Bank Negara clarifies Fatwa ruling on forex trading

KUALA LUMPUR: Bank Negara Malaysia said today that only licensed financial institutions and money changers are allowed to conduct foreign currency trading.

This statement came about after the National Fatwa Council’s ruling on Wednesday that forex trading is forbidden for Muslims.

The Council’s statement on it being permissible among banks and money changers was not prominently mentioned in the media, which created some confusion among the public.

BNM said licensed commercial banks, Islamic banks, investment banks and international Islamic banks are allowed to buy and sell foreign currency in Malaysia, as provided under the Exchange Control Act 1953.

And under the Money Services Business Act 2011, so too are licensed money services business providers or money changers.

“In addition, Shariah-compliant financial products, including foreign exchange related transactions, offered and transacted by licensed Islamic financial institutions are approved by Shariah Committee of the respective financial institutions with endorsement from the Shariah Advisory Council of BNM,” said the central bank.

International Shariah Research Academy for Islamic Finance (ISRA) head of Research Affairs, Dr Asyraf Wadji Dusuki when contacted, said he lauded the National Fatwa Council’s decision as it is targeted at Muslim individuals who engage in forex trading via the Internet.

He said ISRA research on online forex trading raised a few concerns such as the leverage, rollover interest, the issues of qabd and qabl (status of ownership), and the element of gambling.

Asyraf said it is common from brokers to offer a loan in the form of leverage, which is against Islamic practice.

“For example, when an investor wants to have an open position worth US$1,000, the individual only needs to provide a capital of US$10 while the balance is offered by the broker in the form of a loan,” he said.

This practice, he said, can lead to riba (interest), whereby the broker will profit through what is known as spread – the differences between the bid and ask prices where the broker sells the currency to the trader at a high price and buying it at a low price.

Dr Asyraf added that according to ISRA’s study, almost all forex online platforms are operating without valid licences.


Meanwhile, National Fatwa Council chairman Professor Emeritus Tan Sri Dr Abdul Shukor Husin clarified yesterday that not all the foreign exchange trading (forex trading) is forbidden to Muslims.


In a statement, he said the decision by the council on Wednesday was misreported in several media and explained that it was only referring to foreign currency scheme by individual spot forex through electronic platform.

He said the decision was taken as there were many doubts about the individual spot forex and it involves the trader to use the Internet, with uncertain outcomes.

“Such trading are against the Syarak laws and the Malaysian law,” he said in the statement.

However, he said the decision did not apply to other forms of trading in foreign currencies, such as by licensed money changers or between banks.

He said such trading are permissible as they do not involve currency speculation or uncertain outcomes.

Innovation key to success of Islamic finance industry

Innovation is the key to the future success of the Islamic finance industry and to meet the challenges of contributing to economic growth and to facilitate internationalization of the industry. According to Nor Mohamed Yakcop, minister in the prime minister’s department in Malaysia

“the Islamic financial system has to continually innovate and adapt in order to be competitive. At the same time, innovation is also the driving force behind developing greater diversity of products and services. Therefore there is a need to focus on product innovation and development efforts that will provide a comprehensive array of Shariah-based products for the industry.”

Yakcop was speaking at the KLIFF Islamic Finance Awards dinner which was held recently in Kuala Lumpur. While he may have been speaking in a Malaysian context, his words apply to the Islamic banking industry in general.

Yakcop is no ordinary observer of the Islamic finance industry. He together with others is the architect of the Malaysian Islamic financial system when he was adviser to Jafaar Hussein, the then governor of Bank Negara Malaysia, the central bank, and effectively helped the governor to implement his dream of developing a dual banking system in the country – an Islamic banking system operating side-by-side a conventional one, cooperating but not interacting.

He was also the pioneer of Malaysia’s bilateral payments arrangement of settling accounts between central banks rather than using expensive correspondent banking services in London, New York and Frankfurt; a prime mover behind the concept of an Islamic dinar to settle trading accounts between Muslim countries.

However, Yakcop warned that while in Islamic finance, innovation has been significantly pervasive, the industry needs to further accelerate the innovation momentum to ensure that it achieves its objectives and aspirations. The challenge to innovate and adapt at the same time must be based on the core principles and values as well as the ethics of Islam.

“For innovation to become an important driver of growth, a critical area that needs attention is addressing the shortage of skilled and experienced professionals in the industry. WE need to build a pipeline of talents who have the ability and creativity to develop new ideas and the capacity to run ideas into achievable results,” added Yakcop.

The greater awareness of the inbuilt strength of Islamic finance has contributed toward the increased international participation in Islamic financial markets. Indeed Malaysia has benefited from the internationalization of Islamic finance.

The minister highlighted Malaysia’s leadership in the Islamic financial industry. For instance, in the issuance of sukuk, out of the Top 10 biggest sukuk issued globally in 2010, five originated from Malaysia. For this year to date, global sukuk issuances totaled $54.5 billion and Malaysia accounted for about 67 percent of the issuances.


The country had also attracted continued presence and interest of foreign issuers and investors, which has seen several successful issuances of foreign currency and ringgit denominated sukuk by issuers including the Islamic Development Bank ($500 million), Gulf Investment Corporation (RM600 million), Nomura and National Bank of Abu Dhabi (RM500 million).

Yakcop also stressed that to facilitate greater internationalization of the Islamic capital market, the capacity to structure multi-currency and cross border transactions and to build greater scale needs to be further strengthened.

This would allow intermediaries to make greater inroads into the international market. “The transition into the mainstream of the global financial system will provide opportunities for market intermediaries to seek new frontiers and expand new markets, as well as contribute toward further widening the diversity of products and services.”

In Malaysia specifically, the country’s march toward developed nation status by 2020 has required a shift toward new and competitive growth sectors characterized by higher value added and knowledge intensive activities.

As identified by Prime Minister Mohd Najib Abdul Razak’s Economic Transformation Program, these policy shifts also provide good opportunities for Islamic finance to also develop products which meet the needs of these growth areas.

Indeed in last week’s budget 2012, Najib, who is also Malaysia’s finance minister, outlined several opportunities for the Islamic finance industry including further incentives for certain types of sukuk origination, support for SMEs, for venture capital and the housing industry.

Malaysia Taking Islamic finance further

Malaysia’s Islamic finance sector is further consolidating its position as a market leader, moving to broaden its product range and expand its reach, though it may need to keep an eye on rivals aspiring to emulate its success.

At a recent seminar on Islamic finance held in Istanbul, Mehmet Asutay, the director of the Durham Centre for Islamic Economics and Finance at UK-based Durham University, said Malaysia was positioning itself to capture 25% of the market share in the Islamic banking and finance sectors by 2012.

“Islamic banking and finance has experienced substantial and unprecedented growth in recent years, growing at a rate of 10-15% annually,” Asutay said on September 19, adding that Malaysia was looking to take a major share of the international market.

Malaysia’s place at the centre of the international Islamic finance sector was given further recognition in early September when one of Japan’s leading banks announced it was planning to make Malaysia its global base for Islamic finance as soon as it receives approval from industry regulator Bank Negara Malaysia (BNM).

On September 5, Mizuho Corporate Bank (MHCB), Japan’s third-largest lender, began commercial operations in Malaysia, having been granted a licence by the BNM last June, but bank officials made it clear that launching conventional banking was only a stepping stone to the ultimate objective of breaking into the Islamic financial sector.

Keizo Ohashi, chairman of Mizuho Malaysia, said gaining BNM approval to open an Islamic financial arm would serve as a bridge to the wider sharia-compliant banking market in the region.

“We regard Malaysia as a critical part of our Asia-focused strategy because it is a strategic hub and gateway to business development in ASEAN with its strong infrastructure in Islamic finance,” Ohashi told local media.

According to Zakariya Othman, head of Islamic ratings at local ratings firm RAM, making the move into the Malaysia’s Islamic finance sector is a smart move for overseas lenders.

“By having sharia-compliant financing operations in Malaysia, foreign banks like Mizuho will find it easier to tap into the Islamic market,” Othman said in an interview with the Bloomberg news agency on September 7. “Malaysia, with 17m Muslims, also has a ready market and attractive incentives.”

As well as attracting investment and building on its reputation as a centre for Islamic finance, Malaysia is also branching out into neighbouring markets. In mid-September, Malaysia’s sovereign wealth fund Khazanah Nasional announced it was planning to issue a $78.3m sukuk or Islamic bond. Volatile market conditions subsequently prompted Khazanah to postpone the issue, but the prospect attracted significant attention while it was on the table.

Malaysia 2011 has just been published by Oxford Business Group. You can read the report in our online reader by clicking on this link:The Report: Malaysia 2011