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Thursday, 20 November 2008

Malaysia to further open sharia banking system

KUALA LUMPUR, Nov 20 (Reuters) - Malaysia will further open up its Islamic finance sector to foreign investors, the central bank chief said on Thursday, as it faces increasing competition to retain its position as the leader in the global sharia bond market.

A recent jump in Gulf oil earnings has drawn new players such as Hong Kong and Singapore into the Islamic finance industry which was once dominated by the Middle East and Malaysia.
Mostly Muslim Malaysia wants to attract more foreign investment to become a global Islamic finance hub, specialising in the origination of sharia bonds, fund and wealth management and international Islamic banking and insurance.

"We are looking at our blueprint for liberalisation which will be announced in the very near term and this will be for both the liberalisation in the conventional as well as the Islamic financial system," central bank chief Zeti Akhtar Aziz told Reuters in an interview.
"As we are evolving Malaysia into an international Islamic financial hub, the liberalisation would be at a faster pace for the Islamic financial system."
She said the blueprint would be launched before year end but declined to give any details. The measures would be part of a 10-year plan that Malaysia launched in 2001 to strengthen its financial system and encourage greater foreign participation in its economy.
Malaysia has the world's largest Islamic bond market, with $66 billion or 62.6 percent of global outstanding sharia bond issuance as at end-June.
Malaysia has been aggressively wooing Islamic assets, allowing foreign businesses to set up wholly-owned foreign currency operations in the country and offering tax breaks on profits earned from non-ringgit Islamic bond deals distributed outside the country.
Three foreign lenders -- Kuwait Finance House , Asian Finance Bank and Al Rajhi <> -- have also been allowed to set up operations in Malaysia.
Government backing and a ready market with a mostly Muslim population have helped Malaysia build its Islamic banking industry but some experts say it lags rivals Hong Kong and Singapore in the ease of doing business.
Zeti said the Islamic finance sector needed larger banks.
"It would be desirable to have large Islamic banks or Islamic financial institutions that could fulfil the role of putting together structures that are able to deal with very large scale investment projects and that are highly complex," she said.
The sector also needs a crisis management framework to grow, with the industry expected to be affected by the global economic downturn, she said.
"This includes having the mechanism and vehicle to preserve short-term liquidity, to remove troubled assets from the balance sheets of financial institutions and to recapitalise Islamic financial institutions," Zeti said.
Slower economic growth would affect the real estate market and hit Islamic financial institutions that are heavily reliant on this sector.
"Islamic financial institutions with a high proportion of their businesses in profit sharing business may be exposed to losses due to equity investment risk, possibly by the inability of the enterprises in generating the expected returns," she said.

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