The country has long sought to become a global leader in Islamic finance services (IFS), and it has built up its sector to encourage international transactions and foreign investment and participation. While it has always been ranked highly in terms of business, it has generally been viewed more as a local market and less of an international nexus. Malaysia now hopes to put that image behind it and become known the primary hub for sharia-compliant transactions worldwide. The numbers indicate that Malaysia already has a solid lead on other contenders. In the first quarter of 2014, the country issued 63.05% of all sukuk, or Islamic bonds, globally, with Saudi Arabia in a distant second place at 12.84%. The Malaysian ringgit was also the number one currency for sukuk denomination at 58.2%, with the dollar following at 11.2%. The Economist has also stated that though only about a fifth of banking assets in Malaysia are sharia compliant, that is still far more than the 12% average for Muslim countries.
Malaysia has long been a thought and education leader in the area of Islamic finance. The Islamic Financial Services Board, which sets standards globally and was established in 2003, is based in Malaysia. Bank Negara Malaysia (BNM), the central bank, is also very active in building capacity and promoting sharia-related institutions, such as the Centre for Education in Islamic Finance, an academic institution set up in 2005, and the Islamic Banking and Finance Institute of Malaysia, an industry-owned training institute set up in 2001. The Association for Islamic Finance Advancement (AIFA) was founded in 2011 to promote the development of relevant educational institutions globally. BNM argues that these organisations are key to the internationalisation of Malaysia’s market as they train people for both the local and global market.
The country is focused on becoming a cluster for Islamic finance education. As a part of the Economic Transformation Programme, Malaysia plans to educate 55,000 local students and 28,000 foreign students by 2020 and become one of the top destinations for IFS educational programmes. The country also wants to get into the publishing business for Islamic finance textbooks and is aiming for global distribution.
Amat Taap Manshor, CEO of the Financial Accreditation Agency, told OBG, “One of the many consequences of the growing success of IFS in Malaysia is the recognition given to training programmes offered by Islamic finance institutions which contributes a larger and more talented pool of trained Islamic professionals to support the further expansion of IFS globally.”
The development of Malaysia as a centre for Islamic finance education would add RM1.2bn ($374.52m) to the country's GDP and create 4300 related jobs, according to AIFA. Malaysia also has a mature and well-developed system for rating Islamic credit. The country has a number of agencies offering Islamic ratings, as well as being a pioneer in terms of the development of ratings appropriate for Islamic products.
Working hard to replace Malaysia as the global leader, the Dubai International Financial Centre was established in 2004, and in 2013 the emirate said it aimed to become the international capital for Islamic finance. Other cities vying for this position include London. The UK has actually had an IFS market for about as many years as Malaysia, or any other country. In 1982 Al Baraka International Bank started offering sharia-compliant mortgages, while the regulatory framework for Islamic finance was developed starting in 2000, when the Bank of England formed a working group on the topic. In recent years, the UK has become more enthusiastic in its support of IFS.
The country, meanwhile, already has a significant base for Islamic financial education. Importantly, London has the advantage of being a major financial centre for conventional products in its own right. It has a critical mass and access to capital found in few other places. In a 2014 ranking of international financial centres published by Long Finance, a financial research organisation, London was ranked 2nd, Dubai 29th and Kuala Lumpur 35th. The survey also revealed that Malaysia’s major weakness was the perception of Kuala Lumpur (KL) as a highly diversified local market rather than a global or transnational market.
The internationalisation of the sector remains one of the main themes in Malaysia and a primary focus of regulation and liberalisation. The limits on foreign ownership of Islamic banks was lifted from 49% to 70% in 2009, and a number of institutions and mechanisms were put into place, or combined, to further facilitate cross-border Islamic finance. The Islamic Finance Stability Forum was established in 2010 with the aim of promoting the stability of cross-border Islamic finance. The International Islamic Liquidity Management Corporation started functioning in 2011 and is designed to help maintain cross-border liquidity. Malaysia has also developed the first sharia-compliant international commodity market, Bursa Suq Al Sila, which was launched in 2009 and is run by Bursa Malaysia.
FSBP & IFSA
The Financial Sector Blueprint takes aim specifically at the internationalisation of Malaysia’s Islamic finance. It calls for more offerings, better liquidity and better links to other markets. Other goals include: developing Islamic fund and wealth management; standardising relevant documentation; developing Labuan as an international retakaful centre; and developing the needed talent through additional training. The 2013 Islamic Financial Services Act (IFSA) is also keen on establishing KL as the undisputed leader of global Islamic finance.
The hope is that by making regulation and supervision more granular and transparent, the market will be better able to adapt to the needs of customers, especially as they look for more complex and sophisticated products. The IFSA also recognises that some Islamic financial centres and institutions have lost ground because of weak supervision and that tighter regulation will boost confidence in the sector and attract more international participation.
In many ways the IFSA takes Islamic finance from a product that primarily appeals to Muslim-majority markets to one that has international appeal. It is designed in part to harmonise supervision of the Malaysian IFS markets and larger, capital markets, especially those in the West. For most of its history, IFS has existed in a highly liberal environment where governments did their best to stay out of the way of organic development; when they did intervene, it was usually to promote the sector. Islamic finance is transitioning now, and by getting ahead of the pack in making this transition and by taking tough measures early on, Malaysia is in a good position to lead the sector globally.
However, Malaysia wants to do more than just be a leader. When it comes to Islamic finance, it may have greater ambitions. Some observers have suggested in local press reports that the country will become an IFS superpower, on par with Tokyo, New York or London. Much of this optimism is based on the development of the Tun Razak Exchange (TRX). The TRX is a RM26bn ($8.11bn) mixed-use real estate development. It has been lauded in the local press as Malaysia’s Canary Wharf or Wall Street and is designed to not only to make the city a financial capital but also one of the top 20 urban areas in the world in terms of liveability.
The project has been implemented along with a set of incentives and pledges from the highest levels to scrutinise business procedures to make sure nothing gets in the way of the goal. Taxes are to be reduced, depreciation accelerated and stamp duties cut. At the launch of the project, the plan was to have it finished by 2015. Estimates from late 2013 suggest that half the business going through TRX will be sharia complaint.
Still, concerns remain, and some observers worry that Malaysia, despite its good education system and sound sharia institutions, will have trouble staffing the Wall Street of Islamic finance. The country simply does not have the population to fill the human resource hole, and critics say the quality of spoken English has declined in recent years, bringing into doubt the international element of the country’s ambitions. Deficiencies in the conventional side of the sector could also hold back this vision. Malaysia does not have access to the international capital that is available in places like London. At the same time, smaller markets, such as Brunei Darussalam and Indonesia, are starting to realise the potential of Islamic finance and could challenge Malaysia in terms of competition for capital.
One surprising consequence of Malaysia’s leadership is that it may actually be too far ahead of the pack. According to an article in the Arab News, due to its advanced systems and the sophistication of its architecture, Malaysia may find a mismatch between its markets and the Islamic markets which its hopes to serve.
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