Standard Chartered Bank has been offering Islamic financial services to clients for over two decades. Clients have included many established families in the Middle East, South and East Asia, including the family of former Malaysian prime minister, Abdullah Badawi. After some initial uncertainties relating to the development of Standard Chartered Bank’s global Islamic business, the bank has now settled into offering one of the more proactive Islamic banking value propositions especially in the Middle East and in Southeast Asia, especially Malaysia, where it has a stand-alone Islamic banking license. Since joining Standard Chartered Saadiq, the global Islamic banking business of Standard Chartered Bank, in 2003, Afaq Khan has been responsible for the strategic build up of a global Islamic banking business covering retail, corporate and investment banking. With over 20 years of Islamic banking experience, including a stint at HSBC Amanah, Khan has been involved in a number of transactions including leading the HSBC team that structured and successfully placed the first global Sukuk by Malaysia and more recently, the first local currency Sukuk programs issued by Pakistan and the Monetary Authority of Singapore. Here Afaq Khan, CEO of Standard Cahrtered Saadiq, discusses with Mushtak Parkerthe bank’s Islamic banking strategy and the prospects for the global Islamic finance sector over the next few years.
Excerpts:
Global banks often have a problem in navigating their Islamic banking business. In 1999 for instance, Standard Chartered launched its Islamic banking division only to close it nine months later. Is Standard Chartered committed to developing its Islamic banking business?
We started with Islamic banking in the group in Malaysia in 1993, but I joined Standard Chartered in 2003 with a global Islamic banking mandate. We do end-to-end business, ranging from consumer banking to global banking to specialized banking such as project finance, shipping finance to hedging. We offer consumer-banking services in 6 countries — Pakistan, Bangladesh, Bahrain, UAE Malaysia and Indonesia, where we operate through Permata bank, in which we have an equity stake. We offer wholesale, corporate and investment banking in many countries. In 1999 the commitment of the bank was still there. But in the aftermath of the Asian financial crisis, it had to prioritize and restructure. As such, it could not make the investment to its Islamic banking business that was required. In 2003, when I was asked to join the bank, I had the same concerns, but the bank convinced me that it is committed to Islamic finance. Today we have branches in six countries. We have been in these countries for over a century and our customers today stress that they prefer Islamic banking products. We have to service these requests and as such we are in these markets for the long-term. At Standard Chartered Saadiq, we do not offer a niche strategy, for instance structuring Sukuk or derivatives only, but a total solutions strategy. We want customers to have their savings, operating accounts, hedging, private banking etc — all with our bank.
Market conditions are currently very tough. What are the prospects for the Islamic finance sector going forward?
Overall the Islamic finance business remains healthy and robust. We are competing aggressively. Yes the Sukuk market has been negatively affected, but we have to understand the reasons why. Sukuk is a means to raise term capital for expansion and is based on underlying assets which have to be valued. When asset prices are falling sharply, you have to make sure that they are stabilized. When the economy is growing healthily, then you have an x amount of expansion taking place. There is overcapacity which the market is trying to work through. Because of the crisis, the need for term capital has gone down. If you compare the conventional bond market with the Sukuk market, the former has been even more badly affected.
Is Asia taking the lead in the Sukuk market revival?
Yes, we led the recent $650 million government of Indonesia sovereign Sukuk issuance, which had an offer price of 8.8 percent which has since tightened and which was heavily oversubscribed. Contrary to the news reports, there is liquidity in the market. In March 2009, the Dubai Electricity and Water Authority raised a $2.2 billion term facility syndication from the market, a transaction we also led. It was raised successfully and oversubscribed. We also worked with the Pakistan government to come up with an instrument for the State Bank of Pakistan, the central bank, to allow the Islamic banks there to participate in the reserve requirements. In high inflation countries such as Pakistan, a 10-12 percent reserve requirement is a significant matter. We have set up a 45 billion-rupee program for the State Bank of Pakistan, and many issuances have already been done under this program. We have set up a similar program for the Monetary Authority of Singapore but on a reverse enquiry basis.
How do you duplicate this on a global basis because the need is global?
You are absolutely right. Bahrain and Malaysia already have such programs in place. Other countries where Islamic finance is provided must look into this issue of managing reserve requirements Islamically.
What about expanding Islamic finance into nontraditional markets? Is there potential for doing this?
Yes, but there has to be a lot of market education. And it cannot be based on pricing only, because then it will be expensive. We have to convince these non-traditional players that we can mutually benefit each other through Islamic finance inter alia through investment and trade. We have to build bridges. As long as you have only marginal utility, it will always be priced high. Relationships don’t get priced, transactions always get priced. We understand that many of these non-traditional countries want Islamic finance and investment to flow into their markets, and Islamic investors and institutions should diversify away from their home markets and expand because of their balance sheet requirements. But this process has to be a two-way one.
What are the pressing challenges for the sector’s going forward?
We have to leverage the potential for Islamic derivatives. Islamic balance sheets are now of that size that they must have the tools for risk management because even if you are an Islamic bank you are still exposed to the external risks of the economy. It is the right of the Islamic investor that when you provide term capital finance whether it is Sukuk, syndications, project finance and aircraft finance, then 100 percent of the economic return of that transaction should come to the Islamic, because we will distribute it to the rab-ul-mal. I do not see a good reason that the financing is done Islamically and the hedging is done conventionally. Leakage is a major issue. If I am taking the risk, then the collateral business should come to an Islamic financing entity as well.
Link: http://www.arabnews.com/?page=6§ion=0&article=123662&d=15&m=6&y=2009
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