TWO YEARS AGO: Islamic Finance emerging as the new Silk Road

(THIS STORY APPEARED EXACTLY 2 YEARS AGO, IN THE INAUGURAL ISSUE OF THE MALAYSIAN RESERVE)
By Habhajan Singh
Of late, Islamic finance has figured prominently in most of speeches by Bank Negara Malaysia (BNM) governor Tan Sri Dr Zeti Akhtar Aziz. In fact, 10 out of 12 Zeti's speeches on the central bank's website are on Islamic finance, the latest being her address intended for the 4th Islamic Financial Services Board (IFSB) Summit in Dubai, UAE.
"She is without doubt the main driving force behind Malaysia's foray into Islamic finance. There is a feeling that, being a Muslim majority country, Malaysia needs to get a handle on Islamic finance," says one banker involved in Islamic finance.
HSBC Amanah's Managing Director Mohamed Ross Mohd Din agrees, noting a predominantly Muslim population and the country’s comprehensive regulatory framework and infrastructure, Islamic finance has demonstrated its viability and robustness.
"More importantly, with BNM as the driving force behind the industry’s growth, and the personal commitment of the Governor, we are undeniably well-positioned to succeed as the global hub of Islamic finance," he said.
Another banker observed that Zeti's new mantra is the 'New Silk Road' in reference to the emergence of Islamic finance. She had first used the term in her address to the second World Islamic Economic Forum (WIEF) in Pakistan last year.
The enthusiasm and conviction in Zeti's talks about Islamic finance, a topic expected to feature prominently at the third WIEF, comes from the sector's future potential.
"Just as historical Malacca was a key port along the ancient trade routes between Asia and the Middle East, it is envisaged that Malaysia would serve as a key destination along the New Silk Road," she told a gathering during the recent Global Islamic Financial Forum (GIFF).
Indeed, the nation's Islamic finance sector has made some great strides, both in terms of statistics and the growing number of players. According to central bank figures, Malaysia's Islamic banking assets amounted to about RM115 billion (US$34 billion) or 13% in terms of market share while the takaful sector stands at RM5.8 billion.
"The Malaysian Islamic banking system a strong performance, saw in particularly in 2006, with higher profitability. It has remained well capitalised," said BNM deputy governor Datuk Mohd Razif Abd Kadir in a recent speech. Malaysian regulators have kept themselves busy putting in place the necessary infrastructure and regulatory framework for the development of Islamic finance.
Among recent initiatives was the launching of the Malaysia International Islamic Financial Centre (MIFC) in August 2006. he centre provides an environment to conduct Islamic financial services in foreign currencies from anywhere in Malaysia. In the country's national budget for 2007, Malaysia announced substantial tax incentives as a boost to the Islamic banking and takaful industry.
A key element was a 10 year tax exemption for the income of Islamic banks and takaful companies derived in international currencies. There has also been tremendous growth in the nation's Islamic capital market front with Islamic corporate bonds now valued at about US$36 billion, or 48% of the total corporate bond issuance in Malaysia.
Malaysia is home to Asia's second largest private debt securities market, including the conventional.
"Sukuk, the Islamic finance world's equivalent of a traditional bond, has taken the Islamic finance industry by storm over the past two years, with most of the origination in Malaysia and the GCC [Gulf Cooperation Council] countries," noted a recent KPMG report entitled 'Growth and Diversification in Islamic Finance'.
In 2006, the report, quoting London law firm Trowers & Hamlins, said some 80% of the 'burgeoning GCC bond market' was accounted for by sukuk, up from just 26% in 2005.
With regards to Malaysia corporate watchers feel that Singapore is certainly a threat to Malaysia's desire to become the region's Islamic finance hub. "We need to be able to move fairly quickly to move ahead. The policies are already in place.
However, sometimes, the implementation may not be as smooth as one hopes," says John Lee Hin Hock, KPMG's executive director for financial risk management.
BNM's Mohd Razif noted that the domestic bond market plays a crucial role in ensuring that the financing needs of the economy are being fulfilled.
"The multinationals and multi-lateral institutions such as the International Finance Corporation and the International Bank for Reconstruction and Development have begun to tap the fund from the Malaysian capital market by issuing ringgit sukuks, thus increasing its depth and diversity," he said.
In Malaysia, the overall management of the Islamic financial services sector falls under the supervision of BNM, which oversees the nation's monetary policy and financial stability of the financial system.
More issuance will be one of the keys to the growth of a global Islamic capital market, observed Badlisyah Abdul Ghani, head of Islamic finance at Malaysia's CIMB Group and chief executive of CIMB Islamic Bank.
"The development of a global Islamic market has been slow because people are unwilling to take the necessary steps. The more players that arrange issuance in the market, the better. You cannot have an active secondary market until you have well in excess of 100 issuances," he said. -- The Malaysian Reserve, May 28, 2006