IT IS less than a year before Southeast Asian countries join the Asean Economic Community (AEC). The region will then experience free flow of labour, capital, goods and services, driving liberalisation in many sectors, including the financial industry.
The region’s population is about 620 million, of which almost half are Muslims. There are only 4 million Muslims in Thailand, but due to the integration, financial services for Muslims – or Islamic finance – should not be overlooked. This does not include the opportunity that Thailand could attract funds from oil-producing nations in the Middle East.
Islamic financial institutions offer products and services that are in line with the principles of Islam. Last year, Islamic banking assets reached US$1.7 trillion (Bt54.7 trillion), with an annual growth rate of 17.6 per cent.
According to their religion, Muslims are not allowed to pay or receive interest. Moreover, funds cannot be invested in businesses that are prohibited, such as alcoholic beverages, arms and casinos.
Islamic banks also engage in trade and real economic activities via investments and production.
Joining the AEC will lead to both opportunities and threats. While there is a larger market for Thai Islamic financial institutions to target, they could also face competitors from the region. Hence, there is a need for the country to have a suitable financial infrastructure, and institutions to have a new business plan ready for the competition.
Thailand has three Islamic banks, namely, the Government Savings Bank, the Bank for Agriculture and Agricultural Cooperatives, and the Islamic Bank of Thailand. The first two are conventional banks that offer Islamic financial services (Islamic window), while the third is a full-fledged Islamic bank.
However, despite the system having been introduced to the country in 1998, there are still many obstacles and challenges to be addressed.
First, Thailand’s financial regulations do not support Islamic banks to engage in trade and investments. There is the issue of double taxation increasing the banks’ costs. Therefore, if these laws are not reviewed, Islamic banks will lack the ability to compete, not only with banks in the country, but with others within the region.
The second issue concerns business planning and product innovation. Islamic banks must offer products that are different from those in the conventional market. This is especially important if an Islamic bank wants to increase its non-Muslim customer base.
Islamic banks could target a “niche market”, one that offers an innovative way of saving and investing. As for Muslim customers, they should not feel that the bank is just a conventional bank “labelled” as an Islamic one. Their confidence in the “Islamicity” of the bank is crucial.
The second issue boils down to the third one: human capital.
For innovation to occur, Thailand must have qualified personnel in the field. There should be courses offered. The government should also support students with scholarships to study in countries such as Malaysia – the pioneer of Islamic finance.
Finally, the fourth challenge is due to the Islamic Bank of Thailand Act. Drafted in 2002, it was aimed at promoting and enhancing the country’s first full-fledged Islamic bank. Some clauses, however, became an obstacle to financial liberalisation. Neither foreign investors nor domestic ones can open another full-fledged Islamic bank.
As monopoly is not good for customers, a revision of the Act should occur as soon as possible.
Time is running out for Thailand’s Islamic finance sector to adjust and change for the AEC. Although there are many challenges and obstacles ahead, with the cooperation of involved parties, many things can be done.
The main question is: “Does Thailand want to attract funds from the Middle East and Southeast Asian countries?” If the answer is “Yes”, Thailand should act now.
The author Saran Sarntisart, PhD, CIFP, is a lecturer at the Graduate School of Development Economics, National Institute of Development Administration