Noripah Kamso, former chairwoman of Bank Rakyat, believes that Islamic finance could become mainstream if it prioritises its environmental and social credentials. She explains to Kimberley Long how the model could be expanded with more support.
Noripah Kamso
Q: What has the rate of adoption of Islamic finance been like in Malaysia? What are the expectations of consumers?
A: The rate of adoption in Malaysia can be assessed at two levels. First, there are the banks, the regulators and the government. And second, there is the customer level. Out of 27 commercial banks in Malaysia, 16 are Islamic banks and five of them are internationally owned. The first Islamic bank was established in 1983, but for the first 10 years, the uptake was slow. But when we realised that Malaysia could put itself on the map as a global centre for Islamic finance, we sprinted forward and established the Malaysia International Islamic Financial Centre backed by the central bank, Bank Negara Malaysia (BNM).
Over the years this has progressed to include the capital markets, pensions and asset management. There was a time when all sukuk issued globally were issued in Malaysia. Having established a comprehensive legal and regulatory framework since the Islamic Banking Act in 1983, Malaysia has been in a strong position as a centre for Islamic finance globally. There followed rapid liberalisation and the facilitation of a business environment that encouraged foreign international Islamic banks to set up in Malaysia. We have comprehensive talent development in most of our universities to educate a support system of lawyers and accountants, so the Islamic finance agenda is very robust.
But the Islamic banking space is starting to get a bit tired. BNM has now encouraged banks to implement their own strategies. So we are looking for fresh narratives. We need new energy, and a reinvention that includes identifying new leadership, which we currently do not have, [and] boosting the rate of adoption at the customer level.
Malaysia has a population of 32 million – which is about the same population as the Gulf Co-operation Council countries of the United Arab Emirates, Oman, Bahrain, Qatar and Saudi Arabia combined – and has a 65% Muslim population. Yet the adoption of Islamic banking goes beyond religion.
Depositors in Malaysia are largely non-Muslims – so, unlike the Indonesian customers who want to know who sits on the sharia council or the Saudi customers who want to know the type of Islamic financial contracts being used, Malaysian customers are very tolerant. They are very accepting of the deliverables of Islamic finance products without the same level of questioning seen in other countries, as long as it delivers the same or better returns than conventional banking. This quick adoption rate, irrespective of the beliefs of the customers using it, was an asset. When I was running a global asset management company, I launched an Islamic Asia-Pacific fund and 75% of my investors were non-Muslims.
In Malaysia we are focused on providing the best possible service for the customer. We can give them a fixed rate on their deposits and good financing options on mortgages. Whereas in Indonesia they will go through the details of the contract and how it adheres to sharia principles, or in Saudi they will point out what they consider not to be permissible.
Today the adoption of Islamic finance in Malaysia is challenged by the leadership in Dubai from the Dubai Islamic Development Centre, and even challenged by Indonesia, the largest and most populous Islamic country in the world. Both advocate for an Islamic economy and not just Islamic finance. Dubai embraces the ‘Seven Pillars’ concept, which includes finance as well as digital infrastructure, knowledge and energy. The goal is to nurture and sustain the backbone of an Islamic economy.
Q: How is Islamic finance modernising through the use of digital and mobile applications?
A: From a capital markets perspective, fintechs support the growth of Islamic finance as a green form of finance that is both socially responsible and sustainable. We are looking towards using technologies such as blockchain and cryptocurrencies in Islamic finance. As long as it does not violate basic teachings of Shia and Sunni beliefs, Islamic fintechs can easily gain the confidence of Muslim, as well as non-Muslim, communities, primarily because we now have the opportunity for the Islamic contract to be a lot more transparent.
The speed of fintech adoption comes down to how the bank is operated. If it is a conventional bank operating with sharia-compliant windows, then the Islamic arm will likely follow the lead of the parent bank. But if it operates alone like my former bank, Bank Rakyat, then we really need to catch up.
Along with the great opportunities offered by fintech adoption, there are challenges such as a lack of good and authentic research into its application for Islamic finance. There’s a lack of trained personnel to deal with the risk of cyber attacks, and a lack of confidence among investors as Islamic fintech is still in its infancy. The regulatory framework is another important area to address as it needs to work alongside conventional banking to operate successfully.
There are several challenges, such as the regulatory compliance framework, which is evolving in conflict with some of the existing regulations. I feel the regulatory bodies should use a relaxed liberal and principle-based approach, as it gives the most coherent and innovative way of doing business.
As transactions on the blockchain are transparent and visible to all users, this sort of smart contract could be a useful mechanism for financial transactions and monitoring. Smart contracts and cryptocurrencies could be a revelation for the Muslim community, but it needs more research and to find a way to develop a cryptocurrency that is fully sharia-compliant. At this time, no Muslim country allows cryptocurrencies for legal transactions.
Q: How does Islamic financing fit with banking’s move towards sustainability?
A: Islamic finance is at a crossroads. If it sticks to Islamic principles only, it will probably reach a dead end. It is here I can see it reinventing itself as a form of sustainable finance or social finance, which focuses on social good and social responsibility. Some are keen to rename Islamic finance as sustainable finance. Instead of being just sharia-compliant it should also be sustainability compliant – so both sharia-compliant and sustainability compliant.
The transition to reinvent it as sustainable finance is slow because, despite the excitement, the road map is vague and there are no champions at the stewardship level. Those in leadership positions need to align profits with purpose. Despite a natural alignment, analysis suggests that few Islamic financial institutions are engaged, but we have seen some of the leading global figures in Islamic finance continue to raise awareness of the UN’s Sustainable Development Goals and inspire practical action among Islamic financial institutions. The BNM hosted a roundtable on the topic in Dubai, for example.
Reframing how we think of Islamic finance encourages a convergence of shared standards that could evolve to see sustainably responsible impact investing in environmental, social and governance (ESG) areas across the Islamic finance sectors. I believe it makes a lot of sense that responsible and sustainable finance practices such as ESG be used as a tool in instigating engagement.
Q: How are customers and the industry responding to this move towards ESG?
A: It’s leading customers towards a different understanding of the world and the impact that banking can have on the environment. We need to help customers to understand the impact that having this focus can have not only on a bank’s profit and loss metrics, but also on the world’s health and security. For so long there has been market-driven financing that depletes natural resources and increases social inequalities. When I was the chairman of the bank, we started to analyse how we worked in order to become a sustainable bank, and if customers would respond positively to the bank being sustainable over time. We realised there are millions of customers who do appreciate the importance of protecting the planet that they live on.
But unfortunately the priority is the economy, not the planet. I don’t believe the customers are yet able to see the common good from ESG-focused banking, combined with the financial benefits. Also, the banking institutions at large have yet to widely embrace the initiatives. More needs to be done to develop a risk framework. They need to come up with policies and procedures. They need to be properly structured, and they need advocates to champion for a more environmentally focused way of banking.
