With the establishment of the first Islamic commercial bank in Dubai in 1976, Islamic banking has made significant inroads into the mainstream global financial market with a growing number of Islamic banks set up in different parts of the world – from the USA to smaller countries in Africa. However, successful transformations of conventional to Islamic banks are few and far in between. Agrobank, a Malaysia-based bank, is arguably the best of such examples.
Given the complexity of such conversion process, most conventional banks engaged in Islamic finance prefer to take an easy route, i.e., operating Islamic windows within the conventional banking system.
Other conventional banks with significant Islamic operations have set up separate subsidiary Islamic banks – a model in which Malaysia has excelled. But such model has not gained the same success in the UAE.
Countries like Qatar and Lebanon have in fact disallowed conventional banks from operating Islamic windows.
In a very short span of time after taking the helm at Agrobank as the President and CEO, Dato’ Wan Mohd Fadzmi Wan Othman, took the bold step of converting the bank into a full-fledged Islamic bank. Undeniably, this is a mammoth task for any bank seeking for a full conversion of its current business operations and system. However, in a record time of less than three years, Agrobank completed its transformation to become a leading Shari’a-compliant Development Finance Institution in Malaysia.
While the transformation process had the full support of the Board of Directors and the top management, key to this success was the leadership of Dato’ Wan Mohd Fadzmi Wan Othman who continues to be the main catalyst in the transformation journey of Agrobank. The bank’s success was recently announced at the Global Islamic Finance Awards 2015 held in Bahrain where Agrobank was named as the Most Upcoming Islamic Bank in the world.
INTRODUCTION
Agrobank was previously known as Bank Pertanian Malaysia or BPM (Agricultural Bank of Malaysia), which was established in 1969 to mobilise savings and provide credit for agriculture development. Established by the Act of Parliament No. 9/69, BPM was formed in line with the Malaysian government’s policies to provide banking services for the sound development of the agricultural sector in Malaysia. Its maiden project financing was the massive irrigation scheme for the rice bowl areas in the Muda Valley in the states of Kedah and Perlis, which is located in the northern part of peninsular Malaysia. The irrigation project was to accommodate double cropping for paddy planting in line with the recommendations set forth by the World Bank in their appraisal report, which also proposed for the establishment of a special credit scheme to support the project implementation.
The launching of its two maiden branches in Kedah and Kota Bharu, Kelantan, marked the beginning and development of BPM in its pursuit to provide credit assistance services to farmers.
Since its founding days as BPM, Agrobank has been central to the development of the agriculture sector and agriculture related business while supporting the government’s vision to establish Malaysia as a global Islamic finance hub. As a government-owned bank under the purview of the Ministry of Finance Incorporated, Agrobank’s financing of the agricultural sector is driven by policies set forth by the Ministry of Agriculture and Agro- Based Industry.
With 46 years of experience in the agricultural banking industry and excellent track record, Agrobank is actively shaping the Malaysia’s agricultural development across eight regions it operates with 189 branches; offering products and services in the areas of corporate, commercial and microfinancing as well as trade finance, personal financing, electronic banking and deposit services. As of September 2015 (3rd quarter) Agrobank has provided primary agriculture financing of RM4.22 billion constituting 10.8% of the overall primary agriculture financing in the banking system.
FROM EARLY DAYS TO MODERN- TIMES
In 2008, BPM was corporatized and commercially known as Agrobank to further strengthen its roles and functions to support the development of agriculture sector in Malaysia.
BPM was corporatized with a paid-up capital of RM1 billion when the House of Senate approved the Bank Pertanian Malaysia Berhad Bill. This was indeed a milestone in the history of the bank as the corporatization enabled the bank to be more competitive with other commercial financial institutions by enhancing its capacity to lend and to offer a broader range and more innovative financial and non-financial products and services to meet the financing and developmental needs of the agriculture and agro-based industries. Following the corporatization exercise, the bank was rebranded under a new corporate identity and renamed as Agrobank to position the bank as a forward looking, modern and progressive enterprise, while at the same time retaining its socio-economic responsibility of developing the agricultural sector and contributing to sector’s growth and sustenance.
In 2011, under the helm of the new President/CEO, Dato’ Wan Mohd Fadzmi Wan Othman, Agrobank embarked on a much greater transformation journey that will see the bank progressively modernising its banking operations through the provision of an efficient delivery system and carrying out full-scale Islamic banking operations by 2015. The bank’s transformation into a full-fledged Islamic bank was implemented in stages from 2012 onwards,” explained Dato’ Wan Mohd Fadzmi. “It is our aspiration that with such transformation, customers will be more confident to take up financing and deposit products based on Islamic principles with us.”
Since its corporatization in 2008, Agrobank has been offering Islamic banking products and services under its Islamic banking window. However, on 1 July 2015, the bank officially became fully Shari’a-compliant.
Agrobank’s transition to a full-fledged Islamic bank is seen as a positive development based on the rapid growth of the Islamic banking sector in Malaysia. This transition is in line with the government’s target to increase Islamic financing up to 40% of total financing by 2020. With this transition, the bank is now able to provide Islamic banking products and funding to cater for the halal food industry.
Operating as a full-fledged Islamic bank, it aims to provide Shari’a-compliant products and services to the agriculture community as well as supporting the government’s initiative to establish Malaysia as a global hub for Islamic finance and the halal industry. With the increasing concern surrounding the shortage of food and climate changes, the Malaysian government, in its bid to cut down export of produce from the international market, has included the agriculture sector as one of the National Key Economic Areas (NKEA) to revive and develop the industry.
“We believe that by offering Shari’a- compliant financing, Agrobank will give more confidence to entrepreneurs, food operators and customers to conduct their business in accordance to Shari’a principles. Even though the journey to be a full-fledged Islamic bank was very challenging – we take pride that our efforts and hard work contribute to strengthen the Islamic economy,” said Dato’ Wan Mohd Fadzmi. As of September 2015, Agrobank contributed about 23.8% or RM2.69 billion of financing to the primary agriculture (food) production segment from a total funding of RM 11.28 billion, which represented almost 1/4 of the market share of primary agriculture (food) financing in the banking system.
AGROBANK – A NEW MODEL OF ISLAMIC BANKING
Agrobank is a bank with direct involvement in the real economy – something that has been emphasized by the proponents of Islamic banking right from the beginning and what remains a challenge in Islamic banking and finance. Other high street banks in Malaysia – both Islamic and conventional – primarily focus on the consumer banking and corporate segments. Agrobank, on the other hand, targets farmers and other businesses related with agriculture to ensure that the government’s development agenda and its policy of financial inclusion are implemented.
“Innovation and product diversity are integral to the further development of Islamic banking and finance. Since Islamic banking mainly focuses on asset financing, there is a dearth of products to cater for different financial needs of business, particularly the SMEs,” stated Dato’ Wan Mohd Fadzmi.
In order to cater for this growing demand, Agrobank provides a wide range of financial products and services including trade finance for SMEs in the agricultural sector. Other products and services are in the areas of consumer banking, business banking, electronic banking and deposit services including Hartani-i, AgroCash-i, MAEF-i and Ar Rahnu.
companies in Malaysia, Ramly Burger/ Ramli Food Industries
In 2014, Agrobank accounts for 32% of financing provided to Malaysia’s food production sector, a vital sector in the gross domestic product (GDP) of the country. Emphasizing on the importance of food, Dato’ Wan Mohd Fadzmi Wan
Othman commented, “Food is synonymous with agriculture sector and halal factor is essential to the Muslim community. After the conversion to a full-fledged Islamic bank, we are able to provide Islamic banking products and funding to complete the cycle of halal food production.”
There are numerous companies engaged in halal businesses – from large to small & medium size enterprises – which receive banking facilities of different types from Agrobank. As a Development Finance Institution, Agrobank can potentially provide an example of cooperation between banking and finance and the real economy – all in a Shari’a-compliant way.
By offering Shari’a-compliant financing, Agrobank gives additional confidence to entrepreneurs in the agriculture sector (also called agropreneurs), food operators and customers to conduct their business in accordance with Shari’a principles. Even though Agrobank’s journey to become a full-fledged Islamic bank was challenging, its efforts and hard work have started to contribute to strengthening the Islamic economy.
GIFA RECOGNITION
In recognition of Agrobank’s efforts in promoting Shari’a-compliant banking and supporting Malaysia’s efforts as a global Islamic financial hub, the bank was awarded the “Upcoming Islamic Bank 2015” by Global Islamic Finance Awards (GIFA) in a ceremony held in Manama, Kingdom of Bahrain. Commenting on this international recognition gained, Dato’ Wan Mohd Fadzmi Wan Othman said, “We are deeply honoured to receive this prestigious award. This is recognition for all our employees who have worked tirelessly in seeing through the conversion of Agrobank to be a full-fledged Islamic financial institution”.
