Malaysia is considered to be a pioneer in Islamic finance, a field that has grown at a dramatic rate over the past few years due to a combination of oil-driven financial liquidity in the Gulf and an increasing proportion of Muslims worldwide seeking sharia-compliant products.
By allowing non-Islamic commercial and investment banks to offer Islamic banking in foreign currencies, Bank Negara, the country's central bank, hopes to further position its leadership in the growing global market for Islamic bonds known as sukuk.
Such bonds are becoming an increasingly popular means of channelling funds into emerging economies.
Developed five years ago, their popularity has grown in the past couple of years due to the increasing liquidity in the Gulf region combined with a sharp fall in equities, which has lead Middle East investors to take their funds out of stocks.
Zeti Akhtar Aziz, Bank Negara's governor, said, "This is particularly the case for the Middle East and Asia, which are among the world's fastest growing regions in the global economy. We want, and aim, to develop Malaysia into a centre for the origination, distribution and trading of sukuk to provide further impetus to the development of an increasingly vibrant and progressive bond market in Malaysia, as well as in the Asian region."
Malaysia currently serves as the world's largest Islamic bond market, accounting for $47bn, 70% of the total bonds outstanding worldwide.
The rush to capitalise on the growth of sukuk is evident. In March this year the UK became the first Western country to announce plans to issue such bonds, drafting legislation to provide companies issuing sharia-compliant bonds the same tax relief as those issuing conventional bonds.
The global Islamic finance market, currently valued at $1trn by Merrill Lynch, is forecast to rise as the Muslim population grows to 1.6bn people within the next 10 years and the increase in the wealth of high net worth individuals in the Middle East is expected to reach $1.8trn by 2010.
With this in mind, conventional banks are increasingly developing Islamic-compliant products and even launching their own fully Islamic subsidiaries.
Western banks such as leading global banks HSBC and Standard Chartered, both of which have a large and historic presence in Malaysia, have had Islamic banking operations for nearly a decade. Along with New York-based Citigroup, they have expressed an interest in opening up Islamic banking subsidiaries in Malaysia.
This follows efforts to expand the country's presence as a global hub for Islamic finance and tap into the wealth of funds originating from the Middle East. In 2005 three Gulf banks were given licences to operate in the country. They are Kuwait Finance House (KFH), Saudi Arabia's Al Rahji and Asian Finance Bank, a Gulf consortium lead by Qatar International Bank (QIB).
K Salman Younis, managing director of KFH Malaysia, told OBG, "The Gulf has tremendous liquidity and there is an increasing need from Gulf investors to diversify their portfolios, particularly towards the East. Gulf investors, when looking for a new market, want to partner with someone whom they have established a relationship with and trust."
Even with all this success, many industry observers say Malaysian banks need to be more aggressive in entering foreign markets. Of the local banks, only Commerce International Merchant Bankers (CIMB) and Maybank are considered to have a significant presence in the Gulf Co-operation Council region.
While Malaysia is considered to have some of the most sophisticated Islamic banking services on offer, it accounts for just 11% of global Islamic assets, compared, for example to 21% for Kuwait.
Vaseehar Hassan Abdul Razack, chairman of RHB Islamic Bank, which under RHB Bank became the first commercial banking group in Malaysia to have a full-fledged Islamic bank, told OBG, "Malaysia has excellent legal structure and framework but few local players that operate from an international perspective. Malaysian banks are too inward looking and need to invest in the Gulf as well as its quid pro quo. KFH is aggressive in Malaysia, so why are the leading Malaysian banks not in turn aggressive in the Gulf?"
While there are still challenges ahead, new regulations permitting international and conventional banks to offer Islamic banking are not only improving Malaysia's international exposure, but improving the offering domestically as well.