The inaugural Malaysian Islamic Finance – Issuers and Investors Forum (MIF 2006) started with the announcement of new measures and initiatives to further promote Malaysia as an international Islamic financial center.

The governor of the Central Bank, Dr Zeti Akhtar Aziz, announced an initiative known as the Malaysia International Islamic Finance Center – or MIFC – to further enhance the inter-linkages in the global Islamic financial market, as well as strengthening Malaysia’s position as an international Islamic financial hub.

The MIFC initiative is specifically undertaken by the collective efforts of the country’s financial and
market regulators, including Bank Negara Malaysia, the Securities Commission (SC), the Labuan Offshore Financial Services Authority (LOFSA) and Bursa Malaysia, together with the participation of the industry, representing the banking, Takaful and capital markets in Malaysia.

As part of these initiatives, Islamic financial products and services that are transacted in international currencies may now be conducted from anywhere in Malaysia. Malaysia has the physical infrastructure, the international connectivity, the communication network, the cultural offerings, as well as the talents which are inherently advantageous to the MIFC.

Key measures and incentives
In this first phase, the MIFC initiative will introduce measures and incentives to promote the center in the offering of Islamic financial products and services in international currencies by a diversified range of financial institutions to the international and domestic financial community. The key measures and incentives include:

i. First, Malaysian Islamic banks and Takaful operators offering Islamic financial services in international currencies will be granted approval under their existing license to set up an International Currency Business Unit within the institution. These new divisions will have their own accounts, separate from the ringgit transactions of the head office, while at the same time sharing the same infrastructure with head office. The division may benefit from tax and other incentives yet to be introduced.

This measure will apply to Islamic banks and Takaful operators licensed under the Islamic Banking Act and Takaful Act respectively to operate in the Islamic financial system, as well as to existing financial institutions which are eligible to participate in Islamic financial services. This is also expected to enhance the capability of foreign players that have identified Malaysia as their center to serve regional markets. International entities will also be able to participate via foreign interest of up to 49% in Islamic banks and Takaful companies. Investment funds set up in Malaysia will be able to enjoy the double tax agreements that Malaysia has entered into with over 60 treaty partner countries.

ii. Secondly, Bank Negara Malaysia will issue new conditional licenses under the Islamic Banking Act to qualified foreign and Malaysian financial institutions to conduct the full range of Islamic banking business in international currencies and enjoy the same tax incentives as those accorded to the International Currency Business Units. This new entity will be termed Licensed International Islamic Bank.The business that the licensed international Islamic banks will be allowed to undertake includes the wide-ranging business of Islamic commercial banking, Islamic investment banking and Islamic leasing in international currencies.

iii. Thirdly, Bank Negara Malaysia will also issue new conditional registrations under the Takaful Act to qualified foreign and Malaysian insurance companies to conduct the full range of Takaful business in international currencies. Similar tax treatment will be accorded to these entities as for banks. The new entity will be termed International Takaful Operator.

iv. Fourthly, the Labuan offshore Islamic banks and the Islamic divisions of offshore banks, as well as offshore Takaful operators, will be given greater flexibility in their business operations by allowing the opening of operational offices anywhere in Malaysia, with no limitation on staffing, to conduct non-ringgit business, while maintaining their presence in Labuan. This measure will be accorded to the six existing offshore Islamic banks and Islamic investment banks operating in offshore center Labuan to participate in the MIFC.

v. Fifthly, incentives will be given to attract the best foreign talent and market players to the MIFC, to spur innovation and offering attractive Islamic financial instruments. This is to further strengthen the large pool of highly trained staff with vast experience in Islamic finance already in Malaysia. Further incentives will also be introduced to spearhead the aspiration of developing Malaysia as a center of educational excellence in Islamic finance to complement the MIFC.

vi. Sixthly, in the pursuit of this national agenda, an MIFC Executive Committee, comprising heads of relevant ministries, agencies and industry representatives, has been set up as a single co-ordinating committee to efficiently and effectively act collectively in the implementation of these recommendations. The committee is entrusted with providing direction, as well as reviewing existing policies for the comprehensive and co-ordinated promotion of MIFC. It will also align the role and responsibilities of the respective parts of Government and the industry to the development of MIFC. The secretariat is Bank Negara Malaysia, which will act on behalf of this committee as a one-stop body to fulfill this task.

Dr Zeti also announced that Bank Negara Malaysia would soon be adding Murabahah-based transactions to the already diverse range of policy instruments available to manage short-term liquidity in the Malaysian Islamic inter-bank money market. Bank Negara Malaysia’s Murabahah-based transactions may utilize either global or Malaysian commodities as the underlying transaction. In future, such transactions could also use other Shariah approved assets, similar to Ijarah Sukuk notes. The widespread usage of this globally practised financing instrument will allow market participation by a more extensive investor base, including those from the Middle-East.

Stressing the importance of product innovation, Dr Zeti said it must be a continuous and deliberate part of the process of market development, adding that Bank Negara was firmly committed to developing the capabilities of Islamic finance and strengthening the global pool of talent and expertise in Islamic finance to increase the potential for this to happen.

As part of the initiative to meet this objective, she mentioned the establishment of the International Center for Education in Islamic Finance (INCEIF) to offer professional certification programs in Islamic finance, in addition to Masters and Doctorate programs.

Bank Negara has also recently made available a Shariah Scholarship Award and a Shariah Research Grant, which is available to Malaysian and non-Malaysians seeking to pursue research studies in Islamic finance.

Fundamental challenges
On the establishment of the MIFC to facilitate the industry to increase the supply of products and services, Professor Rifaat Ahmed Abdel Karim of the International Financial Services Board (IFSB) commended the regulators, saying that such effort was one of the two fundamental challenges for a country to be an international Islamic financial center.

The other challenge, he added, was to have a solid financial architecture and infrastructure to perform efficiently, notwithstanding ensuring the soundness and stability of the financial system.

Speaking on behalf of the IFSB, the official supporter of MIF 2006, Rifaat said such a forum that brought together the main players of the industry served as a platform to showcase Malaysia as the leading financial center.

“The culmination of the front line regulators of the country’s financial industry is an indication of their continuous effort in promoting sound regulatory and legal frameworks which are the core perimeters of an efficient financial intermediation,” he pointed out.

Vibrant Islamic capital market
The forum continued its second day with an insight into the SC’s perspective on the creation of a vibrant and thriving Islamic capital market. SC chairman Zarinah Anwar reiterated that this creation was closely intertwined with its origins. Looking back to 1993, it was clear to the policymakers that there was a need to build on the successes achieved in the banking sector through the formalization of Shariah compliant practises in the capital market, she said, noting that Bank Negara’s pioneering work in developing Islamic banking and Takaful had provided a well-documented role model for the SC and for many other regulators to follow.

“At that point in time, the Malaysian capital market was narrow and equity-centric. Thus, the task of building a modern capital market regulatory framework went hand-in-hand with the pioneering of many regulatory concepts to develop a high quality Islamic capital market,” she explained.

Zarinah continued by saying that the approach of strong government and regulatory leadership had generally worked well in establishing a sound regulatory and facilitative tax framework and these efforts offset the substantial costs associated with start-up situations and helped fast-track the viability and vitality of Malaysia’s Islamic capital market during the formative years.

As Malaysia’s Islamic financial sector reached a level of maturity and sophistication, she highlighted two points that became evident.

First, she said, the role of the private sector became more critical in leading the growth of the market, while the role of regulator shifted from being a developer to that of a facilitator. She stressed that the private sector must drive the increasing commercialization of Islamic finance through higher levels of investment into product origination and distribution capabilities, building intellectual capacity to accelerate growth momentum, as well as to maximize the capture of opportunities. Indeed, the widespread availability of high quality intermediation services was critical to the next phase of growth for Islamic finance.

Secondly, there was a need to increase the international elements of the Islamic finance sector, and at this stage of its development, Malaysia’s Islamic finance sector provided tremendous opportunities for tie-ups with other thriving Islamic centers elsewhere in the world, particularly in the Middle East.

Believing that increasing co-operation and linkages between the various Islamic centers was critical to building a thriving global Islamic financial market with the highly integrated nature of Islamic financial services, Zarinah affirmed that the SC would therefore work towards increasing the level of international participation and collaboration in Malaysia’s Islamic capital market.

For a start, the SC had entered into a Memorandum of Understanding (MoU) with the Dubai Financial Services Authority (DFSA) to pave the way for both jurisdictions to not only ensure effective cross-border regulation in order to maintain well-supervised markets that remain attractive to investors and issuers, but also to explore ways to remove regulatory barriers to ensure that cross-border transactions could be implemented with a high degree of efficiency and minimum regulatory costs.

Zarinah concluded that the focus on enhancing Malaysia as an international Islamic financial center was indeed timely in providing a platform for local and international participants to explore the various challenges and opportunities in relation to increasing the availability and quality of Islamic intermediation services, as well as in expanding the level of co-operation and linkages between the various Islamic centers.

The second deputy minister of finance, Dr Awang Adek Hussin, confirmed that the government sees the Islamic capital market as a fundamental lever in further developing the country’s capital market, as reflected in the ninth Malaysian plan (9MP).
With a huge allocation of US$54.28 billion (RM200 billion) for developmental projects and US$5.43 billion (RM20 billion) for private finance initiatives in the five-year 9MP, Awang urged the domestic intermediation process to leverage on the Islamic capital market for the purpose of mobilizing funds between capital seekers and providers.

“It is, therefore, critical for us to ensure that Malaysia’s Islamic capital market comprises quality, competitive and diversified products and services to enable effective utilization of funds for various 9MP projects,” he said.

Awang, in his keynote address, pledged that the government would continue to facilitate the development of the Islamic capital market and in that regard government-linked corporations would play a more proactive role in the use of Islamic capital market products in meeting their funding requirements, and at the same time support the growth of the Islamic capital market.

Closing the successful two-day forum, deputy governor Mohd Razif Abdul Kadir summarized the issues and suggestions that had been put forward to further enhance Malaysia’s position as an international Islamic financial center. He reiterated and reaffirmed the strong commitment of the Government and the relevant regulatory agencies to spearhead this MIFC initiative.

The MIFC initiative, he said, would propel Malaysia into becoming a vibrant, innovative and competitive international Islamic financial services industry, supported by high caliber human talent, world-class infrastructure and best international standards.

Embarking on more strategic promotional and marketing efforts through greater collaboration and smart partnership, he added that the Islamic finance industry had to build on what it has now in order to create a global brand to be promoted more aggressively in the global arena.

“This will be the key to penetrating markets as well as to attracting global players to our shores, henceforth enhancing the viability and sustainability of Malaysia’s Islamic financial system,” he pointed out, concluding that MIFC would be a global brand.