Malaysian Islamic banks face foreign competition

Malaysian Islamic banks face foreign competition

Agence France-Presse Kuala Lumpur

Malaysian Islamic banks are in for tough times with the planned issuance of three new Islamic banking licenses to foreign banks this year as part of financial liberalization, a top bank official warned on Tuesday.

Ahmad Tajuddin Abdul Rahman, managing director of Bank Islam Malaysia, said the move to bring forward the liberalization of the Islamic financial sector by three years would result in further de-regulation and easier access for foreign institutions.

He noted four out of 13 foreign commercial banks operating in the country already provided Islamic banking services.

Despite current restrictions on foreign banks, these 13 foreign banks command nearly 26 percent of total banking assets in the country and more than 20 percent of the loans market, he said.

Malaysian Islamic banking institutions (IBI) must therefore, reorganize their operations to prepare for tougher competition or risk being gobbled up by these larger and more established foreign giants, he warned.

"Malaysian IBIs are in dire need to restrategise themselves to enable them to effectively and efficiently compete with foreign IBIs and more importantly, remain relevant to the system," he was quoted as saying by Bernama news agency at a conference.

"Malaysian IBIs will need to remain resilient to any adversarial consolidation exercise that would put an end to their existence."

Bank Islam set up in 1993 is Malaysia's first IBI. In 1999, a second IBI, Bank Muamalat Malaysia, was established. Almost all other local banks also offer Islamic banking and financial services.

Islamic banking combines Islamic laws against interest payments with modern banking principles.

Predominantly Muslim Malaysia aims to be a key Islamic financial hub in Asia and last year announced the move to fast- track the liberalization of the Islamic financial sector by issuing three new licenses to foreign banks this year.

As of November last year, assets in the Islamic banking sector stood at 80 billion ringgit (US$21 billion), representing less than 10 percent of the overall banking system, but Malaysia wants to enlarge this to 20 percent.