Ten-Year Conversion by Malaysian Bank Shows Islamic Hub Hurdles

Updated on
  • Agrobank seeks to increase loans by 10 percent annually
  • Fear of uncertainty hinders development: Chartered Institute

It took a Malaysian lender more than 10 years to complete its conversion to a fully-fledged Islamic bank, highlighting the challenge for countries such as Indonesia in their bid to become Shariah funding hubs.

Agrobank, a state-owned lender set up in 1969 to provide financing to farmers, would have given up its ambition to be Shariah-compliant had there been no commitment from employees and directors, said Chief Executive Officer Wan Mohd Fadzmi Wan Othman. The process was “grueling,” involving numerous meetings with staff and customers, and redoing all documentation, he said. The plan was first announced in 2004, derailed and then revived in 2012. 

“I felt that it was a job not done and agriculture, by nature, is a good fit with Islamic finance,” the CEO said in an interview in Kuala Lumpur last week after achieving the goal in July. “We even had to dig into our pocket and pay the legal fees for customers to get them to convert to Islamic loans.”

Agrobank’s experience with complex approvals and legal hurdles brings to focus the uphill task for nations seeking to become financial centers for the $2 trillion industry. Indonesia, which has the world’s most Muslims, has pushed back deadlines for creating a megabank catering to those wanting to invest in an ethical manner, while Singapore was dealt a blow in September after Islamic Bank of Asia, a unit of the city’s biggest lender, was dismantled due to a lack of “economies of scale.”

Need Perseverance

Islamic lenders still don’t have the financial clout to compete with their conventional counterparts, even in Malaysia, which pioneered the Shariah-compliant banking industry more than 30 years ago and has so far failed in its attempts to form a megabank along religious guidelines. Kenya is the latest nation to announce ambitions to become a hub, while Hong Kong, Singapore, London and Luxembourg have the same goals.

“The underlying reason why Islamic finance is still lagging behind is the fear of uncertainty, and that applies to all institutions and jurisdictions,” said Badlisyah Abdul Ghani, president of the Chartered Institute of Islamic Finance Professionals in Kuala Lumpur and the former CEO of CIMB Islamic Bank Bhd. “Agrobank’s experience shows the will to do Shariah-compliant finance business.”

Agrobank has 189 branches spread throughout the Southeast Asian nation and seeks to quadruple the number of people acting as representatives to 600 by the end of the decade, Wan Mohd Fadzmi said. The lender aims to increase loans by 10 percent per annum to 12 billion ringgit ($2.8 billion) by 2020 from the existing 7 billion ringgit, he said.

It’s another step forward for Malaysia, the world’s biggest Islamic debt market, as it aims to have 40 percent of banking comply with religious principles within five years from 25.8 percent as of the end of August.

“Malaysia had to go through a similar experience as Agrobank before it became known on the map as a global Islamic hub,” said Badlisyah at the Chartered Institute. “The first step is always the hardest. Once you overcome the fear and have the perseverance to move ahead, there is no limit to the business you can do.”

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