Malaysia: Taking Islamic finance further

Malaysia’s Islamic finance sector is further consolidating its position as a market leader, moving to broaden its product range and expand its reach, though it may need to keep an eye on rivals aspiring to emulate its success.

At a recent seminar on Islamic finance held in Istanbul, Mehmet Asutay, the director of the Durham Centre for Islamic Economics and Finance at UK-based Durham University, said Malaysia was positioning itself to capture 25% of the market share in the Islamic banking and finance sectors by 2012.

“Islamic banking and finance has experienced substantial and unprecedented growth in recent years, growing at a rate of 10-15% annually,” Asutay said on September 19, adding that Malaysia was looking to take a major share of the international market.

Malaysia’s place at the centre of the international Islamic finance sector was given further recognition in early September when one of Japan’s leading banks announced it was planning to make Malaysia its global base for Islamic finance as soon as it receives approval from industry regulator Bank Negara Malaysia (BNM).

On September 5, Mizuho Corporate Bank (MHCB), Japan’s third-largest lender, began commercial operations in Malaysia, having been granted a licence by the BNM last June, but bank officials made it clear that launching conventional banking was only a stepping stone to the ultimate objective of breaking into the Islamic financial sector.

Keizo Ohashi, chairman of Mizuho Malaysia, said gaining BNM approval to open an Islamic financial arm would serve as a bridge to the wider sharia-compliant banking market in the region.

“We regard Malaysia as a critical part of our Asia-focused strategy because it is a strategic hub and gateway to business development in ASEAN with its strong infrastructure in Islamic finance,” Ohashi told local media.

According to Zakariya Othman, head of Islamic ratings at local ratings firm RAM, making the move into the Malaysia’s Islamic finance sector is a smart move for overseas lenders.

“By having sharia-compliant financing operations in Malaysia, foreign banks like Mizuho will find it easier to tap into the Islamic market,” Othman said in an interview with the Bloomberg news agency on September 7. “Malaysia, with 17m Muslims, also has a ready market and attractive incentives.”

As well as attracting investment and building on its reputation as a centre for Islamic finance, Malaysia is also branching out into neighbouring markets. In mid-September, Malaysia’s sovereign wealth fund Khazanah Nasional announced it was planning to issue a $78.3m sukuk or Islamic bond. Volatile market conditions subsequently prompted Khazanah to postpone the issue, but the prospect attracted significant attention while it was on the table.

Should a new date be set for the issue, it will be the first-ever offshore sukuk denominated in the Chinese renminbi, with the issue to be floated on Hong Kong’s dim sum market. While it would be a ground-breaking move, it is unclear how responsive the market will be to the Khazanah issue, according to Debashis Dey, a partner at Clifford Chance in Dubai.

“I don’t think anybody really knows what the exposure is by Islamic institutions to Chinese businesses that may or may not be paying them in renminbi,” said Debashis in an interview with the Financial Times on September 21.

While investors may not break down the door to get a slice of Khazanah renminbi sukuk, the Malaysian sovereign fund seems keen to test the waters, however tentatively, as they could run deep given the increasing capital available in the Chinese markets. By developing an awareness of sharia-compliant instruments, especially by using the local denomination, Khazanah will be hoping it can not only whet the appetite for Islamic products but by being the first to serve up such offerings position itself to feed the demand it creates.

About the only possible drawback to the float could be that other countries could use Malaysia’s experience as a basis to break into the renminbi sukuk market it is seeking to establish. Hong Kong, where the issue is taking place, has aspirations to become an Islamic financial centre, riding on the back of its own decades’ worth of experience as a banking centre. The delay to the issue has not helped to get its sharia-compliant market off the ground, especially as there are still some regulatory issues to deal with, in particular taxation and transition costs, before Hong Kong can advance its Islamic finance credentials.

Balancing caution with innovation will be crucial for Malaysia as it seeks to maintain its reputation for breaking new boundaries and place as a world leader in Islamic financing, and indeed strengthen its position through deepening the client pool it can dip into. At least for now it is a case of Malaysia setting the pace and others trying to catch up.

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