Malaysia aims to take Islamic finance to its next level

While other Muslim countries appear to be either fair-weather or ambivalent friends of Islamic finance, Malaysian policymakers continue with their strong support with the core objective of taking the industry to its next logical level.

Malaysia aims to take Islamic finance to its next level

Malaysian Prime Minister Najib Abdul Razak at the Global Islamic Finance Forum.

Whether it is in the numerous speeches by the prime minister and his Cabinet, or by the regulatory officials; or in the National Development Plan; or in agreements signed with foreign governments; or in the investment strategies of its two sovereign wealth funds (SWFs); or even at international forums such as the annual World Bank/IMF meeting or the Board of Governors meeting of the Islamic Development Bank, Islamic finance is never off the agenda.

Malaysia Inc. exudes a confidence about its Islamic finance policy proposition which is certainly unique. None of the self-denial about the sector as in Saudi Arabia and Turkey; none of the policy ambivalence as in Iran, Sudan and Pakistan; none of the policy confusion as in Kuwait, Jordan and the UAE; and none of the institutional hostility and cynicism to Islamic finance as in Egypt, Libya, Algeria, Morocco and Tunisia.

In Baku in June, Ahmad Husni Hanadzlah, the Second Finance Minister of Malaysia, called on the member countries of the Islamic Development Bank (IDB) to consider establishing “the world’s first supra-sovereign wealth fund (SWF)” to invest in a Shariah-compliant way in Muslim economies on the same returns expectations as for the SWF industry in general.

At the World Bank/IMF annual meeting in Washington DC in October, Hanadzlah, in his capacity as a governor of the International Monetary Fund (IMF) and the World Bank for Malaysia, was the only one from any country (including the 57 Muslim member countries of the Organization of Islamic Conference (OIC) to urge the Plenary Session of the meetings to consider using Islamic finance in its development projects and for its green agenda.

The latest Islamic finance policy manifestation of Kuala Lumpur was last week at the 18th World Congress of Accountants 2010, which was held in Kuala Lumpur for the first time, when Prime Minister Najib Abdul Razak in his keynote address urged delegates to study the benefits and approach of Islamic finance and how these could contribute to economic growth, financial stability and better reporting standards and disclosure.

Similarly the message from Dr. Zeti Akhtar Aziz, governor of Bank Negara Malaysia, the central bank, in her speech to the plenary session, was to the point. The globalization of Islamic finance offers huge potential for greater intermediation of cross border financial flows, especially surplus funds, between economies from different parts of the world, thus presenting new opportunities for the industry. Islamic finance is an increasingly important component of the international financial system and continues to gain global acceptance. As such, she added, strengthening the accounting, financial reporting, auditing and disclosure standards are very much a vital part of this process, as it is for the conventional financial sector.

Perhaps the most wide-ranging of the new measures relating to Islamic finance came in Prime Minister Najib’s Budget 2011 speech, which was delivered in his additional capacity as the country’s finance minister to the Dewan Rakyat (Parliament) in October.

The Budget, said Najib, emphasizes the transformation of Malaysia into a developed and high-income economy with inclusive and sustainable development, spearheaded by the private sector. A number of strategic high-impact projects are expected to involve both conventional and Islamic financing and investment.

To this end, Government-Linked Investment Companies (GLICs) will be allowed to increase investment in overseas markets to explore opportunities for better returns. For example, the Employees Provident Fund’s (EPF) will increase its investment overseas from the current 7 percent to 20 percent of the total assets managed, including in Islamic instruments such as sukuk.

In addition, Bursa Malaysia will launch sukuk and conventional bonds to meet retail investors’ demand for fixed income instruments in order to boost the bond and sukuk market.  “Efforts will be taken to strengthen Malaysia’s position as a premier Islamic capital market,” said Najib. “Bursa Malaysia will develop an international board to enable foreign securities to be listed including Shariah-compliant products. To further promote innovation in Islamic securities products, the government proposes that expenses for the issuance of Islamic securities which adopt the principles of Murabaha and Bai Bithaman Ajil based on Tawarru’ be given tax deduction. This will strengthen Malaysia’s position as the leading sukuk market and promote transactions in Bursa Suq al-Sila, the world’s first Shariah-compliant commodity trading platform. The government proposes that takaful contributions for export credit be given double tax deduction.”

Najib in the last few weeks played host to Indian Prime Minister Manmohan Singh, on a visit to Malaysia on his way to the G20 summit, and a delegation from Mubadala Development Company, the SWF of Abu Dhabi.

The Indian prime minister saw firsthand the progress Malaysia has achieved in Islamic finance over the last three decades. Singh since his days as finance minister has been a strong supporter of facilitating Islamic finance in India.

“There have been from time to time demands for experimenting (with) Islamic banking. I would certainly recommend to the Reserve Bank of India (RBI), which is looking into the question, to look at what is happening in Malaysia in this regard,” Singh emphasized at a meeting in Kuala Lumpur with Najib.

In his speech at the signing of the strategic partnership between 1Malaysia Development Berhad (1MDB), the Malaysian SWF, and Mubadala, Najib said that the partnership is a testimony of the strong bond established between Malaysia and Abu Dhabi and through it, the Middle East.

The parties signed two agreements – one for Mubadala to participate in the Kuala Lumpur International Financial District (KLIFD) development led by 1MDB, which has an estimated cost in excess of RM26 billion and commencing in 2011, and the other regarding a RM21.7 billion (USD7 billion) investment in the Sarawak Corridor of Renewable Energy.

“We intend to advance growth by forging international partnerships in the firm belief that the right partners can contribute to mutual prosperity. Major international banks and professional financial services firms, including Shariah experts will be located in the KLIFD. More importantly, such strategic development will further strengthen Malaysia’s position as the premier international Islamic financial hub,” explained Najib.

Indeed, the increased cooperation between Malaysian Islamic financial institutions, GLCs and SWFs with partners from abroad is a priority for the Malaysian government. Malaysia’s Second Finance Minister Ahmad Husni Hanadzlah at the Khazanah Megatrends Forum in October 2010 urged Malaysian Islamic financial institutions to widen their reach to leverage opportunities both at home and abroad to take the sector to the next level.

He urged institutions including banks, asset management companies and non-banking financial institutions such as Lembaga Tabung Haji (the Malaysian Pilgrims’ Management Fund) to expand by cooperating with partners abroad.

“The financial services industry,” explained Minister Husni, “is one of our 12 National Key Economic Areas and is a critical pillar in our thrust forward. Yes, we have done very well in the sukuk market but we now have to seriously develop our capacity in other products and services that would command greater premiums not only within the domestic market but also across the seas. In this context, the expansion of a Shariah-compliant asset management industry would give impact and add value across the financial services sector. The asset management industry can directly support as well as complement a number of sectors, including the Takaful industry, private equity, mutual funds, private wealth management, trust and Wakaf.”

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