Sabah: Islamic banking expands

The positive assessment of recent progress at Sabah’s state banks underlines the confidence in the potential of its financial services sector, particularly in the area of Islamic finance.

In July, Malaysia-based RAM Ratings reaffirmed the Sabah Credit Corporation’s (SCC’s) “AA1” and “P1” issue ratings, stating that the state financial institution had a stable outlook. In the previous month, RAM Ratings also assigned long- and short-term issue ratings of “AA1” and “P1” to the Sabah Development Bank (SDB), noting the “strategic role” the financial institution plays in supporting the state’s goals.

The positive rating for the SCC came just weeks after it issued three tranches of sukuk, with tenures of five, seven and 10 years, amounting to RM200m ($65.38m). In August, the SDB also issued three tranches of five-, seven- and 10-year bonds, with a total size of RM500m ($163.44m).

In May, Vincent Pung, the CEO of the SCC, told local media that the first issuance of the corporation’s sukuk programme in December 2011 had strengthened the bank’s funding base, supporting the growth of its sharia-compliant business.

“The SCC’s profitability is an indicator of its success, recording a surplus before tax of RM51.7m ($16.89m) for the financial year 2011. This was an increase of RM9.3m ($3.04m), or 22%, from the audited surplus before tax of RM42.4m ($13.86m) for the previous financial year,” Pung told The Borneo Post.

The confidence in Sabah’s financial services potential is not limited to state institutions, as a number of major foreign banks are now also moving into the market. Citing its confidence in the “rapid economic growth potential of the state”, Standard Chartered Bank opened its first sharia-compliant branch in Sabah in February under the name Standard Chartered Saadiq. It also launched a financial literacy programme called “Minda Wang”.

“Islamic banking has been growing twice as fast as conventional banking, owing to the rising customer demand, increasing sophistication of Islamic banking offerings and strong government support. The new branch, alongside the activation of Minda Wang, furthers our ongoing strategy to support this growth, while expanding our Islamic banking footprint in East Malaysia and throughout the nation,” said Osman Morad, the managing director and CEO at Standard Chartered Bank Malaysia, at the bank’s opening.

In October 2011, Saudi Arabia’s Al Rajhi Bank – the world’s largest Islamic bank – also opened a branch with an eye on the potential raised by the Sabah Development Corridor initiative, which is estimated to have seen some RM107bn ($34.98bn) in investment since it started four years ago. Like its state-run and private sector counterparts, Al Rajhi Bank has said it will take aim at providing a wider range of financial services for small and medium-sized enterprises (SMEs), which are expected to become a major engine of economic growth.

In May, SME Corporation Malaysia approved grants and loans totalling RM110.7m ($36.19m) to help SMEs, while in August, talks were held in Sabah as part of an initiative to engage SMEs, business organisations and banks. Officials told local media that the dialogue would introduce a spectrum of financing options available for SMEs under a nationwide SME masterplan. The focus on encouraging a symbiotic relationship between small businesses and financial services firms to encourage growth is also apparent in the state's establishment in February of an SME village.

Under plans for Malaysia to achieve high-income nation status, Sabah is projected to have a per-capita income of around RM32,400 ($10,591) and achieve a gross national income of RM110bn ($35.96bn) by 2020. As part of the initiative, SMEs’ contribution to nationwide GDP is expected to grow from 33% in 2011 to 40% by 2020.

“At state level, we have many programmes and activities to assist SMEs. In 2011, we reported at least 10 government agencies implementing programmes involving a funding of some RM12m ($3.92m), benefitting around 3000 people, ” Raymond Tan Shu Kiah, the minister of industrial development, told The Borneo Post.