Islamic finance is one area where Malaysian competitiveness has gained a degree of credibility it has yet to achieve in other sectors
Spearheaded by Bank Negara Malaysia governor Zeti Akhtar Aziz, Malaysia’s drive to become a regional hub for Islamic financial services was born out of the realization of an innate comparative advantage: for a start, the country is predominantly Muslim, but crucially, its financial sector is relatively sophisticated and the climate politically stable.
But what makes it a winning proposition is the lack of credible competition in the south-east. Although Indonesia’s population is bigger, the authorities there have enough to worry about shoring up the country’s banking sector before developing a framework to encourage Islamic finance; and Pakistan, although making some headway, is nevertheless very much a late arrival into the market.
Malaysia’s success in building Islamic finance domestically is beyond doubt: 70% of new domestic bond issues are Islamically compliant sukuk structures. It has made strides as something of an ambassador for the market too, having launched the first global sovereign sukuk in 2002, and more recently the first Shariah compliant exchangeable bond, a $750 million issue by Khazanah Nasional.
But the ground-breaking initiative was the launch of the Malaysia International Islamic Financial Centre in August 2006. Zeti calls it “a catalyst in our efforts for Malaysia to becoming a centre” of Islamic finance, from origination to wealth management to insurance and asset management. Among many other incentives, this centre will allow foreigners to own up to 100% of Malaysia-based Islamic banks. Rather than keeping the world out, Malaysia appears to be trying to coax it to come in.
Malaysia already has three foreign Islamic banks licensed and active in the country: Kuwait Finance House (KFH), Asian Finance Bank and the Saudi Arabian group Al Rajhi, whose marketing material seems to dominate every lamppost in central Kuala Lumpur these days. Abdullah Sulaiman al-Rajhi, chairman of Al Rajhi says: “We look at Malaysia as a platform to do more business in this region.” His firm is planning to have opened 50 branches by 2010.
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But another of those groups, while active in Malaysia, may feel entitled to wonder just how truly open the country is. Kuwait Finance House was one of the bidders for the Utama Group’s stake in the banking group Rashid Hussain, but lost out instead to a bid (curiously, not even the highest bid) from Malaysia’s own main pension fund. KFH had announced plans to turn Rashid Hussain into a global Islamic finance powerhouse, headquartered in Malaysia; had it succeeded, this would no doubt have bolstered Malaysia’s claims to openness.
Still, the country has the most comprehensive legislative environment for Islamic finance in the region and appears to have put the most thought into its future development , especially through training institutions and qualifications. It has also grasped the important role incentives can play in bringing business in from overseas. —C.W.