Race to excel in Shariah Banking

By Habhajan Singh
The Islamic finance landscape in Malaysia has attained a certain level of maturity and depth with the country being one of the pioneers in crafting legislation to govern the sector that began to emerge in the Middle East in the mid-1970s.
The Islamic Banking Act (IBA) 1983 remains the core reference for regulations for Islamic banking, while Malaysia’s experience with Islamic finance and banking has probably been put to the test more vigorously than in most other jurisdictions. For example, Islamic financing contracts have been challenged legally, with some cases going all the way to the Federal Court, the nation’s highest court.
"Some other jurisdictions dream of becoming centres for Islamic finance. But wait till one of the cases goes to court, (we need to) see if the system is able to handle it," one banker with a local Islamic bank told The Malaysian Reserve recently.
This may be true at the present moment but it may not hold for too long. Jurisdictions like Singapore and Hong Kong are already adjusting and padding their regulations to allow them to embrace Islamic finance.
They are tweaking their laws and planning new regulations to accommodate this new kid on the block. In fact, just last week, Singapore’s financial regulatory authority issued a set of guidelines on the application of banking regulations to Islamic banking. Issued to coincide with the Sixth Islamic Financial Services Board (IFSB) Summit meeting in Singapore, the Monetary Authority of Singapore (MAS) said the guidelines consolidated the various regulations and clarifications which it has issued and offers specific information on the regulatory treatment of various Islamic structures.
"This set of guidelines will provide greater clarity and certainty for financial institutions offering Islamic banking products in Singapore," it said in a statement.
On top of that, MAS had also issued two regulations clarifying that, with immediate effect, Singapore-based banks may enter into diminishing musharakah financing and spot murabahah transactions. However, there's no doubt that, on this score, Malaysia is a couple of steps ahead.
"In addition, MAS has ensured equal tax, regulatory and liquidity treatment of the Singapore dollar sukuk Singapore Government Securities, effective immediately. Taken together, these various changes will allow banks to conduct a wide range of Islamic financing activities, and to have greater flexibility in structuring instruments to meet their risk management needs," MAS said.
Such is the vigour abroad when it comes to Islamic finance. Battle lines are being drawn and knives sharpened to secure future Shariah-compliant deals.
Comprehensive Landscape
Malaysia’s experience in pushing forward the agenda for Islamic finance has been one of continuous innovation and preparing the ground on multiple fronts. Innovation is something that many Malaysian Islamic bankers pride themselves in. Malaysia has been at the forefront of engineering innovative products and developing various enabling infrastructure to facilitate the progress of the industry.
As far back as 1990, Malaysia emerged with one of its early "firsts" for Islamic finance when Shell MDS Sdn Bhd issued the first bai bithaman ajil (BBA) Islamic debt securities worth RM125 million. Four years later, in 1994, Cagamas Bhd issued the first sukuk mudharabah worth RM30 million.
On the global plane, the first global corporate sukuk ijarah also came from Malaysia in 2001, with Kumpulan Guthrie Bhd making an issuance worth RM540 million. On the legal framework, besides the IBA, Malaysia promulgated the Takaful Act 1984 to regulate and supervise Islamic takaful companies. Similarly, the country has also shown foresight on the Shariah framework front.
Malaysia is one of the first nations to establish central Shariah councils, vested with regulatory powers. The Shariah Advisory Councils were established under the wings of Bank Negara Malaysia (BNM) and the Securities Commissions (SC), the central bank and capital markets supervisor, respectively. These councils were established to act as the reference on all Shariah matters pertaining to Islamic banking and takaful as well as the Islamic capital market.
The nation had also, earlier on, emphasised the requirement for Islamic financial institutions to establish in-house Shariah commitees to ensure that business operations are in adherence with Shariah values and principles. The country also played an instrumental role in addressing a key need for the industry such as trained Islamic bankers.
No industry can survive without properly trained and equipped human resources. Here, BNM stepped up to the challenge by establishing the International Centre for Education in Islamic Finance (INCEIF), a dedicated university for the industry. Prior to that, the International Islamic University Malaysia (IIUM) had played its part in providing the much needed expertise for the sector.
Many of today’s Shariah scholars come from IIUM and some of them are still teaching staff from this higher educational outfit. Today, the university has also established the IIUM Institute of Islamic Banking and Finance (IIiBF), allowing those involved in the sector to equip themselves with the proper knowledge and understanding of the nuts and bolts that make up Islamic finance. Future Landscape As with most fields, Islamic finance is set to undergo tremendous changes in the years to come. On the local front, the stage is being prepared for the emergence of mega Islamic banks.
On April 27, BNM governor Tan Sri Dr Zeti Akhtar Aziz declared that Malaysia will be the first country to have a mega Islamic financial institution with a paid up capital of at least US$1 billion (RM3.51 billion).
"In the present economic environment, there is no such Islamic financial institution. In fact, we don’t have it in any part of the world," she said.
The announcement was made at a press conference after Prime Minister Datuk Seri Mohd Najib Razak announced measures to liberalise the financial sector, which included the issuance of two new Islamic banking licences for foreign players this year with a paid-up capital of at least US$1 billion. This is one of the core changes and future main challenges for local Islamic banks.