Financial services to reach Muslims in rural Malaysia

Financial reforms in Malaysia will give Islamic banks more opportunities in the rural areas.

However, there are concerns about profitability that may slow the expansion.

The central bank issued new agent banking guidelines allowing lenders to offer basic financial services through non-bank retail outlets.

“It will be a cost-effective channel for financial institutions to reach out to the underserved parts," said Malaysian central bank governor Zeti Akhtar Aziz.

The guidelines list 474 rural districts, or mukims, which can be serviced through the initiative; some of them have the highest proportions of Muslims in the country, and also the lowest average household incomes. This could give Islamic banking an important role in the government’s efforts to expand financial services to the poorest sections of the population.

The populations of the Malaysian states of Kedah, Kelantan, Perlis and Terengganu are on average 89.3 percent Muslim, much higher than 46.4 per cent for the capital Kuala Lumpur, data from the Malaysian Department of Statistics shows. Those same four states hold 40 per cent of the mukims that could be reached through the new agent banking programme.

Malaysia’s Islamic banks collectively held 19 per cent of the country’s banking assets as of June, according to central bank data.

The prospects for tapping new Muslim consumers appear healthy; RHB’s Islamic business has been growing at an average rate of 20 per cent compared to eight per cent for its conventional business, according to Abdul Rani Lebai Jaffar, chief executive of RHB Islamic.

The relative poverty of some of the mukims involved in the agent banking scheme may deter banks from expanding into them aggressively, however.

Expansion will depend on whether banks choose to create separate task forces to manage larger groups of agent relationships, Jaffar said.

“We currently have a very small number of agents operating under the programme, but it has shown a positive response,” he said. “For now, we are still leveraging on the bigger RHB network.”

Executives at other banks said they would be cautious. “We are looking into the guidelines to see what kind of role we can play,” said a senior official at Maybank, who asked not to be named under briefing rules.

“We have always striven to use all the distribution channels that are available to us, but I think we have a pretty good reach at this stage. For now it will be business as usual.”

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