Source: Sudin Haron & KuMajdi Yamirudeng. Islamic Banking in Thailand: Prospects and Challenges. International Journal of Islamic Financial Services Vol. 5 No.2
Introduction
Thailand is a multi-religious country and Islam is the second largest religion with over six million followers. Majority of Muslims are populated in the province of Yala, Pattani, Narathiwat, Satun and Songkla. Since these provinces, located in the Southern Region, are situated adjacent to the Northern States of Malaysia, they are therefore easily exposed and influenced by the Malaysian Islamic banking system. The Islamic banking system in Thailand first started when the Government Savings Bank (GSB) introduced the ‘Islamic window’ concept in 1998. Similar method was also implemented by the Bank for Agriculture and Agricultural Cooperatives (BAAC) in 1999 and followed by the introduction of ‘Islamic Branch’ by Krung Thai Bank in 2001. The Islamic banking system expanded further when Islamic Bank of Thailand was established by the Thai government in 2003.
Since Islamic banking in Thailand is relatively new, it faces many challenges. Among these are economic region, public acceptance, rules and regulations, meeting public demand and infrastructure. Overcoming these challenges involves the hard works and diligent efforts from various parties. The main objective of this paper is to elaborate in detail those challenges and provide remedial solutions. This paper is divided into five sections. Section Two and Three provide an overview of the total banking system and the development of the Islamic banking system in Thailand, respectively. Section Four discusses the prospects and challenges of this new system as an alternative to the conventional system. Section Five provides the concluding remarks.
An Overview of the Banking System in Thailand
The banking system in Thailand started when British-owned Hong Kong and Shanghai Bank established its branch in 1888. It was followed six years later by the Chartered Bank in 1894, and the French bank, Banque de I’ Indochine in 1897. Up until 1955, when the Thai Cabinet passed a resolution to restrict the approval of new banks, there were 12 foreign banks operating in Thailand. The main reason for these banks setting up branches in Thailand is to facilitate trading between their home country and Thailand. The first local commercial bank, Siam Commercial Bank (formerly known as Thai Commercial Bank) was established in 1906 (BOT; 1992: 174). Prior to this, the financial institutions in Thailand were pawnshops, which had been in operation since 1866.
The establishment of Siam Commercial Bank fuelled the incorporation of domestic banks led by Chinese traders and noblemen in the community. The founders and shareholders of these new banks were also shareholders of the Siam Commercial Bank. By the end of 2000, there were 34 commercial banks in Thailand, of which 13 were locally incorporated11 and 21 were branches of foreign banks (BOT; 2000: 2).
The classifications of these institutions are based on business activities and are supervised by different authorities. Generally, these institutions belong to two groups i.e. banking and non-banking institutions. Banking institutions include Bank of Thailand (BOT), commercial banks, International Banking Facilities (IBF), specialized banks (i.e. the Government Savings Bank (GSB), Bank for Agriculture and Agricultural Cooperatives (BAAC), EXIM Bank and the Government Housing Bank (GHB)). Non-banks financial institutions comprise of finance companies, finance and securities companies, Mutual Fund Management Companies, The Industrial Finance Corporation of Thailand, Small Industry Finance Corporation, Small Industry Credit Guarantee Corporation, Social Security Fund, credit foncier companies, life insurance companies, agricultural cooperatives, savings cooperatives, and pawn shops. In response to the Asian financial crisis in 1997, several new organizations have been set up as part of the financial sector restructuring effort, namely, the Financial Sector Restructuring Authority (FRA), the Radanasin Bank (RAB), the Asset Management Corporation (AMC), and the Property Loan Management Organization (PLMO).
The Development of Islamic Banking System in Thailand
The history of Islamic financial system in Thailand started with the establishment of a cooperative society, Pattani Islamic Saving Cooperative, that operates based on Shariah in 1987. By the end of 2001, four other Islamic saving cooperatives were established in Southern Thailand, i.e. Ibnu Affan Saving Cooperative (Pattani), As-Siddiq Saving Cooperative (Songkla), Saqaffah Islam Saving Cooperative (Krabi), and Al-Islamiah Saving Cooperative (Phuket). These Islamic cooperative societies have successfully established themselves as viable financial institutions in managing and mobilizing Muslims funds in this region. For example, total assets for Pattani Islamic Saving Cooperative at the end of 2001 were 90 million baht, while total assets for the Ibnu Affan Islamic Saving Cooperative were 60 million baht as at the end of 2002.
The Islamic banking products and services were first introduced to Muslims in Thailand with the implementation of “Islamic Window” by GSB in 1998. A similar concept was also introduced by BAAC in 1999. The Krung Thai Bank is the first bank to set-up an ‘Islamic Branch’ in 2001. This branch offers a full range of basic banking products and services based on Islamic principles.
Another key milestone for Islamic banking in Thailand was the enactment of the Islamic Bank of Thailand Act 2002. This law paved the way for the establishment of the first full-pledge Islamic bank, Islamic Bank of Thailand in 2003. This bank, which is located in Bangkok plans to open branches in Yala, Pattani, Narathiwat and Songkla.
Prospects and Challenges
It is expected that Islamic financial institutions in Thailand are able to provide banking products and services not only to Muslims but also to non-Muslim customers. It is the hope of the government that by allowing Islamic banks to operate in Thailand, they would be able to fulfill the following objectives (Division of Financial Policy and Financial Institution; 2001):
The programme to develop Southern Provinces as a hub for Halal (permitted) foods as outlined in the government Master Plan creates opportunities for Islamic banks. The banks can participate in the programme by providing capital to entrepreneurs under the principles of mudharabah (trust financing) and musyarakah (joint-venture). However, Islamic banking system in Thailand faces several challenges. Among the challenges are (1) economic potential (2) public acceptance, (3) rules and regulations, and (4) human resource.
Introduction
Thailand is a multi-religious country and Islam is the second largest religion with over six million followers. Majority of Muslims are populated in the province of Yala, Pattani, Narathiwat, Satun and Songkla. Since these provinces, located in the Southern Region, are situated adjacent to the Northern States of Malaysia, they are therefore easily exposed and influenced by the Malaysian Islamic banking system. The Islamic banking system in Thailand first started when the Government Savings Bank (GSB) introduced the ‘Islamic window’ concept in 1998. Similar method was also implemented by the Bank for Agriculture and Agricultural Cooperatives (BAAC) in 1999 and followed by the introduction of ‘Islamic Branch’ by Krung Thai Bank in 2001. The Islamic banking system expanded further when Islamic Bank of Thailand was established by the Thai government in 2003.
Since Islamic banking in Thailand is relatively new, it faces many challenges. Among these are economic region, public acceptance, rules and regulations, meeting public demand and infrastructure. Overcoming these challenges involves the hard works and diligent efforts from various parties. The main objective of this paper is to elaborate in detail those challenges and provide remedial solutions. This paper is divided into five sections. Section Two and Three provide an overview of the total banking system and the development of the Islamic banking system in Thailand, respectively. Section Four discusses the prospects and challenges of this new system as an alternative to the conventional system. Section Five provides the concluding remarks.
An Overview of the Banking System in Thailand
The banking system in Thailand started when British-owned Hong Kong and Shanghai Bank established its branch in 1888. It was followed six years later by the Chartered Bank in 1894, and the French bank, Banque de I’ Indochine in 1897. Up until 1955, when the Thai Cabinet passed a resolution to restrict the approval of new banks, there were 12 foreign banks operating in Thailand. The main reason for these banks setting up branches in Thailand is to facilitate trading between their home country and Thailand. The first local commercial bank, Siam Commercial Bank (formerly known as Thai Commercial Bank) was established in 1906 (BOT; 1992: 174). Prior to this, the financial institutions in Thailand were pawnshops, which had been in operation since 1866.
The establishment of Siam Commercial Bank fuelled the incorporation of domestic banks led by Chinese traders and noblemen in the community. The founders and shareholders of these new banks were also shareholders of the Siam Commercial Bank. By the end of 2000, there were 34 commercial banks in Thailand, of which 13 were locally incorporated11 and 21 were branches of foreign banks (BOT; 2000: 2).
The classifications of these institutions are based on business activities and are supervised by different authorities. Generally, these institutions belong to two groups i.e. banking and non-banking institutions. Banking institutions include Bank of Thailand (BOT), commercial banks, International Banking Facilities (IBF), specialized banks (i.e. the Government Savings Bank (GSB), Bank for Agriculture and Agricultural Cooperatives (BAAC), EXIM Bank and the Government Housing Bank (GHB)). Non-banks financial institutions comprise of finance companies, finance and securities companies, Mutual Fund Management Companies, The Industrial Finance Corporation of Thailand, Small Industry Finance Corporation, Small Industry Credit Guarantee Corporation, Social Security Fund, credit foncier companies, life insurance companies, agricultural cooperatives, savings cooperatives, and pawn shops. In response to the Asian financial crisis in 1997, several new organizations have been set up as part of the financial sector restructuring effort, namely, the Financial Sector Restructuring Authority (FRA), the Radanasin Bank (RAB), the Asset Management Corporation (AMC), and the Property Loan Management Organization (PLMO).
The Development of Islamic Banking System in Thailand
The history of Islamic financial system in Thailand started with the establishment of a cooperative society, Pattani Islamic Saving Cooperative, that operates based on Shariah in 1987. By the end of 2001, four other Islamic saving cooperatives were established in Southern Thailand, i.e. Ibnu Affan Saving Cooperative (Pattani), As-Siddiq Saving Cooperative (Songkla), Saqaffah Islam Saving Cooperative (Krabi), and Al-Islamiah Saving Cooperative (Phuket). These Islamic cooperative societies have successfully established themselves as viable financial institutions in managing and mobilizing Muslims funds in this region. For example, total assets for Pattani Islamic Saving Cooperative at the end of 2001 were 90 million baht, while total assets for the Ibnu Affan Islamic Saving Cooperative were 60 million baht as at the end of 2002.
The Islamic banking products and services were first introduced to Muslims in Thailand with the implementation of “Islamic Window” by GSB in 1998. A similar concept was also introduced by BAAC in 1999. The Krung Thai Bank is the first bank to set-up an ‘Islamic Branch’ in 2001. This branch offers a full range of basic banking products and services based on Islamic principles.
Another key milestone for Islamic banking in Thailand was the enactment of the Islamic Bank of Thailand Act 2002. This law paved the way for the establishment of the first full-pledge Islamic bank, Islamic Bank of Thailand in 2003. This bank, which is located in Bangkok plans to open branches in Yala, Pattani, Narathiwat and Songkla.
Prospects and Challenges
It is expected that Islamic financial institutions in Thailand are able to provide banking products and services not only to Muslims but also to non-Muslim customers. It is the hope of the government that by allowing Islamic banks to operate in Thailand, they would be able to fulfill the following objectives (Division of Financial Policy and Financial Institution; 2001):
- To meet the banking and credit needs of the Muslim population in Thailand in conformity with Shariah.
- To cultivate savings habit among the Thai Muslims, particularly for pilgrimage purposes.
- To supply low cost funds for entrepreneurs who wish to undertake investment projects especially in the southern border provinces.
- To attract savings and investments from other Muslim countries.
- To encourage non-Islamic financial institutions to participate in the Islamic banking sector.
The programme to develop Southern Provinces as a hub for Halal (permitted) foods as outlined in the government Master Plan creates opportunities for Islamic banks. The banks can participate in the programme by providing capital to entrepreneurs under the principles of mudharabah (trust financing) and musyarakah (joint-venture). However, Islamic banking system in Thailand faces several challenges. Among the challenges are (1) economic potential (2) public acceptance, (3) rules and regulations, and (4) human resource.
