Mainstreaming Islamic Finance within Global Financial Systems
Manama, Bahrain: In a strategic partnership with CIMB Islamic, Thomson Reuters, Islamic Research and Training Institute (IRTI) and the General Council for Islamic Banks and Financial Institutions (CIBAFI), the Malaysia Islamic Finance Report 2015 was launched today.
Badlisyah Abdul Ghani, Chief Executive Officer of CIMB Islamic said, “This is an important and balanced country report which fully reflects the comprehensive state of play of the Islamic finance industry in Malaysia. Our year-long strategic partnership with IRTI demonstrates not only the importance of having industry information but also ensuring the integrity under which the information is made available to the market. CIMB Islamic is committed to undertake the necessary efforts in making available more credible, independent and unbiased Islamic finance industry research and country reports. We look forward to working closely with IRTI and other institutions in extending the report to other countries especially those in the ASEAN region.”
According to the study, for the next five years Malaysia’s Islamic banking sector is expected to grow at an average of 18% year-on-year, to more than double to US$296.29 billion in 2019 compared to US$141.77 billion in 2013. This projected growth can be achieved if sustained favourable conditions are met. The study also projects takaful contributions to grow at an average 18.2% year-on-year to reach a market share of 17.96% of total insurance premiums by 2019, equal to US$5.51 billion, from 10% in 2013, equal to US$2.02 billion .
Dr. Sayd Farook, Global Head of Islamic Capital Markets for Thomson Reuters , said: “The report presents the continuing advancement of Islamic finance in the country where the industry is considered to be the most developed in the world.”
“The study is based on a retail consumer survey and exclusive interviews with leading stakeholders that highlights how Islamic banking growth will be driven by opportunities for Islamic banks to finance the development of expansion projects that tap into the real economy,” he continued.
At the retail and household level, consumer survey findings reveal that Islamic subsidiaries of conventional banks have gained customer trust; this will create more demand for existing conventional banks to offer Islamic solutions. The survey also reveals that Islamic banks have gained momentum in maintaining customer relationships, and that a higher level of satisfaction was expressed by Islamic banking users compared to conventional banking users.
The study includes interviews with influential decision makers in the Islamic finance industry, including the central bank Governor and the CEOs of CIMB Islamic and Maybank Islamic who reveal their insights on key trends and developments in the industry.
Professor Dr. Mohamad Azmi Omar, Director General at IRTI, said: “Malaysia has been building its Islamic finance capacities beyond its domestic market and is playing a key role in providing Islamic finance expertise throughout ASEAN and Far Eastern countries. In this way, Malaysia has directly and indirectly contributed to the introduction of Islamic finance products and services as well as the establishment of Islamic financial institutions in Asia.”
“Malaysia’s prominent position as Asia’s Islamic finance hub makes it the key Islamic finance gateway and partner for Middle Eastern, European, and Central Asian markets and its independent and forward-thinking Islamic finance policies are driving the country’s Islamic finance sector forward and affirming the country’s reputation as a leader in the global Islamic finance industry,” he continued.”
Market shifts in response to new regulations under IFSA 2013
Changes embodied in the Islamic Financial Services Act 2013 point to Malaysia’s “independent and forward-thinking” Islamic finance policies. They are designed to privilege customer protection, financial inclusion, and move Islamic finance to become more risk-sharing, which is meant to translate into public perception of Shariah-compliant products as more authentically Islamic and also ethical.
The study finds that the takaful sector will be undergoing the most changes under IFSA 2013.The sector has until 2018 to sort out the biggest policy change – separation of family and general takaful business lines, which also relates to the conventional insurance sector under the Financial Services Act 2013.
In Islamic banking, the reclassification of deposits into principal-guaranteed Islamic deposits and non-guaranteed Investment accounts was the biggest change for consumers and Islamic banks alike. This is part of the Central Bank’s diversification strategies to expand the scope of the Islamic banking business in order to cater to a wider range of customers, the study says. This change is expected to promote transparency because of additional prudential disclosure requirements for Investment accounts and inclusion, and encourage Islamic banks to innovate new products. It also reflects a more risk-sharing approach to Islamic banking.
Emphasis on improving end-to-end Shariah governance
The most recent development in the Shariah framework for Islamic finance under the IFSA 2013 goes even further to emphasize the importance of end-to-end Shariah governance. The study highlights a key strategy that was recently implemented –the development of Shariah standards and operational standards that specify underlying Shariah principles of each contract and address sound prudential measures. These standards aim to enhance clarity that will in turn promote greater legal and operational certainty and infuse Shariah-driven innovations in Islamic finance.
The importance of Shariah compliance, as one of the regulatory objectives under IFSA, warrants for serious enforcement that has led to the introduction of strict specific penalties for Shariah non-compliance.
The world’s largest Sukuk market
Malaysia is the world’s biggest Sukuk market, constituting 67% of global outstanding Sukuk. The Malaysian Sukuk market jumped from US$11.86 billion in 2008 to reach US$82.39 billion in 2013. Total Malaysia Sukuk issued in 2014 was US$77 billion. This represents a fall of 6.5% of the total value of Sukuk issued in Malaysia in 2013, largely due to the drop in the value of the Ringgit. In Ringgit terms, Malaysian Sukuk increased by 1.6% to RM260.87 billion in 2014 compared to RM256.63 billion in 2013. Globally, the overall issuance level fell short of 2013’s despite initial positive outlook and new countries making their debut such as the United Kingdom, Hong Kong, and South Africa.
Islamic Economy growth potential
Malaysia is the global leader in the Islamic Economy, which is made up of six major sectors – food, finance, clothing/fashion, travel, media and recreation, and pharmaceuticals and cosmetics. These sectors pose substantial growth opportunities for Malaysia’s Islamic finance sector, and the report highlights two growth sectors — health and travel, which ranked in RM690 million in revenue in 2013, and green technology, which is contributing to product innovation and a more diverse asset base for investments.
New guidelines for Sustainable and Responsible Investment (SRI) Sukuk were introduced in August 2014 that will help fundraising for both these sectors. Further, green financing has also been introduced and since 2010 more than RM800 million has been allocated as Shariah-compliant financing under the Green Technology Financing Scheme.
Abdelilah Belatik, Secretary General of CIBAFI, said: “The report presents a comprehensive analysis on the dynamic process of Malaysia’s Islamic finance development through several key initiatives in regulations, market infrastructure, competitive landscape of the industry, industry’s best practices, and the variety of innovation. It also presents Islamic finance’s contribution to the Malaysia’s overarching ambition to become a high-income nation by 2020, by implementing an Islamic economics paradigm aligned with Malaysia’s orientation for transformation into value-added economy. Generally, the report determines the dimensions of Malaysian model of Islamic finance for those interested to replicate the experience of the country as a potential global marketplace for Islamic finance”.
Malaysia, a global marketplace for Islamic finance
The current snapshot of macroeconomic and Islamic finance development favours Malaysia as the world’s Islamic finance hub. However, it is prudent to also consider the other top ranking Islamic finance countries such as Bahrain, UAE, Qatar and Saudi Arabia which lie on the periphery of the race to be a global centre for Islamic finance. Though Malaysia also plays an important role in the regional development of Islamic finance, the country’s opportunity is to spread and strengthen Islamic finance in the region. The demographics and trading environment are conducive. It is the political will and regulatory environments of each Southeast Asian nation that poses the biggest challenges, the study explains.
To download the full report please click here