The Malaysian Islamic finance scene has been humming quietly for the past 30 years, but with the awakened global interest in the industry, there is a new urgency in Kuala Lumpur to maintain its lead and become an international Shariah-compliant financial hub.
There is no doubt that the global appetite for Shariah-compliant goods and services is growing.
Some of this is fuelled by rising Muslim insistence on Shariah-compliancy and the adjustments global companies are making to tap into this rich source of alternative funding.As industries boom in the Middle-East and Southeast Asia, so do the need for Islamic finance services.
The Islamic debt market is also becoming more sophisticated with the Shariah-compliant banking assets valued at US$1.7 trillion that will reach US$3.4 trillion by 2018, according to Ernst and Young estimates.
Islamic finance is also viewed favourably by the mainstream. In recent years, interest in Islamic finance has spiked in traditionally non-Muslim areas. South Africa, the UK and Hong Kong are some of the countries that have woken up to the potential of Islamic finance as an alternative source of funding, each having issued their own Sukuk to tap into the wealth of Muslim investors.
Even the American investment bank, Goldman Sachs, saw the value of Islamic financing when it raised US$500 million from its first Sukuk issue.The recent banking crisis resulting from high levels of leveraging has opened the eyes of western bankers to Islamic finance’s inherent quality of being based closer to the real economy.
Being far less leveraged than conventional finance, it is seen as insulated from vulnerabilities that were exposed during the banking crisis.Bank Negara Malaysia Governor Tan Sri Zeti Akhtar Aziz said Malaysia’s focus is to keep its Islamic finance industry connected with the underlying economic activities by maintaining as much diligence on the businesses being financed.With these already in place, Malaysia is now pushing strongly to make Islamic Finance its unique selling point in its quest to become a major finance hub, and is part of the present Government’s strategy to achieve the nation’s goal of becoming a high income nation by 2020.
Malaysia already has a leg-up in halal goods and services. According to a recent Thomson Reuters survey, Malaysia leads the world in its global Islamic Economic Indicator, ahead of the UAE, Bahrain, Oman, Saudi Arabia, Qatar, Kuwait, Jordan, Pakistan and Indonesia.In the more important category for global Islamic finance markets, the top three countries for the survey are Malaysia, Bahrain and the United Arab Emirates.
The country is the world’s largest Shariah-compliant bond market where corporate issuance jumped 26.6% to RM61.9 billion, from RM48.9 billion in 2013 according to numbers from Bloomberg.
According to Bank Negara, Malaysia leads globally in integrating Islamic finance with 20 fully-fledged Islamic banks including 10 that are foreign-owned. It is also home to five international financial institutions from Europe, the GCC and Asia Pacific. Malaysia’s total Islamic banking assets totalled RM527.2 billion, which is the 24.1 % of its banking system.
Compare this to just 12.1% at the end of 2006.Malaysia’s stock market, Bursa Malaysia remains the top exchange for Sukuk listings amounting to RM102 billion as of August 2013.Malaysia also leads the way in Islamic capital market development, with more than 60% of the global Sukuk market amounting to US$164 billion worth as of the first half of 2014.
Much of this lead in market share came from Malaysia’s long history of innovation in Islamic financing to meet its own needs. Malaysia has been building up the infrastructure for Islamic finance for over 30 years and is now head and shoulders above rivals in regulating Islamic finance. In 2013 it passed the Islamic Financial Services Act in 2013, a more comprehensive iteration of its Islamic Banking Act of 1983 to oversee operations within the country.
In comparison, other Islamic finance centres like Dubai and London rely on common banking laws with Islamic finance add-ons to govern its Shariah finance operations.
Bank Negara also envision that Islamic finance will continue to play a bigger share of the Malaysian financial sector that would internationalise its Islamic finance marketplace by creating environment to mobilise higher volumes of international Islamic financial flows that will be channelled through innovative Islamic financial instruments.
Even though Kuala Lumpur is already a regional hub for Sukuk in Southeast Asia, it has so far focused on tapping into its large and deep base of institutional investors.Much of this new gambit to become an international financial centre is focused on the new financial district being quietly built in the capital city.
Called the Tun Razak Exchange, or TRX for short, the site covers nearly 29 ha in prime location in Kuala Lumpur. It will eventually have 11 new buildings of at least 25 floors or higher and is expected to be fully completed in 10 years.
The multi-billion ringgit TRX development represents the physical nucleus to focus all the good soft groundwork that Malaysia has done and provide a beacon to Islamic finance players and investors.
But Malaysia’s ambitions will have to take into account other financial centres which not only include neighbours Singapore, Jakarta and Hong Kong, but also from Dubai, UAE and an aggressive London, England who are all vying to take the lead.
“London is already the biggest centre for Islamic finance outside the Islamic world. I want London to stand alongside Dubai and Kuala Lumpur as one of the greatest capitals of Islamic finance anywhere in the world,” said UK Prime Minister David Cameron when his country hosted the first World Islamic Economic Forum in 2013.
To stave off the competition Malaysia will count on its still many advantages.Malaysia still shines as an example of a stable political and economic environment, something that investors will look with keen interest in these recently troubled times.
And while London, or other financial centres that are not located within Muslim-majority states, can adapt their experience in conventional banking to the Shariah sector, they are still playing catch up.For this reason too, Malaysia will attract issuers because, due to more advanced innovation and liberalised approach, it accepts a larger variety of Shariah principles and products compared to Islamic finance practiced in the Middle East. Some examples include exchangeable and hybrid Sukuk, and more recently, Sukuk denominated in Chinese Renminbi and Japanese Yen–all of which appeared for the first time in Malaysia.Shan Saeed, chief economist and global investment strategist at IQI Group Holdings which serves clients in Kuala Lumpur, Singapore, Hong Kong, London, Melbourne and Dubai, says Malaysia can work on its advantages to achieve this ambition.
He said, among the international Islamic finance community, the TRX project is highly anticipated as a good thing and an investment opportunity, especially for investors and financiers who see Kuala Lumpur as the Islamic finance bridge between the Middle East and the Asia Pacific economic area.”Malaysia needs to have a positioning strategy in the minds of the financial investors,” Shan said in an interview.
“It will maintain the lead for some time before other financial centres catch up.”Shan said one concern that also needed to be addressed is whether Malaysia has enough Islamic finance talent to serve the needs of an international Islamic financial district.He said in this regard, Malaysia must find the solution both quickly and sustainable.
“Continuous investment in education will give dividend in the long run,” he said.Shan also noted that while Malaysia is working hard to produce the talent needed in country, the “option of hiring qualified foreign talent should be considered.
“On the talent side, Bank Negara’s Zeti perhaps has said it best when she pointed out that Malaysia is working on providing a continuous stream of talent to work in its new Islamic financial district.She said recently that Malaysian institutions like the International Centre for Education in Islamic Finance (INCEIF) and the Islamic Banking and Finance Institute of Malaysia (IBFIM) are creating a body of knowledge workers.
INCEIF, with 2,000 students at any one time, is the world’s leading university to study Islamic finance while its International Shariah Research Academy is responsible for producing internationally acceptable rules for Islamic finance.IBFIM in turn provides hands-on vocational training for students and consults with banks that want to become Shariah-compliant.
“All these (institutions) give Malaysia greater status within the ummah and the global Islamic community, and will provide the pipeline of talent for banks,” Dr Zeti said recently in an interview with The Economist.With planning done and groundwork put in place, all Malaysia has to do now is to execute its strategy to become an Islamic finance hub to rival the rest of the world.