Reflections on Islamic Banking

Raja Teh Maimunah is a CEO for Hong Leong Islamic Bank, one of the largest Islamic banks in Malaysia. She has risen through the ranks and has proven to be a formidable player in the advancement of the Islamic financial industry. Here she discusses Hong Leong Islamic Bank, the products and services on offer, and why the future of banking is on-line.

Q: Please describe Hong Leong Group (“HLG”). What is the relationship between Hong Leong Islamic Bank (“HLISB”) and other subsidiaries in the group?

HLG is a leading conglomerate based in Malaysia with operations in banking and financial services, manufacturing and distribution, property development and investments, hospitality and leisure, and principal investment, with presence in North and Southeast Asia, Western Europe and the UK, North America and Oceania (Please visit www.hongleong.com for more information).

Hong Leong Financial Group Berhad (“HLFG”) forms part of the Hong Leong Group, and is the holding company for HLG’s banking and financial services. Hong Leong Bank Berhad (“HLB”) is part of HLFG, and Hong Leong Islamic Bank Berhad is in turn wholly-owned by HLB (Please visit www.hlfg.com.my for more information on HLFG, www.hlb.com.my for more information on HLB,   and www.hlisb.com.my for more information on HLISB).

The large conglomerate structure in which HLISB operates provides for a diverse and easily accessible network, both locally and internationally. This provides for strong intra-group support which also allows for the creation of a deeper resource pool especially at the larger group level.

Q: How is HLISB structured? What are the different departments? What are your most popular products? What are clients looking for when they approach HLISB?

HLISB’s operations comprise of business units, namely Islamic Capital Markets and Business & Corporate Banking (BCB) (both parked under Wholesale Banking), Personal Financial Services-I (PFS), Islamic Global Markets (GM) and Digital Innovation and Transactional Banking (“DITB”). The business units receive support from similar functions at HLB level, similar to that provided for support and administrative functions. For example, HLISB PFS-I is supported by HLB PFS, HLISB BCB is supported by HLB BCB and HLISB GM-I is supported by HLB GM. This is the same for support services; for example HLISB Legal is supported by HLB Legal, HLISB Finance is supported by HLB Finance (we know them as Group Finance).

In addition to my function as Managing Director and Chief Executive Officer of HLISB, I also hold the portfolio of Chief Operating Officer for HLB DITB (i.e. a division of HLB). This provides a direct link to group-wide digital banking initiatives and supports HLISB’s efforts towards developing this strategic market.

HLISB has been appointed as facility agent for several large banking transactions and sukuk programmes. Other services include Term Financing, Revolving Credit and Trade facilities

Q: What would you regard are the main challenges for HLISB and how have you sought to address these challenges?

The introduction of the Islamic Financial Services Act 2013, as well as changes in the Shari’a regulatory landscape, is naturally aimed towards better governance and compliance. However, the very same changes that are meant to improve the industry are also expected to continue putting pressure on Islamic banking operations in general over the medium term.

A structured and proactive approach has been taken by HLISB, initially through observing the changing landscape and followed by active development of new products and services which anticipate the future implementation of these changes. This proactive approach demonstrates the role played by HLISB in leading change, which in turn forms part of a larger customer acquisition and risk management strategy.

In addition to the above, the dual banking system in which HLISB operates sees the existence of the Islamic banking industry alongside conventional banking. In a multi-cultural society such as Malaysia, this creates a rather peculiar situation whereby Islamic banks not only compete amongst themselves but also with conventional banks for, typically, the same pool of customers. As such, HLISB strives to create clear product and service differentiation propositions to expand its market share under such conditions.

HLISB, as with other Islamic financial institutions, also face an environment of increased pressure on net income margins driven by higher cost of funds and stagnating yields. It is therefore important that banks move away from relying upon more traditional financing income and expand their respective non-financing income bases. From this angle, HLISB has taken cue from the increasing shift towards digital and electronic banking. Borderless banking and the development of alternative non-financing income streams are some of the areas that have been actively explored by HLISB in recent years.

Q: What are the short, medium and long term plans for HLISB?

In the short to medium term, HLISB is focused on addressing matters arising from the changing Shari’a compliance and regulatory environment. At the same time HLISB will continue developing existing strategic markets including structured finance, business and corporate banking, personal financial services, Islamic global markets and wealth management. These activities will run alongside development of its own business niche in non-financing income or fee-based income – that is income derived from business activities which charge fees. Examples include transactional banking fees, fund transfer fees, foreign exchange fees, ICM advisory fees, Global Markets trading fees, etc. In contrast, financing income involves the exploration of transactional, digital, electronic and mobile banking products and solutions, as well as developing its reach within the Islamic capital markets.

In the long term, HLISB is gearing itself to become a market leader in the digital and electronic banking space, which would in turn support its more traditional Shari’a compliant banking and Islamic capital market activities.

Q: Who are your major clients?

From a wholesale banking perspective, given the large value amount of transactions made such as those for sukuk issuances, most of our clients would naturally originate from the corporate sector. This includes both local and foreign entities.

HLISB recently closed a sukuk deal which was issued by a Saudi corporate, Al Bayan Group Holding Company. This marked the first foreign deal for HLISB. It also represented the first Saudi corporate to break into the Malaysian sukuk market. HLISB is currently arranging the sukuk deal for Society General, which will make them the first French company and bank to issue a MYR sukuk in Malaysia.

Our success in arranging these innovative structures in the Islamic capital markets continues to underscore HLISB’s capabilities in arranging cross border sukuk programmes involving foreign issuers.

Q: Are there frequent conflicts with Shari’a scholars when attempting to set up a product? How do you manage differences of opinion?

We do not face regular conflicts with our Shari’a scholars when developing products. Instead, we frequently engage in healthy discourse with our Shari’a Committee members, where we apprise them of the operational challenges faced in the development process. The scholars would then provide their guidance on the relevant Shari’a issues, and together we almost always come to a workable solution.

Q: Please describe the Shari’a governance structure at HLISB.

Observance and compliance with Shari’a rules and principles is paramount for HLISB as an Islamic bank. Based on this notion and in line with BNM’s Shari’a Governance Framework requirements, HLISB has set up the necessary Shari’a governance infrastructure to ensure that our operations and business activities are at all times conducted in accordance with Shari’a rules and principles. Towards this objective, HLISB has established a Shari’a Committee whose main responsibility is to provide independent advice to the Board and Management on the appropriate Shari’a rules and principles in conducting its Islamic banking and finance business. The HLISB Shari’a Committee, which consists of 5 qualified Shari’a scholars, is also tasked with the role of independent oversight over the business and operations of HLISB as an assurance that they are carried out in conformity with Shari’a rules and principles.

To support the roles and responsibilities of the HLISB Shari’a Committee, a set of robust internal Shari’a compliance functions have also been established accordingly. This comprises of Shari’a Review, Shari’a Research & Secretariat, Shari’a Audit and Shari’a Risk Management. These compliance functions are guided by HLISB’s own internal Shari’a manuals and Bank Negara Malaysia’s Shari’a Governance Framework in carrying out their duties and responsibilities.

This further establishes HLISB as an institution with strong fundamentals, one with a dynamic, innovative and well-rounded management team who are well versed in Shari’a-related matters which allows for better flow of ideas and meaningful debates at the operational level.

Q: How has HLISB responded to the global drive to improve capital adequacy and improve liquidity ratios? Do you feel that these rules are impeding banks or are they necessary for the health of the system?

More recently, HLISB successfully issued the first tranche of its subordinated sukuk ijara amounting to RM400 million. The book was closed within one day of opening at 4.80% per annum with a bid to cover ratio of 2.95. It set the stage for Hong Leong Bank’s own issuance not long after. The sukuk had a nominal value of up to RM1.0 billion where the first tranche was issued for 10 years, on a 10 non-callable 5 years basis which provides us with flexibility required for future business expansion.

The programme also provides support to HLISB for our liquidity management especially on long term stable funding. At present the risk weighted capital-adequacy (RWCAR) ratio of the Bank is strong, well exceeding Bank Negara Malaysia’s limit of 8%.

Q: Is HLISB looking to expand further outside of Malaysia or is your concentration on the Malaysian market?

HLISB is mainly looking at local expansion while maintaining an opportunistic stance towards foreign expansion of its banking business. This is especially true in countries where the larger Hong Leong

Group has bases in addition to other growing Islamic finance markets. From an Islamic capital market’s perspective, HLISB continues to scour international markets to expand its Malaysian sukuk offerings to foreign entities.

Q: Why has there been a recent increase in the setting up of Basel III sukuk? What is the attraction of this sukuk and why have they been so popular?

The increase in Basel III sukuk signals that the market is moving towards instruments that are potentially hybrid in nature (of equity and debt),which offer fixed rates of return while being able to absorb losses as per equity instruments via returns which can be deferred and non- cumulative.

Basel III compliant sukuk can be an alternative funding source for institutions that face difficulties in raising capital through equity issuances as the global financial instability continues to depress stock markets. Furthermore, sukuk, as we know, promotes ethical financing. Also, with the existence of underlying assets to evidence the transaction, sukuk provide higher levels of protection for its investors, generally offering lower level of risks and a predictable rate of return.

Issuers also tend to prefer sukuk issuances due to its pricing competitiveness while allowing them to take advantage of some benefits provided by the government. For example, Malaysia provides tax benefits to both the issuers and investors.

From a financial institution and corporate point of view, sukuk serves as one of the tools to manage its excess liquidity where they may choose to invest in sukuk that will offer a return and can be traded if the need arises. Sukuk can also be used as a means to release funds tied-up in assets through securitization and reinvestment of the proceeds.

The setting up of Basel III compliant sukuks is the latest innovation for the sukuk market. I believe that moving forward further developments are to be expected in order to keep pace with developments in the conventional market. The increase in the types of sukuk being offered, such as covered sukuks, is poised to be the next big thing for the Malaysian market.

Q: Foreign institutions such as Societe Generale and Al Bayan are entering the Malaysian market. What is it about the Malaysian Islamic market that is proving to be attractive for foreign institutions?

Malaysia remains one of the most sought after markets for a large proportion of potential issuers, both locally and abroad. In terms of market share, Malaysia still holds over half of what the global sukuk market currently has. The Malaysian market is unique in that the Islamic market runs parallel with its conventional market. Moreover, the Malaysian government has been enhancing the Islamic market following the 1997 Asian Financial Crisis through providing issuers with benefits, waivers, and tax incentives which are updated on a yearly basis during the announcement of the country’s annual budget. This has helped to further open the market and attract foreign issuers to raise funds in Malaysia.

It must also be noted that most Malaysian investment banks, including Islamic banks, have a dedicated team, with years of experience to advise and arrange for sukuk transactions. Coupled with forward thinking and a coterie of dynamic Shari’a experts, Malaysia has everything going for it to be the centre point for funds in the eyes of global issuers.

Q: HLISB has recently set up a 1 billion ringgit programme. Please describe this programme to our readers, its innovative aspects, and what HLISB is attempting to achieve by setting up this programme.

The innovative aspects of this programme can be seen from its structuring based on the principle of ijara. By using HLISB’s assets, such as its Islamic hire purchase portfolio, the structure introduced a sub-leasing leg between the issuer and its customers to imitate the nature of the transaction pursuant to the original hire-purchase agreement between the Bank and the customers.

The proceeds raised from the first issue of the sukuk had been to replace, at more efficient rates, the issuer’s existing sub-debt as well as to enhance HLISB’s capital position supportive of future growth and expansion.

Q: What is the relationship between HLISB and the wider Islamic financial community in Malaysia?

HLISB takes an active role in developing the industry, both from business and regulatory standpoints. This is largely accomplished through providing working level feedback and opinions, knowledge sharing by its senior management through forums and conferences, and participating in various industry and regulator driven initiatives. The Bank is a member of local and international Islamic banking organizations, and through such membership has, for example, in recent times assumed the lead together with other prominent industry players in furthering discussions with regulatory bodies on key issues impacting the Islamic finance industry.

Q: What do you think needs to be done to improve human resources in the industry? What do you look for when hiring, and what training schemes are available for budding bankers at HLISB?

There is a need for a steady flow of Islamic finance talent to drive the business forward. For instance, Malaysian universities have taken steps in offering Islamic banking and finance courses from first degree to doctorate level with institutions like UIA and INCEIF leading the way. Other training institutions, like IBFIM and FSTEP, are also facilitating industry driven talent enhancement programs.

Notwithstanding all these initiatives, there is still room for improvement particularly for Shari’a- based graduates entering the Islamic banking and takaful field. There is also a shortage of Shari’a- based graduates with dual qualifications in Shari’a and finance; this is a rare combination due to the deep language divide between Arabic and English. A challenge is translating the correct understanding imbued in the Arabic into English. Retaining the original message can often be lost in translation.

This gap will remain if universities, both local and foreign, continue to separate the Arabic language driven key courses like fiqh and usul al-fiqh courses with that of contemporary law, economy, finance and management science courses.

Q: You recently spoke about how technology has disrupted the traditional banking model. How have HLISB responded to this new phenomena?

There has been increased focus on digital, electronic and mobile banking from a global perspective.

These developments are transforming the way in which banking activities are conducted, and create opportunities for the likes of borderless banking as well as reduced costs through improved economies of scale. Such trends have gained significant momentum both within the banking and non-banking communities.

With this shift in technology, HLISB has been steadily building its alternative banking capabilities in recent years to position itself as a market leader in the digital and mobile banking space. These differentiated offerings provide for a level of detachment from conventional brick and mortar delivery channels, and instead rely on the globalisation capabilities of the internet coupled with the portability of mobile networks. The linkage between HLISB and DITB, as mentioned earlier, also feeds into this approach where the development of these new and innovative delivery channels could draw upon readily available resources of the larger HLB group. By providing solutions beyond existing physical channels, HLISB is gearing-up to be a forerunner in this market segment with a goal of acquiring the patronage of the substantial un-banked and de-banked customer segments, which had until recently remained elusive to traditional financial institutions.

Q: Please describe Connect and Mach? What payment systems have you adopted for customers to pay?

In today’s day and age, online banking is no longer an innovation, it is fundamental. With Connect we have extended our digital banking services to mobiles, and very soon, tablets as well. Mobile and tablet banking is still relatively new in Malaysia, despite it having a 130% mobile penetration rate.

One of our leading products is PEx or Payment Express. Both Hong Leong Islamic Bank and Hong Leong Bank customers can use the Connect application on their mobile to send money across to almost anyone by sending it to a mobile number rather than an account number. All the recipient has to do is collect it from any HLB / HLISB ATM machine, or visit the Connect site to transfer the money to their own bank accounts. What makes it even more special is that the recipients need not be HLB / HLISB customers, and they get to keep their account details confidential.

Q: As a CEO, please describe your management style.

Team work is of utmost importance to me. I therefore place great emphasis on engagement and consultation. I believe in inspiring and influencing my colleagues by setting clear targets and goals, and by sharing my ambitions and aspirations for the organisation. I encourage feedback, although final decisions are still mine to make. Once a decision is made, I do not tolerate disruptor and dissension in the ranks. You could say I operate midway between democracy and autocracy, taking the best of both.

Q: What is a typical working day like for Raja Teh Maimunah?

Mornings are manic as I try to have breakfast with the family every day before we each set off on our own way for the day. Thereafter, I start the day with planning out my to-do list in terms of priority (it takes about five minutes which I do in the car while on the way to work). A typical day for me would include five meetings covering internal committees, clients and regulators. In addition to this I usually have at least 10 or so people dropping by my room for advice, guidance, crisis management, etc.

I clear emails on the go, i.e. in the car on the way to work, on the way to meetings and on the way back from meetings. I use a tablet (or two) and I have a portable plug and play WiFi device that I carry with me everywhere. I go through printed documents in my in-tray once in the morning and before I leave for the day.

I try to have dinner with the family and put my kids to bed every day, after which I then work on emails again. With some luck, on some days I get to read a book before I sleep. I am now reading The Perfect Gentleman: A Muslim Boy Meets the West by Imran Ahmad.

Q: What is the most exciting project that you have worked on?

I must say that working on development of Bursa Suq Al-Sila’, the commodity murabaha exchange whilst at Bursa Malaysia was most satisfying. From conceptualisation to commercialisation, septics did not believe it would take off. Today Bursa Suq Al-Sila’ covers more than 70% of the Malaysian commodity murabaha market and has a good number of international clients.

As for Hong Leong Islamic Bank, we have recently embarked on developing digital and e-products and this is an exciting phase for me.