City & Country: Maybank Islamic rolls out foreign currency financing

MAYBANK ISLAMIC BHD will eventually enable its Foreign Currency Offshore Property Financing-i (FCOPF-i) instrument to fund property purchases outside its current market in Zones 1, 2 and 3 in London. The portfolio limit of FCOPF-i is £100 million, which will comprise a combination of customer deposits and interbank funding.

The bank plans to allow buyers to finance properties in other towns in the UK, such as Midlands and Cardiff, and eventually other Commonwealth countries, such as Hong Kong and Singapore, that are covered by Malaysia’s Reciprocal Enforcement of Judgments Act 1958 (REJA), says its CEO Muzaffar Hisham.

For those defaulting on payments, REJA allows judgments on those made in Malaysia to be enforced in the UK. “As it is, we are evaluating each property outside Zones 1 to 3 on a case-by-case basis,” Muzaffar tells City & Country.

As a lot of the Asean currencies are fluctuating, our clients have the opportunity to minimise their exposure by having financing denominated in sterling or ringgit. - Muzaffar

‘Demand for pound sterling facility’

FCOPF-i is Malaysia’s first syariah-compliant financing denominated in pound sterling. The maximum loan-to-value (LTV) ratio of the property is 85%, which is significantly higher than the conventional mortgage’s typical limit of 70%.

“We put up to 85% financing because we think it’s a fair estimate based on the profile of a lot of our customers. I think this is a reasonable margin of advance,” Muzaffar comments.

Maybank already has a conventional offshore mortgage that covers  Melbourne, Australia and London. Its Overseas Mortgage Loan Scheme offers financing margins of up to 75% and is denominated in ringgit.

“We felt there was demand for a pound sterling facility and we thought it would be a good idea to offer affluent and high net worth Malaysian clients, who may want to buy either for the purpose of residence or investment, this sterling and syariah-compliant facility,” Muzaffar explains.

The facility may also be used to refinance existing mortgages from financial institutions in the UK and other Malaysian banks. Buyers of completed and off-plan properties may apply for financing. Those eligible are Malaysian citizens, permanent residents as well as those not residing in the UK or the European Union.

Maybank Islamic is targeting high net worth individuals in Malaysia buying properties in London either for investment purposes or for their own use. For now, properties in Zones 1 to 3 are given priority because the bank’s research has shown that these areas are popular with Malaysian investors. “But I won’t be surprised if folks look at the key cities where there are a lot of businesses, colleges and universities, such as in Midlands and west of the UK, like Cardiff or Bristol,” says the CEO.

Despite FCOPF-i being an Islamic financing product, it does not just target Muslim customers. “This is a niche product, which complements those for our affluent private banking customers, half of whom are non-Muslims,” Muzaffar remarks.

While taking a loan denominated in a foreign currency exposes buyers to foreign exchange risk, customers may deposit in a foreign currency account. Maybank will also advise them on cross-currency swapping options to mitigate currency fluctuation risk.

“Our in-house view is that the ringgit will rise to 5.10 to the pound by year-end,” Muzaffar says. “As a lot of the Asean currencies are fluctuating, our clients have the opportunity to minimise their exposure by having financing denominated in sterling or ringgit.

“Clients may also take the sterling and hedge a certain amount of their exposure. Our treasury guys could arrange some cross-currency income swap enrichment. They may not swap the whole amount, but a certain portion based on their view of the currency.”

As it is an Islamic product based on the Murabahah structure, there is no compounding interest. Moreover, there is a ceiling on the interest rates.

“During the 1997/98 Asian financial crisis, a lot of our customers saw interest rates going up to 20%. So, there is comfort in taking this loan,” explains Muzaffar.

“The effective profit rate we are looking at is 4.45% for between 5 and 20 years and 4.6% for between 21 and 30 years based on prevailing rates. This is equivalent to a spread of about 1.95% to 2.5% — for 5 to 20 years — above our cost of funds. To manage our costs, our spread is slightly lower, about 2.3% for the longer term.

“Our pricing is comparable to that of conventional products. The slight difference in the Islamic structure of Murabahah is, of course, the ceiling rate — because it’s not an interest rate but buying and selling of the facility. Even though it is still a variable rate, we have a ceiling of 11%.”

The maximum tenure of the facility is 30 years. As it is a foreign currency-denominated facility, it has stamp duty exemption under the International Currency Business Unit incentives of the Malaysia International Finance Centre’s initiatives.

However, due to the nature of FCOPF-i, buyers of commercial properties must ensure that their tenants are conducting syariah-compliant businesses.

“Like in Malaysia, we are mindful of what the activities on the premises are,” Muzaffar says. “The guidelines we follow are based on the syariah screening that is provided by the syariah advising council in both Bank Negara Malaysia and Securities Commission Malaysia. It’s a step-by-step screening process. This is the beauty of Islamic banking in Malaysia, where we have a consolidated guideline that we can follow.

“We screen the tenants based on the [prima facie] information given by the borrower. As part of our checklist, we might also have a site visit. That’s usually the standard follow-up.”

While there is no timeline for how long it will take for the funds to be disbursed, Muzaffar reckons that the process is quicker for properties in London compared with properties in Malaysia as paperwork in the UK is processed faster.

Regional expansion

So far, Maybank Islamic has received about 200 to 250 enquiries on FCOPF-i since it was soft-launched on Sept 18, in conjunction with the World Islamic Economic Forum in London. The product was officially launched in Malaysia on Nov 8.

If interest in the product picks up, Maybank Islamic will likely introduce it to other countries in the region, such as Singapore, which is among the leading buyers of prime UK properties, and Indonesia, which is not only the world’s most populous Islamic country but also has a burgeoning population of high net worth individuals.

According to Knight Frank’s The Global Wealth Report 2013, there were 1,029 high net worth individuals — those with assets of more than US$30 million — in Indonesia in 2012, and this number is expected to quadruple in the next decade.

This article first appeared in The Edge Malaysia Weekly, on November 25, 2013.

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