Malaysia is looking to build on its reputation as an Islamic finance centre by maximising its competitive advantages, forging ahead with international expansion, and strengthening the regulatory framework.
With many Muslim-majority countries in the Middle East and North Africa (MENA) region and South East Asia seeing surging growth over the past decade, Islamic finance has shot to prominence. Estimates of its global worth are somewhat hazy - the Islamic Financial Services board estimates that the sector has some $700bn of assets under management, while ratings agency Standard & Poor's (S&P) puts the figure at $4bn. According to recent reports in the international press, the sector is growing at around 10-15% annually.
What is sure is that the sector is thriving, and that Malaysia is one of the world's leading sharia-compliant finance centres. As Zarinah Anwar, the chaiman of the country's Securities Commission (SC) told the Malaysian Islamic Finance Issuers & Investors Forum in August, Malaysia launched its first Islamic-oriented financial institution in 1969 - the Lembaga Tabung Haji (Pilgrims' Board Fund), a government institution that helps Muslims save up for a pilgrimage to Mecca. The first Islamic bank was launched in 1981 and the Malaysian Islamic Finance Centre (MIFC), a collaborative project bringing together participants from public, private and regulatory bodies, was established in 2006 to promote the country as a global centre for sharia-compliant finance.
Sharia-compliant products are now available across Malaysia's financial sector. The market for sukuks (Islamic "bonds") is particularly strong - the country accounts for 60% of those currently outstanding worldwide, and it issued the world's first five-year sovereign sukuk in 2002. More than three-quarters of the bonds launched in Malaysia last year were sukuks, and despite tougher international financing conditions, the market continues to appeal: on August 15, Malaysian national mortgage firm Cagamas issued sukuks worth $606.8m.
Equity is another area of strength. According to Anwar, some 85% of the stocks listed on the Bursa Malaysia (the stock exchange) are sharia-compliant, accounting for almost two-thirds of overall market capitalisation. Increasing numbers of firms apply for registration with the Shariah Advisory Council prior to listing.
While Islamic products have thrived on capital markets, the banking sector also has a strong sharia-compliant element. According to Moody's Investors Service, by April 2008, Islamic banking assets were worth $62bn, or 15.4% of all banking assets in Malaysia. The country's position as an Islamic hub was confirmed when ING Funds, a wing of Dutch bank ING, announced early in September that it would set up the headquarters of its new Islamic finance division in Malaysia.
Having established itself as one of the global leaders in the field of Islamic finance, Malaysia is looking to stay ahead of the pack by expanding operations abroad. To this end, in August the MIFC launched a global communications campaign which "strives to promote Malaysia as a leading Islamic financial hub".
The MIFC stated that Malaysia already offers a particularly strong environment for the sector thanks to its favourable tax levels, liberal foreign exchange rules and tried and tested regulatory framework. The industry is now set to receive a further boost from the 2009 budget announced by Prime Minister Abdullah Ahmad Badawi in August, which will provide a three-year tax holiday on fees and profits on Malaysian sukuks issued abroad.
In a recent interview with the local press, Nik Norishky Thani, executive director of Islamic finance at Dubai International Financial Centre (DIFC), called for the country's financial institutions to become more involved in sharia-compliant finance in the Gulf. According to Thani, projects worth a total $600m in Gulf Cooperation Council (GCC) member states could provide excellent funding opportunities for Malaysia-based firms.
Speaking at the MIFC conference, Anwar echoed this call, saying that it is "important for our domestic intermediaries to increase their visibility abroad and to enhance their focus on regional and global expansion".
The authorities are well aware of some of the challenges faced by Islamic finance globally. International regulation and monitoring remains an area of debate, with some scholars and financiers disagreeing about what sharia-compliance constitutes. Some also worry that the burgeoning but occasionally opaque sector could be sorely tested in a downturn, in part due to inadequate regulation and poorly monitored exposure to risk. While Malaysia, with its decades of experience and strong framework, is in a better position than others, all efforts are being expended to ensure that legislation, oversight and disclosure keep pace with growth and diversification.
"It is [...]essential that steps are taken to enhance investor protection through efforts by industry to invest in compliance, risk management and corporate governance to enable them to discharge their responsibilities to investors appropriately," Anwar said. "At the same time resources have to be invested to enhance investor education to improve investor knowledge in the products they invest and enable them to better manage the risks of investment," he added.