Malaysia has been a pioneer in the Islamic finance space. Bucking the trend of underperformance of much of the world in 2010, the Malaysian Islamic banking system remained resilient, with banks registering a profit. Total deposits for the Malaysian Islamic banking system increased from RM235.9bn in end 1999 to RM277.5bn a year later, according to the Bank Negara Malaysia. Malaysia also remained the global leader in sukuk issuance, with a 66% market share or $94bn of total global sukuk outstanding as at end-2010. Shari’ah retail funds under management grew at a compound annual growth rate of nearly 26% over five years, according to Cerulli Associates. So what has been the key to Malaysian growth?
As State Street points out in its Vision Focus report on the industry, Islamic finance in Malaysia started as a strategy for greater financial inclusion. “It provided a means for the government to reach out to the underserved segment of its society by offering basic banking and insurance products that were compatible with Shari’ah principles,” explains the firm.
The country liberalised its market and has increased foreign entry and participation. The Ninth Malaysia Plan, which covers 2006 to 2010, seeks to position Malaysia as a global hub, and growth is supported by significant investment in human capital and the establishment of the Centre for Education in Islamic Finance (INCEIF) in 2006. Malaysia also established the International Shari’ah Research Academy (ISRA) to conduct research on Islamic issues. In 2010, Bank Negara also participated in the establishment of the International Islamic Liquidity Management Corporation (IILM), to support liquidity needs of the system, and the Association of Shari’ah Advisors (ASAS) was created to regulate the conduct, ethics, and accreditation of scholars.
“Malaysia addressed the issue of scholar concentration on boards by creating a centre of learning. We have more and more scholars coming on to the market,” explains Zaha Rina Zahari, now a consultant and advisor, but an industry veteran and a leading figure in the development of Islamic finance in the country. Zahari has held numerous senior posts in her career, including that of chief executive officer of RHB Securities, where she spearheaded the development of the first Islamic index, the RHB Dow Jones Islamic Index. “As more and more banks and financial institutions come out with Islamic products, the margins are getting less and less. But as more people participate it will be the consumer who will benefit,” she says.
Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic, believes the Malaysia model can be exported to other countries. “Malaysia is the living example of how Islamic finance has grown and has over taken conventional finance. The model is very viable, for any country. To me, if any OIC country wanted to adopt the legislative and legal framework for Islamic finance [that Malaysia uses] I can confidentially say that Islamic finance will no longer be an alternative in the market, but a main solution,” he says.
The use of the Dublin-based UCITS platform for cross-border distribution of Islamic funds has paved the way for a faster growth of Asia’s Islamic funds industry. The joint venture between Principal Global Investors and the CIMB Group produced the first UCITS funds targeted for global distribution, notably in Asean and the Asia-Pacific, in January this year. CIMB-Principal Islamic registered three UCITS-compliant equity funds – the Islamic Global Emerging Markets Fund; Islamic Asia-Pacific ex-Japan Fund; and Islamic Asean Equity Fund. It is distributing these funds in seven jurisdictions - the UK, Switzerland, Germany, Saudi Arabia, Bahrain, UAE and Singapore.
Datuk Noripah Kamso, Chief Executive, CIMB-Principal Islamic Asset Management says, “By registering on a global fund platform such as Dublin, Malaysian asset managers can entice international investors, retail as well as institutional, to enter the Malaysian investment space. This pioneering initiative to internationalise Malaysian Islamic asset management capabilities clearly supports the Malaysian International Islamic Financial Centre (MIFC)’s aspiration to be a global hub for Islamic finance.
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