PERMODALAN NASIONAL BHD (PNB) is pushing for bigger Islamic financial activities to turn Malaysia into a centre of global Islamic banking. In an interview to mark his one-year stint in the country’s largest unit trust fund, group chairman Tan Sri Abdul Wahid Omar explains how PNB and its strategic companies will intensify efforts to boost syariah-based investment and financing products.
Q: Why is the Islamic finance agenda so important to PNB? Is it tied to the government’s objective of making Malaysia the Islamic financial hub of the world?
A: Indeed, if you look at the aspirations of our unitholders, they want syariah-compliant unit trust funds. I think this was why back in 2008, there was a fatwa that investments made in Amanah Saham Nasional Bhd (ASNB) were permissible (“harus”). This fatwa was issued at the national level and 10 states adopted the fatwa, excluding Selangor and Penang. Over the past year, we had been engaging with the Selangor Mufti Department and based on those engagements, they revised their fatwa positively. So starting from April, investments in ASNB funds are “harus”.
We have similarly engaged with the Penang Fatwa Council over the past one year and are waiting for the outcome. We are hopeful they will give a similarly positive fatwa. So, this syariah-compliant status is important for our unitholders.
We are also looking at increasing the number and value of syariah-compliant equity instruments. That can come in the creation of a second Islamic universal bank, which is something that has been promoted by Bank Negara Malaysia.
If you look at previous announcements of Malaysia Building Society Bhd wanting to merge with Asian Financial Bank, for example, I think that is good for the industry and it means we will have another listed Islamic financial institution. Likewise, we are supportive of other Islamic banks increasing their size to become another Islamic universal bank, but beyond that, we are also looking at how we can increase the number and value of Islamic equity instruments from among the existing major players.
If you look at the biggest Islamic entity in Malaysia, it is Maybank Islamic. The usual question put forward would be, “Why can’t Maybank Islamic or CIMB Islamic or RHB Islamic be listed separately?” The answer is this is not feasible because Islamic operations are already embedded within the operations of the banking group. However, they (these banks) have adopted the “Islamic First” strategy so that they use the same branch network.
In fact, through Islamic First, any customer who wants financing for a house or car or working capital, the first thing to do is to give the customer a syariah-compliant product. Only if they ask for conventional then do we give them conventional products.
Through that approach, Islamic finance has grown very fast and as you know, in terms of assets, about 20 per cent have to be syariah-compliant and that’s moving towards the 40 per cent target set by Bank Negara. Our push is in support of the government’s Islamic capital market agenda.
Q: Does being syariah-compliant limit the type of investments that you can partake in, especially those in overseas markets?
A: At this moment, only two per cent of our investments are abroad, which are primarily in properties, and properties are mostly syariah-compliant. Likewise, in terms of investment in public equities abroad, there are stocks that are part of the Dow Jones Islamic Index, beyond which we do have some investments in private equities, of which we do dictate that the fund be invested in syariah-compliant businesses.
So the idea is to add into the syariah-compliant activities. It is our belief that globally there are enough financial investments which are syariah-compliant, except in the area of financial services. That’s why we have to be creative in terms of looking at the supply which can be increased.
Q: As of now, how many banks that you have shares in are syariah-compliant? And how do we go about changing these conventional banks to syariah-compliant?
A: About 69 per cent of some RM266 billion of our AUM (assets under management) is in public equity. Of that, 50 per cent is in strategic companies. We also own 48 per cent equity in Malayan Banking Bhd (Maybank). Through our large shareholding in the Maybank group, we are able to appoint a management team that is focused on the growth of Islamic banking. We ensure that the management is pushing the Islamic First agenda. Now it is being pushed in CIMB and RHB, and this helped push the growth of Islamic finance in the country. If PNB did not have majority shares in Maybank and SP Setia, for instance, it will lessen the acceleration of Islamic finance in the country.
Q: What about the other banks? Are they also pushing for the syariah-compliant agenda?
A: Through the Islamic First adoption, both CIMB and RHB experienced rapid growth in their Islamic finance segments and we encourage other banks to do the same.
Q: Does that mean that PNB is forcing other banks, through the success of Maybank/CIMB/RHB Islamic, to also adopt the Islamic First agenda?
A: We have seen that some banks have different approaches to their businesses. One particular bank has separate management and strategies for its Islamic and conventional businesses and it has seen that this approach did not work as there were a lot of conflicts between Islamic and conventional banks. This approach also created a lot of confusion among its customers. We met up with them and advise them to adopt the Islamic First approach, and this has helped the bank grow even bigger. This is just one of our efforts for the greater empowerment of this industry. It doesn’t matter which bank as we are all moving towards the same objective to strengthen the country’s Islamic finance sector.
Q: How confident are you that this syariah-compliant adoption by PNB will further strengthen your investments as well as returns? Your unitholders are always hoping for healthy returns, but there is a perception that syariah-compliant investments yield lower returns versus their conventional counterparts.
A: We believe that when we invest in syariah-compliant companies, these investments will have more berkat (blessings) as well as being sustainable. We don’t have any problems not investing in “sin shares” such as alcohol and gambling firms because there are plenty of other firms that we can invest in. Our only issue right now is the limited number of syariah-compliant equity instruments and that is why we encourage Islamic banks to list on Bursa Malaysia.
Q: PNB called for more syariah-compliant/Islamic banks, but with a population of just 36 million, wouldn’t the market be too competitive if everyone were to convert into Islamic banking?
A: Certainly not. If you look at the number of syariah-compliant stocks on Bursa Malaysia, they only make up about 60 per cent of the total market capitalisation. The balance of 40 per cent, a big chunk would be the financial services and from our perspective, there are enough Islamic funds for syariah-compliant instruments. So, apart from PNB, there is EPF (Employees Provident Fund) that has set up the RM100 billion Islamic fund to invest in syariah-compliant funds. It is our belief that there is a lot of demand, so we need to increase the supply.
Q: Why is PNB looking at reducing its cash holding by five per cent to 15 per cent from 20 per cent? What is the motivation for this and how are you planning to go about this?
A: We don’t think we need as much as 20 per cent cash in money market instruments. There is that opportunity to reduce our cash position to a lower level, so we can invest it in private investments, fixed-income securities and such that can generate higher returns. This is all part of our strategic asset relocation where we think we should lower our cash components. As you know, for money market instruments, the yield is below four per cent. Whereas if you were to invest in fixed income and securities, it has, like, five to nine per cent returns. We are always looking at coming up with the right investment combination in order to generate better returns.
Q: One of your goals in the PNB Strategic Plan from 2017-2022 is to further empower the Bumiputera agenda. Your mission statement is to become a distinctive investment fund and to empower the Bumiputera economically. On that note, the government had already rolled out the New Economic Policy (NEP) and in the 40 years, Bumiputera equity holding had only increased very little. The target of 30 per cent still has not been reached. How confident are you that PNB can help push this further?
A: If we look at the increase (of Bumiputera equity shareholding), you are right, it is not that big. However, when NEP was created in 1976, the Bumiputera equity shareholding was about 2.4 per cent. As of 2011, it had increased to 23.5 per cent, which was about 10 times more than 40 years ago. To me, that was a huge increase and a big portion was attributed to PNB. If we were look at our AUM, which is RM266 billion, 90 per cent is invested in listed companies that make up some 10.3 per cent of total Bursa Malaysia capitalisation.
Moving forward, the 23.5 per cent can further be increased, not only through PNB alone but also through programmes by Teraju (Bumiputra Agenda Steering Unit) and other Bumiputera-centric programmes. Yes, we have not made the 30 per cent target, but I do feel that the increase from 2.4 per cent to 23.5 per cent is a huge achievement.
That said, we do not have a target for the Bumiputera equity shareholding in our strategic planning. We want to increase our AUM from RM266 billion to RM350 billion by 2022.
Q: What is the percentage of your unitholders who have less than RM500 and what is the percentage with higher than RM100,000? Following that, how do these percentages fit into the Bumiputera agenda?
A: We have some 13 million unitholders. About 80 per cent are Bumiputera. We accept investments/savings from those as young as six months old and going by that, it is natural that their savings would be very little. We have two ways of going at this. If we can, we want each Malaysian to have at least one ASNB account.
Secondly, we want to increase the total savings/investments into these schemes and ultimately, these are our missions which are to broaden and deepen the participation. That is why we have put a RM200,000 limit on some of these schemes, so that more people can participate. We have also come up with multiple ways that people can increase their investments/savings; one of which is auto deduction from their monthly pay into ASNB. So efforts like this will help those who want to invest further, and for those who have more funds, they are limited to RM200,000 of our units as we believe they are capable of investing in other money market instruments.
Q: How helpful are your current offerings to the Bumiputera?
A: PNB has 12 offerings, six of which have a fixed price. The rest have variable prices. I feel that we have enough investment offerings, but what we want to do is focus on now is our investment our reach, our customer service and increasing the awareness of the importance of savings. That’s why our online investment approach is important as we want to simplify the process as much as possible. So now our unit holders no longer have to physically go to the branches. We do not have any plans to add more to our offerings right now. Having 12 is enough for us.
Q: What is your investment diversification plan?
A: We have said before that we want to increase our investments in unlisted firms. We will use the targeted five per cent decrease from our cash holding to invest in unlisted firms, property or sukuk or fixed-income instruments.
Q: Why did PNB enter the affordable housing business?
A: This was actually a request from the prime minister when he appointed me as chairman of PNB group. He outlined three main objectives. They are to strengthen PNB and PNB group, to increase the participation of Bumiputera in the corporate, human capital and financial sectors and to increase the offerings of affordable housing. I stress that PNB is not encroaching on property developers or other agencies, our objective is to supplement and help them. We expect to launch 1,500 of landed affordable units as soon as possible, pending regulatory approval.
Q: You are selling your landed affordable units for as low as RM200,000 each, a price that most developers are not willing to commit to. How do you manage this, and why are you taking this risk?
A: We are lucky because we own land, which helps push cost down. This includes 57.8ha in Banting, where we will build the 1,560 affordable landed units. We have a business strategy that goes “not for loss”, which means we aim for profit but at a small margin of around five per cent in comparison to the profit margin of a typical developer, which is at some 20 per cent. We also have 4.4ha in Port Dickson, where we can build about 144 units of landed affordable houses. We are doing this depending on demand and the location of the land, so it will be a pragmatic approach. And we are hoping that we can work with each state so they can provide us with ideal land for affordable landed houses.
I must stress that we are not a property developer and our core business is in investment. Our number of units is very small compared with 300,000 units that 1Malaysia People’s Housing Corp is doing, because affordable housing is its main purpose. Our main purpose is investment.
Q: What can we expect from Sime Darby Property, of which you are also the chairman?
A: Sime Darby Property and I&P Group have their own affordable housing components which are being pursued separately.
Q: What can we expect from your strategic firms and core companies?
A: We will start looking at the core companies. We are looking at their total shareholder return (TSR), where they are not doing well. We would like to engage with them, where we think they can do better, and there will be an engagement process. We do not have a board representative in a quite a number of our core companies and we have made the decision in which in all the companies that we have 15 per cent or more shareholding, such as Axiata Group Bhd and MMC Corp Bhd, we will have discussions with them. We are finalising our engagement with them, but this engagement is very much centred on the TSR.
Q: Do you have any plans to increase the shareholding in core companies that you currently hold less than 15 per cent?
A: Our shareholding increase would be done dynamically, but first we need to ensure that we are comfortable with the firm and we have high confidence in the sector that the firm is in. This is also reliant on the management quality, so from time to time we will do the assessment. Our investment style also differs from core companies to strategic companies because with strategic companies, we will hold on. We have more than 40 core companies. Of that, we have some 10 companies that we have more than 15 per cent right now.
Q: What sectors are you bullish on?
A: We like the financial sector because as the gross domestic product grows, so would the sector. We like technology and logistics and healthcare and consumer goods as there is a massive potential there.
Q: How does your asset allocation differ from the EPF?
A: Our asset allocation, as an investment firm, is different from pension funds as these funds would usually focus on assets in fixed income which have higher returns. For PNB, our investment mandate is for those with “pendapatan tinggi” against equity. We do believe in asset allocation and that is why we are keen to invest some five per cent of our cash holding in different asset classes. Through the five per cent, we will have some RM13 billion to invest with.
Q: Can you expand on the online portal for ASNB/Amanah Saham Bumiputera?
A: We have some 50,000 registrations and have seen over RM150 million in investments since the beta roll-up in June. This is good as we are only commercially rolling it out nationwide next month.