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Saturday, 8 August 2009

Malaysia: Islamic finance industry thriving

THE Islamic financial industry in Malaysia has bloomed over the years and with 17 stand-alone Islamic banks, the country is poised to become one of the biggest Islamic financial hubs in the world.

The sector is also expected to see further stimulus following the liberalisation of the financial sector, which allows for an increase in foreign equity ownership of up to 70% in Islamic banks, investment banks and insurance companies.

According to the Association of Islamic Banking Institutions Malaysia, the country’s Islamic financial system started from the establishment of the Malaysian Pilgrims Fund Board (Tabung Haji) to the setting up of the country’s first Islamic bank, Bank Islam Malaysia Bhd, which commenced business in 1983.

Following that, Bank Negara permitted existing conventional banking institutions to offer Islamic banking services via their existing infrastructure and branches, pushing further the growth momentum of Islamic finance, deposits and insurance in the country.

Islamic banking assets accounted for 17.4% of total banking assets in the local financial system while in the bond market, the sukuk market accounted for 57% of the total market as at end-2008.

Maybank Islamic Bhd executive vice-president and acting chief executive officer Ibrahim Hassan said Islamic financing assets grew at a compounded annual growth rate (CAGR) of 15% between 2004 to 2008 compared to conventional banking loans and advances, which grew at a CAGR of 10% during the same period.

“Going forward, most banking analysts are optimistic over the positive outlook and growth prospects of the Islamic banking industry in the medium-term.

“Bank Negara anticipates syariah-compliant assets will continue their double-digit growth momentum in line with continuing efforts and promotions to make Malaysia the world’s leading international Islamic financial centre,” he said.

Ibrahim said the Islamic banking industry was also gaining popularity not only among the Muslim community but also non-Muslims.

“This can be attributed to a number of factors such as the proliferation of Islamic products and services which share common features as well as competitive pricing and packaging with that of similar conventional products,” he said adding that another key factor was the various incentives provided by the Government to promote the growth of Islamic products.

Maybank Islamic’s total financing stood at RM23.4bil last year compared with RM21.7bil in 2007, while total Islamic deposits stood at RM18.8bil in 2008 compared with RM16.8bil in 2007.

HSBC Amanah Malaysia Bhd executive director and CEO Musa Abdul Malek said Islamic finance growth remained on an uptrend as Bank Negara continued to focus on providing conducive regulatory framework to accommodate the growth and development of the industry.

“This includes human capital development to position Malaysia as an international Islamic financial hub coupled with the industry players’ active participation by introducing innovative products and upgrading their service platform.

“Currently, Islamic finance represents about 17% of the whole banking industry compared to 6% in 2000,” he said.

The ringgit sukuk market for corporate bonds, according to Musa, accounted for over 68% of all corporate bonds issued in the Malaysian market last year.

Sukuk bonds account for more than 70% of total overall corporate bonds issued in the ringgit market year-to-date.

“This marks tremendous success in the Government’s foresight and its pro-active involvement towards the progress of Islamic financing in the domestic landscape and towards establishing the country as a foremost international Islamic hub,” he said.

Musa said HSBC was committed towards the growth of the sukuk market in Malaysia and globally.

“We will continue to advance in product innovation having successfully executed a number of world’s first in the sukuk market both domestically and globally, including the US$600mil five-year sukuk by Malaysia Global Sukuk in 2002,” he said adding that the bank had been in the Malaysian Islamic banking sphere since 1994 via window operations, prior to the establishment of HSBC Amanah in August last year.

Musa said HSBC Amanah had seen encouraging results in its first year of operations.

“We hope to continue contributing effectively towards the Government’s vision for the Islamic finance industry to constitute 20% of the overall banking and insurance market by 2010,” he said.

OCBC Al-Amin Bank Bhd is in the process of enhancing further its syariah-compliant assets building capacity and investment banking in Malaysia, says director and chief executive officer Syed Abdull Aziz Syed Kechik.

He said the bank was poised for further growth based on the potential of the Islamic capital market going forward.

“We hope to close several sukuk issues by year-end. We’re also exploring initiatives to expand the sukuk issuer base to the regional market,” Syed Abdull Aziz said.

OCBC Al-Amin, which started operations on Dec 1, 2008, has a total asset size of RM3.7bil.Its customer deposits and outstanding financing stood at RM2.7bil and RM2.2bil respectively as at Dec 31, 2008.

Syed Abdull Aziz said the bank had built a niche in the mid-tier issuers market. “In the last five years, with the exception of the second half of 2008, the sukuk volume showed a positive growth trend averaging above 10%.

“For 2009, as the domestic market has yet to demonstate recovery of confidence in mid-tier names, our view is that it will still be a challenging year,” he said.

He said that in the long run, the industry was expected to focus more on product innovation coupled with cross-border financing and investment activities to attract liquidity into Malaysia.

“The development of more innovative products and services based on musyarakah (joint venture equity financing) and murabahah (cost plus profit commodity investments) principles is expected to intensify with more players coming into the market,” he said.

(The Star)

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