I was recently in Malaysia and spent a valuable hour with bankers from Maybank Islamic. In the process, I learnt something about Islamic finance that has implications for the entire region.
I had assumed that the bank’s Muslim clients would be the biggest buyers of Islamic wealth products. But it turns out I was wrong. It is the bank’s ethnic-Chinese clients who are account for nearly seventy percent of sales.
How so? The bank’s Chinese clients are attracted by the straightforward design of Islamic wealth products. They are a far cry from the complex derivative products of the last few years that have made, and lost, a lot of money.
Take a “Structured Islamic Deposit”. It guarantees your initial investment, and then offers a return based on the performance of copper and wheat prices. Even a beginner can grasp the risks of investing in these two commodities.
And Chinese investors like buying commodities. As a China economist, I am reminded of this fact daily.
Over the past six months, I have heard stories of Chinese manufacturers speculatively buying everything from copper, nickel, and iron ore, and storing it in warehouses around the country. It is a gamble. But they will have nonetheless made a tidy profit.
Now not everyone can afford to buy copper, let alone store the stuff in their backyard. However, it might be that the Islamic banks can offer Chinese investors the same wealth products on sale in Malaysia with a return linked to the price of copper, tin, or oil.
If so, then China offers Islamic finance vast untapped opportunities.
There are a few obstacles. So far there are no Islamic banks in China. I heard from a Chinese banking regulator last year that officials were still shy about licensing a foreign Islamic bank. “It would take more time to assess the implications”, he said.
Yet maybe that time has arrived.
The Chinese Economic Observer is reporting that Ningxia province, a largely Muslim province in China’s west, will shortly trial Islamic financial services. The article says that the trial, if successful, will be expanded more broadly across the country.
There is still work to be done. Tax regulations in China do not favour Islamic finance. Officials claim there is a lack of qualified personal familiar with the principles of Islamic banking. IT systems also need to be overhauled.
But it might be that foreign Islamic banks will find a warmer reception the next time they apply for a license in China. They could certainly lend a hand to Ningxia’s officials, helping to train their staff and overhaul their IT systems.
Most importantly, they might just find a willing market for their own wealth products.
Neither do the products have to be labelled as Islamic. As Edwin Hitti, head of Hong Kong’s Arab Chamber of Commerce, said to me the other day, “You rarely hear Islamic terms used to describe financial products in the Middle East. There isn’t any need. It’s simply assumed that the product is Islamic”.
Maybank Islamic likewise sells their Islamic wealth products through the bank’s ordinary retail branches. Most ethnic-Chinese clients probably don’t realize what they are buying is in fact designed for Islamic clients. It certainly doesn’t have a “warning label” attached. They could adopt much the same approach in China.
From China to the Middle East there is a tendency to prefer investments that are tangible, from copper to property. It could be that the financial links between China and the Middle East are stronger than many believe.
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