With total global Islamic finance assets now surpassing $1000bn and about 300 Islamic financial institutions in operation worldwide, Malaysia has made a sound call in cultivating expertise in what continues to be a fast-growing and increasingly international market in which even non-Islamic players are beginning to want to play a part. From Malaysia’s perspective, becoming a world leader in the Islamic finance market will help it to forge valuable ties with the Middle East.
Malaysia prides itself on its well-established Islamic banking sector and has sought to establish a position of leadership in the Islamic finance industry. Its current slew of initiatives comes on the back of an impressive list of industry firsts: Malaysia ranks first for sukuk (Islamic bond) issuance, with 67% of global outstanding sukuk, and 7% of global outstanding sukuk in international currencies. In 2006, the combined volumes of Islamic bonds and loans issued rose to a record high of more than $21bn, a rise of 33% on 2005.
In 2002, Malaysia issued the world’s first global sovereign Islamic bond, a $600m Malaysian Global Sukuk. And the world’s first global corporate Islamic bond (sukuk Ijarah) was issued out of Malaysia by Malaysian conglomerate Kumpulan Guthrie Berhad.
Many analysts believe that the country’s strong performance in the past 20 years and the emergence of a number of Islamic banks have put them in a strong position to enable sustained growth over the coming years. At the end of 2006, Islamic banks in Malaysia accounted for 12% of the country’s banking market.
In addition, about 86% of total securities on the Bursa Malaysia are shariah-compliant securities, and represent about 65% of total market capitalisation, and about 36% of all shariah-listed equity funds in the world are listed on the Bursa Malaysia. But in an initiative intended to compound its reputation and to carve out a unique niche in the global market place, the country has established the Malaysia International Financial Centre (MIFC) and an associated International Centre for Education in Islamic Finance (ICEIF).
The MIFC was launched in August 2006 to build on an already thriving portfolio of activities. In essence, the centre comprises a range of institutions offering Islamic financial products and services in any currency, both to residents and non-residents alike.
The government hopes that, having established the centre, the country can become a hub for the origination, distribution and trading of Islamic treasury and capital market instruments, a recognised centre for Islamic fund and wealth management services, and for international currency Islamic financial services, including savings and lending.
To date, more than 40 financial institutions are participating in this market, a number of which are Islamic banking subsidiaries of foreign players, including ABN AMRO Bank Berhad, Bank of China, Citibank Berhad and Deutsche Bank (Malaysia) Berhad.
Malaysia believes it has created exactly the right kind of infrastructure that is conducive to Islamic finance, including a dedicated judge at the High Court to preside over Islamic finance cases, and dedicated arbitration rules for Islamic finance disputes under the Kuala Lumpur Regional Centre for Arbitration.
From the perspective of capacity building, the country knows that by creating a knowledge hub for the Islamic finance industry, it is in a position to forge and maximise its commercial and financial ties throughout not only the south-east Asian region, but also across the Muslim world as a whole.
The ICEIF was launched in 2006 with an initial intake of 800 students (200 of whom are non-Malaysian). It offers a Certified Islamic Finance Programme for financial professionals, which can be taken in three years or over a period of up to six years.
Malaysian Islamic scholars are working hard on the important issue of convergence. Islamic finance strictures are not universal – traditionally, the Malaysian approach is more relaxed than the approach elsewhere, which potentially might exclude sources of investment. “The key term now is ‘GCC compliant’,” one banker told fDi.
Abu Hassan, director of communications at the Bank Negara Malaysia, the central bank, insists that the task of convergence is nearly complete. “We’re 80% of the way there,” he says. And he adds that the bank is very much on track to making Malaysia a new knowledge centre in the realm of Islamic finance.