February 2015

Malaysian and Indonesian corporates engage with Islamic finance
The rise of Sharia finance, and in particular the growing popularity of sukuk bonds issued by sovereign entities, has been a well documented story, but to what extent has Islamic finance been embraced by corporates in Muslim countries?

East & Partners Asia (E&P Asia) recently concluded its first report on the penetration of Sharia products among Malaysian and Indonesian corporates and the results from this inaugural research – the first such demand side study of its kind - lifted the lid on a segment of Islamic finance ignored by researchers up until now.

Although both deeply Muslim communities, finance – as ever – is not just a religious issue, it is driven by a whole range of factors from official sanction through to cost.

E&P Asia interviewed just over 1000 corporates in both countries, and these extended from the smallest SME businesses through to the top Institutional businesses in both countries.

The E&P Asia research confirmed that Malaysian corporates are significantly more engaged with Sharia products than their counterparts in Indonesia. This was particularly the case among the larger institutional businesses in Malaysia, which are most engaged of all segments across both countries.

While Indonesian corporates hold, on average, more total bank debt, Sharia compliant debt comprises a greater percentage of the debt held by private Malaysian companies.
The gap between Sharia penetration between the two countries is expected to grow sharply over the next year, with Malaysian volumes forecast to growth more rapidly in that country.

Much of this growth will come from businesses replacing conventional western style finance with Sharia compliant products. Forecast Malaysian “conversion rates” are generally two times higher than the levels planned by Indonesian corporates.

Malaysian corporates, for example, say they plan to convert around one quarter of their conventional bank lending and outstanding bonds into Sharia compliant forms within the next year.

For corporates in both countries, the Sharia story is much more about debt than it is about equity, where the penetration levels are at around 5 percent or below.

The differences extend to the competitive dynamics of the market. In Malaysia, for example, Islamic units of major global banks are prominent providers of Sharia products to corporate Malaysia. Indonesia, in contrast, is more dominated by specialist Islamic providers with no links to conventional banks, either local or global.

It is clear that competition will intensify in both markets over 2015. With larger and larger volumes moving into the Sharia compliant world, it can be sure that the market will attract the global players, who will bring the same fierce competition to the Sharia markets as they do to others around the world.

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