Dato’ Sri Zukri Samat, CEO of Bank Islam Malaysia Berhad, discusses Sharia-compliant finance, retail banking, wealth management, the current state of the Malaysian banking market and his career in banking with International Banker.
Simon Hughes: Hello, it is my very great pleasure to present Bank Islam with three prestigious awards from International Banker. Best Islamic Bank Malaysia 2014. Best Customer Service Asia 2014. And joining me is the CEO of the Year Asia 2014, Zukri. I’m very pleased indeed to have you with me. And many congratulations on these awards.
Dato’ Sri Zukri Samat: Thank you, Simon. And first and foremost, I would like to thank the International Banker for honoring us with such an honor and privilege. But, of course, I owe lots of success to the people around me; and first and foremost, basically, it is the staff at Bank Islam who have worked so hard and given all their best to achieve what we have achieved today. And, of course, we wish also to thank our customers who have been supporting the bank through thick and thin. A big thank you to all of them. And hopefully they will continue to support us. And again, with this award, hopefully that will spur Bank Islam to work even harder to give their best service to our customers. Thank you.
Simon Hughes: Let’s think about that idea of working harder. In terms of the kinds of efforts you think that are needed to improve the understanding of Sharia-compliant finance and Islamic banking, what are the key things, do you think, that are needed to kind of make that happen?
Dato’ Sri Zukri Samat: I think the first thing that we need to do is basically do education. Even, for example, in the case of Malaysia, we started Islamic finance in 1983 with the establishment of Bank Islam being the pioneer bank. But I think today, all over the globe, there is still a misconception where some segments as a matter of fact feel that Islamic banking is only meant for Muslims. I think that’s more education’s part to make sure that the message is put loud and clear that Islamic banking is for all. And the second thing is what we need to do is basically to make sure that in those countries that are not now banking with Islamic finance is to market it in a different way. Because sometimes the word ”Islam” can be quite sensitive, you know. Probably the way we should market it in those countries where the majority of the people are non-Muslim is to call it maybe ethical banking. After all, the values that are provided by Islamic banking, you know, the core values, i.e., you don’t have gambling, you aren’t allowed to take extra sick days, you aren’t allowed to do speculative elements. These are ethical values that are applicable to everybody.
Simon Hughes: Do you think that those kinds of core propositions will enable Bank Islam to expand globally with that kind of message, you know, that kind of offer?
Dato’ Sri Zukri Samat: Yes, I think certainly it will work for us. But being a bank that is relatively small in size compared to our conventional counterpart, we have our own preference. We do want to basically have a mission to actually start operating outside Malaysia, but we have to choose our peak. For the time being, our strategy basically apart from Malaysia, we want to go somewhere near to home. A country like Indonesia, for example, is very interesting, with a population of 240 million, and the majority are Muslim. So that is something that we are closely watching. The other condition for us is basically that before we can operate, there is a need for the country to have the basic infrastructure for Islamic banking to flourish. And the top agenda basically they must understand the banking act. Without which actually we cannot start an Islamic bank. Especially for banks now with actual retail service.
Simon Hughes: So in fact when you were talking about the awards earlier, you were talking about your customers. How much of your business rests with the retail customer?
Dato’ Sri Zukri Samat: Currently, if you look at our balance sheet, close to 74 percent of our customers actually are retail – meaning, mainly people who borrow to buy a house or for their personal financing or to buy a car. But having said that, I think we need to rebalance our portfolio. I think at the management level, we have looked at it. And what you call –we are expecting that there could be more macro-prudential policies that maybe through the central bank will slow down the growth of the so-called household debt. We may have to look beyond retail. I think the idea of the bank now is to diversify to go 70-30 probably. 70% retail, 30% will focus more on conventional commercial.
Simon Hughes: In any sense does the regulatory climate need to develop to help you do that?
Dato’ Sri Zukri Samat: I think certainly we don’t want to see what happened during the 1997 financial crisis where the whole – every country in Asia, including Malaysia actually, suffered from the problems. So I think there is a need for more regulation, especially in the areas of risk management. I think with Malaysia’s economy prior to the 1997 financial crisis, there was very little emphasis on risk management. But today we can’t negate it. So I think certainly that regulation for a country is important. But it shouldn’t be done with over-regulation because then you’ve basically stunted the growth of the industry. So you have to balance between growth and regulation.
Simon Hughes: And where might you find some specific growth areas?
Dato’ Sri Zukri Samat: I think if you are talking about Islamic banking per se – I think while the statistics show that Islamic banking is growing globally at more than 30 percent per annum, but I think it’s more skewed toward the sukuk market. So there is a niche area where basically Islamic banking has not been treated; one such area is of wealth financial management. If you look at the growth of the management of the Islamic finance bank, it is very small, not even one percent. So I think that’s one area that basically there needs to be more focus. It will be interesting to see, for example, in Brunei, they have what you call the Islamic Law. And they are now—actually a lot of their assets are being parked in what you call the conventional asset. So it will be interesting to see how it fits in with respect to the Sharia-compliant set.
Simon Hughes: And you are in fact at Islam Bank moving quite hard to move from principles to compliance. Is that right?
Dato’ Sri Zukri Samat: Yes. Technically I think there are two types. What basically we are doing now actually is physically making a conventional product, right. And we make it in such a way that it is Sharia-compliant. So that is the old way of thinking. But that is not only thinking. It is Sharia-compliant for now. I think the bank’s initiative is to make basically what you call a Sharia-based product. We are moving from the so-called debt business model to the equity business model. Equity business model meaning that the bank should take a more active role in true blue what you call Sharia. For example, Musharakah Mudaraba contract. Whereby under the Musharakah Mudaraba contract, the bank participates with its equity. If there is a loss in the venture, the bank will have to suffer their share of the equity. So I think that is the will power; I think we are moving in that direction.
Simon Hughes: And given what’s happened to the global banking industry, there are some strengths, aren’t there, in offering that kind of model and offering that kind of product?
Dato’ Sri Zukri Samat: Yes, certainly, I think we definitely have a new perspective. Before a debt can happen, you must really basically have a product that fills a niche, which we do have. But sometimes, you see it takes two to tango, so to speak. For example, I can offer my customer, “OK, I have this product where I actually share with you in the profit or loss.” If anything goes wrong with the venture, the bank must basically lose their money. But some customers say, “Look, I can go to a conventional way, or I can do it through the conventional Islamic way. If I promise you a return of 50 percent, I don’t want to lose my share of the profit. If I go into a venture like that—no, I don’t want to. I’ll go to the traditional way.” It takes two to tango. So there is a need for understanding on both sides.
Simon Hughes: Do you think that’s one of the things that you’ve brought to your world, that kind of sense of perspective of sharing and how that works? Is that one of the things you feel you rely on in terms of running a successful operation?
Dato’ Sri Zukri Samat: Yes, certainly, to me success basically should be shared by all parties. And in the case of Bank Islam, it’s very clear. I think we have done pretty well, and along the way I think that we have created value for the staff itself. We have created lots of opportunities. And I used to sort of remember that when I first joined the bank, and the bank was very much around the public sector, whereby you didn’t take performance into consideration. You were a standard group. If the bank declared one month’s bonus, everybody received one month’s bonus. Whether you work, or you do not. But now we actually bring a new culture where we say that we’ll pay you by performance. If you do well, and the company grows, we make sure that we share the wealth with you.
Simon Hughes: So you actually joined the bank in 2006. How did that change start for you?
Dato’ Sri Zukri Samat: Well, it’s something basically that I have not asked for and never sort of intended to join Bank Islam, because I knew that the bank was in trouble. But one fine day, I received a call from the then senior officer at the central bank of Malaysia asking me to go to Bank Islam. He said, “The bank is in trouble. So you need to do whatever you know to try to help the bank out.” I said, “Well, I just had my special duty. I just completed my seven years with Danaharta”— the management company formerly government during the 1997 financial crisis, to absorb all the notes from the banking system. Having just finished with Danaharta, because I was such a “fool”, he asked me to go down and see what I could do. “No, no, no, not any more. I want to take a breather.” But a couple of weeks later, I got a call from the then prime minister, Abdullah Ahmad Badawi, who gave me instructions to go and see what I can do to try and salvage Bank Islam.
Simon Hughes: That was a call you couldn’t really ignore.
Dato’ Sri Zukri Samat: Yes, I couldn’t really ignore it. Because deep inside me also I think as a Muslim that it was time for me to use whatever knowledge I had to try to salvage the bank. Because I knew that if anything happened to Bank Islam, being the finest Islamic bank in Malaysia, if it were to collapse, the repercussions could be quite great.
Simon Hughes: Given the challenge of a bank in that kind of position, how did you set about? What was the first thing that you did in terms of moving it forward rather than watching it fall over?
Dato’ Sri Zukri Samat: OK. I think the bank was certainly in a big mess. The year before I went in, there was a loss of half a billion. When I joined the bank on the 9th of June 2006, I knew there was going to be another round of big losses, which they were going to announce. It was triple the amount. So I knew basically that the first thing was to prevent what you call a bank run. The moment you announce the losses, you’re going to wipe out the entire capital of the bank. So what should I do? Right. To make sure that Bank Islam the bank can go on as usual. And, of course, we had to do a lot of things. And basically engage with all the stakeholders. Start with all the participants. So we went to see all the participants, telling them that this is the situation of the bank. But don’t look back. Let us look forward. And I as CEO have a business plan to turn it around, and try to convince them to please give me a chance and opportunity. Having said that, we went to see the regulators to try to convince them that while we would try to do what we could do and of course ask for some support from them in case there is a need. Then we didn’t forget to see the politicians, the members of parliament, the backbenchers, to basically look at it. We knew they could make trouble if they wanted to. We explained to them, this is the situation the bank was in, but what our plan is to do and please give us the opportunity. And finally I had to go and visit all the editors of all the major newspapers in Malaysia to explain to them what had happened, what was going to happen now and what our plans were going forward. And praise God, everybody was so supportive. I was about to say that when we announced another big loss of $ 1.4 billion, we didn’t see a big run on the bank. Not only that, but we saw that our deposits went up.
Simon Hughes: We are recognizing that leadership quality in you. And over the time you’ve been with the bank, you’ve got past that moment. What do you think your other biggest achievement has been?
Dato’ Sri Zukri Samat: Of course, apart from that, I think our achievement was that we managed to turn our bank around within 12 months, from loss making. We made a record profit in 2007. And since then we have never looked back. We have established a new record every year since then. And from being one of the worst banks to have in the whole city for finance, or long-term loans that were about to do us in, today we are one of the best industries. So I think that’s a great achievement.
Simon Hughes: The other thing that struck me, too, is looking at the bank is the innovation you’ve spotted. The world we’re living in is becoming more digital, it’s becoming less cash. Where have we got to in terms of coping with those new innovations from a banking point of view?
Dato’ Sri Zukri Samat: Especially if you are doing retail banking, innovation is very important because customers want new change almost every day. What was applicable say one year ago is not applicable today. So innovation is very important. I think we spend a lot of money on IT, on IT systems, to make sure they are able to cope with the new products that we want to launch. For example, we were actually the first ones in Malaysia within the convention of Islamic to move into mobile banking. With mobile banking, the true blue mobile banking, you don’t need an Internet connection. You can do your mobile banking anywhere as long as you have a signal, the right type of signal. So we were the first ones to do it. So innovation basically is the key to survival. You need to do that in order to stay ahead.
Simon Hughes: Comparing that to say the Islamic banking as a banking principle, what do you think is going to happen to Islamic banking over the next five years? As you march forward with innovation and technology, where will Islamic banking move forward?
Dato’ Sri Zukri Samat: I think there is going to be a lot of changes taking place. I think first and foremost, we are looking at changes from our commercial counterpart. We are looking at Basel policy, and I think there will be more regulation, as you call Basel policy, coming up in terms of the governance, risk management, capital liquidity. I think more to come. So in this respect, the Islamic governance is what compliance needs. Islamic finance will see more. The committee is responsible for setting up the standards. I think they will be coming out with more standards to follow the conventional counterpart.
Simon Hughes: In many ways, bankers are seen as a kind of pioneer in the industry. So what do you think you need to do to keep that position and keep moving forward?
Dato’ Sri Zukri Samat: Well, again, as I say, that as a pioneer bank, we need to not only be happy with what we have done in the past, but I think we need to keep innovating. All right. We need to come up with new ideas, new products. For example, in the case of Bank Islam, with the influx of new acts in Malaysia now, called the Islamic Financial Services Act, we are now basically the bank that is supposed to segregate between investment account and deposit account. For example, in the past, which is currently, if you actually save in an Islamic bank, but you go for a type that is actually profit-sharing, right, they give you a percentage— for every dollar the bank makes, so much goes into savings. But now under the new act, if you go for that contract, it can no longer be deemed as savings; it is called an investment account. An investment account meaning that the capital is no longer guaranteed. Of course, the customer expects it to be. So how do we tell them that it is an investment. So what we need to do is customer education. We need to find new products for customers who want to have that kind of flexibility but want it to remain as a deposit. So that’s the sort of thing we are doing.
Simon Hughes: So I am getting the impression that you are very customer focused. What philosophies in life have helped you support your leadership role in the bank?
Dato’ Sri Zukri Samat: Well, initially, when Islam Bank started, the customers were banking with Islam Bank because of conviction. Because they said they were Muslim, they said they wanted to have a Sharia-compliant bank to bank with. And in that process, I think they didn’t mind a little bit of, how do you say, profit-sharing, lower convention, the services to be slower, for example, you don’t mind. But I think that is now goodbye. We have a new generation of people who are actually Muslim, but most feel the same. I think we cannot give them the run around. I think they too expect us to move as far as or better than conventional banks. So there are some changes in terms of turning the mindset of people around. All right. People don’t mind because they want Sharia-compliant, but they want Sharia-compliant as good as or better than the conventional banks.
Simon Hughes: Now I’ve got a couple of more questions for you. One of them is your leadership style. How would you describe that?
Dato’ Sri Zukri Samat: To me, I actually look at peoples’ strengths. All of us are born obviously with weaknesses, plenty of them. So my role as a leader basically is to identify where my staff’s strengths are and put them in the right place to suit their strengths. And nurture them to become leaders on their own. Secondly, I realize that as a leader, you have the power to influence. So walk the talk. And I practice that. So when I started my journey with Bank Islam in 2006, we knew that we needed to do cost-cutting, saving, things like that. So what I did, basically, even for my travel, I would use the budget line. If there was no budget line, I would just travel economy class. And I expected people to follow. And true enough. When they see the MD sticking within the budget line, what are we? So everybody follows. So walk the talk. So you actually gain the respect of your people.
Simon Hughes: OK, looking ahead for the next five years, what do you think are your next big objectives personally?
Dato’ Sri Zukri Samat: Personally, of course, I would like to see that Bank Islam grow from strength to strength. As I mentioned here, that today Bank Islam is very much domiciled in Malaysia, apart from a small investment in Sri Lanka. I’m just hoping that the bank actually can expand a bit further to set up offices or to take a stake in other Islamic countries such as Indonesia, which I find very, very, very interesting. So that’s one thing that I would like to see. And secondly, I think that by comparison that Bank Islam, or any other Islamic bank in Malaysia, is very much smaller compared to their conventional counterpart. To me, size does matter. I hope to see that we have some mergers and acquisitions. And I want to see banks become mega-Islamic banks with big financial muscle for us to expand and to show better.
Simon Hughes: Well, I’ve really enjoyed our conversation today, and congratulations once again on your awards.
Dato’ Sri Zukri Samat: Thank you very much. It’s a pleasure to meet you.