Malaysia determined to lead world in Islamic finance
Malaysia appears well positioned to become the world’s leading provider of Islamic finance, with its market in sukuk bonds the jewel in the country’s crown
In August, while the Europeans hit the beaches for their summer holidays, Najib Tun Razak, the prime minister of Malaysia, was busy introducing the country’s Islamic finance marketplace to the world and revealing its new brand identity – ‘Malaysia: World’s Islamic Finance Marketplace’.
In doing so he extended an invitation “to the global financial community to collaborate with and mutually benefit” from this new development. The question on our lips is whether the sukuk market will finally become a viable new wealth product channel for the private banking industry that can assist its growth plans?
Marketing campaigns aside, Malaysia’s confidence in this area is well-founded. Islamic financial investments are already worth $1.8tn (€1.35tn) – with the industry forecasting this to grow to $2.5tn by 2015.
Malaysia appears to think so. It has spent significant time, money and resources in creating a framework for their present Islamic investment offering as a result of the efforts of Bank Negara Malaysia (BNM), the Securities Commission Malaysia, Sharia scholars and the Islamic financial industry community. And it is already bearing fruits.
Islamic finance, unlike its traditional counterpart, requires the structuring of products which do not pay interest on investments.
Malaysia’s expertise in this area meant that in 2010, they held the third largest amount of Islamic assets in the world, but crucially for a population of just 30m people, the vast majority of these assets were from abroad.
Islamic bonds
One of the largest investment classes within Islamic finance are sukuks. Sukuk is the Arabic name for financial certificates but is commonly used to refer to the Islamic equivalent of bonds.
Since fixed income interest bearing bonds are not permissible under Islam, sukuk securities are structured to comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest. In this one specific area of Islamic finance (which accounts for approximately $205bn of Islamic investments), Malaysia controls 70 per cent, or $144bn.
The opposition
Other market centres recognise the opportunity too. In June 2013, Britain’s Baroness Warsi issued a rallying cry to the City of London to become the global capital of Islamic finance.
While Malaysia controls as significant a share of the sukuk market as it currently does, London will need to leverage all its expertise and talents to challenge Kuala Lumpur. Plans to promote UK financial institutions abroad and establishing a regulator and accreditation for educational courses are just some of the plans being mooted.
But Malaysia is in no mood to slow up. Earlier this year, the country passed the Islamic Financial Services Act Malaysia, which among other things meant that senior appointments for firms trading Islamic products, would need to be approved by the BNM. As the central bank responsible for creating the world’s pre-eminent global Islamic financial centre (both Iran and Saudi Arabia cater to large domestic markets), the BNM is unlikely to let its nation’s position slip in the face of competition, least of all from London.
James Horrax is senior associate at wealth management think-tank Scorpio Partnership
