(This industry outlook emphasizes on Islamic Banking as a proxy for Islamic Consumer Finance)
Islamic finance has existed since the early years of Islam, starting with the social and economic justice teachings of the Prophet Muhammad, as detailed in the Quran and Sunna.
Islamic empires had a well-developed financial system, complete with legislative systems governing transactions, a judicial system enforcing contracts, different commercial papers and banknotes and licensed bankers, which contributed to the development of modern banking practices. Subsequently, under the influence of European colonizers, many Islamic countries adopted Western banking models.
According to the statistics by Islamic Financial Services Board 2019, Malaysia is the second largest market for Islamic Banking in the world in terms of Islamic Banking Assets , following Iran. Malaysia’s Islamic Banking assets accounted for around 11.2% of global Islamic banking assets (USD 1,760 billion in 2018 which was 70% of Global Islamic Finance Assets in total).Malaysia’s Islamic Banking assets were over 8 times higher than the regional peer,Indonesia’s Islamic Banking Assets (USD 23.8 billion in 2019), reflecting a greater penetration in the region.
Malaysia maintains a strong position in Islamic Finance sector and is the top market in terms of Islamic finance development in 2019, as per the Global Islamic Finance Development Indicator (IFDI).
Core Themes
Impact Investing
We also actively prioritise investing in businesses that demonstrate a high degree of ESG “consciousness” consistent with the values of the company. IHB will not compromise its objective of creating long term shareholder value as it embeds principles of Shariah and ESG investing. Potentially referred to as “alternative investments”, IHB is resolute in not demonstrating herd mentality in the way it chooses to invest.
As such, IHB will seek amongst other asset classes, to invest in businesses such as Waste Recycling, Renewable Energy, Green Transportation, Pollution Control and Aquaculture – an investment thematic correlated to sustainability, risk managed and leaving the world a more sustainable place.
Islamic Financing
IHB’s core investment themes are in the Shariah-compliant Consumer, Corporate and Trade Financing and Project Financing sectors. These sectors have been resilient through the storm the world has weathered over the last 12 months and in some cases have expanded – driven in part by the conservatism of traditional lending institutions to look beyond asset or collateral based lending and to move into cashflow supported lending.
In providing contextual support for this theme, Malaysia can be recognised as a country with higher levels of household indebtedness. In 2019, household debt to GDP in Malaysia was recorded at 82.7%, higher than that recorded in other ASEAN countries, such as Thailand (79.9%) and Singapore (63.8%).
The high desirability for home ownership led to loans for residential property (67.0% of loans outstanding) being the biggest category in consumer loans as of December 2019. This would have also been a contributory factor towards the reason why 59.6% of loans applied during 2019 was for residential property. In addition to this, the high cost of purchasing a house, would have contributed towards the higher loan value. Residential property loans were followed by financing for passenger vehicles (17.6% of outstanding loans as at December 2019 and 15.8% of applied loans during the year), which was due to the reluctance to use public transport for daily commute, among the working population and among students with a driver’s license.
Liquidity Focused
We prioritise investments that afford us a high degree of liquidity – investments that can be liquidated, when necessary, without significant lead times normally associated with high capital expenditure investments. This strategy is based on the experience of its Board of Directors who view the management of risk as being central for a company such as this. In times of significant market volatility, the ability to quickly liquidate investments and re-deploy funds into opportunistic investments is key to producing superior returns for investors whilst managing downside risk. The Board believes that the financial markets will remain volatile for the foreseeable future given the uncertainty around the Covid-19 pandemic.
Mid-Term Thesis
Certain sectors such as Real Estate Development, Green Chemicals Manufacture and Trading and Carbon Credits Trading and/or Offset Projects (inclusive of Forestry, Blue Carbon and Natural Capital) also feature in the mid-term investment thesis. And these sectors continue to increasingly attract investors looking for Shariah compliant opportunities. IHB is currently developing what will be Malaysia first Carbon Trading Exchange – a significant development towards the achievement of carbon reduction targets in the country. Some of these themes create long term shareholder value whilst others provide immediate, distributable returns. The Board of Directors will also from time to time evaluate other opportunities that may present themselves and will evaluate those deemed consistent with our stated investment objectives. Notwithstanding, the company adopts a prudent approach to managing outcomes and returns and in that process, seeks to enhance the level of trust with its stakeholders.