KUALA LUMPUR: Financial reforms in Malaysia could spur the growth of the country's Islamic banks by giving them more opportunity to tap into rural areas, which have a greater proportion of Muslims than urban centres. But concerns about profitability may slow the expansion.
The central bank issued new agent banking guidelines this month that expand a pilot programme allowing lenders to offer basic financial services through non-bank retail outlets.
"It will be a cost-effective channel for financial institutions to reach out to the underserved parts of the population, particularly those in rural areas," said central bank governor Zeti Akhtar Aziz.
The guidelines list 474 rural districts, or mukims, which can be serviced through the initiative; some of them have the highest proportions of Muslims in the country, and also the lowest average household incomes.
This could give Islamic banking an important role in the government's efforts to expand financial services to the poorest sections of the population.The populations of the Malaysian states of Kedah, Kelantan, Perlis and Terengganu are on average 89.3 percent Muslim, much higher than 46.4 percent for the capital Kuala Lumpur, data from the Malaysian Department of Statistics shows.
Those same four states hold 40 percent of the mukims that could be reached through the new agent banking programes. Malaysia's Islamic banks collectively held 19 percent of the country's banking assets as of June, according to central bank data.
The agent banking scheme originally started as a pilot programme in 2010 with participation from Maybank, RHB Bank and government-owned Bank Simpanan Nasional - all conventional lenders with sharia-compliant offerings. The pilot currently serves over 65 percent of the mukims identified in the guidelines, against 46 percent at the end of 2011, according to the central bank.
At present the combined network consists of 2,322 agents who have handled more than a million transactions worth over 190 million ringgit ($61 million) since the pilot began. No data is available on how many transactions were sharia-compliant.
The prospects for tapping new Muslim consumers appear healthy; RHB's Islamic business has been growing at an average rate of 20 percent compared to 8 percent for its conventional business, according to Abdul Rani Lebai Jaffar, chief executive of RHB Islamic, part of the RHB group.
PROFITABILITY
The relative poverty of some of the mukims involved in the agent banking scheme may deter banks from expanding into them aggressively, however.
Expansion will depend on whether banks choose to create separate task forces to manage larger groups of agent relationships, Jaffar said.
"We currently have a very small number of agents operating under the programme, but it has shown a positive response," he said. "For now, we are still leveraging on the bigger RHB network."
Executives at other banks said they would be cautious. "We are looking into the guidelines to see what kind of role we can play," said a senior official at Maybank, who asked not to be named under briefing rules.
"We have always striven to use all the distribution channels that are available to us, but I think we have a pretty good reach at this stage. For now it will be business as usual."
Foreign banks in Malaysia will tend to remain focused on urban areas which have proven to be more profitable, said Wasim Saifi, chief executive of Standard Chartered Saadiq, the Islamic arm of Standard Chartered Malaysia.
At present the agent scheme is outside the bank's scope of operations, but it will consider the scheme in the long term, Saifi added. "There is a lot of value in getting our distribution to reach more local areas. It would certainly be a great opportunity, and going forward it is something we will have to look at."
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