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Public Bank, Malaysia's third-largest lender by assets, will set up a sharia subsidiary in November as strong demand is expected to boost its Islamic loan growth to double the conventional industry level next year, its managing director said on Wednesday.
Like other Malaysian lenders, Public Bank is seeking alternative sources of income by going overseas and tapping the rapidly growing Islamic industry as the domestic market of 27 million people becomes increasingly saturated.
The bank, which is Malaysia's second largest lender in terms of sharia loans and deposits, sees its Islamic loans rising 15 percent in 2009, versus the 7-8 percent growth expected for the conventional banking industry. The bank's Islamic business would focus on the retail market, managing director Tay Ah Lek said.
"We will still focus on the retail financing part and the deposit-taking business and wealth management products," Tay said in an interview. Public Bank's upbeat outlook comes amid a global credit crisis which has pushed Lehman Brothers to seek bankruptcy protection, Merrill Lynch into the arms of Bank of America and insurer American International Group Inc to the brink of collapse.
But Public Bank said Malaysian lenders are likely to remain healthy in the absence of a sharp decline in economic growth. Malaysia's economy is officially forecast to expand 5.4 percent in 2009, among the fastest-growing in Southeast Asia.
"We expect 2009 to be challenging but we expect it to remain strong," said Public Bank's group economist Nasaruddin Arshad, referring to the domestic banking sector. Islamic banking - which shuns usury-based investments and gains from sectors such as alcohol, gaming, weapons and pornography - is perceived to be a relatively safe sector as transactions have to involve specific assets. The $1 trillion industry is witnessing a surge world-wide, thanks largely to a rapid rise in oil earnings that are hungry for sharia-compliant assets.
A slew of government and central bank incentives and a ready-made market among the majority Muslim population have buoyed the Islamic industry in Malaysia. About 13 percent of total Malaysian banking assets fulfil sharia conditions, and the industry ranges from banking, insurance, stockbroking to fund management and pawnbroking.
The Southeast Asian country has the world's largest sukuk, or Islamic bond, market, with $66 billion or 62.6 percent of global outstanding sukuk issuance as at end June 2008. Public Bank said it had no immediate plans to establish Islamic bank branches, preferring to tap the market through its current network of 242 conventional branches.
"It may not be as efficient to duplicate that network for the Islamic banking business until such time as there is actually demand that is sufficient to justify opening separate Islamic branches," Leong Kwok Nyem, the bank's chief operating officer said. Sharia banking now contributes about a tenth of the bank's total annual net profit, he said.

Copyright Reuters, 2008

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