Islamic finance sector in Malaysia is yet to reach its full potential


It was only last year that Malaysia rose through the ranks to become the global leader in Islamic banking and nance.

As noted in the Global Islamic Finance Report 2016, the country surpassed Iran in the Islamic Finance Country Index (IFCI) for the first time since the inception of IFCI in 2011, largely due to the government’s commitment to use Islamic banking and finance as a policy tool and an integral part of the economic agenda.

Bank Negara Malaysia (BNM) in a recent strategic paper noted that the market share of Islamic banks in Malaysia quadrupled from 7.1% in 2010 to reach 28% in 2016.

Yet, the industry’s annual growth rate slowed from 24.2% in 2011 to 8.2% in 2016, signalling a need to explore new opportunities for sustained growth.

The central bank also said the local Islamic finance industry is well supported by comprehensive market infrastructure, a robust regulatory framework and dynamic market participants.

These efforts are not surprising, given the rise of Islamic finance across the world. Over the past two decades, the global Islamic financial industry has grown to register an overall total asset of US$1.88 trillion (RM8.05 trillion) as at end-2015, as per the Islamic Financial Services Industry Stability Report 2016.

The World Bank and Islamic Development Bank Group’s Global Report on Islamic Finance 2016 said Shariah- compliant financial products and services are now offered in 50 Muslim and non-Muslim jurisdictions worldwide.

BNM’s July 2017 statistics showed total assets of Malaysia’s Islamic banking system (IBS) (comprising Islamic banks, Islamic banking operations of commercial banks, and investment or merchant banks) as at January 2007 stood at RM126.27 billion.

As at January 2017, the figure had risen to RM584.45 billion. By June 2017, the industry’s total assets reached RM610.52 billion.

Total loans applied to Islamic banks amounted to RM21.92 billion in January this year before declining to RM19.74 billion in June.

Total loans approved for Islamic banks in January stood at RM8.69 billion in January 2017 and rose to RM10.45 billion in June.

For non-performing or impaired financing, the IBS (for Islamic banks, commercial banks, and investment or merchant banks) recorded a total of RM6.36 billion in January 2007.

By December that year, non-performing financing dropped to RM5.56 billion and remained relatively flat over the next two years, settling at RM5.69 billion as at December 2009, as per the latest numbers provided by BNM.

Malaysia has done much to develop a Shariah-compliant ecosystem, beginning with the institutionalisation of Islamic financial players in 1980, which saw the formation of the first Shariah committee by Bank Islam Malaysia Bhd that then became the first Islamic bank established under the Islamic Banking Act 1983.

In 1997, a centralised Shariah advisory was created, including the Shariah Advisory Council, the Dedicated Muamalat Court and several talent and knowledge instutitions to nurture talents and generate knowledge.

By 2007, the diversification of Islamic financial business had begun, thus requiring legal and regulatory frame- works to ensure end-to-end Shariah compliance of such ventures. Among these was the Islamic Financial Services Act (IFSA) 2013, a comprehensive legal framework fully consistent with Shariah principles in all aspects of regula- tion and supervision from licensing to the winding-up of an institution.

The year 2017 has not been short of action either. Last month, Securities Commission Malaysia (SC) said it would launch a sustainable and responsible investing (SRI) investment funds framework by year-end to capitalise on the values shared by SRI and Islamic finance.

The framework comes on the back of SC’s SRI sukuk framework, introduced in 2014 to continue pioneering the development of a Shariah- compliant SRI segment.

Moody’s Investors Service Inc also said in an April report that it expects Shariah-compliant investment accounts at local banks to display strong growth over the next three to five years, with an upward trajectory of Shariah-abiding investment accounts in the country already seen since July 2015 following the implementation of IFSA 2013.

Yet, as the central bank has pointed out, the industry’s annual growth rate has reduced from double-digit to single-digit expansion.

Calls have been made for greater broadening of the offering mindset — to extend beyond compliance, to deliver value propositions not just to financial consumers but also to the wider stakeholders within the society and economy at large.

The industry also needs to move beyond short-term objectives to take a long-term view, with performance measurement based on both financial as well as non-financial aspects such as people and the planet (green sukuk, for example). Key stakeholders — consumers, employees and the public — need to be more proactive in implementing an impact-based approach that fosters good conduct. After all, a main principle of Islamic finance is to take on sustainable, interest-free projects with high returns to be distributed to shareholders, thus maximising the social benefits and bringing prosperity to the economy.