the conventional insurance market. Similarly total net contributions income increased from RM3.025 billion in 2008 to RM3.521 billion in 2009. However net benefits and claims payments, according to Bank Negara Malaysia, jumped from RM866.1 million in 2008 to RM1.208 billion in 2009.

Best Regard
ZULKIFLI HASAN
DURHAM, UK

Oxford University