Malaysia and Indonesia go head-to-head on Islamic banking digitisation

Malaysian Islamic banks could lean on their parent groups cashing in to boost digital drive.

Whilst the digitization of Islamic banking across the region has beared witness to significant progress, Malaysia may overtake Indonesia in its digitalisation ambitions, according to a Moody’s report.

“This is because Islamic operations are a more integral part of banking groups and are at the center of their growth strategies in Malaysia. The largest Islamic banks in Malaysia are subsidiaries of banking groups. Hence, Islamic banks in Malaysia will benefit from large banking group's overall digitization investment,” the report stated.

Moody’s noted that Malaysia’s top two largest banking groups by assets, Maybank and CIMB Group, have both adopted an “Islamic-first” approach in growing their domestic business, offering Islamic products first to all new and existing customers across business lines for individuals, small and medium-sized enterprises (SMEs) and corporates.

“Of the two, CIMB has earmarked $480m (MYR2b) to invest in enhancing technology and data analytic capabilities from 2019 to 2023 in order to advance the digitization of operations, including Islamic banking,” it said, noting that Maybank’s Islamic segment contributed 59% of total financing in Malaysia in 2018, up from 57% in 2017. Maybank is now trying this strategy to develop and market all Shariah-compliant products in Indonesia, which led to strong growth in financing, deposits and net income in the country in 2018.

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“A key reason why Maybank and CIMB have been successful with this approach is the banks allow their Islamic subsidiaries to utilise the parent groups' physical infrastructure, including branches and offices, which helps save costs and improve efficiency,” Moody’s continued.

On the other hand, Indonesia’s largest islamic lender, Bank Mandiri Syariah, a subsidiary of Bank Mandiri, accounted for only 8% of overall group financing. According to the report, Bank Mandiri Syariah’s digital related fee income surged 58% in 2018 after an 8% increase in digital banking transactions in the same year. For 2019, the bank amped up its digital investments by 42% to $20,000 (IDR19m).

The report further noted that standalone Islamic banks in Malaysia are also investing in digitization more aggressively than their counterparts in Indonesia. The largest standalone Islamic bank in Malaysia, Bank Islam Malaysia Berhad, has committed $72.54m (MYR300m) to digitization for 2019-2021.

“This is not to say Indonesian banking groups are sitting idle. They are making good progress in digital transformation, which trickles down to their Islamic operations,” Moody’s said.

Bank Negara Indonesia Syariah’s digital investments hit about $2.1m (IDR300b) in 2018. During the same year, it has seen its online banking transactions hit $70.88m (IDR1t), and its mobile app users base skyrocketed 200% to more than 250,000. The bank has also forged a partnership with Ammana Fintek Syariah to offer P2P financing.

For its part, Bank Rakyat Indonesia Syariah’s online banking transactions surged 73% in 2018 whilst mobile app user base jumped 30% to more than 300,000. The bank has also tied up with Grab to provide MSME financing.