MALAYSIAN ISLAMIC FINANCE Issuers and Investors Forum 2006

Report Mining can put a Smile on the Face of the Tiger of Islamic Banking in Malaysia

By Rob Graham

The poet William Blake died long before the technological revolution that resulted in the internet, computers, software and electronic solutions. Having said that, take the tiger as the resurgent Islamic capital and banking sector in Malaysia and you will quickly understand how many suppliers of software solutions either have, are, or wish to be the framers of the technological symmetry.

Wanting and being needed, however, are two quite different things. Many suppliers wish Islamic banks in Malaysia to buy whole expensive new systems. What Islamic banks need is an easy-to-adopt solution which enhances the value of the investments they have already made in IT.

International compliance imperatives may be seen as one of the driving forces. Banks will have to speed up their pace to comply with the international Basel II accord, which is aimed at enhancing risk management practices, as the deadline is fast looming. In Malaysia, Bank Negara Malaysia requires banks to implement the framework by the end of 2008. Banks, however, have to start the ball rolling much earlier, as the Central Bank is slated to perform a “parallel run test” in January 2007.

For example, the AmBank Group has invested over US$2.72 million (RM10 million) as part of its efforts to be Basel II-compliant. Bank Negara Malaysia requires banks to compute their capital adequacy ratio under the Basel II Standardized Approach for Non-Islamic Banks and the Capital Adequacy Standard for Islamic Institutions by the end of 2008.

With competition heating up in the banking sector, banks need strong and reliable business intelligence platforms that will ensure the success of their strategies. Coupled with the ongoing mergers and acquisitions taking place in the financial services industry, the dependence on quality and reliable business intelligence platforms has become even more important.

The sheer volume and potential linked with Shariah compliant investment is another strong call to action. With one-fifth of the world’s population now Muslim and with ongoing additional revenue from natural energy sources, there is actually more Shariah compliant cash chasing insufficient channels for investment.

Any Islamic bank with genuine aspirations to become a full-blooded player in this market must be prepared to offer its teams around the enterprise the information they need to compete, measure and identify on an international model.

The adoption of knowledge management (KM) practices by local Islamic banks in Malaysia is perceived as being the beginning of their emergence as knowledge-based institutions.

A review of the results of a study aiming to identify the causes and effects of adopting KM practices among 10 local commercial banks in Malaysia is important. Analysis of the results confirmed that there is a relationship between the causes and the effects of implementing KM practices. KM equips organizations to be more competitive and provides better integration and sharing of information. Increases in knowledge sharing, both horizontally and vertically, along with increases in workers’ efficiency, appear to be common effects resulting from adopting KM practices. It is hoped that this study will encourage local banks to maximize the benefits that KM can offer.

The Malaysian financial sector is highly diversified and among the more advanced in East Asia. Banks account for two-thirds of the sector in terms of assets, and non-bank financial intermediaries for one-third. There is also an offshore financial sector in the province of Labuan, located on the island of Borneo.

The Malaysian banking sector is the largest part of the financial system, holding over 50% of total financial system assets. In 2004, the Malaysian banking sector comprised 24 commercial banks, two Islamic banks, 11 finance companies and 10 merchant banks, all under the supervision of Bank Negara Malaysia, the Central Bank.

Malaysia has a sizeable, fast-growing Islamic banking sector, which is supervised by Bank Negara Malaysia. The National Shariah Advisory Council for Islamic Banking and Takaful accounts for 10.5% of banking system assets and 11.2% of deposits. Rapid expansion has been fostered by the introduction of new Islamic financial instruments, as well as by the official promotion of Islamic banking and of Kuala Lumpur as a regional Islamic financial center. The Financial Sector Master Plan (FSMP) has set a target for Islamic banking to account for 20% of banking assets by 2010.

An unusual feature of the Malaysian financial sector is that financial institutions are required to provide loans “at reasonable cost” to priority sectors – all bumiputera organizations (those owned by ethnic Malays or other indigenous peoples), low-cost housing and small-scale enterprises. A micro-financing scheme for micro-enterprises was established in 2003.

Under the 10-year FSMP, published in March 2001, the first phase of development focused on the building of domestic banking capacity, which is closely monitored by the Central Bank. Banking consolidation took place during 2004. The aim was to create a core of strong domestic players able to compete with foreign banks. In 2005 the FSMP moved to a second phase focusing on liberalization. Foreign institutions were encouraged to compete with domestic banks, and the 30% ownership limit of domestic banks was relaxed. Rules for the setting of interest rates were eased and the range of permitted financial products was expanded.

In 2003, there were 53 offshore banks, 50 insurance firms and numerous other financial companies in the Labuan Offshore Financial Center. All of the offshore financial institutions are supervised by the Labuan Offshore Financial Services Authority (LOFSA).

Possibly 80% of new bonds issued this year in Malaysia are expected to consist of Islamic bonds, reflecting the country’s comprehensive Islamic capital market. Malaysia’s market has a diversified range of products and services, with significant size and scale. For example, a recent study showed that there were over 85% Shariah compliant stocks listed on Bursa Malaysia, with a market capitalization of approximately US$127.7 billion (RM470 billion). This figure represented 65% of the total market capitalization of the exchange.

The usual suspects – all global providers of large new IT systems – have been offering the usual tactics of inspiring fear in banks should they not immediately write a large check in response to this new climate. However, there is another option.

If a bank does not believe that the information required for corporate governance and compliance exists somewhere within its existing systems, then it is a toothless tiger. Of course it is there. It is how the institution facilitates its various teams by easier access to such information that is the key issue.

The western experience has been that instruments such as the Basel II Accord are not instant mechanisms, and it can take three or four years for the regulator and the regulated to fine tune a design for living. That is a good argument for not buying a whole new system now, but to explore ways of adding value to systems already in place, with all that means in saving disruption to staff and customers.

Islamic banks should follow the lead of their opposite numbers in the Middle East and examine the enhancing effects of report mining technology. In fact, around 70% of the world’s banks use this technology. Any quick test of a major search engine will throw up the leading players.

Why report mining instead of, say, data mining? Banks run many, many reports every night, and the ability to allow non-IT professionals the opportunity to merge and drill into the information contained in such reports offers a logical way forward in terms of the business process and compliance imperatives. Allowing this without access to the live database – with all that could entail – is just one of the reasons why so many banks follow this route.

The goal of providing the right information to the right person at the right time, and in the right format, remains elusive for many banks, despite heavy technology investments in powerful business intelligence and information delivery tools. What the organization needs to achieve is the goal of easily creating and delivering the right information to the right person at the right time.

First, any bank needs to address the strategic question of how truly successful organizations view IT to support the organization’s critical business processes. Secondly, the tactical question of how to best transform the potentially limitless data collected by the enterprise into meaningful information without complex programming or end user frustration has to be addressed.

In short, Islamic banks in Malaysia wishing to be truly competitive must embrace the same solutions as so many of their western counterparts have already, by adopting the many advantages of report mining.

The challenge for banks in the region to be truly global players is a real one. The answer may not be to just wave a large check at the problem, but to understand that what the enterprise needs is not more technology, but real solutions.

So, when that salesman comes calling, Islamic banks would be well advised to act the tiger – not the pussy cat.

The author is the product manager for Datawatch Middle East and can be contacted at rob.graham@datawatch-europe.com. Datawatch is a leading provider of business intelligence, enterprise reporting and data transformation that enable organizations to increase productivity, reduce costs and gain competitive advantage.