It’s All About the Sukuk

Islamic financing in Malaysia was kick-started in 1983 when the Islamic Banking Act 1983, the country’s first law for Islamic banking, was passed. Islamic banking in Malaysia was introduced via “windows,“ which allowed conventional financial institutions to offer Shariah-compliant banking products and services. Unlike countries such as Qatar, where legislation now requires Islamic banks to be standalone, maintaining this policy supported the creation of a dynamic and competitive Islamic industry. The same year, a Sharia-compliant government Investment Act was introduced to allow the government to issue Sharia-compliant investment certificates, or sukuk, to facilitate the liquidity management of Islamic banks. Progressive liberalization, which allowed foreign institutions to obtain Islamic banking licenses, saw an increase of players in the industry; Malaysia now has 16 licenced Islamic banks, of which 6 are subsidiaries of foreign institutions. Today, Malaysia’s Islamic banking assets amount to $65.6 billion and the industry sees a robust average growth rate of around 18-20% annually.

The role of Bank Negara Malaysia (BNM), the country’s central bank, has been crucial in establishing the right regulatory framework and creating an environment where the Islamic financial industry continues to flourish more than 30 years since its inception. In 1994, BNM introduced an Islamic Interbank Money Market (IIMM), which remains unique to Malaysia. “Malaysia has been distinct from the very beginning by having a strong public policy stance, and a mix of experimentation and development of a vision,“ explained Jaseem Ahmed, Secretary-General of the Islamic Financial Services Board (IFSB), a Kuala Lumpur-based organization set up to issue global standards to promote stability in the Islamic financial services industry.
Malaysia has also been particularly successful in other countries at addressing the challenges that prevent Islamic finance from competing with its conventional counterpart. One of the often-cited problems is a shortage of talent in the industry. To address this, in 2005, BNM set up the International Centre for Education in Islamic Finance (INCEIF), the world’s first international university dedicated solely to Islamic Finance. According to independent reports, 11% of the world’s accredited and referenced output on Islamic Finance comes from INCEIF and its related organization, the International Shari’ah Research Academy for Islamic Finance (ISRA).

Another global issue is the negative perception that surrounds Islamic finance. Unlike Turkey, which despite its dominant Muslim community refers to Islamic banking as participation banking, Malaysia has been able to market it as an alterative business model rather than a product targeted at Muslim consumers. According to Raja Teh, CEO of Chinese Malaysian-owned Hong Leong Islamic Banks (HLIB), half of HLIB’s customers are non-Muslims. “This clearly illustrates that the service is meant for everyone.“

Alongside a robust Islamic banking sector is a well-developed takaful industry in Malaysia. Its risk-sharing model is seen as an alternative to conventional insurance and hence appealing to non-Muslim Malaysian customers. A low penetration rate of around 14%, coupled with a large protection and savings gap, “shows that there is so much potential for the Takaful business,“ says Elmie Aman Najas, CEO, AIA Public Takaful.
Malaysia’s success in Islamic finance has made Malaysia the case study for those countries wishing to tap its growing potential. “Malaysia is clearly becoming the Islamic finance capital of the world,“ says Daud Vicary Abdullah, CEO of INCEIF. As countries increasingly turn to Malaysia to learn from its experience, the country assumes a growing role in exporting Islamic finance to the rest of the world. The UK, for example, has set up an advisory board on Islamic finance on which the IFSB sits, and organizations such as INCEIF are responsible for supplying a large pool of talent to the global Islamic finance industry each year. Sukuk issued both by the Malaysian government and Malaysian multinational firms is increasingly denominated in foreign currency, contributing to the internationalization of Islamic finance and creating liquidity in the global Islamic finance market.