Crowded landscape
Zukri says there are too many Islamic banks in Malaysia and it’s timely for M&A activities
PETALING JAYA: There are too many Islamic banks in the country which means that this segment of the local financial sector is ripe for merger and acquisition (M&A) activities, according to outgoing Bank Islam managing director Datuk Seri Zukri Samat.
Zukri is also advocating direct listings of such banks.
“The industry is overcrowded... I hope there will be some M&As among Islamic banks to create a couple of mega Islamic banks that can rival the size and capabilities of conventional banks,” he said.
There are 16 Islamic banks in Malaysia of which two are fullfledged banks, eight are subsidiaries of conventional banks and the remaining, foreign banks.
The 59-year-old Zukri, credited with helping to turn around the once ailing Bank Islam was given a grand send-off by his colleagues last Friday after spending 11 years at the country’s oldest Islamic lender.
“Hopefully the industry will grow beyond Malaysian shores with careful strategic positioning. I hope to see the creation of mega Islamic banks that can potentially become regional champions particularly under the Asean banking integration framework,” he told StarBiz.
While there have been several M&A attempts in the Islamic banking space in recent years, all have fallen through.
In 2011, Bank Islam itself had attempted but failed in a merger with Bank Muamalat that is owned by DRB-Hicom Bhd. Following the effects of the Asian financial crisis in the late 1990s, Bank Negara had called for a consolidation of the country’s then almost 60 financial institutions of which over 20 were local commercial banks.
Today, the country has eight local banking groups.
Nevertheless, while consolidation has happened in the conventional banking industry, new licences had been issued within the Islamic banking space to more Islamic banks like Bank Muamalat, Kuwait Finance House, Asian Finance Bank and Al Rajhi Bank.
On the issue of direct listings of Islamic banks, Zukri said more of such companies being listed would lead to the creation of a new asset class which can appeal to syariah investors.
Zukri joined the BIMB Holdings Bhd-controlled Bank Islam in June 2006 when the bank was technically bankrupt.
Bank Islam is wholly-owned by BIMB while in turn Lembaga Tabung Haji (LTH) controls 52.5% of BIMB.
It is also one of LTH’s core investments.
“Bank Islam suffered RM480mil and RM1.3bil losses in 2005 and 2006 making it technically a bankrupt bank as shareholder’s funds were in negative territory.
“I was aware of the fact that Bank Islam is the first Islamic bank in Malaysia and the failure to manage it may have caused a systemic risk to the banking system in general and Islamic banking in particular,” he said.
Taking on the mammoth task of turning things around, Zukri and his team implemented a three-year plan, which contained two broad strategic objectives to be achieved within a three year timeframe, to return the bank to profitability and position the bank for sustainable growth.
“Within 12 months, the bank recovered and posted its highest profit up until that time of RM256mil while net non-performing financing had also declined sharply to 8.8%, from 12.2% posted in the previous year.”
At the end of 2016, the bank post- ed a pre-tax profit of RM720mil with net non-performing financing at -0.75%. The biggest challenge in his view was changing the work culture at the bank. Zukri who was executive director of investment at Khazanah Nasional Bhd and managing director at Pengurusan Danaharta Nasional Bhd before assuming his position at Bank Islam said “nothing could have prepared me for the difficulty in executing change in the working culture.” “Although Bank Islam is a private sector-owned entity, the bank used to be run very much like a public sector organisation. So, when we started to implement new policies such as pay-by-performance, sales culture and injecting new blood from other organisations there was a lot of resistance, it was not easy.” “Continuous communication was what we practised so everyone was on the same page on the progress the bank was making.” The challenges in the banking industry are aplenty, he said. “Regulatory requirements such as Basel III and Internal Capital Adequacy Assessment Process or ICAAP were introduced mainly to achieve financial stability... I see this as another form of competition for capital and premium assets.” He also pointed out that the rapid emergence of companies doing the business of lending using financial technology (fintech) only means that banks have no choice but to embrace the new development. “Some estimate that fintech may take up to 40% of the banking business going forward, so it makes sense for banks to collaborate with or invest in a fintech company. While it is not yet known who will replace Zukri, it is learnt that after a careful selection process, one name has been submitted to Bank Negara for approval. Notably, Bank Islam’s parent company BIMB is at the same time contemplating a group-wide restructuring, something that it has been mulling for years, partly to fulfil regulatory compliance requirements.