Malaysia on right track to become global Islamic finance hub

23 April 2019 (Bernama)

KUALA LUMPUR: Malaysia is on track to becoming the world’s leading global Islamic finance hub, said Deputy Finance Minister Datuk Amiruddin Hamzah.

Amiruddin said Malaysia had the International Islamic Liquidity Management Corporation (IILM) which was established in 2010 in cooperation with 12 central banks around the world, and its main function is to pioneer government initiatives involving the development of Islamic finance globally.

“According to Thomson Reuters’s Islamic Financial Development Report in 2018, Malaysia remains the leader among 56 countries for Islamic financial institutions, and this shows that the establishment of the corporation in 2010, which was the government’s ‘frontier’ to develop the country’s Islamic finance at the global level was the right step towards making Kuala Lumpur the best Global Islamic Finance hub,“ he said in a question and answer session at the Dewan Negara today.

He was responding to Senator Asmak Husin’s question on the government’s measures to make Malaysia the world’s leading global Islamic Finance Hub.

Amiruddin said Malaysian banks were appointed as the regulator and lead manager of sovereign ‘sukuk’ or bonds for other countries such as Turkey and Hong Kong, which also proved that Malaysia was now internationally recognised as a leader in international Islamic finance.

In answering a supplementary question from Asmak on the government’s plans to increase talent and human capital in Islamic finance from Malaysia, Amiruddin said the International Centre for Education in Islamic Finance (INCEIF) offered bachelors degrees and doctorates that could provide the expertise needed to bring the sector to the international level.

“In fact, in 2018, INCEIF received the prestigious accreditation from the Association to Advance Collegiate Schools of Business (AACSB) which placed the centre among the top five per cent of international institutions offering business and Islamic finance programmes,“ he added.

Amiruddin said the International Shari’ah Research Academy for Islamic Finance (Isra) provides advisory and consultancy to emerging markets in matters related to Islamic finance. — Bernama

23 April 2019 (Bernama)

Islamic banking & takaful in Malaysia

Islamic Banking

Islamic banking refers to a system of banking that complies with Islamic law also known as Shariah law. The underlying principles that govern Islamic banking are mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset.

These principles are supported by Islamic banking's core values whereby activities that cultivate entrepreneurship, trade and commerce and bring societal development or benefit is encouraged. Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited.

Through the use of various Islamic finance concepts such as ijarah (leasing), mudharabah (profit sharing), musyarakah (partnership), financial institutions have a great deal of flexibility, creativity and choice in the creation of Islamic finance products. Furthermore, by emphasising the need for transactions to be supported by genuine trade or business related activities, Islamic banking sets a higher standard for investments and promotes greater accountability and risk mitigation.

Islamic finance has grown tremendously since it first emerged in the 1970's. Current global Islamic banking assets and assets under management have reached USD750 billion and is expected to hit USD1 trillion by 2010.(1)

There are over 300 Islamic financial institutions worldwide across 75 countries According to the Asian Banker Research Group, The World's 100 largest Islamic banks have set an annual asset growth rate of 26.7%(2) and the global Islamic Finance industry is experiencing average growth of 15-20% annually.(3)

Malaysia's Islamic finance industry has been in existence for over 30 years.  The enactment of the Islamic Banking Act 1983 enabled the country's first Islamic Bank to be established and thereafter, with the liberalisation of the Islamic financial system, more Islamic financial institutions have been established

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 USD65.6 billion with an average growth rate of 18-20% annually.4

Today, Malaysia's Islamic finance continues to grow rapidly, supported by a conducive environment that is renowned for continuous product innovation, a diversity of financial institutions from across the world, a broad range of innovative Islamic investment instruments, a comprehensive financial infrastructure and adopting global regulatory and legal best practices. Malaysia has also placed a strong emphasis on human capital development alongside the development of the Islamic financial industry to ensure the availability of Islamic finance talent. All of these value propositions have transformed Malaysia into one of the most developed Islamic banking markets in the world.

Rapid liberalisation in the Islamic finance industry, coupled with facilitative business environment has encouraged foreign financial institutions to make Malaysia their destination of choice to conduct Islamic banking business. 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 non-ringgit businesses.

Malaysia continues to progress and to build on the industry by inviting foreign financial institutions to establish international Islamic banking business in Malaysia to conduct foreign currency business.   

The domestic Islamic financial institutions may also apply for ICBU, a dedicated division to conduct foreign currency business. ICBU will also be accorded various tax incentives and privileges that lead to reduction in the cost of doing business and expedient market entry in foreign currency Islamic finance business. For more information on the establishment and application procedure for ICBU, please contact MIFC Secretariat.

  1 Mckinsey, The World Islamic Banking Competitiveness Report 2007-08, "Capturing The Trillion Dollar Opportunity"

2 Ibid

3 Ibid

4 Bank Negara Malaysia: Annual Banking Statistics 2007

Takaful Industry

Takaful (Islamic insurance) is a concept whereby a group of participants mutually guarantee each other against loss or damage. Each participant fulfils his / her obligation by contributing a certain amount of donation (or tabarru) into a fund, which is managed by a third party - the takaful operator.

In the event of loss or damage suffered, the takaful operator will disburse the funds accordingly to its participants.  Any surplus is paid out only after the obligation of assisting the participants has been fulfilled. Through this principle, takaful operates as a protection and profit sharing venture between the takaful operator and the participants.

Globally, the takaful industry has been growing rapidly, appealing to both Muslims and non-Muslims. The industry is expected to grow by 15-20% annually, with contributions expected to reach USD7.4 billion by 2015.(1) Currently, there are more than 110 takaful operators worldwide.

Malaysia has achieved significant milestones in the development of its takaful industry. With the enactment of the Takaful Act 1984, the first takaful company was established in 1985. Since then, Malaysia's takaful industry has been gaining momentum and increasingly recognised as a significant contributor to Malaysia's overall Islamic financial system.

As at 2007, total assets of Malaysia's takaful industry amounted to USD2.8 billion, with market penetration of 7.2%.(2) Takaful assets and net contributions experienced strong growth with an average annual growth rate of 27% and 19% respectively from 2003 to 2007.(3)

The rapid liberalisation of Malaysia's Islamic financial industry has encouraged foreign institutions' participation in Malaysia, thus creating a diverse and growing community of domestic and international takaful operators. There are currently eight takaful operators and two retakaful operators, with five foreign participations from the UK, Bahrain, Germany and Japan. These takaful operators conduct both domestic and foreign currency business.

Malaysia continues to progress and build on the industry's rapid development by inviting financial institutions across the world to establish takaful and retakaful operations in Malaysia to conduct foreign currency business.

The domestic Islamic financial institutions may also apply for ICBU, a dedicated division to conduct foreign currency business. ICBU will also be accorded various tax incentives and privileges that lead to reduction in the cost of doing business and expedient market entry in foreign currency Islamic finance business. For more information on the establishment and application procedure for ICBU, please contact MIFC Secretariat.

1 Based on projection by Institute of Islamic Finance and Insurance & Investor Offshore Review, February 2006

2 Bank Negara Malaysia: Annual Takaful Statistics 2007

3 MIF Monthly 2008 Supplement Series - Takaful Industry in Malaysia: Performance and Key Developments

Source: Bank Negara Malaysia's website on 21 April 2019

Bank Islam Malaysia Berhad

The establishment of Bank Islam can be traced even way back before World War II where Muslims in the country were already looking for an alternative financial system that would comply with the Shariah (Islamic jurisprudence) requirements. It was not until 1969 however that the Pilgrims Management and Fund Board (Lembaga Urusan dan Tabung Haji or “Tabung Haji”) was established as one of the first Islamic financial institutions, primarily to encourage savings and investments among the Muslims and help depositors perform Hajj.

At the international level, the call for the establishment of an Islamic banking system had been gaining in momentum but it was only in 1975 that the first Islamic bank was established in Dubai. The bank was formed after 15 years of extensive research and joint effort by professional Islamic economists, financiers and officers from various world Islamic organisations.

The inception of Bank Islam in 1983 was the culmination of intense determination, inspired by the Bumiputera Economic Congress in 1980, followed by a seminar on the Concept of Development in Islam in 1981, and the tireless efforts of Tabung Haji, PERKIM (a non-governmental organisation committed to looking after the welfare of Muslims across the country) and the National Steering Committee for Islamic Bank (“National Steering Committee”).

Starting with 30 pioneering staff, Bank Islam’s first year of operation was conducted by its temporary headquarter at the first floor of Kompleks Jemaah Haji at Subang, Selangor. By the end of its first financial year, Bank Islam has four (4) operating branches at Kuala Lumpur, Kuala Terengganu, Kota Bharu and Alor Setar, with 272 employees.

Via the innovative application of Waqf land development, today, Bank Islam’s headquarter is the pristine Menara Bank Islam, located in the midst of the ‘Golden Triangle’ of Kuala Lumpur. As at end of 2013, Bank Islam has 133 branches nationwide with a workforce of more than 4,200.

1 July 1983 is a date of historic significance. It was when Bank Islam Malaysian Berhad or Bank Islam, in short, was officially established, marking the beginning of Islamic banking not just in Malaysia but also within the ASEAN region. As the pioneer of the industry, Bank Islam has since set the benchmark for innovations with a number of groundbreaking Shariah-based banking products and services. It has grown from a banking organisation providing purely Islamic banking products and services to an institution that provides comprehensive, end-to-end financial solutions. Today, Bank Islam is transforming the country’s economic landscape, leading the way in the development of Malaysia as one of the world’s major Islamic financial hub.

Source/website: bankislam(dot)com(dot)my

Malaysian Islamic banking in 2019 to grow at the same rate as 2018 — RAM

26 March 2019 (The Edge Markets)

KUALA LUMPUR (March 26): Financing growth of the Islamic banking sector is expected to come in at around 10% to 11% this year, RAM Rating Services Bhd said, which is pretty much the same as the rate of growth in 2018.

The local rating agency said Islamic banking continued to expand at a much faster pace than conventional loans last year, coming in at 11% compared with the latter's 3.3% growth. It grew 10.3% in 2017.

For 2019, RAM is maintaining a stable outlook on the Malaysian Islamic banking sector, in line with its view on the overall domestic banking system.

"However, it may take longer to achieve Bank Negara Malaysia's 40% target for Islamic financing as a proportion of the overall system's loans by 2020," it said in the latest edition of its annual publication called "Islamic Banking Insight" today.

As at end-January 2019, Islamic financing comprised 32% of the overall system's loans.

While it may require more time to attain the targeted 40%, RAM co-head of financial institution ratings Wong Yin Ching said the Islamic banking industry has come a long way in terms of maturity and breadth.

Meanwhile, RAM noted that the asset-quality indicators of Islamic banks have remained relatively benign, with a gross impaired financing (GIF) ratio of 1.2% as at end-January 2019 and an annualised credit cost ratio of 27 basis points in the first nine months of 2018.

"That said, we note an uptrend in the absolute GIF of Islamic banks, which increased 13% in 2018," it said.

"On the other hand, the implementation of Malaysian Financial Reporting Standards 9 has bolstered loss-absorption buffers; the Islamic system's GIF coverage ratio had improved to 103% as at end-January 2019 from 89% as at end-December 2017.

"While the moderation in economic growth may affect borrowers' repayment capabilities and thus lead to an uptick in impairments, the asset quality of the Islamic banking industry is unlikely to deteriorate significantly," added RAM.

Last year, the Islamic banking system's deposits grew 12.4%, slightly slower than the 14.2% growth recorded in 2017.

"The bulk of the expansion stemmed from fixed deposits as banks are bracing for the implementation of the net stable funding ratio (NSFR) requirement.

"Despite the deferred adoption of the NSFR, margin pressure is unlikely to ease amid the ongoing keen competition for retail and small and medium enterprise deposits, as banks keep building up their funding bases. However, the overall outlook on profitability remains stable as banks keep a tight rein on operating expenses," RAM co-head of financial institution ratings Sophia Lee said.

The industry's liquidity coverage ratio stood at 143% as at end-January 2019. The Islamic banking system also remained well capitalised, with common equity tier-1 and total capital ratios of 13.3% and 17.6% respectively.

26 March 2019 (The Edge Markets)

http://www.global-islamic-finance.com/2019/03/islamic-banking-in-2019-to-grow-at-same.html