CIMB's Rafe Haneef: Steering the Once Fastest Growing Islamic Bank, Away From the Dreaded 'Plateau'

It is fairly easy to measure the success of banks. Key indicators such as Return on Equity (ROE), Loan To Deposit Ratio (LDR), Asset size and Capital Requirements all make it quite effortless for the market to distinguish which banks are financially healthy and which aren’t.

It is therefore unchallenging for the market to observe that CIMB Group, and its subsidiary companies did extremely well in 2017. But what of 2018 and beyond?

However, a key indicator, that of growth, has signalled possible challenges for CIMB’s Islamic banking franchise. The issue for CIMB Group’s Islamic Banking & Finance business is not that of its financial health, but on how they need to reinvent themselves to capture the market again the way they did back in the glory days of heady growth of the late noughties.

CIMB Islamic can be deemed as considerably healthy due to its higher Islamic ROE and stable Islamic LDR compared against their banking group. Year 2017 saw their Profit Before Tax (PBT) reach record levels. But its compounding annual growth rate (CAGR) on assets, and fee based income has since cooled to a stable rate.

REACHING A PLATEAU

“If we don’t do something, growth in this sector will see a plateau” cautions Rafe Haneef, CIMB Group’s CEO for Group Islamic Banking.

“If we don’t take CIMB Islamic 2.0 stage to CIMB Islamic 3.0, we won’t see growth like we did ten years ago,” he adds.

If we don’t take CIMB Islamic 2.0 stage to CIMB Islamic 3.0, we won’t see growth like we did ten years ago

At one time, CIMB Islamic Bank Berhad – the corporate banking entity of CIMB’s Islamic Banking & Finance franchise – was the world’s fastest growing Islamic bank. With a CAGR of their assets reaching in the thousands of percentage points and its corresponding ROE hitting above 20 percent for a number of years; it was dubbed as one of the world’s most promising Islamic banks to watch.

But those days are long gone now. In its place, 21 percent of CIMB Group’s total assets are now Islamic, with the rest being conventional assets. A feat that was reached in record time that most banking groups are still admiring, even today.

But what’s next for this still-much admired finance house as it seeks to retain the plaudits?

“We really have to reinvent ourselves and see where else we can grow our business,” says Rafe. “One of the ways of reinventing ourselves is by taking the “Islamic First” offering extremely seriously. If we make the default banking & finance product to be an Islamic one, then the market can easily see a sharp growth for Islamic banking."

The CEO adds that Islamic First is not only good for the growth of the sector, but also makes operational sense for CIMB Group by lowering overall costs and increasing operational efficiency.

“Imagine this, a kitchen in McDonald’s serving both halal and non-halal food. It would be an operational nightmare when you have two burger staff, two cashier counters, two food suppliers, two everything! It makes much more sense if the kitchen is – by default – serving halal products,” Rafe says.

“This is because you are promoting a more inclusive form of business when you serve halal food. This is what I mean by banks making an Islamic First offering,” he adds.

Islamic First is not new in the market. Maybank has done so for their consumer business for some years now. Other banks, with varying degrees, have also executed Islamic Fist for their offerings. But results on growing these banks’ Islamic books have been mixed.

Market observers claim that the mixed results in growing their respective Islamic businesses is because of the varying degrees of commitment in growing their Islamic assets.

“If banks are serious in doing this, we could really see results in growing Islamic banking, at least in the traditional banking books of financing, deposits, and asset management,” Rafe adds.

GREEN SUKUK

While the traditional banking business of growing its balance sheet by dispensing financing/loans and growing its deposits is a stable business, the real engine of growth for Islamic finance is in its wholesale business.

The Indonesian sovereign was the first but most certainly won’t be the last. In fact, in Malaysia, corporates are already in talks with us on issuing Green Sukuk

“Sukuk has always been a staple for Islamic finance” reminds Rafe.

“Sukuk was a fantastic way to herald the entry of Islamic finance in the realm of investment banking. In the years following the advent of regulatory framework allowing for Islamic finance to take shape in this area, Sukuk issuances and underwriting grew from strength to strength,” he says.

“But in this sphere as well, we have seen the sector cool off. That is why when Indonesia issued the world’s first green sukuk, the financial world took notice of it, and some excitement have been drawn into this activity once again."

Green Sukuk, which is a Shariah compliant Socially Responsible Investment (SRI) instrument, allows governments and financial players to provide the market, not only a viable and stable financial investment opportunity, but also enables issuers the ability to entice a broader base of investors to join in on the ‘Green Revolution’.

“Investors are hungry for these types of investments” says Rafe. “It is only a matter of time when corporates and sovereigns alike will start issuing Green Sukuk. The Indonesian sovereign was the first but most certainly won’t be the last."

"In fact, in Malaysia, corporates are already in talks with us on issuing Green Sukuk, and hopefully we will see some of these deals being completed within this year.”