Malaysia Building Society becoming Islamic after failed mergers

KUALA LUMPUR (BLOOMBERG) - After two failed merger attempts with Islamic banks, Malaysia Building Society Bhd is opting to transform into a Syariah lender by itself.

MBSB has stopped offering conventional loans and sees more room for growth in Islamic services, chief executive officer Ahmad Zaini Othman said in an interview on Monday (March 28). The mortgage provider and consumer lender, whose net income plunged 75 per cent last year, ended discussions with Bank Muamalat Bhd in February after a proposal to combine with CIMB Group Holdings Bhd and RHB Capital Bhd was called off in January 2015.

"MBSB's plan is not surprising as many see Islamic finance as the way forward," said Mr Badlisyah Abdul Ghani, president of the Chartered Institute of Islamic Finance Professionals in Kuala Lumpur and the former CEO of CIMB Islamic Bank Bhd. "People are not only wanting banks to provide Islamic products but are demanding them."

Malaysia, which pioneered Syariah finance in the 1980s, aims to have 40 per cent of its banking assets complying with the religion's ban on interest by 2020 from 26.8 per cent at the end of last year. A global Islamic population that's expanding faster than non-Muslims is driving growth in Syariah-compliant finance, with Ernst & Young predicting the industry's worldwide assets will double to US$3.4 trillion (S$4.65 trillion) by 2018 from 2013.

Around 85 per cent of MBSB's outstanding loans are already Syariah-compliant and credit growth this year should be around 6 per cent to 8 per cent, in line with the industry, Mr Ahmad Zaini said. The company isn't looking at any other mergers for now and will maintain its focus on government contracts, particularly in the development of affordable housing, he said.

"Sustaining asset growth, while maintaining low operational costs and product innovation shall be our medium-term plan."

MBSB is 65 per cent owned by Employees Provident Fund, Malaysia's largest pension fund. Its share price fell 38 per cent to RM1.35 over the past year and net income dropped to RM256.7 million (S$87.9 million) in 2015 from RM1.02 billion in 2014. The company said in a Feb 24 filling to the stock exchange that the decline was due to higher allowances for impairment losses on loans.

MBSB had RM34.1 billion of loans outstanding at the end of 2015 and RM41.1 billion of assets, according to data compiled by Bloomberg, and is planning to raise as much as RM2 billion from a rights issue. The company is already in compliance with Malaysian financial reporting standards and is stepping up efforts to adhere to banking standards, Mr Ahmad Zaini said.

The yield on the MBSB's sukuk due December 2021 fell 11 basis points this year to 4.83 per cent, according prices compiled by Bloomberg. The company, which last sold Islamic bonds in October, doesn't have any plans to sell more debt at this point, Mr Ahmad Zaini said.

"MBSB is making the right move as it already has the Islamic infrastructure in place," said Mr Mohamed Azahari Kamil, president of SEGi University & Colleges in Selangor, who was formerly Asian Finance Bhd's CEO. "There's still a lot of potential for MBSB to be involved in retail and corporate Syariah financing."