Is the internationalisation of IF in Malaysia waning?

Malaysia’s Islamic finance runs the risk of becoming ordinary, albeit a local champion still

By RADZUAN TAJUDDIN / Pic By TMR

The latest ICD-Thomson Reuters Islamic Finance (IF) Development Report 2017 ranked Malaysia as the top performing market yet again, a familiar feat which it has maintained in preceding years.

It scored the highest for quantitative development, knowledge and awareness. It ranked second for governance, but conspicuously low on corporate social responsibility — one of the many upbeat assessment of Malaysia’s IF.

Likewise, the Islamic Financial Services Board (IFSB) Islamic Financial Services Industry Stability Report 2018 continues to place Malaysia as the largest sukuk market globally — despite a declining market share of 37.9% in 2017 compared to more than half a few years ago.

Malaysia’s Islamic fund global share stood at 32%, a marked improvement. Its Islamic banking assets grew further domestically and captured about 9.1% of the global share.

At a glance, there was never really any doubt about Malaysia’s global leadership in this space. Its strong foothold since the establishment of the first Islamic bank 35 years ago was predicated by the desire to excel and pioneer in almost every aspect and segment of the Islamic market.

The ecosystem built and the enabling environment created had shaped the industry landscape — one that is competitive, innovative and thriving.

Its role in mainstreaming IF is widely acknowledged.

As the industry spreads and grows, it has managed to gain the recognition of world bodies and institutions such as the World Bank, International Monetary Fund and even international standard-setting institutions in banking, capital market and insurance.

Malaysia’s impact on the industry had been so significant and far reaching to the extent that Kuala Lumpur (KL) became the natural choice and place for key institutions like the IFSB and International Islamic Liquidity Management Corp to base their operations.

The one obvious trait that sets Malaysia apart from others is its leadership, one capable of steering orderly development by setting a clear vision and direction on how the industry should grow and evolve.

The outcome is self-evident. Malaysia became the global darling of anything IF, duly recognised as an important hub and a benchmark for others.

While the past has been glorious, there have also been missteps and avoidance along the way. If they continue unheeded and without taking any remedy, Malaysia’s IF runs the risk of becoming ordinary, albeit a local champion still.

What Ails the Industry?

What then ails the industry? As of now, Malaysia’s effort to internationalise IF and seek greater scale appears to have been left stunted.

It has been stunned by the assertion that “one needs to first be an international financial centre to become an international Islamic financial centre” and that the existing ecosystem is “not there” just yet.

It also faces the challenge “to do the impossible to make it possible”. These appear to have placed a damper to the entire process and aspiration.

It thus then begs the question: Why have internationalisation in all those great plans to begin with? The vision of a niche internationalisation is in itself disruptive.

To be fair, it was never meant to be a “quick win”. But to make it happen, inevitably difficult structural reforms were needed on many fronts. This involves the markets, industry, regulatory and supervisory institutions, and many others.

Importantly, all stakeholders must clearly appreciate the value proposition, understand the end game, the significance of building global capability and how a globally competitive IF marketplace works to the advantage of the nation — one that has multiple spillover effects onto the economy, as well as strengthen the country’s global competitiveness in its true sense.

The challenges and complexity of navigating, due to the dynamics of the marketplace, are tough. But having a strong and effective leadership with the ability to effectively steer the course is critical and in itself mitigating.

Need To Reinvent

It is thus imperative for a stakeholder platform such as the Malaysia International Islamic Financial Centre to reinvent itself and act as a truly effective enabler to strategically drive the internationalisation agenda forward.

Unfortunately, such passivity has its costs. It is sad to note that KL’s ranking as a financial centre has slipped to the 40th spot, according to the Global Financial Centres Index 24 in its September
2018 Report. It is now ranked below other Islamic financial centres such as Dubai (15th), Abu Dhabi (26th) and Doha (34th).

If the complacency persists, it will be no surprise that even newcomers such as Astana (up to 61st from 88th) could potentially overtake KL. It is plainly clear and apparent that centres like Dubai, Abu Dhabi and Doha had demonstrated that they have done something right in order to be where they are now.

The ball is now in Malaysia’s court. It either stays the course or recalibrate to make a difference. As Nicki Minaj once said: “When you don’t make moves and when you don’t climb up the ladder, everybody loves you because you’re not competition.”

  • Radzuan Tajuddin runs a consultancy specialising in strategy development of capital markets and sustainable finance. The views expressed are of the writer and do not necessarily reflect the stand of the newspaper’s owners and editorial board.