Monday, July 6, 2015

MALAYSIA: Islamic retail banking the next battle ground

By Habhajan Singh

One of the key battle grounds as Malaysia continues its push to deepen the Islamic finance sector is the take-up rate at the retail and household levels.

It is still deemed at the lower end, especially when compared to the Islamic capital markets (ICMs) in the country, according a country report on the sector recently released by the Jeddah-based Islamic Research and Training Institute (IRTI).

“For the lagging retail and household demands for Islamic financial products and services, changes embodied in the Islamic Financial Services Act (IFSA) 2013 are designed to privilege customer protection and financial inclusion, and move Islamic finance to become more risk-sharing, which is hoped to translate into public perception of Shariah-compliant products as more authentically Islamic and also ethical,” noted the report entitled Islamic Finance Country Report for Malaysia 2015.

Dr Azmi (middle) is flanked by (from left) IRTI economist Dr Hylmun Izhar, IDB acting director Kunrat Wirasubranta, IRTI senior economist Dr Turkhan Ali Abdul Manap and research division manager Dr Abdul Ghafar Ismail. (Pic by Habhajan Singh/TMR)

At end-2013, ICMs formed a 56.4% of the overall capital market but Islamic banking assets only reached 21% of total banking assets and takaful only made up a 10% of the whole insurance sector, the report noted.

“In our assessment, the takaful sector will be undergoing the most changes, and the sector has until 2018 to sort out the biggest policy change — separation of family and general takaful business lines,” the report added.

In Islamic banking, the report higlighted that the reclassification of deposits into principal-guaranteed Islamic deposits and nonguaranteed investment accounts was the biggest change for consumers and Islamic banks (IBs) alike.

It noted that it was part of Bank Negara Malaysia’s diversification strategies to expand the scope of the Islamic banking business in order to cater to a wider range of customers.

“We believe this change will increase transparency (because of additional prudential disclosure requirements for investment accounts) and inclusion, and encourage IBs to innovate new products,” it said.

The changes came under IFSA 2013, a comprehensive piece of legislation introduced by the central bank.

Under this new legislation, IBs were given the time till the middle of this year to fully segregate their deposits into either Islamic deposits or investment accounts.

In the past, IBs operating under the now-repealed Islamic Banking Act 1983 had deemed all monies accepted from customers — whether it was classified as deposit or investment products — as Islamic deposits.

“It also reflects a more risk-sharing approach to Islamic banking. This reclassification moves together with plans for the Investment Account Platform to serve small and medium enterprises.

“It is still too early to tell what the migration numbers to investment accounts would be like and this is one development that will be most closely watched,” the report added.

The country report is the fifth in its series and features Malaysia’s ongoing initiatives and prospects in transforming into a high-income economy and the contribution of Islamic finance in this endeavour.

“We intend to use the country report to position Islamic Development Bank (IDB) member countries to attract investment to those countries focusing on Islamic finance and Islamic economies,” IRTI DG Prof Datuk M Azmi Omar told The Malaysian Reserve.

IRTI is the research and training arm of the IDB.

IRTI was established in 1981 with the principal aim to undertake research, training and advisory activities in I sl a m ic e conom ic s a nd Islamic finance to facilitate the economic, financial and banking activities in IDB member countries to conform to Shariah.