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Sunday, 15 March 2009

Sharia Finance Provides Bridge Between Middle East and Indonesia

Mukhtar Hussain is global chief executive of HSBC Amanah and CEO of Global Banking and Markets Middle East and North Africa. He has been with HSBC Group since 1982. Mukhtar was appointed to both of his current positions in May 2008 after spending two years in London as co-head of global banking the first year, and global head of principal investment the following year.

He moved to Dubai in 1993 to establish HSBC’s regional investment banking business there. He advised the government of Dubai on the establishment of the Dubai Financial Market and served as a director of the Dubai International Financial Exchange from 2005 to 2007.

The Jakarta Globe spoke with him on March 3 on the sidelines of the World Islamic Economic Forum. He talked about global Shariah banking, as well as the challenges and prospects for Islamic finance in this country.

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He stressed that this kind of banking was relatively young in Indonesia, and thus there was a great deal of potential for growth. He also said that Shariah banking was a “natural bridge between the Middle East and Indonesia,” that could draw the two regions closer together.

The following are excerpts from the interview, including comments by Mahmoud Abushamma, the head of HSBC Amanah Syariah in Jakarta:

What do you think about the growth of Shariah banking in Indonesia?

We see Islamic banking continuing to be a major growth component in the financial services world. Historically, this is a business that has been growing by 15 percent to 20 percent per annum. Obviously, given the economic environment we have today, that growth will slow. But it will exceed the growth of the conventional sector and will continue to grow into the future.

Compared to the conventional sector, just how big is Shariah banking worldwide?

The comparison is a difficult one to make, because in reality the Islamic financial services market is still relatively small compared with the conventional industry. But, of course, we need to acknowledge that the conventional industry has developed over two centuries, whereas the Islamic financial services industry is probably only 40 years old. So it’s a young industry that’s growing quickly, but it’s still relatively small in proportion to the overall financial services industry.

What are the most promising markets for Shariah banking?

The logical places for growth are clearly those countries and regions with large Muslim populations, where it has a natural home. But I think that even in other parts of the world, there is growing interest in ethical banking. So, whether it’s Europe or the United States or elsewhere, I think the industry will continue to grow, because people like principles-based banking and Islamic banking is exactly that. We see the trajectory of growth being concentrated in Asia and the Middle East, with potential for growth in Europe and elsewhere.

Indonesian Vice President Jusuf Kalla has said that Islamic banking has proven that it can weather the global crisis. What do you think?

I agree with that. There is inherent discipline in Islamic banking, given the fact that it focuses on the real economy. It focuses on real, asset-based financing, which means that you know it is less involved in speculative activity. I also think that Islamic banking has very clear criteria on the amount of leverage that can be made available in transactions. Therefore it doesn’t promote the use of high leverage — this being one of the reasons the conventional banks have encountered the problems they have. The other reason is that conventional banks invested heavily in toxic assets. Many of those assets would not have been permissible in Shariah banking.

What do you think about the potential for Shariah banking in Indonesia?

We are very excited by the potential in Indonesia. This is obviously one of the biggest Muslim countries. There is a coherent approach, being led by the government in Indonesia, in terms of developing a framework for the growth of Shariah-based financing. The president has stated very clearly that Indonesia sees itself as a leader in this case and it has a natural role to play, given the consumer base you have here. I would be delighted to assist those efforts.

But Shariah banks in Indonesia only control 3 percent of the market in terms of assets.

Well, I wouldn’t call that a problem. Three percent to me represents plenty of potential for growth, and, secondly, in every industry you start small and you scale up. I think perhaps that in time to come you will see our market share hit double digits in Indonesia. That should happen over the course of time, as more Islamic banks start up and consumers become more aware of the products and the choices they offer. And that’s the right way for the industry to grow, because it’s consumer-led. Shariah banking in Indonesia is very young. You can’t compare it to Malaysia or the Middle East.

Does Indonesian law support the growth of Shariah banking here?

I think a lot has happened in the last few years. And if you looked last year, we have the sukuk law being issued by the House of Representatives. We have the Shariah banking law being issued as well. So a lot has happened in the last few years. You know, you shouldn’t look at Shariah banking as being too small in Indonesia. You should look at it as still being young and still not developed, still not matured to the level where we can actually compete with conventional banking. The regulations are getting better. The government realizes the potential, realizes the fact that it is a huge need in Indonesia. That was shown by the success of the retail sukuk [Islamic bond] sold by the government recently. There is demand and the demand needs to be satisfied. So, this should be a cooperative effort between government, market players, the regulators. In this way, we will be able to develop the next generation of products.

Will Shariah banking help Indonesia access financial resources from the Middle East?

[Mahmoud Abushamma]: It already has. Indonesia already has Middle Eastern funds to invest. HSBC has arranged a large syndicated finance package for Pertamina, totaling over $500 million, and has arranged more than $90 million for Krakatau Steel. As you know the Republic of Indonesia is now working to issue a global sukuk which is also aimed at Middle Eastern investors.

[Mukhtar Hussain] : I think Islamic finance provides a natural bridge between the Middle East and Indonesia. It is an area of commonality that should draw these two partners together. There is already evidence of traffic over the bridge. I think as time goes on the issue is for Indonesia to become increasingly aware of these issues both at the governmental level as well corporate levels. People will become more familiar with the risks, they will see opportunities to invest. But it takes time. Volumes will take time to develop. But most importantly, the first journey, the first transactions are already evident and have been successful. And the Middle East would like to see more of it’s capital being directed to and deployed in Asia, and Indonesia should be one of the primary recipients.

(Roffie Kurniawan/Jakarta Globe)

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