ISLAMIC FINANCE IN MALAYSIA
Within the last decade, Malaysia has become the leading hub for the Islamic finance industry worldwide, overtaking major financial centres in the Middle East. This achievement has not only helped to catalyse the growth of Malaysia’s financial services industry, but has become an important showcase for the rest of the Malaysian economy of how Malaysia can be a global leader in a knowledge-intensive industry.
In 2010, Prime Minister Najib Razak decisively led the nation by setting out a vision and road map for Malaysia to become globally competitive in high value-adding industries. The Islamic finance industry has a key role to play in the overall development of the financial services industry, which forms an important strategic segment of Malaysia’s Economic Transformation Programme launched in 2010.
In 2009, Malaysia’s Islamic finance industry accounted for an estimated 8 percent of global Islamic banking assets, and the objective of the Malaysian government under its strategic plan is to increase this share to 13 percent of global Islamic assets under management by 2020, with annual growth in assets under management of around 12-15 percent per year projected over the next decade.
The Origins of Malaysia’s Islamic Finance Industry
In late 2010, when I met with Dr. Zeti Akhtar Aziz, the Governor of Bank Negara Malaysia, she casually mentioned in passing that the first Islamic financial institution in Malaysia was actually founded by her father, Royal Professor Ungku Aziz. This was a remarkable revelation for me, given the instrumental role that Dr. Zeti has played in transforming the Malaysian financial services industry from the rubble of the East Asian crisis into a very competitive, well regulated financial sector that is now competing in other markets globally, including in other Asean countries as well as the Middle East.
It is a remarkable achievement indeed for father and daughter to have created the Malaysian Islamic finance industry from nothing in 1969, and subsequently built it into the world’s leading Islamic finance hub in just four decades.
Drivers of Competitive Advantage for Malaysia
The success of the Malaysian Islamic financial services centre reflects a number of key factors.
The first and most critical has been the substantial achievements made by the Malaysian government, led by the central bank, Bank Negara Malaysia, together with the securities regulator, the Securities Commission, in reforming and restructuring the Malaysian financial services industry after the East Asian financial crisis. The consolidation of the Malaysian banking industry that took place in 2000 was a key step towards creating a stronger, more resilient financial system in Malaysia.
The second key driver that has been critical for building the competitiveness of Malaysia’s financial services industry has been the sustained strategic initiatives undertaken by the central bank and securities regulator to strengthen regulatory standards and corporate governance in the financial system, as well as improving risk management practices. These reforms have been critical in pushing Malaysia’s financial services industry towards global best practice standards, creating a competitive environment for the growth of an international financial centre for both conventional as well as Islamic financial services.
Thirdly, the development of Malaysia’s Financial Sector Masterplan, launched in 2001, created a vision and roadmap for the process of
structural change and transformation of the Malaysian financial services industry, with clear objectives and timelines against which progress could be measured. The effective implementation of this Masterplan has also been a fundamental driver of building competitiveness.
Fourthly, the Islamic financial services industry has also been developed with careful strategic planning and vision, in a structured way. Following the establishment of Tabung Haji, the next major phase of the development of the Islamic finance industry was to permit Malaysia’s conventional banks to offer Islamic products and services, allowing them to use their existing infrastructure and balance sheets to support the development of their Islamic financial services. Only after banks had time to develop these Islamic products and services was a dual banking system created, whereby firewalls were put in place between conventional and Islamic banking funds.
A very important fifth step was the creation of an Islamic capital market in the 1990s. The development of the sukuk market in Malaysia has become a key platform of Malaysia’s global competitiveness as an Islamic financial centre, with the Malaysian sukuk market accounting for 50 percent of the Malaysian bond market, which is one of Asia’s largest bond markets, with capitalization of around 98 percent of GDP. The development of the sukuk market has also created important synergies for the Malaysian stock market, with the total value of the sukuk programme listed on Bursa Malaysia at the end of 2010 being around US$28 billion, with one-third of global sukuk issuance in 2010 being listed on Bursa Malaysia.
<< Previous Page 5 of 5