Islamic finance is becoming a part of the mainstream and we have many non-Muslim clients as well. It is an inclusive business model and not exclusive to a certain group.
Vince Cook, the CEO of The Islamic Bank of Asia (IB Asia) of Singapore, sees a strong Islamic finance industry in the region and works on bridging the gap between South East Asia and the GCC. For him, a key priority is to develop cross-border transactions within Asia and the Gulf with a view to securing a range of business, he told Emirates Business.
What got you started in the Islamic financial services industry?
My first 24 years in banking were with Barclays, so I was basically associated with the British banking scene, so to say. Then they asked me if I was interested in looking at the overseas part of the business, and in 1987, I took my first Islamic banking project. That was my first exposure to the industry.
At that time, the nature of the market was very different from what it is today. Since then, there has always been an element of Islamic banking with me. It was not a conscious decision but today it has become a very familiar field to me.
The elements of Islamic banking have always appealed to me. The social side of it, the business concern that underlines the use of money and the idea it is used for productive means are very important. Islamic finance has a close involvement with the community, which is remarkable. I strongly believe in all these things and enjoy them very much.
How would you describe the Islamic banking industry today, its atmosphere and current trends?
It’s in the very early stages of development. A lot of players still question as to how we develop the business and how do we expand, as opposed to competing with each other head-on for market share. The game is about making the market bigger rather than fighting with each other for small percentages.
In our case, based in Singapore, we are surrounded by huge potential markets with large Muslim populations. Investors are looking at different ways to structure the business. Islamic banks are a serious option for the very first time and if we look 20 years ahead and compare ourselves, we are very small today.
Islamic finance is relatively new and therefore perhaps not completely understood by the average individual. Is there a unified organisation to market it or has it been left to individual banks to promote themselves?
There are a number of industry bodies. The Islamic Financial Service Board (IFSB) looks at the regulatory framework, at some of the government issues that the industry faces, and is trying to build a degree of consistency and standardisation. The Auditing Organisation for Islamic Financial Institutions (AOIFI) is a body working on consistent accounting treatment for transactions, and the International Islamic Financial Market (IIFM) is an Islamic financial market body looking to develop markets.
These three are the most well-known bodies making an impact but at the same time, we are always looking at the local regulatory framework. The moves are to standardise but you can do that to a certain extent as you have to fall within the law and local banking regulations. Everybody talks about standardisation but it isn’t that easy to achieve.
Are most Islamic banks ready for Basel II compliance?
We are expected to follow it [Basel II norms] in almost all the jurisdictions but there are one or two types of transactions and one or two asset classes that are slightly different. Overall, however, it’s quite consistent with conventional banking.
Islamic finance is moving at a very fast rate. Do you foresee it taking a share off conventional banks?
To get to the figures that people talk about seems achievable. Malaysia is talking about increasing its Islamic banking business by 20 per cent by 2010 and the UAE plans to have 20 per cent of its banking industry based on Shariah-compliant products.
Now if we add those countries that do not have Islamic banking but have the potential for these kinds of figures, I think it becomes quite significant. The way the markets are growing, it isn’t about taking the share of conventional banks, but about creating options.
Some of the world’s largest sukuks have been issued in the GCC but South East Asia, with countries such as Malaysia, is known as the hub of Islamic finance. With an increasing amount of petrodollars being channelled into Islamic investments, do you see that changing in the future?
I think what you have is different countries growing at different paces for different reasons. When we talk about Malaysia, it’s the most developed market in the world as far as Islamic finance is concerned, partly because of the good number of players and partly because of the government support they receive. The government there supports the growth of the industry and government institutions are expected to put a certain amount of money in Islamic banks and that helps create demand.
In the GCC, the industry has been a lot more fragmented. Each country had one predominant bank until recently and the market developed accordingly. We need more and bigger players here.
The financial raw material is available to create some very significant players. So we could see the balance moving to the GCC unless Islamic banks don’t get market penetration in countries such as Indonesia, India and China, where there are huge Muslim populations and no players yet.
Does that mean a lot of mergers and acquisitions are waiting to happen here?
Mergers and acquisitions are a little way away but we have had announcements from some banks. For example, Noor Islamic Bank intends to grow both organically and by acquisitions. So there are expectations that acquisitions will happen.
What are some of the new services and attractive Islamic financial instruments that The Islamic Bank of Asia plans to offer in order to have higher customer fidelity?
We have a slightly different position than the existing players. Most existing players have a very local focus. Firstly, we have a split shareholding structure. We have a joint venture between the two fastest-growing regions in the world. DBS, the largest bank in South East Asia, holds 50 per cent shares and the remaining is held by GCC investors.
With an already different positioning, we are spending a lot of time showing people investing options such as real estate and Asian equities that are Shariah-compliant. We are bridging the gap between South East Asia and the GCC.
What are your plans for the region?
DBS has an office in the DIFC and so we work with them on a number of transactions. Then we have a representative office in Bahrain, close to our shareholders and the majority of our clients. I would like to see our representative offices open in countries where we have maximum business, and that includes the UAE and Saudi Arabia. So it is just a question of when we will be able to achieve this.
A major issue that needs to be looked into urgently is human capital development within local Islamic banking institutions, because the industry is now facing a shortage of qualified personnel. Are you facing problems such as lack of quality graduates who understand both Shariah and conventional finance?
Singapore is a non-Muslim country and many organisations have addressed this issue. In the future, this will be a smaller problem and a lot of financial-oriented scholars will help the industry develop. I see this as a relatively short-term problem, but the people in training now don’t immediately become professionals with full competence when they finish studying. We have to give them some time.
What about other challenges, such as accounting and auditing standards pertinent to Islamic banks and lack of uniform standards of credit analysis?
In terms of order of importance, there are more organisational challenges than Shariah challenges. Differences in interpretation and accounting problems are relatively fewer and the challenges that we face today are very similar to those faced by conventional banks.
How important is CSR in your field?
CSR is an integral part of the industry. Islamic banks don’t need to be told about this. It’s a part and parcel of their business; second nature you can call it. We are conscious of our role in the community. We support Council of Muslim Affairs and many community-based events.
Is there anything else that you’d like to tell the readers of Emirates Business?
I would like to stress the fact that we built our competence in a non-Muslim country like Singapore with a very sound reputation of strict legal proceedings. Islamic finance is becoming a part of the mainstream and we have many non-Muslim clients as well. It is an inclusive business model and not exclusive to a certain group.
The fact that it’s successful in Singapore sets a precedent for other countries. London is trying to become an Islamic banking hub and I see no reason for other countries in Europe not to try to achieve that.
By Shuchita Kapur, Emirates Business April 29, 2008