Raja Teh is familiar with the multitude of Western misconceptions concerning Islam and Islamic finance and is keen to tackle these so the outside world can gain a more concrete understanding of the potential of the industry.
Too often the error arises from the ignorant presumption that Islamic ideas, beliefs and practices are cast in calcified stones, and that hard-lined Islamic zealots are too intractable and unyielding to the ideas that have spawned the modern world.
In fact, Islamic laws themselves are subject to varying interpretations by Shariah boards. There are those who take a hard-line stance in interpreting the teachings of the Prophet Mohammed and there are those who take a more liberal view.
Teh, who is the head of Islamic business at Bursa Malaysia and one of the moving forces behind the exchange’s move to develop a global Islamic hub, says the developments in the last thirty years belie the notion of an unchanging face for Islamic finance. “More changes are sweeping through the industry now that is itself rapidly entering the cusp of maturity,” she points out.
The problems faced by a slew of Western financial institutions and the shadows of doubt that surround Western corporate governance and regulations are now giving Islamic finance the necessary gravitas to challenge the dominance of those practices. Islamic finance will proceed at its own pace, Teh contends, and will not mindlessly bite into the esoteric structures and techniques that have weakened Western finance in recent years.
Steady and gingerly
The industry will continue to tread carefully, especially when introducing changes and new ways of doing things, and will not embrace innovation for innovation’s sake. “We are particularly careful that we hew closely to Shariah principles,” Teh stresses emphatically. “Innovation is fine but whatever changes and innovation must be in the ambit of validity.” This suggests no radical departure from how things were done in the past decades and Teh says it is inconceivable that things could move at the speed at which conventional bankers are used to doing things.
In the Islamic sphere, she points out, all practices and proposed innovations go through a vetting process and the final test of a product’s acceptability is sealed with the approval of a board of Shariah scholars. Outsider observers may think that such vetting runs the risk of constricting the imagination of the industry and stifling growth.
While recognizing that the ability to constantly innovate provides the essential alchemy and catalyst for Islamic finance to remain relevant in the complicated world of business, Teh – who used to be chief corporate officer and head of international business of Kuwait Finance House (Malaysia) – emphasizes how crucial the Shariah scholars are in view of their deeper understanding of the scripture and their talent for interpreting the rules to believers.
Teh says that when they introduced Bursa Suq Al-Sila’ last year, the commodity murabaha trading platform became the first Islamic commodity trading platform in the world. “Our hope is that it will reinvigorate the fledging Islamic markets, and may one day evolve into a thriving and powerful global Islamic exchange that attracts traders and investors across the globe.”
She is confident that her Islamic markets team has what it takes to build what could become a global hub for Islamic products. “We have been here in this industry the longest and based on our experience and skills we can make it work. By introducing the commodity murabaha trading platform, we ushered in what we feel can be our most significant gift to the world – if the world accepts it.”
Teh is optimistic about the future of Islamic finance and banking. “This is a young industry,” she tells The Asset visiting her at her Bursa Malaysia’s office in Kuala Lumpur. She is proud of what has been accomplished in Malaysia in terms of building Islamic finance. “I believe that we are the only one in the world with a parallel interbank Islamic money market alongside a conventional market.” She is pleased that the industry is moving in the right direction, with banks and other institutions placing greater focus on building their Islamic franchise.
And while a fair number of practices are already changing in response to the various realities facing the industry, she is well aware that a lot of things still need to be done. In the last 20 years, for instance, Islamic finance has seen the introduction of hybrid products such as exchangeables or convertibles. “These are old concepts in the conventional world,” she points out, “but still rather new in Islamic finance.” There has been a considerable change in attitude. For most of its past, the Islamic finance industry was reactive and slow to explore the possibilities presented by its own unique outlook and practices. “Too often, we were not looking at how things should move forward, with the industry reacting and taking decisive action only when the whole industry was already caught in a turmoil, wallowing deep in a problematic situation.”
Teh is clearly one of the shining lights to have emerged in Islamic finance in recent years. Her credentials are impeccable. She has over 18 years of banking experience focussed on investment banking and Islamic finance prior to joining Bursa Malaysia. She was the chief corporate officer and head of international business of Kuwait Finance House (Malaysia) where she was responsible for the bank’s regional expansion and establishment of its Singapore and Australia offices.
Prior to that, she was CEO of UIB Capital, which is a wholly-owned subsidiary of Unicorn Investment Bank in Bahrain. She served at RHB Sakura Merchant Bankers (now known as RHB Investment Bank) where she was responsible for the establishment of the investment banking division. Before that, she was with Commerce International Merchant Bank (now known as CIMB Investment Bank) for some nine years covering debt and equity origination, and equity sales.
Ironic prohibition
Teh would be the first to admit that Islamic finance was affected by the global financial crisis. “And how could we not be?” she asks, adding that the entire industry does not operate in a vacuum. “We are still much tied to the real world, so it was never correct to say that we would be fully shielded from the crisis. We operate as a part of the real economy.” Yet, the crisis is turning out to be a useful prelude to scaling even greater heights for the industry, according to Teh.
The crisis immediately made it clear that Malaysian Islamic institutions were less vulnerable to the contagion that had sapped the strength of major regional banks. “The industry was spared from the worst impact of the crisis, the value of their assets not having deteriorated as much as those of Western banks, much on account of the fact that Islamic banks were much less exposed to toxic financial instruments,” she explains.
The irony is that the prohibition against investing in derivatives used to be considered as one of the serious weaknesses faced by the industry – with rating agencies like Moody’s and Standard & Poor’s coming out with reports claiming that the inability of a large number of institutions to a use derivatives to structure aggressive hedging techniques rendered them less able to manage their risk. Now that prohibition has vindicated Islamic finance, as it shielded numerous Islamic institutions from monstrous losses when those instruments failed.
Still, a considerable number of Islamic institutions with significant exposure to property assets suffered considerably when their assets depreciated as a result of the crisis. “The speed at which prices corrected during the crisis was so sudden that hardly anybody who is anybody was unaffected, since most were significant investors of property across Asia. Nobody wanted to be left holding those investments and as prices plunged, substantial losses piled up.”
Malaysian fortitude
The evolving debt crisis in Dubai further worsened the situation as the possibility grew of a default by several corporates, most famously among them Nakheel Properties, the property arm of Dubai World. “People reacted adversely to the development,” says Teh, describing the subsequent backlash on other Islamic structures as nothing more than “a naïve reaction” to the developing crisis. She suggests that there was, in fact, little to worry about, considering that Islamic markets’ exposure to Nakheel was only US$5 billion out of Dubai’s US$80 billion outstanding debt.
Even Dubai’s overall debt position was relatively minuscule and nowhere near, for instance, the trillion dollar debts owed by Lehman when the investment bank collapsed in a heap. All the drama and the Doomsday scenarios that attended Dubai’s troubles confounded her since, in the perfect storm that ensued, throngs of investors shied from Islamic instruments and conveniently forgot that Nakheel was largely a credit issue and not an Islamic structuring issue. “Whether what was sold was an Islamic structure or a conventional structure, at the end of the day the debtor still has to pay.”
While Nakheel’s sukuk was a property-backed deal it became painfully obvious, according to Teh, that it couldn’t continue to build the fancy real estate developments it had been pursuing in the Gulf state and around the world, considering that the whole luxury residential market was collapsing under its feet. While investors questioned the Islamic provenance of Nakheel’s sukuk structure, the issue was really with investors who took the risk of investing in that sukuk. “The prospectus clearly stated there are risks with the investments.”
Teh says Islamic financial institutions in Malaysia proved resilient during the crisis given the fortitude they had developed ten years earlier. After what they went through ten years ago during the financial crisis they were ready for anything. “That crisis crystallized the realization for everyone that a debt is a debt and has to be paid back.”
What helped Malaysia even more was the robust regulatory framework in place. With hindsight, the Malaysian government demonstrated a focus and concentration in developing a strong and robust regulatory regime. “The government looked at basic and fundamental indicators, such as capital adequacy requirement, and this proved crucial,” explains Teh.
In Malaysia, banks are not allowed to invest in real estate and Islamic institutions engaged in financing real estate transactions mostly have a nuanced view regarding the different risks involved. In a musharaka partnership financing scheme, the capital cover for partnerships is treated differently because losses and profits are equitably shared. Other prescriptive measures include requiring sukuk sold to the public to be rated before they are marketed. “You simply cannot sell junk papers in the market,” Teh points out.
This is in sharp contrast to practices in countries of the Gulf Cooperation Council (GCC) where investors tend to be more yield-driven so rating becomes a secondary consideration. Before the bust, a lot of papers were issued in the GCC that were unrated, in fact most of the issuance did not carry any rating since that was not mandatory. And even if rated below investment grade, it could still be sold as long as you provided a decent yield.
Reaching global markets
“That’s a difficult thing to do in Asia. Even if you come up with a 20% return and it is not investment-grade, it is a challenge. In a sense, our market has moved. It is good and I guess it has reinforced our position as a Islamic finance hub in the region. Real estate proved to be the Achilles heel for so many financial institutions in the GCC, due to the fact that most of them had loaded exposure to the asset class, and a number of investment banks had more than 50% of their assets in real estate. The crisis forced a fire sale where they lost as much as 30% to 40% of the value of those assets.”
“We developed Islamic finance primarily to service our domestic market.” Teh says they are happy that other markets such as Singapore and Hong Kong are looking to developing their own Islamic finance expertise as well. “They are looking at Islamic products as an asset class that cannot be ignored. Since those two countries don’t have a large Muslim population they are opting top focus on the wholesale market just as London had done in recent years. We are encouraged by this, and do not feel threatened,” Teh tells The Asset, when asked if she is worried about the challenges posed by the two cities.
Last year, even US giant General Electric tapped into the general market and issued a sukuk. She considers this a major breakthrough, since that was the first US corporate to tap into the Islamic markets.
“We want more people to embrace Islamic finance. It is hard to call yourself an international financial centre if you are alone in this, so you get the global markets.”
This story appeared in the April 2010 edition of The Asset
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