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Positioning Malaysia as an Islamic finance hub

The openness of Malaysia's marketplace has seen increased foreign participation both in terms of institutional presence and participation in the capital market.

To turn a financial centre into a centre or hub is not something to be done overnight or even over a few short years. It is a long process that requires the development of all the necessary components that would not only facilitate the smooth and efficient functioning of the system but also those features that would attract players from within and outside the jurisdiction. Moreover, it needs to demonstrate obvious and significant advantages that the players would gain as compared to doing business elsewhere. Malaysia has been lucky because it has over the years developed the financial, legal and economic infrastructure that allows Islamic financial institutions to compete the conventional counterpart on a level playing field. A few unique features that it has developed made it more attractive than other jurisdictions as we shall deliberate below:

How it all started?

One of the most visible traits of Malaysian Muslim society in general is their pragmatic approach to life. They are tolerant, may be respectful or even generous in attitude towards others, but above all, passionate about their belief, Islam. Even if they are not practising Muslims, they will not easily give up their religion.

Apart from the Muslim Family Law and Malay culture, which were left to the administration of the local rulers or Sultans, the whole economic, finance and public administration were completely conducted in the conventional or usury-based system. To turn Malaysia into an Islamic finance hub as it is today is not something that was planned from the time the first seed of Islamic finance was planted. It was in 1963 when an academician who was concerned about rural poverty suggested the establishment of a savings scheme for pilgrims to the Holy land of Makkah because the rural folks refused to use the interest based banking system to accumulate money for their pilgrimage.

Some six years later, it received strong support from the Malaysian government to establish what is today, a huge conglomerate called Lembaga Tabung Haji (Pilgrims Fund Board). Its investment portfolio includes Islamic banks, Takaful (Islamic insurance) companies, property development, construction, palm oil estates and a host of other companies that have been bringing in a steady Shariah compliant return of around 10 per cent for a long time.

The success of the Pilgrims Fund Board is an example of something simple and pragmatic that has grown to be an internationally recognised institution demonstrating Malaysians as the most disciplined pilgrims in the world. Indeed the success of Pilgrims Fund Board did not catalyse the founding of other financial institutions at all. It was the need to provide alternative financial intermediaries that inspired the government to establish not only the first Islamic bank but also the International Islamic University, Malaysia (IIUM) in 1983. Indeed these two institutions had played very pertinent roles one providing the Islamic banking services and the other the human talents that were very much needed to support the Islamic financial institutions which began to populate the market place especially from 1993 onwards.

The expansion stage

Having one Islamic bank and one takaful company will not help position any country to be the hub of anything at all. Ten years after the first bank was listed on the Kuala Lumpur Stock Exchange, the government allowed other commercial banks to offer Islamic banking services through window operations. This was a landmark decision. In fact all the 17 commercial banks at that time including the foreign banks took the opportunity to offer Islamic banking services. This event facilitated the development of the first Islamic money market in the world, which could not be done when only one Islamic bank was in operation. It also offered fair competition for banking products and services which used to be one of the complaints of those using the services of the sole Islamic bank. Eventually, Bank Negara Malaysia (BNM) or the Central Bank of Malaysia required the window operations to be turned to subsidiaries of the parent conventional banks with separate Boards of Directors.

Development of Shariah framework

After 1993, it was not only the banking industry that made a positive response, indeed the takaful (Islamic insurance), broking, asset management and investment banking also started to align themselves to offer Shariah-compliant services. One of the principle requirements for any institution to offer Shariah-compliant services was and still is the establishment of Shariah Committee. The Shariah Committee must consist of Shariah scholars and practitioners with sound Shariah knowledge to advise all Shariah-related matters of the institutions. The proliferation of Shariah Advisors and Shariah Committees witnessed a number of conflicting decisions made by some of the financial institutions. By 1997, BNM took the stand to establish the Shariah Advisory Council (SAC) at the BNM itself as the highest Shariah authority in Islamic finance to override decisions made by any Shariah Committee. At the same time it limits the number of Shariah Committees a Shariah Advisor can sit in. All appointments of Shariah Committees have to be approved by BNM. The same stand was made by the Securities Commission of Malaysia (SC) for those entities under its purview. SC too had the Shariah Advisory Council whose members are more or less the same individuals who sit at the Shariah Advisory Council of BNM. The rationale is to have consistency in Shariah decisions throughout the country. Again this is another unique feature that exists in Malaysia and so far has no parallel in any other jurisdictions.
Another important decision took place when BNM Act 2009 further reinforced the role and functions of the SAC as the sole authoritative body on Shariah matters pertaining to Islamic banking, takaful and Islamic finance. Its rulings shall prevail over any contradictory ruling given by a Shariah body or committee constituted in Malaysia and that the court and arbitrator are also required to refer to the rulings of the SAC for any proceedings relating Islamic financial business, and such rulings shall be binding.

Development of legal framework

Instead of utilising existing laws for commercial banks and financial intermediaries with probably minimal amendments, Malaysia promulgated specific laws such as the Islamic Bank Act 1983 and Takaful Act 1984 prior to establishing the first Islamic bank in 1983 and the first takaful company in 1985. This is a unique feature of the practice in Malaysia where the legal infrastructure always precedes the establishment of any institution. The evolvement of Islamic finance over the years had been regulated through guidelines and procedures by BNM from time to time in order to ensure that the stakeholders are well protected. By 2013, BNM came up with two very comprehensive Acts, the Financial Services Act 2013 (FSA) and Islamic Financial Services Act 2013 (IFSA). These two Acts are the culmination of efforts to modernise the laws that govern the conduct and supervision of financial institutions in Malaysia. The objectives are to ensure the laws continue to be relevant and effective to maintain financial stability, support financial inclusion and provide adequate consumer protection within a more complex and interconnected regional and global environment. The FSA and IFSA are the amalgamation of several separate laws to allow the financial sector to be governed by a single legislative framework for the conventional and Islamic sectors respectively. The amalgamated laws are the Banking and Financial Institutions Act 1989 (BAFIA), Islamic Banking Act 1983, Insurance Act 1996, Takaful Act 1984, Payment Systems Act 2003 and Exchange Control Act 1953.

Human talent development

One of the most important components that need to be available is the appropriate human resource at all levels of the industry to ensure the success of the institutions. For this purpose, the BNM has established:

1. International Centre for Leadership in Finance (ICLIF) Leadership and Governance Centre, which provides practical and relevant solutions-based leadership and corporate governance programmes.

2. Islamic Banking and Finance Institute of Malaysia (IBFIM) has been designated as an industry-owned institute dedicated to producing well-trained, high competence personnel and executives with the required talent in the Islamic finance industry.

3. Asian Institute of Finance (AIF) has been jointly established by BNM and Securities Commission of Malaysia (SC) to focus on developing human capital across the financial services industry in Asia. It is committed to elevating Malaysia’s role as a premier provider of comprehensive solutions for the financial sector across the region.

4. International Centre for Education in Islamic Finance (INCEIF) was established by BNM in 2005 as a university dedicated to the teaching and training of Islamic Finance at the post graduate and professional levels.

The above are only a sample of initiatives by the BNM, SC and industry to ensure there is sufficient supply of professionals, academics and practitioners at various levels of the industry. This is not to mention the public and private universities that also offer various programmes in Islamic Banking and Finance at the Diploma, Bachelors and higher degree levels to support the growing industry.

Marketing stance

In 2006, the Malaysian International Islamic Finance Centre (MIFC) was established to develop Malaysia’s Islamic finance market by engaging with industry and government. The MIFC is supported by BNM, SC, Labuan Financial Services Authority and Bursa Malaysia (formerly known as the Kuala Lumpur Stock Exchange). Its private sector partners include Islamic banks, conventional banks with Islamic operations, investment banks, brokers, lawyers, Shariah advisory firms, Shariah scholars, accounting and tax advisors, rating agencies and takaful providers. INCEIF is one of two university partners of MIFC.

The MIFC Executive Committee, chaired by BNM Governor, acts as a single coordinating body to provide direction and act collectively in the implementation of recommendations. It also functions as a body to review existing policies for the comprehensive and coordinated promotion of the MIFC initiative, and to align the roles and responsibilities of the respective parts of government and the industry for the development of the MIFC initiative.

Conclusion

In evolving Malaysia as an Islamic financial marketplace, the goal is to be an open marketplace that is linked to a network of other financial hubs. The openness of Malaysia's marketplace has seen increased foreign participation both in terms of institutional presence and participation in the capital market. In doing so the increased internationalisation of Islamic finance would influence the patterns of global financial and economic integration, and intensify financial and economic connectivity between countries. The mobilisation of higher volumes of cross-border Islamic financial flows from a diverse range of market participants will be channelled through innovative and responsible Islamic financial instruments, to meet the diversified and sophisticated needs of trade, investors, markets, corporations and individuals globally.

INCEIF, on its part, will continue to develop talent for the global industry to elevate and advance Islamic financial knowledge and acceptance among the masses. The university has also engaged in key strategic partnerships and collaborations with international bodies and global academic institutions such as the World Bank, the Islamic Financial Services Board and the University of Reading, in order to synergise learning and research in Islamic finance.

Prof Datuk Dr Syed Othman Alhabshi is the Chief Academic Officer of INCEIF – The Global University of Islamic Finance in Malaysia. Since 1969, he has served in various academic capacities in four public universities in the country and his area of expertise is micro finance and takaful. He currently sits on a number of boards of takaful companies in Malaysia and abroad.