Malaysia's in-depth experience and solid fundamentals in Islamic finance developed over more than 30 years, offers strong value propositions to foreign financial institutions to establish Islamic banking operations in Malaysia to conduct foreign currency business.
Malaysia has placed an equal emphasis on the four core sectors in Islamic finance - Islamic banking, takaful, Islamic capital market as well as Islamic capital and money market. Malaysia's long track record of building a successful domestic Islamic financial industry of over 30 years gives the country a solid foundation - financial bedrock of stability that adds to the richness, diversity and maturity of the financial system. Presently, Malaysia's Islamic banking assets reached USD72.5 billion with an average growth rate 20% annually.
The rapid liberalisation in the Islamic finance industry has encouraged foreign financial institutions' to make Malaysia their destination of choice. This has created a diverse and growing community of local and international financial institutions.
Currently, Malaysia has a significant number of full fledged Islamic banks including several foreign owned entities; conventional institutions who have established Islamic subsidiaries and also entities who are conducting foreign currency business. All financial institutions are given permission to conduct both ringgit and foreign currency businesses.
Foreign financial institutions can also leverage on the Islamic money market (IMM) in Malaysia, which provides Islamic financial institutions with the facility for funding and adjusting portfolios in the short-term.
The IMM's unique advantage is that it allows surplus banks to channel funds to deficit banks, thereby maintaining the funding and liquidity of the Islamic banking system to ensure stability. Islamic financial institutions, whether foreign or domestic, can also match their funding requirement through the Islamic Interbank Money Market (IIMM).
Foreign financial institutions also benefit from Malaysia's thriving environment consisting of a wide range of innovative Islamic banking products and services.
Malaysia's existing expertise and experience in this area of Islamic finance enables foreign financial institutions to also efficiently and cost effectively structure their own innovative offerings. Ultimately, the benefit is a shorter learning curve, quicker time to market and reduced costs for new entrants to Malaysia's Islamic banking industry.
Adopt Global Legal and Regulatory Best Practices
Malaysia's legal framework caters for Islamic finance matters. There is a dedicated judge at the High Court level for Islamic finance matters. The Kuala Lumpur Regional Centre for Arbitration has specific capabilities to deal with Islamic contract matters. This legal framework enables the enforceability of Shariah-based contracts for Islamic finance while providing governance and legal redress for Islamic financial institutions.
The Malaysian Islamic banking industry is governed by the Islamic Banking Act 1983, which provides for licensing, regulation and supervision of Islamic banking and financial business to ensure that such businesses are carried on at all times in accordance with Shariah principles.
The development of various regulatory guidelines has been instrumental in providing industry consistency and clarity for the operations of Islamic finance in Malaysia. In addition, Malaysia's regulatory guidelines have also set the benchmarks for other countries in developing their own Islamic industry.
Well-Developed Shariah Governance Framework
The Central Bank of Malaysia (Bank Negara Malaysia) has established a centralised Shariah Advisory Council (SAC) to advise on issues related to Shariah compliance matters pertaining to the Islamic banking and takaful industry. The approach was taken, by recognising the importance of Shariah compliance in the Islamic financial system which possesses distinctive characteristics when compared to the conventional system.
The SAC is responsible for analysing issues on Islamic banking and takaful matter, to ensure the aspects of the operations of Islamic financial institutions are in accordance with Shariah principles. The role of the SAC has been a catalyst in promoting product innovation while ensuring consistency in Shariah interpretations.
Comprehensive Human Capital Development
Malaysia has placed a strong emphasis on human capital development alongside with the development of Islamic finance industry to ensure the availability of Islamic finance talent. As a result, Malaysia has a large and diverse pool of Islamic finance talent comprises product innovators, regulators, intermediaries and risk managers who have both financial and Shariah knowledge and expertise.
Malaysia adopts a structured and comprehensive approach to human capital development in Islamic finance to meet the growing needs of Islamic finance talent by domestic and foreign financial institutions. Several learning institutions offer wide range of Islamic finance training programmes to develop Islamic finance professionals and cultivate Islamic finance thought leadership.
Liberal Foreign Exchange Administration (FEA) Rules
Malaysia's liberalised foreign exchange administration rules enhance Malaysia's competitiveness and business efficiency, while promoting financial and economic stability.
The relaxation in rulings was made in tandem with the readiness of the Malaysian economy to support the country's growth and competitiveness, whilst creating a conducive business environment for international financial institutions.
Tax neutrality has been accorded to Islamic finance instruments and transactions executed to fulfill Shariah requirements. There is no additional stamp duty and tax payment incurred in the usage of Islamic products.
Malaysia's tax neutrality framework is to promote level playing field between conventional and Islamic financial products. Tax neutrality reduces the cost of doing business in Islamic finance, thereby contributing to the overall competitiveness and spurs the development of Islamic finance. (MIFC)
Alfalah Consulting - KL: www.alfalahconsulting.com
Islamic finance consultant: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com