Interview: Rauf Rashid

What are the growth prospects for Malaysia’s Islamic banking industry?

RAUF RASHID: We have come a long way since the Islamic Banking Act was introduced in 1983, going from having just one Islamic bank to many. We are also seeing rapid growth in countries such as Qatar, Turkey, Indonesia, Saudi Arabia and the UAE. These markets are expected to see their collective Islamic commercial banking assets reach about $1.6trn in 2018. Today, of the world’s total Islamic banking assets, Malaysia contributes 22%, or $125bn, and this is set to grow to more than $390bn by 2018. Moreover, ongoing liberalisation of the financial sector is creating opportunities for partnerships between Malaysian and global banks, largely those in the Middle East. This may become a driver for East-East connections, promoting capital movement and increasing the size of the global Islamic finance industry.

In what ways will the Islamic Financial Services (IFS) Act, introduced in July 2013, promote financial stability and sharia compliance?

RAUF: Malaysia has an advantage over other Islamic finance jurisdictions in that regulations were in place well before the industry was, which meant a well-established regulatory framework was already in place. Malaysia introduced its first Islamic Banking Act in 1983 and Takaful(Islamic insurance) Act in 1984. The IFS Act merged all previous acts and has thus set Malaysia apart from other markets by providing greater regulatory clarity to industry players.

Which factors are likely to help sustain growth in the family takaful segment in 2014-15?

RAUF: Malaysia has emerged as the world’s largest family takaful market, with total premiums estimated at $14.7bn in 2013. Within Malaysia, family takaful commands almost two-thirds of the takaful industry’s domestic market share. This growth can be attributed to several factors, including proven operating models, a young Muslim population and regulatory initiatives such as the Takaful Operational Framework 2012, the IFS Act 2013, and the Risk-based Capital Framework for Takaful. The maturity of regulations across all areas of Islamic finance, including sukuk(Islamic bond) issuance, has made Malaysia a leading destination for global institutions looking to tap into the strong demand for long-term investments. As such, it has also strengthened the country’s position as a regional centre of excellence for the takaful industry.

How do the different sharia interpretations affect the future of Islamic product development?

RAUF: During the 1990s, the first sharia-compliant products in Malaysia were conventional products packaged as Islamic products. Over time, market forces helped shape these into what the market needed. During the 2013 World Islamic Banking Conference in Singapore, one of the main topics was the harmonisation of the Islamic banking codes. While Islamic jurisdictions agree on the majority of sharia-related points, there is still a lot of focus on the differences. One misconception is that the four main sharia schools of thought are in disaccord about Islamic rulings issued for financial products, when in fact there appears to be a high consensus of agreement. That said, there is still debate when analysing existing financial products and developing new ones that have to meet ethical sharia requirements.

What is the potential for financial centres in the West to position themselves as key IFS hubs?

RAUF: The emergence of the UK as a Western hub for Islamic finance shows the importance of the industry as a whole. After the 2007-08 financial crisis, many governments started to understand the significance of asset-backed finance. As a major financial centre, London recognises the potential of Islamic finance as a contributor to foster growth in the global economy. The New York Stock Exchange already works with Islamic compliance at a minor level. It is likely that Islamic banking will gain steam in the West in the coming years.