DUBAI HSBC Holdings Plc (HSBA.L) is to significantly scale back the scope of its global Islamic banking operations, as the business becomes the latest area to be affected by a wider restructuring at the UK-based bank.
HSBC is cutting thousands of jobs and exiting non-core businesses as part of Chief Executive Stuart Gulliver's plans to cut costs and improve profitability. The bank has already divested assets in more than 26 countries, including the United States, South Korea and Pakistan.
Having been one of the pioneers in developing Islamic finance among big global banks, HSBC last year became the first Western bank to issue an Islamic bond when its Middle East unit sold a $500 million (309 million pounds) sukuk. Yet it has decided it wasn't big enough in all its markets for its presence to be worthwhile.
The bank, which did not say how many jobs would be cut as a result of the move, will focus its Islamic finance business on customers in Malaysia and Saudi Arabia and keep a limited presence in Indonesia, the bank said in a statement on Thursday.
Except for wholesale banking operations, HSBC will no longer offer Islamic products in Britain, the United Arab Emirates, Bahrain, Bangladesh, Singapore and Mauritius, it said.
The bank said that, after the move, it would still retain around 83 percent of its Islamic business revenue.
"Its Islamic activities in the affected countries were sub-scale so they decided to wind them down in an effort to reduce costs," said Jaap Meijer, director of equity research at Dubai-based Arqaam Capital. "Except for maybe the UAE, it's not likely to have a big impact on the Gulf region."
Staff at HSBC Amanah, the bank's Islamic banking arm, look set to be absorbed into the main bank, although there will be some job losses.
"People have been leaving HSBC Amanah and moving to other jobs as it became more clear that this was the direction the bank was taking," said one source familiar with the matter, regarding the move to cease operations in the UAE.
Islamic finance, based on principles such a ban on interest and pure monetary speculation, has grown rapidly in recent years because it draws on pools of investment money in the oil-rich Gulf and Asia that have been relatively untouched by the global financial crisis.
The industry's global assets are expected to rise 33 percent from 2010 levels to $1.1 trillion by the end of 2012, according to consultants Ernst & Young.
However, HSBC's move raises a number of questions for both the bank and the wider Islamic finance industry.
Among them is the ability of conventional banks to maintain segregated funds for Islamic customers.
The segregation on offer has been questioned by some scholars as being insufficient, while fully-fledged Islamic banks have complained they are at a disadvantage in competing with bigger international players.
In Qatar, authorities banned the sale of Islamic banking products by conventional banks in February 2011 to retain the purity of Islamic funds.
In a statement, an HSBC spokesman said each of the lender's global businesses offering Islamic products would continue to operate to the appropriate sharia oversight during a transition period.
HSBC's withdrawal will also raise issues for those in the affected countries who want to bank according to sharia principles.
"Given its global reputation, HSBC is often the preferred choice for Islamic clients. This move is a shame because there are many that just wouldn't be as comfortable going to another local Islamic bank," said a senior executive at a Gulf lender.
(Additional reporting by Shaheen Pasha and Amran Abocar; Editing by David Holmes)