Malaysia’s central bank governor has denied that the country’s more stringent regulation of Islamic finance will stifle growth of the sector, even as Pakistan and Arab countries build lighter regimes.
Responding to questions from Emerging Markets, Zeti Akhtar Aziz , governor of Bank Negara Malaysia, denied that the level of regulation could damage the sector’s growth in Malaysia. “There are no impediments, or regulatory arbitrage between the two financial systems [Islamic and non-Islamic],” she said. “Both are competitive and we see both as developing.”
This year, 70% of private issues on the country’s bond market were in Islamic paper, she said.
Approaches to regulation of Islamic finance vary considerably around the world, from the mainly self-regulatory approach of Saudi Arabia to the much tighter regulation of Malaysia. Efforts to harmonise standards are being made most notably by the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
Malaysia last week announced new guidelines, under which local and foreign financial institutions may apply for licences to create Islamic commercial and investment banks. It is offering tax breaks to encourage participation in Islamic banking, insurance and fund management.
Malaysia’s Islamic financial market is arguably the world’s most sophisticated, but measures such as prohibiting the Islamic scholars who certify products as shariah- compliant from advising more than one bank have drawn criticism in the Middle East, where there are no such restrictions.
Dr Shamshad Akhtar, governor of the State Bank of Pakistan in Karachi, told Emerging Markets this weekend that Pakistan is promoting an Islamic financial system “in a more liberal way.”
While not referring specifically to Malaysia, she said: “We don’t want to have an excessive, stifling form of regulatory framework… our objective is to make the thing work in a way that brings diversification, innovation, and enhances the depth and reach.”
Pakistan is a much later starter than Malaysia in developing an Islamic banking system, with six banks active in the area and only 2% of deposits managed in shariah-compliant ways. The country also requires each bank to appoint a shariah advisory board, and has one within the central bank itself, but does not limit the number of boards on which a scholar can serve.