The bank's creation stems from a 2001 plan devised by the central bank, Bank Negara Malaysia, to develop the country into the regional Islamic finance hub of South-east Asia. As such, Malaysia is striving to achieve a dual banking system whereby both Islamic and conventional banks can offer Islamic banking products. AFB's chairman, Abdullatif Abdullah al-Mahmoud, said Malaysia's legal and financial structures, developed sharia-compliant framework and large Muslim customer base, give Middle Eastern financial institutions investment confidence in the country.
QIB has a 70% stake in the new bank with Saudia Arabia's Rusd Investment Bank and Kuwait-based Global Investment House owning 20% and 10%, respectively. All three institutions have a strong track record in the Islamic finance market in their respective countries. AFB's CEO, Faisal al-Shuwaikh, said the bank plans to add as many as seven more branches around the country in the next several years and following that, would look to expand its operations to neighbouring countries such as Brunei, Singapore and Indonesia.
Al-Mahmmoud, who is also the managing director of QIB, told reporters at the opening for the new bank, "Strategically, we believe we are opening at the right time - where the Islamic financial services industry in Malaysia is at the threshold of a new stage of development and its instruments are gaining a wider global acceptance."
As part of the drive to make the country a regional hub for Islamic banking and attract more foreign funds into the sector, Prime Minister Abdullah Ahmad Badawi announced last week the relaxation of policies that required ethnic Malays must hold at least 30% of any business. Foreign businesses are now allowed to set up wholly owned foreign currency operations. Tax breaks are being offered for overseas banks to set up Islamic financing operations in the country and100% foreign equity ownership in Islamic finance institutions is also now possible.
"In order to fulfil our objectives concerning the developments of Islamic finance, it is imperative that we transcend geography, race, culture and religious edicts," said Badawi.
Malaysia, where about 60% of the population is Muslim, issues the highest number of Islamic bonds, known as sukuk, worldwide. In November, it allowed the sale of foreign-currency Islamic bonds for the first time. According to last week's government announcements, foreigners who invest in non-ringgit-denominated Islamic securities, including Islamic bond issues in Malaysia, will be exempt from withholding tax on any profit or income.
Malaysia has long been considered a pioneer of Islamic banking, attracting not only reputable Islamic institutions but also conventional international banks such as UK-based HSBC, which recently applied to the central bank for a licence to set up a full-fledged Islamic banking subsidiary in Malaysia.
HSBC Malaysia saw record profits in 2006, largely boosted by its Islamic banking operations, which jumped 65.7% from 2005 to $51.7m. Approximately 12-13% of the local subsidiary's total assets come from Islamic banking business. The central bank predicts this could reach 20% by 2010.