Over the past two decades, the Islamic Bank of Thailand (IBank) has faced numerous challenges in becoming the sole financial institution in the country to provide sharia-compliant financial services in accordance with Islamic principles, says president Thaweelap Rittapirom.
IBank has carved out a clear niche market and maintained a balanced approach between its role as a state-owned bank and its growth aspirations, he said.
The Thai government has consistently supported the bank by increasing its capital, and the Finance Ministry now holds almost 100% of its shares. This support aims to ensure the Muslim community in Thailand has access to a sharia-compliant banking service that adheres to the tenets of their faith.
"We want to be the bank of choice for both Muslim and non-Muslim customers who need sustainable finance." — Thaweelap Rittapirom, President, Islamic Bank of Thailand
The bank has a widespread network of branches across the country, with roughly half located in the southern region. These branches primarily serve Muslim customers and offer comprehensive financial services, including deposit accounts, financing and takaful insurance.
RECAPITALISATION PLAN
Mr Thaweelap said during the first 10 years of the bank's operations, it was a daunting task to be the first bank in Thailand to provide financial services in accordance with sharia principles.
The bank's non-performing loans (NPLs) tallied 40-50% of outstanding loans at this stage and it eventually had to enter a government debt rehabilitation programme as it was saddled with high NPLs and net losses.
During 2014-2024, the bank restructured its business operations and benefited from capital injections, rising from 1 billion baht to 18 billion at present, thanks in part to the Finance Ministry, as IBank's capital buffer swung back into positive territory.
In 2017, the ministry also transferred out a significant portion of IBank's bad assets or non-performing finance (NPF) worth 40 billion baht to Islamic Bank Asset Management Co Ltd.
Even though the bank's NPF level is still high, it has declined to 21% of loans outstanding.
IBank exited the rehabilitation programme as its operating performance improved, with the State Enterprises Policy Commission assigned to continue supervising the bank.
As part of the rehabilitation plan, the bank has long sought a new partner. However, an obstacle is interested investors asked IBank to finish recapitalising before they invest, raising its capital adequacy ratio (CAR) to meet the Bank of Thailand minimum requirement of 8.5%.
IBank's CAR in the first half of 2017 was -20%.
Mr Thaweelap said the bank aims to post a profit and move its CAR to the requirement of 8.5% of risk-weighted assets.
In 2023, the bank reported an operating profit of 1 billion baht, while its NPF was reduced by using stringent lending criteria, such as a credit scoring system that helped contain NPLs.
IBank caps lending to new borrowers at 500 million baht each, increasing to 1 billion baht for those with no default history.
"Short-term and medium-term operational plans are needed to strengthen the bank and generate sustainable profits, in line with economic conditions," he said.
"Improving performance and finding a new partner are important criteria mandated by the Finance Ministry to allow wider recognition of IBank."
Last year the bank issued total loans worth 6 billion baht, up by 6-7% from 2022, which was close to its target.
However, IBank is being more cautious in granting loans to small and medium-sized enterprises following the pandemic, said Mr Thaweelap.
TOWARDS A NEW PATH
"The bank is satisfied with loan growth of 6-7%, which seems high compared with the entire industry, but we have a small base," he said.
"The bank is attempting a new path of prudent lending in response to the new financial reporting standards [Thai Financial Reporting Standards 9] set to take effect in 2025, which require state financial institutions to set aside more reserves than before."
This new path continues to comply with sharia principles, which value sustainability as an intrinsic part of Islamic finance.
Mr Thaweelap said people believe IBank only provides financial products and services to Muslims, but half of its 1 million customers are non-Muslims.
"We want to be the bank of choice for both Muslim and non-Muslim customers who need sustainable finance," he said.
Sustainability principles align with the philosophy of Islamic finance, as the latter promotes social justice, inclusion, sharing of resources between the haves and have-nots, financial sector stability through avoidance of over-indebtedness, and especially redistribution of wealth, said Mr Thaweelap.
"The bank's new path will focus on the southern region of the country as the majority of Muslims reside there, with up to 2.5 million people. The goal is tapping into this burgeoning market," he said.
As Muslims comprise a large proportion of population in the South, IBank could emerge as a major financial institution there in the future, said Mr Thaweelap.
To ensure its success, he said bank management must be customer-oriented, innovative, creative and adaptive to market shifts, as in Malaysia, Brunei and Indonesia.
Indonesia is a top 20 Islamic finance provider globally, as expected from a nation with the world's largest Islamic population. Indonesia posted 35 banks in the main Islamic bank rankings for 2023, more than any other country.
Islamic law prohibits "riba", understood as interest in the West. Traditional Western debt instruments cannot be used as investment vehicles or ways to raise capital for a business.
One alternative is a bond-like instrument known as a sukuk, created to link the returns and cash flows of debt financing to a specific asset being purchased. The issuer of a sukuk sells an investor group a certificate, and then uses the proceeds to purchase an asset in which the investor group has direct partial ownership interest.
This allows investors to work around the prohibition outlined under sharia and still receive the benefits of debt financing.
In 2010, the Thai government said a regulatory framework regarding tax issues for a sovereign sukuk, called the Trust Act, would be enacted, but it did not happen and the regulations for Islamic finance as a whole remain fragmented.
CHANCE FOR ISLAMIC FINANCE
Islamic finance remains a frontier territory in the Thai financial market.
In recent years, many companies have created financial products that are appropriate for Muslim investors.
Mr Thaweelap said if Thailand can connect its Islamic finance with the global industry, the country could become a gateway for Islamic investment in the region.
IBank acquired the Islamic banking windows of the Government Savings Bank and Krungthai Bank (KTB), making it the only bank to offer sharia-compliant banking products in the country.
The Finance Ministry owns a 49% direct stake in IBank and has stakes in KTB, bringing its combined ownership of the bank to 98%.
He said Thailand has not harnessed the full potential of Islamic finance as it placed 62nd in the Islamic Bank Rank in 2021, far behind its regional peers.
IBank aspires to become a top three Islamic bank in Asia, planning to increase its asset size to 100 billion baht in 2-3 years from 80 billion at present, said Mr Thaweelap.
He said growth should come from new products aimed at the mass market, including micro- to medium-sized businesses.
These products will come in all sizes and types, from loans starting from 10,000 baht to 1 million baht, and from personal loans to mortgages and corporate loans, said Mr Thaweelap.
