April 2015

Bank debt goes Islamic in S-E Asia
Corporate engagement with Islamic Finance is deepening across South-East Asia with a growing number of corporates electing to convert conventional bank debt to a Shariah compliant alternative.

The second round of East’s Islamic Finance Markets report, created from around 1100 interviews with corporates of all sizes in Malaysia and Indonesia, shows a clear and growing trend for bank debt, a core banking product, to become Shariah compliant.

The second round also reinforces the conclusion, gleaned in the first round, that the momentum for Islamic finance among corporates is considerably stronger in Malaysia than it is in Indonesia.

Despite Indonesia’s larger population, Malaysia is staking a claim as a global centre for Islamic finance alongside the United Arab Emirates and also London, where the City is branching out in partial re-invention.

Around 21 percent of Malaysia’s total banking assets are Shariah compliant, amounting to US$135 billion. Regulation is strong, and there are 16 Islamic banks, five of them foreign. In Malaysia, Islamic finance is not just about the big sukuk issuance: it permeates through all levels of financial activity down to the owners of SMEs.

In Malaysia, for example, the first round of East’s research showed that Shariah compliant product comprised 9.3 percent of total bank debt among the Malaysian corporates interviewed. These ranged from the largest institutional businesses to small and medium sized enterprises.

In the most recent report, fieldwork for which was completed in March, this 9.3 percent figure had moved up to 9.8 percent. Engagement was strongest among institutional businesses, where Shariah compliant bank debt moved from 18.8 percent of total debt, to 19.6 percent.
There was growth in the Indonesian markets as well, although from a lower base. Total Shariah compliant bank debt edged up from 3.9 percent to 4.2 percent over the two research rounds.

Institutional-sized Indonesian businesses were also the more engaged of the business segments, with Shariah compliant debt increasing to 8.2 percent of the total.

It is a trend which the research suggests will only increase. East also asked businesses about the percentage of their bank debt they plan to convert from conventional to Shariah compliant over the next six months.

While all segments reported that this conversion would accelerate, it was once again most pronounced among institutional businesses in Malaysia. It may not be played out in full, but these businesses say they plan to convert around 30 percent of their conventional bank debt to Shariah compliant in the next six months.

While there is similar momentum in bonds as an asset class, much of the traction for Islamic finance among Malaysian and Indonesian corporates would appear to be around debt, and not deposits or equity solutions.

Engagement levels for these products are significantly lower, with markedly less enthusiasm to convert conventional assets to Shariah.

Nevertheless, the research gives an insight into the strong momentum for Islamic finance in South-East Asia and the opportunities for providers.

It also shows that while the Gulf states and London are setting up to challenge for major sukuk issuance, Malaysia in particular has developed at a more grass roots level with significant engagement from private businesses of all sizes.
Sharia Compliant Solution Penetration: Bank Lending
Average % Sharia to Total Loans

Source: East & Partners Asia : The Islamic Finance Markets Report – April 2015

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