Islamic banking in Thailand: On the Path of Recovery

According to the US Central Intelligence Agency’s The World Fact book, Thailand has the 20th largest population in the world — 69,648,000 people. Muslims represent 4.3% of the grand total, or 2,995,000 people — almost 3 million. This number, though, does not include guest workers from Indonesia and Bangladesh. The Thai government is confident that the country has at least 6 million Muslims who live predominantly along the southern border with Malaysia. Closeness to Malaysia, the world’s most developed Islamic finance market undoubtedly affects the development of Shariah compliant finance in its northern neighbour.

The first attempts to implement Islamic finance in Thailand was undertaken in the late 1990s when the Government Savings Bank, the Bank for Agriculture and Agriculture Cooperatives and Krung Thai Bank established “Islamic windows” and “Islamic Branches”.

But the real onset of Islamic finance in Thailand started in 2003 with the establishment of the Islamic Bank of Thailand. The bank is owned by the Ministry of Finance, the Government Savings Bank and Krung Thai Bank, and in reality, 99.6% of its shares are controlled by the government. It has over 100 branches all over the country and serves 750,000 customer accounts.

The Islamic Bank of Thailand (IBANK)’s performance was hurt by the economic downturn caused by the global pandemic — in 2020 the bank had to make large provisions for potential losses. Still, most analysts, including the rating agency Fitch, expect the Thai government to fully support this state-owned bank. The Thai government routinely compensates IBANK for the implementation by the latter of socially important government-sponsored projects, such as helping self-employed people affected by the floods, or promoting public transportation in the 5 southern provinces.

IBANK currently has the following subsidiaries:

· Amanah Leasing Public Company (motor vehicle hire-and-purchase services);

· Amanah Haj and Umrah Company (provides and operates Hajj and Umrah tours).

One of the key strategic goals of IBANK is to promote Shariah compliant financial literacy and hence, financial discipline among its existing and prospective customers. Another highly publisized goal is to cultivate savings habits among Thai Muslims, particularly for pilgrimage purposes. It should be noted that among IBANK’s customers receiving financing, only 32% are the Muslims, 68% represent other religions, mainly the Buddhism. When it comes to deposits — 58% of the depositors are Muslims, and 42% are of other faiths. The total financing outstanding amounts are close to THB 60 billion (US$1.7 billion) — 47% to large corporates, 33% — to retail customers, and 20% — to the Small and Medium Enterprises.

One of the important public services offered by IBANK is the management of Zakat accounts. In 2020 the bank received Zakat from customers on behalf of those eligible to receive Zakat for a total of THB 1,692,000 (US$47,900). The Bank then has made Zakat payments to 237 people eligible to receive Zakat.

Key products offered by IBANK include: mortgage loans and mortgage refinancing, loan to retail entrepreneurs and SMEs in the southern provinces of up to THB 100 million, refinancing of credit card and conventional debt, leasing of vehicles and machinery, Takaful and international funds transfers.

The development of Islamic finance in Thailand is facing the following challenges:

1) Economic capacity. The majority of Thai Muslims live in rural areas and are mainly engaged in agriculture. The 5 predominantly Muslim provinces (out of 74) are the poorest in the country.

2) Public adoption. Some of the Shariah compliant products are not well known or understood by potential customers. IBANK intends to bring in mosque officials to explain the basic principles of Islamic finance to the attending Muslims.

3) Rules and Regulations. The Islamic bank of Thailand is regulated by the Bank of Thailand and the Ministry of Finance. Some additional regulation is required to allow IBANK access to overseas Shariah compliant funding to assure it competitiveness vs conventional banks in the country. The resuming of diplomatic ties with Saudi Arabia (the Saudi government sent 50,000 copies of the Holy Quran to Thailand to commemorate the event) may ease the funding shortage for IBANK.

4) Human Resources. Despite being in existence for 19 years, the IBANK still faces the shortage of experienced senior Islamic bankers.

In the post-Pandemic world IBANK sets the following development priorities:

· To further develop trade finance operations, especially in the agriculture sectors;

· To develop digital collection system for Zakat and Sadaqah;

· To increase the outreach of its Takaful programs outside of the bank’s client base;

· To develop joint programs with Malaysian Islamic banks to promote cross-border trade between Thailand’s southern provinces and Malaysia;

· To reach out to the Indonesian expatriate community with Shariah compliant product offers;

· To develop funding programs (including Sukuk) to attract financing from other Muslim countries;

· To develop southern provinces as a hub for Halal food stuffs, targeting Malaysia and Singapore’s customers — the bank will provide Mudharabah and Musharaka programs.

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Vladimir Malenko

Vladimir Malenko

A former Medical Doctor turned VC/PE enthusiast