Co-opetition in Islamic Banking: Malaysia & Brunei

Transcription

1 Co-opetition in Islamic Banking: Malaysia & Brunei To explore the opportunity for co-opetition more thoroughly and understand the implications, possibilities and hurdles in the process between Malaysia and Brunei, we use the modified Redding framework. This framework explores the various layers of the business systems of both these countries, which further helps understand the potential for the success of a co-opetition strategy between the countries. This paper takes off where we left off last time trying to reinforce the recommendations made with the support of the new framework. Malaysia The first Islamic bank in Malaysia was established in 1983 which established the seed for the growth of the industry which eventually started growing in 1991.In 1993, commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under the Islamic Banking Scheme (IBS). This scheme encouraged the introduction of dedicated Islamic banks and Islamic Banking Windows in conventional banks which were looking to cash in on the growing popularity of this form of banking. The demand for Islamic banking services was growing among the predominantly Muslim society and the industry is strengthening its position on the back of this rising demand. In 2006, Bank Negara Malaysia setup International Centre for Education in Islamic Finance (INCEIF) a dedicated University to provide skilled and certified personnel for Islamic Finance in Malaysia which is the only university in the world that is wholly dedicated to postgraduate study in Islamic Finance. The business environment in Malaysia is very conducive for the growth of this industry and this supportive environment has allowed the business to thrive putting Malaysia at the forefront of this burgeoning industry in the world. We see that there is diversity in the type of institutions that offer Islamic banking services. This means that there are dedicated Islamic banks which function solely in the confines of the Shariah law, alongside mainstream banks like Citi & HSBC which operate Islamic banking windows within their conventional banking system in order to cater to the existing demand. This helped increase the competition among the players in the industry the benefits of which eventually cascade to the customer who has enough choices to pick for his business. This setup of banks is supported by regulatory environment propagated by the government of Malaysia by providing an environment conducive to the growth of the industry while attracting both foreign and domestic players to cater to the demands of the industry. These banks actively participate in the creation of innovative products to gain an edge over its competitors. These products are designed for the market and are safer than conventional banking products in order to make this stream of banking more attractive to customers. The industry has also invested in the creation of legal best practises to encourage standardization of services and quality of products across the industry. The industry has also identified the human resource requirement which is high in the industry because there is a high demand for specialized trained professionals to continue the growth of the industry.

2 Therefore, with regulatory and administrative support for the industry, the Malaysian banking industry has become a pinnacle in the global Islamic banking industry. However, now the industry is looking to expand to other markets to take advantage of unexplored territories with a higher possibility of profitability. The products and services of the industry are now looking for a larger market and in the face of the integration process in December 2015, the stage is set for the Malaysian IB industry to spread its wings in the region. Brunei Brunei regained its independence from the United Kingdom on 1 January Economic growth during the 1970s and 1990s, averaging 56% from 1999 to 2008, has transformed Brunei into a newly industrialised country. It has developed wealth from extensive petroleum and natural gas fields. Brunei has the second-highest Human Development Index among the South East Asia nations after Singapore, and is classified as a developed country. According to the International Monetary Fund (IMF), Brunei is ranked fifth in the world by gross domestic product per capita at purchasing power parity. The IMF estimated in 2011 that Brunei was one of two countries (the other being Libya) with a public debt at 0% of the national GDP. Forbes also ranks Brunei as the fifth-richest nation out of 182, based on its petroleum and natural gas fields. However, the government is actively seeking to diversify the sources of income for the nation. Currently, Brunei is heavily dependent on receipts from its oil trade. The oil reserves of the nation will run out at some point in the future cutting off the biggest source of income for the kingdom. Therefore, the nation seeks to diversify into hydrocarbon production, religious tourism and there is an increasing interest in Islamic banking. The country has a large Muslim population with GDP per capita equivalent to Singapore. Islamic finance received attention in 2006 when the Ministry of Finance launched the Banking Order and Insurance Order in the country to set up infrastructure and regulatory framework for the Islamic banking industry. The government established the Brunei International Financial Center and launched its first Shariah Financial Supervisory Board on a national level, which was followed by the Islamic Banking Order in The industry is its nascent stages of development however the unique position of Brunei as a rich country with a large Muslim population with an increasing demand for Islamic banking services has created a place for the industry. The Sultanate is now well placed to carve out a niche for itself as an international Islamic banking centre. There is a large opportunity for fund management from religious tourism and the thriving hydrocarbons and oil business. The industry is Brunei is seeing an increasing demand for Islamic banking products. The government is very supportive of the industry and has provided it with a framework for the industry to thrive in. Most firms in the industry are currently banking windows and there is a requirement for dedicated banks which will concentrate on the creation of new innovative products for the economy as well as encourage the development of the human resources required for the growth in the region.

3 Modified Redding Framework The framework has various layers and aspects which define the rubrics of doing business in these nations and if it is feasible to consider an opportunity to enforce the co-opetition strategy in this industry across borders. To compare the business systems we use the example of two dedicated Islamic banks within the region, Bank Islam Malaysia Berhad and Bank Islam Brunei Darussalam. Ownership Bank Islam Malaysia Bank Islam Brunei 100% held by BIMB Holding, increased from 51% in October 2013 The bank is completely private in terms of ownership governed by a trust Brunei Ministry of Finance, Sultan Haji Hassanal Bolkiah Foundation, Fajr Capital Limited, and 6,000 individual Bruneian investors. This is a mix of public and private ownership. Government supports the industry with a stable regulatory environment Essential industries are state owned but the country has seen increased proliferation of private entities Firm size is large, small and medium firms are not competitive in banking Government holds a stake through the Ministry of Finance and the Sultan holds a stake through the foundation Government keen on development of the industry to diversify sources of national competitiveness The State s role in both cases, is that of a regulator and protector of public interest which works in collaboration with the private sector in order to facilitate a seamless banking experience in adherence of the Shariah rules.

4 Co-ordination Bank Islam Malaysia Bank Islam Brunei The state is the dominant driving power of Malaysia s growth; state capitalism through the New Economic Policy created a new indigenous capitalist class that set up business conglomerates acting through prominent Malay families Mixture of foreign and domestic entrepreneurship, government regulation, welfare measures, and village tradition; growth targets and development outlined in a series of National Development Plans The New Economic Policy in 1971, Vision 2020, and now the Economic Transformation Program are clearly drawn strategic mandates on how the government will pursue economic growth. Leaders plan to upgrade the labour force, reduce unemployment, which currently stands at 6%;strengthen the banking and tourism sectors, and broaden the economic base The government in both cases is a driving force for economic growth and development and is actively involved in planning. With its policies the government plays a key role in the development of the industry. Order Category Malaysia Brunei Capital Has large inflow of FDI and domestic investment from indigenous capitalist class that set up business conglomerates Substantial income from overseas investment supplements income from domestic production. Most of these investments are made by the Brunei Investment Agency, an arm of the Ministry of Finance

5 Human Capital Social Capital The New Economic Policy in 1971, Vision 2020, and now the Economic Transformation Program are clearly drawn strategic mandates on how the government will pursue economic growth. In touch with the Bamboo network Leaders plan to upgrade the labour force, reduce unemployment, which currently stands at 6%;strengthen the banking and tourism sectors, and broaden the economic base Brunei shares a close relationship with the Philippines and Singapore Culture The cultures of the two countries are similar in various aspects. Both Malaysia and Brunei are Islamic nations with religion integrated in policy making. The countries share a border which has led to common cultural aspects and language. They have a shared colonial history and similar composition of ethnicities with Malays, Chinese and Indians constitute majority of the population in both nations. Therefore, these cultural similarities lead to a good fit culturally and will help in the integration of the industry in this cross cultural scenario. Co-opetition Strategy We see that both countries have something to offer to each other. Malaysia has specialized organizations that can provide services & training to Brunei while Brunei will give Malaysia the scale it requires to grow its industry. Therefore we see the following recommendations plausible for the integration of the industry: Malaysian IB firms starting Brunei branches in partnership with local organizations to develop the local industry and gain access to a larger market Creation of new, sophisticated products to cater to the new ASEAN market Promote dedicated Islamic banking organizations to create specialization Form an ASEAN governing forum to serve as a platform to develop, share and implement best practices This will make ASEAN a source of skilled and specialized Islamic banking professionals providing services across the region and other regions with growing demand for the services. The banks across Malaysia and Brunei can co-operate to create a strong and thriving industry quickly scaling it across the region. The competition aspect comes in when the banks compete with each other to provide the best cost service to its customers and the lowest transaction costs. Further, the firms can compete to fulfil the growing demand from regions like Europe, Middle East Asia and Africa.

6 OWNERSHIP Bank%Islam% Malaysia%Berhad Bank%Islam%Brunei% Darussalam ASEAN%ENTERPRISE% SYSTEMS CO:ORDINATION ORDER MEANING (CULTURE) Exhibit 1: Redding Framework

7 Creation&of&a& larger&asean& market Lower& transaction& costs&through& economies&of& scale&and& scope proliferation& of&the& industry Firms&from&ASEAN&can& compete&in&markets&like& Africa,&Middle&East&and& Europe demand&for& these& products CoDoperate&within& ASEAN&by&sharing& knowledge&and&train& human&resources Development& of&specialized& professionals Competition Competition&among&the& labor&force&to&fulfill&the& demand&for&specialized& professionals&in&these& markets sophisticatio n&of&products& in&the&market efficiencies&in& processes ASEAN&as&a&source&of& Islamic&banking&training Exhibit 2: Co-opetition Strategy Framework