11 December 2009

Malaysia ranks third behind Saudi Arabia and Iran in terms of sharia-compliant banking assets, with $86 billion, and third behind Bahrain and Kuwait for the number of Islamic banks, with 53.

These rankings emerged from The Banker magazine's 2009 survey of the top 500 Islamic financial institutions.

Malaysia may not be the world's biggest center for Islamic finance, but it has a good claim to being the most comprehensive. The sector is both poad and varied, with large-scale banking, fund management and capital markets activity alongside the conventional financial sector.

According to the Financial Times, about 45 percent of all Islamic bond, or sukuk, issues between January and July took place in Kuala Lumpur, raising $9.3 billion and putting Malaysia first in the global league table for issuance, far ahead of Iran and Saudi Arabia.

Malaysian Landscape

Bank Negara, the central bank, says 58 percent of outstanding corporate bonds are sukuk, while Malaysia's total outstanding sukuk amounts to $66 billion or 62 percent of global outstanding issuance.

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Just under 19 percent of banking assets are sharia-compliant, according to Zeti Akhtar Aziz, the central bank governor, and the government has set a target of 20 percent by next year.

Standard & poor's, the ratings agency, said in a report published in the summer that the target was 'achievable', given the rapid progress of domestic banks such as Bank Rakyat, with $13 billion in Islamic assets, and Maybank, with $10.6 billion.

On Bursa Malaysia, 88 percent of listed stocks are sharia-compliant, representing 63.7 percent of the market by valuation, according to Najib Razak, the prime minister, in a speech in November to the annual Kuala Lumpur Islamic Forum.

However, many Malaysian companies are relatively small by international standards, with the result that few of them make it into leading Islamic equity global benchmarks. Just 17 out of the 1,268 companies in the FTSE Sharia All-World Index are Malaysian, representing 1 percent of capitalization.

Malaysia is also a big center for Islamic fund management. pwC says there were 149 Islamic funds domiciled and managed in Malaysia by late last year, against 131 in Saudi Arabia.

None of this is an accident. Malaysia regards the success of its Islamic financial sector as a national strategic priority, and is prepared to put the full authority of the state behind it.

The sector has a friendly tax regime that was extended until 2015 in this year's budget and backed up by a range of fresh measures, including stamp duty exemption of 20 percent on Islamic financing instruments and tax deductions on the setup costs of Islamic stockpoking firms and the issuance costs of Islamic securities.

However, although tax peaks and government support have clearly played a significant role in the development of the industry, the critical factor appears to be regulation, which has provided a high degree of legal certainty for issuers and investors, and a climate favorable to innovation.

In contrast to the competing schools of sharia interpretation in the persian Gulf region, Malaysia recognizes only one source of religious legitimacy--rulings by its own Sharia Advisory Council, now entrenched as a statutory organization under the 2009 Central Banking Act.

Tesco of the UK and Toyota of Japan have both issued Malaysian ringgit sukuk in Kuala Lumpur, blazing a trail that may be followed by other local currency Islamic bond issuers.

Thailand and South Korea are both planning local currency sovereign bonds.

pole position

Most recently, Bursa Malaysia has launched the world's first sharia-compliant commodity trading platform, intended to provide a sophisticated mechanism for Islamic banks to manage their liquidity.

Malaysia does face competition. Neighboring Singapore is much better, as it is an established international finance center. While Muslims are in a small minority in the city-state, the Singapore government is still keen to expand the financial sector into Islamic products. Hong Kong has also signaled its intention to develop as a conduit for Islamic investment into and out of mainland China.

However, Malaysia is clearly in pole position to be Asia's Islamic finance hub, if not the world's, helped by its position as host to the Islamic Financial Services Board, which sets international standards for Islamic banking, capital markets and insurance.

"Malaysia is clearly emerging as a leading hub for the growing Islamic finance industry," says Iqbal Khan, head of Fajr Capital and the former chief executive of HSBC Amanah.

It has the best-developed Islamic capital markets, excellent enabling regulations for Islamic financial institutions and a huge tailwind provided by the political leadership of Malaysia.

© Iran Daily 2009