By Evelyn Fernandez
Since the turn of the millennium, Islamic finance has seen rapid development across the globe. Where once its concept had appealed only to a select segment of the world's Muslim population, today Islamic finance has moved into the mainstream, extending its appeal to non-Muslims.
Not surprisingly, the global landscape for Islamic banking and finance has evolved tremendously over the past few years.
Today, the global industry is made up of some 300 Islamic financial institutions, with another 90-plus takaful operators, which together are present in 75 countries. Globally, the Islamic financial system is host to over US$1 trillion (RM3.5 trillion) in assets, with another US$300 billion in funds under management.
Locally, since 2000, assets managed by the sector have expanded at an average annual rate of 18.9%. At the end of 2006, the value of assets held by the Islamic banking system amounted to RM133 billion, growing from just RM47 billion at the end of 2000.
The country's Islamic financial sector has evolved from just two full-fledged Islamic banks in 1983 to 12 today. The market now has a combination of six full-fledged domestic and foreign financial institutions. Six of the country's anchor banks have already spun off their Islamic banking operations into full subsidiaries.
This combination of structures reflects the industry's development trajectory, say industry players. The presence of full-fledged Middle Eastern players such as Al Rajhi Bank, Kuwait Finance House and Asian Finance Bank also signals the sector's rapid liberalisation.
"The diversity of local and foreign Islamic banks in Kuala Lumpur has added competitive vibrancy and depth to grow Malaysia into a regional Islamic financial hub," says Faiz Azmi, the global Islamic finance leader and financial services leader at PwC Malaysia.
Malaysia has undoubtedly led the industry's boom over the past few years, scoring numerous "firsts" as leader on many fronts. With projected global growth rates of about 15% to 20% annually, the industry represents one of the fastest growth segments in the financial sector. Consequently, a much wider array of players is being lured into the field to compete for a piece of this growing pie.
As more and more players ride the fast train of growth in Islamic finance, regulators in Malaysia, Singapore, the UK, Dubai, Qatar and Saudi Arabia alike are jostling to become the destination of choice for Islamic money.
Naturally, as the competition for pole position intensifies, the fight to stay ahead becomes more difficult. How will Malaysia hold its ground?
Industry players in Malaysia believe the country has already marked out its lead in several areas, leaving most of the late entrants to play catch-up.
Product innovation, infrastructure and market development, the legal framework and talent development have all set the country out as one with the most well-rounded development strategy in place.
"The way the Malaysian market has developed is fantastic and the statistics, particularly with regard to developments in the capital market, prove the point," says Ahmed Rehman, CEO of Al Rajhi Bank in Kuala Lumpur. Additionally, the country's proximity to Indonesia offers players here the ability to rapidly scale up their operations, making Malaysia an attractive choice for players.
"Malaysia has nothing to worry over the (growth) strategies seen in other jurisdictions," says Badlisyah Abdul Ghani, CIMB's head of Islamic banking.
Pointing to statistics such as the 1.5 billion Muslims globally, the US$1 trillion already held as assets under management and another estimated US$15 trillion to US$20 trillion in wealth held among high net worth individuals, Badlisyah says, "The global market is big enough for everyone."
Others agree that Malaysia still leads the race to become the regional destination of choice, staying ahead of competitive forces like Singapore.
"Malaysia is still the leader for the region. It has the most comprehensive infrastructure compared to nearby markets such as Singapore and Indonesia, allowing players and products alike to flourish," says Daud Vicary Abdullah, COO at Asian Finance Bank.
One other major point, adds Badlisyah, is the country's regulatory framework, enshrined in 1983 under the Islamic Banking and Finance Act.
"Malaysia remains the only country in the world that has a law enshrined in a statute of Parliament that prohibits Islamic funds from being used in conventional riba-based transactions," says Badlisyah.
Even so, others warn that the leadership gap Malaysia has is starting to narrow.
"From a global perspective, we have had a great start. But we are starting to lag because the (private debt security) issue sizes are getting bigger and product innovation in the Middle East is becoming more rampant," says Rafe Haneef, Citigroup Asia's head of Islamic banking.
Ahmed of Al Rajhi Bank adds that the country will have to keep the momentum for development going. "(In many other countries), the time it takes from the thought process to execution of an idea is very quick," he says.
So, to stay ahead, "a lot will depend on how the regulations turn out, how the momentum continues and whether players will continue to be attracted to this market", he adds.
In chalking up Malaysia's successes, observers invariably zero in on its achievements in the Islamic capital markets. Industry observers rattle off the many "firsts" in innovative sukuk, commodities and money market instruments that the country has issued to stress its leading edge in Islamic capital markets.
Indeed, Malaysia has the deepest local currency debt market. Even as the Gulf Cooperation Council economies have made headway in the issuance of Islamic sukuk, Malaysia remains the world's largest sukuk market. At the end of January this year, Malaysian issues accounted for 67% or US$47 billion of the world's outstanding sukuk, notes PwC Malaysia's Faiz.
In the domestic market, the Islamic bond market accounted for about 31.3% of total bonds outstanding at the end of 2006. Supported by increased innovation in the debt capital markets, the issuance of Islamic debt papers in 2006 ticked above that of conventional banks, accounting for 50.3% of private debt securities issued last year, Bank Negara statistics show.
Even though Malaysia's success in the local currency market is evident, the challenge now will be to achieve the same in the dollar market, say observers.
"A local market niche does not give the country global leverage," cautions Rafe of Citigroup Asia.
Rafe explains that because the ringgit market is so liquid, "it stifles the dollar market". Thus, the key challenge will be to figure out how to drive the dollar market amidst this highly liquid ringgit market.
Under the Malaysian International Islamic Financial Centre (MIFC), Bank Negara Malaysia has introduced various new incentives to drive the international currency market. A year on, however, the number of dollar issues remains small. "At the moment, we don't have the deal flow for dollar issues and that is holding us back," says Rafe.
The problem, he says, is partly due to the ringgit bond market being tight. Thus, issuers save a fair bit in costs on ringgit issues.
Rafe also reckons that the country should step up efforts to expand its lead in other segments of the business, particularly in private wealth management, which include asset management, structured investments and real estate investment trusts.
Faiz adds that Malaysia can "leverage on its Muslim heritage and Asian networks to collaborate with regional players and maintain its global leadership in product innovation".
Across Asia, there is a significant Muslim populace in high-growth economies, including China and India, which may have a growing appetite for syariah-compliant products as an alternative to conventional financial products, he says.
"Convergence of interpretation and application of the syariah laws and guidelines for the region can be achieved through greater collaborative engagements between regional countries."
Additionally, with the many Islamic banks currently existing in Malaysia, there is a need to merge and look into creating a mega Islamic bank, says Salman Younis, managing director of Kuwait Finance House.
"This is so, as the country seeks to become a global hub of Islamic finance. There are 12 Islamic banks, including three from the Middle East, and it would be good for the country to see further consolidation. Size is important for success in order for Malaysia to maintain its advantage," he says.
Amidst this growing global competition, Malaysia has remained focused on developing and strengthening its position. Last year, taking its efforts to the next level, Bank Negara announced various new incentives under the MIFC to enhance its competitive advantage. Set out one year ago, plans under the MIFC are aimed at establishing the country's position as the centre for Islamic financial products and services in international currencies.
To achieve this, the central bank announced various incentives to attract global players into the market and position the country as the centre for the origination, distribution and trading of Islamic capital market instruments. That aside, incentives were also introduced to promote the country as a centre for Islamic funds and wealth management, international currency Islamic financial services as well as takaful and retakaful. To complement all these efforts, Bank Negara increased its efforts to develop human capital in Islamic finance with the setting up of the International Centre for International Centre for Education in Islamic Finance (INCEIF)
INCEIF was born out of the recognition of the need to invest in human capital to move the industry forward.
According to Agil Natt, president of INCEIF. if the industry keeps growing at its current pace, about 30,000 new Islamic banking jobs will have to be filled in the Gulf alone in the next decade. ‘The first batch of graduates will qualify at the end of 2008,' he adds.
INCEIF offers interested candidates a certification through the Certified Islamic Finance Professional (CIFP) programme, the first of its kind in the world. "The CIFP modules have been designed by renowned experts in their respective fields and have been developed in full consultation with local and international industry players in order to ensure their relevance to the requirements of the industry," says Agil.
Right now, INCEIF has 492 candidates from 45 countries enrolled in its CIFP programme. Moving forward, the centre also plans to introduce master's and doctorate programmes to expand the education process.