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“AlHuda CIBE is organizing World largest Conference on Islamic Banking & Finance on 7th April, 2008 at Lahore – Pakistan “
 
 
 
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Making Islamic finance a success story
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For the Islamic financial community, the series of events that took place in London, Tokyo and Hong Kong in the last couple of months looks set to trigger another wave of industry transformation. The UK Treasury, in early November, published a major consultation paper for the issuance of the UK government sovereign sterling sukuk (bond). The instrument, when issued, will be a watershed event as Islamic finance marches into the heart of Western capital.

Meanwhile, in Asia, the Tokyo Stock Exchange and Hong Kong Stock Exchange have launched their own syariah indices in a move to lure massive Islamic funds into their equity markets. And being the pragmatic man he is, Donald Tsang, the Hong Kong chief executive, announced at the end of last year that his government would now focus its energy on developing the sukuk market.

As major financial capitals rush to embrace Islamic finance, the stage is now set for a global competition to tap the US$1.5 trillion (about RM4.9 trillion) of Islamic funds, and in the process turn the capitals into Islamic financial centres.

Kuala Lumpur should not lose out. After all, it already has first-mover advantage. Malaysia is the first country to develop a comprehensive legal framework for Islamic finance, the first to issue sovereign sukuk and is now still the world's largest sukuk market. It is home to 13 full-fledged Islamic financial institutions, including three foreign players and 17 Islamic windows. This makes Kuala Lumpur a capital with the most institutions providing Islamic financial services. The November 2007 Islamic finance policy paper published by the UK Financial Services Authority has rightly credited Malaysia as a mature market from which the UK had much to learn. It is a testimony to Malaysia's success in bringing the industry to the mainstream of international finance.

But in the realpolitik of global finance, the stake is high in the face of an increasingly competitive race. While the Malaysia International Islamic Financial Centre (MIFC) initiative has provided a platform for a more focused and aggressive approach to "selling" Malaysia, the anecdotal evidence suggests that we still lack the much-needed vibrancy in our ser­vice sector, notably legal service, to make this effort a success.

Anybody undertaking a quick survey of major financial centres around the world would have acknowledged that a liberalised legal market is often a key element that distinguishes one financial centre from another. So in its quest to internationalise its financial market, Dubai has been quick to open its arms to foreign legal firms. It now has more than 20 foreign firms operating within the Dubai International Financial Centre. Hong Kong has 54 and Singapore almost 100 operating under various types of ventures. London boasts the presence of 200 foreign law firms.

Thus, the centrepiece of any successful effort to promote the MIFC at this juncture should also include the lifting of entry bar for foreign law firms into the Malaysian market. I am, of course, not advocating a complete liberalisation, but the global environment demands urgent action on our part to loosen up the rules vis-à-vis international firms. But will this inundate the market with so many players that Malaysian firms will be driven out of business?

Far from it. The focus of these firms would be on the transactions where the governing law is English law as it would, for reason of universal acceptability, normally be the choice of law for most international transactions. So, their presence would not only enhance the sophistication of the Malaysian legal market but also create unparalleled opportunities for the advancement of Malaysian lawyers. Cross-border deals done out of Kuala Lumpur would necessarily require the service of local firms for local law advice.

For this reason, any effort to open up the Malaysian legal market should not be seen as a sign of lack of confidence in the competence and credibility of local lawyers. In fact, the opposite is true. At least in the sphere of Islamic finance, Malaysian lawyers are recognised as one of the most capable. They have advised on some of the world's most sophisticated Islamic finance deals, have won accolades and pioneered documents that today have become references for later transactions. The fact that we have a home-grown law firm that has expanded into a regional entity with operating offices in major capitals across Southeast Asia speaks volumes of our ability to compete on the global stage.

But this should not hold us back from recognising that, owing to the depth and breadth of financial markets that exist elsewhere and years of existence, these international firms possess the technology and know-how that we require to make the leap. The combination of our experience in Islamic finance and theirs in more established markets would provide us with the necessary leverage to project Kuala Lumpur as a global financial centre.

Far from undermining the market, this will allow for greater exchange of ideas, more exposure of Malaysian expertise and, through the extensive network of the international firms and the unique nature of legal business, provide Malaysian firms with immediate access to the global market.

How Malaysia wants to liberalise its legal market — whether in the form of joint law ventures or full-fledged establishments confined to practising Tier-1 work — needs to be decided soon. It should not be hindered by the lingering question of whether those foreign firms would consider setting up shop in Kuala Lumpur when some already have a presence across the Causeway. What is more important is to have the facilitative framework in place urgently, or we risk losing out to the new "converts" and being relegated to playing a mere domestic role.

 
 
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