Malaysia Eases Rules on Islamic Finance

Malaysia will ease its rules to allow all banks to do Islamic banking business in foreign currencies, the central bank said yesterday, further cementing the country’s role in Shariah financing.
Non-Islamic commercial bank and investment banks licensed by the government will now be allowed to do Islamic banking business as the country aims to position itself as a global hub for the sector, central bank chief Zeti Akhtar Aziz said in a statement.
“We want and aim to develop Malaysia into a center for the origination, distribution and trading of Sukuks (Islamic bonds) to provide further impetus to the development of an increasingly vibrant and progressive bond market in Malaysia as well as in the Asian region,” Zeti said.
Muslim-dominated Malaysia has the world’s largest Islamic bond market, accounting for about $47 billion or two-thirds of total Islamic bonds outstanding worldwide.
Its Islamic finance industry is worth $38 billion in assets ranging from stocks and insurance to home loans and pawn-broking.
Islamic banking assets also make up over 12 percent of total bank assets, the central bank said.
In remarks at an Islamic banking forum Monday, Zeti said Islamic bonds are increasingly becoming more important in channelling funds into emerging market economies.
“This is particularly the case for the Middle East and Asia, which are among the fastest growing regions in the global economy,” Zeti said.
“This includes financial needs of the private sector following the privatization and implementation of infrastructure projects.” The Islamic bond market, she said, was growing by an average of 40 percent yearly, and demands for bonds “significantly exceeds supply.” Since Malaysia’s first issuance of sovereign global Islamic bonds in 2002, there have been a series of other issuance by countries such as a United Arab Emirates, Qatar, Bahrain and Pakistan.
Multilateral lending agencies have also made issues to finance development projects, with Islamic bonds now catching on as an attractive instrument of financing, the central bank chief said.
Singapore-based financial analyst Abhishek Kumar said Kuala Lumpur’s move signaled a further growth in Islamic finance.
“What Malaysia has done in opening up its currency regulations is a means to attract foreign funds, which is the right thing to do,” said Kumar, who works for Financial Insights, part of the market research and analysis firm International Data Corp (IDC).
Kumar said that while Malaysia is undisputedly that world’s center for Islamic finance, there have been observations that its bond market had been “very domestic” and needs further room to grow internationally.
“This now is the right thing to do to attract foreign funds. I do know that a lot of countries have been seeing a lot of advantages in Sukuk and how much funds and liquidity it grows,” he told AFP.
In a study published last month by Financial Insights however said that growth of Islamic finance in recent years had occurred during a period of economic expansion. And there are concerns over how it would perform during a major financial crisis.