Speaking in Kuala Lumpur on Monday, Bank Negara governor Zeti Akhtar Aziz unveiled six new measures that will constitute the Malaysia International Islamic Finance Centre (MIFC) initiative. She said that the initiatives would “enhance the capabilities of foreign players that have identified Malaysia as a centre to serve the regional markets.”
Of the six new measures, the most important will see Bank Negara issue conditional licences for qualified foreign and local financial institutions to undertake a full range of Islamic banking functions in international currencies.
The moves will counter two of the primary limitations of Malaysian Islamic Finance.
At present, Malaysia’s Islamic bonds are almost entirely issued in ringgit, which limits their appeal to foreign investors. The Malay currency is not freely traded internationally because of measures meant to protect it from speculators, which were put in place following the 1997 Asian financial crisis. Also, bankers are only allowed to conduct Islamic business in foreign currencies on Labuan, the island site of Malaysia’s offshore banking services.
Once the new measures are in place, Labuan offshore Islamic banks and divisions, and even Islamic insurance operations will be able to open operational offices anywhere in Malaysia, for the conduct of non-ringgit business.
“Islamic financial products and services that are transacted in international currencies may now be conducted from anywhere in Malaysia,” Zeti said in her opening address at the Malaysian Islamic Finance Forum 2006.
There are currently six existing offshore Islamic banks and Islamic investment banks operating in Labuan that could take advantage of the initiative.
Under the MIFC, Malaysian Islamic banks and takaful operators (Islamic insurance) will also be granted approval under the existing licence to set up international currency business units within the institutions. These new divisions will have their own accounts separate from the ringgit transactions of the head office and will share the same infrastructure.
Zeti said financial institutions that will be granted the new conditional licenses would enjoy the same tax incentives as currency business units. They will be termed as licensed International Islamic Bank and will be allowed to undertake Islamic commercial and investment banking and Islamic leasing in international currency.
Malaysia has a long history of experience in Islamic finance, but has often been hindered by the focus on the domestic market. The increasing demand for Islamic instruments from a Middle East flush with petrodollars as well as the emergence of rival centres of Islamic finance in Singapore and Dubai have encouraged Malaysia to become more innovative and introduce increasingly outward-looking measures in recent years.
Most notable was the opening of the market to foreign Islamic banks in 2005, a move that has resulted in three new players in the Malaysian market – Kuwait Finance House, a Qatar-led financial services consortium and Saudi Arabia’s Al-Rajhi Banking and Investment Corp.
Meanwhile, the Islamic sector in Malaysia is also facing challenges, such as the lack of a streamlined process to determine acceptability, whether from an investment or sharia perspective, of the Islamic products on offer. The need for approval from various bodies in foreign markets hinders development on the supply side of Islamic finance, the area where observers see a bottleneck in progress.
With the new International Islamic Financial Centre, Malaysia’s Bank Negara is seeking to address this challenge domestically. According to Zeti, the new centre will recognize and accommodate “the various juristic reasoning (of other financial centres) based on contemporary analysis and logical inference so long as it is approved by recognized sharia advisers.”
Though some would argue that sharia compliance is of less importance than pricing and returns in the global Islamic financial market, it is true that Middle Eastern investors have sometimes questioned the validity of Islamic instruments used in Malaysia, particularly in securities and hedging. Though taking into account the ‘various juristic reasoning’ of others is a step towards creating a more centralized standard, it is unclear whether it will be enough to make Malaysian products more acceptable to authorities overseeing such matters in the Middle East.
Among other new measures announced this week, the central bank will introduce new sharia compliant structures for securities, including murahaba based transactions, also known as cost-plus financing. Murabaha based transactions will help manage short-term liquidity in the Islamic inter-bank money market, Zeti said.
In 2005, the country had RM92bn (US$25bn) of outstanding Islamic corporate bonds, over three times the amount outstanding in 2000.
At present, Islamic banking assets stand at RM117bn (US$32bn) and Islamic corporate bonds RM125bn (US$34bn). A total of 26 sukuks (Islamic bonds), worth RM23bn (US$6bn) have been announced in the first six months of this year.
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