MALAYSIAN ISLAMIC FINANCE Issuers and Investors Forum 2006

Successfully Meeting Local and International
Regulatory Requirements

Moderator Dr Nik Ramlah started the session with a brief discussion of the MIFC initiatives, as part of Malaysia’s plans to further promote Islamic finance both locally and internationally. She then asked Azizan Abdul Rahman of Labuan Offshore Financial Services Authority (LOFSA) to elaborate on the roles that Labuan International Offshore Financial Center (Labuan IOFC) and LOFSA could play in supporting the MIFC initiatives.

Azizan pledged that the Labuan IOFC and LOFSA – the authority for the Labuan IOFC – would be very supportive of any government efforts to promote the financial industry, especially the Islamic finance industry, the pride of Malaysia.

The MIFC initiatives were basically an indication of a positive development in the Malaysian financial sector, he said, noting that the six existing Islamic banks operating in the Labuan IOFC could now operate onshore in Malaysia.

For the benefit of foreign participants, Azizan explained the uniqueness of LOFSA, where the authority played different roles including that of regulator, registry of offshore companies and promoter of Labuan IOFC. He saw the MIFC initiatives as a national agenda requiring support from everybody. The initiatives would encourage players to leverage on the tax incentives offered to all Labuan IOFC-registered companies without having to be physically present in Labuan.

Elaborating further on tax incentives, Jennifer Chang acknowledged that the tax regime was very attractive, with a minimal tax of 3% or RM20,000 (US$5,413) limited tax and expatriates were given a 50% income tax exemption. She added that Labuan could also function as a center for foreign currency issue, as stamp duty had been fully exempted. With this tax regime, she said, Labuan would be very good to complement the MIFC initiatives.

However, Dr Humayon Dar looked at such a development from a different perspective. He perceived the connection between Labuan IOFC and the MIFC initiatives as similar to the development of Bahrain as an offshore financial center, with the emphasis changed with the establishment of Dubai International Financial Center (DIFC). Just as Bahrain remained successful after the establishment of DIFC, there was no reason for Labuan IOFC to be neglected.

Nik Ramlah raised a question regarding Malaysia’s common law tradition and whether such a tradition was considered a strength or a weakness for Malaysia. Jal Othman looked on this as a weakness in the short term, but as a strength in the long run. He said such a tradition had influenced the environment to have a proactive regulatory framework with dedicated guidelines and structured education programs. More importantly, he added, Malaysia had the strong governmental and political will to push the industry forward.

Humayon, however, felt that countries with favorable legislation (as in very much inclined to the Islamic law) would be in a better position to promote Islamic finance. Sharing his experience from the UK, he said that European law could not easily accommodate Islamic finance, and even the Financial Services Authority of the UK, another common law country, took almost two years to finalize its Islamic mortgage plan.

Still on regulatory requirements, Nik Ramlah looked at the role of the Shariah Advisory Council, Malaysia and Pakistan being the only countries where regulators are shouldering responsibilities along with the Shariah members of institutions. She questioned whether such a structure would be beneficial to the industry or otherwise.

Humayon highlighted the definitive role of regulators – to ensure the transparency of the Shariah advisory process, which could be divided into the two major processes of Ijtihad and Iftar. Ijtihad is the creation of Shariah standards whereas Iftar is the issuance of Shariah compliance certification. At present both processes were handled by a single party, meaning that the spirit of the segregation of duties had been neglected, resulting in the process being less transparent.

“There is a need to draw a line between the two processes and only the regulators could do it.” Ideally, the Shariah council at the regulators’ level should take the lead in Ijtihad, while the respective banks’ Shariah members should issue certifications on products based on the Ijtihad taken by the regulators, he suggested.

Wrapping up the session, it was agreed that Malaysia’s success factors include the pioneering and accommodative spirits of both the players and the regulators, and the strong financial infrastructure. It was cautioned that the country should not rest on its laurels, but instead should further drum-up support to tell the world what Malaysia had to offer.