Malaysia’s SME Bank, which made its first foray into the capital market with a Sukuk issuance in August 2012, plans to convert into a fully Islamic operation in line with the government’s aspirations for Islamic finance in the country, and in tandem with the development financial institution (DFI)’s efforts to achieve sustainable funding.
In an interview with Islamic Finance
news, Mohd Razif Mohd Yunus, its managing director, said that: “We are trying to convert all our funding and lending towards Islamic. Currently, 60% of our financing portfolio since inception has been made up of Islamic financing; and this year, 100% is Islamic.
“We have a program to convert all our conventional financing towards Islamic. With the consent of customers, we hope to achieve this between 2013 and 2014. This is a process we will embark upon soon.”
Mohd Razif also said that the DFI, which operates under separate legislation to commercial banks, is also looking to phase out its non-Shariah compliant investments, with an eye on achieving full Shariah compliance on all its assets by 2018. The conversion of its assets will be overseen by its internal Shariah board.
He added that its planned conversion to full Shariah compliance is in keeping with expectations of the market, where it sees strong demand for Islamic products from its customers, 90% of which are Malay Muslims, due to the fact that the structure of its customer base is also in line with the institution’s mandate to assist Malaysia’s bumiputra entrepreneurs.
Debut Sukuk
Meanwhile, the institution, which launched its inaugural Sukuk offering on the 2nd August this year, could issue the next tranche from its program as early as the end of 2012, provided there is strong demand for funding from its customers; barring which it will likely be issued in the first quarter of 2013.
To recap, SME Bank established a RM3 billion (US$967.44 million) government guaranteed Islamic medium-term notes program in July 2012. Its first tranche amounted to RM500 million (US$161.24 million). According to Mohd Razif, the next issuance from the program will hinge on demand for financing from its customers. Proceeds from its program will be used to fund its financing portfolio.
He also said that the institution expects to record 8% growth in its financing portfolio this year. This is on expectations it will approve RM3 billion-worth of financing in 2012, having approved RM1.5 billion (US$483.7 million)-worth of financing from January to June. Its total financing portfolio since inception has amounted to around RM4 billion (US$1.29 billion).
Mohd Razif cautioned however that the DFI may have to rationalize the growth of its financing portfolio going forward.
On the rationale for issuing Shariah compliant notes in its move to tap the debt market for the first time ever, he said that it is in line with Malaysia’s economic agenda, which promotes lower dependence on government support.
One hundred percent-owned by the ministry of finance, the institution has hitherto received financial support from the government. “In the context of Malaysia’s new economic model and in striving towards sustainability, we have to be in tandem with government aspirations; henceforth we have to go to the market now. That was the intention for the Sukuk; and also the timing is quite appropriate because investors are still looking for bonds and interest rates have stabilized,” said Mohd Razif.
Growth plans
On the institution’s financial performance, he said that SME Bank is expected to turn in another year of profit in 2012, although it may be lower than last year’s profit before tax and Zakat of RM146.2 million (US$47.14 million). Last year’s results also marked the institution’s return to the black after reporting two straight years of losses. Mohd Razif said that its forecasted lower profitability this year is due to lower margins, primarily because it now sources more funds from the market instead of relying wholly on government funds.
Going forward, growth at the institution is expected to be driven by the continued role it plays in Malaysia’s economic agenda, where more than 90% of companies in the country are small and medium-sized enterprises. Mohd Razif confirmed that its support for SMEs will be very much geared towards the government’s national key economic areas: which comprise 12 economic sectors including financial services, agriculture, tourism; and oil and gas and energy.
With the institution continuing to play a substantial role in the country’s economy, it looks as if SME Bank’s planned conversion into a fully Shariah compliant institution is set to further drive the growth of Malaysia’s Islamic finance industry. — EB