Tolerance and prosperity go hand-in-hand in multi-ethnic, multi-religious Malaysia. Bridging the divide between languages, cultures and identities is a part of its national heritage, and has helped to forge its modern identity. These traditions, coupled with the country’s dynamic economy and its solid governance, helped Malaysia to become the world’s leading centre for Islamic finance – a burgeoning global market that has seen its total assets grow by 150 per cent since in 2006.
With sustained annual growth rates of 17 per cent in recent years and total assets forecast to break the $2 trillion mark in 2014, Islamic finance has begun to make its mark in the world of big finance. Total assets will continue to climb, reaching $2.7 trillion by 2017, according to PricewaterhouseCoopers. At its core lie a few basic principles: Islamic finance aims to generate a fair and equitable profit from transactions that are backed by real assets, while avoiding usury, uncertainty, short-selling and excessive credit. This approach satisfies the ethical standards required by Islamic law, known as Sharia, opening up a potential customer base of 2 billion people and providing a conduit for large amounts of capital to reach global markets.
Malaysia is the world’s leader in providing Islamic finance services and the largest Sukuk, or Islamic bond, issuer worldwide. Sukuk issuances make up a large share of the total Islamic capital market, which is forecast to triple its value in 10 years’ time. The growth is projected to spearhead a dramatic increase in the asset and investment management industry, commercial banking, Islamic banking, takaful, and asset and wealth management. Malaysia’s Economic Transformation Programme (ETP) projects that by 2020 Malaysia’s financial services industry will contribute RM180.2 billion (£33.7 billion) to its gross national income and create 275,400 new jobs.
With Britain becoming the first non-Muslim country to issue government-bond Sukuk, the relations between UK and Malaysia are bound to hit a record high.
In spite of the business community’s curiosity towards this development, Islamic finance is still overshadowed by misconception, which is why the UK hosted the 9th World Islamic Economic Forum in London in 2013. It was the first time that a non-Muslim country hosted the event.
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| Muzaffar Hisham, CEO of Maybank Islamic Berhad | Prof Dr Normah Omar, Director of ARI |
Sharia-compliant institutions largely avoided many of the now-maligned synthetic and highly leveraged investments that contributed to the global financial crisis. An IMF study found Islamic banks “showed stronger resilience” during a time of market upheaval, due to their “smaller investment portfolios, lower leverage, and adherence to Sharia principles – which precluded Islamic banks from financing or investing in the kind of instruments that have adversely affected their conventional competitors.”
The rapid build-up in Islamic finance has been driven by high demand for Sharia-compliant products, as well as increasing liquidity in the Gulf region due to high oil revenues, according to the World Bank, which in a 2013 study concluded it to be “one of the fastest growing segments of emerging global financial markets,” and yet “the market is far below its true potential.”
No country has played a larger role in the development of Islamic finance worldwide than Malaysia. Long before much of the world had been introduced to the concept of Islamic finance, Malaysia began establishing all of the necessary components to form a thriving marketplace. It made a concerted effort to bring together the government, Bank Negara (Malaysia’s central bank), its securities commission and its community of private and institutional investors. This joint undertaking paved the way for Malaysia to hold a dominant share of the Islamic finance market worldwide, with over $411 billion in assets in 2013, in addition to 92 Islamic finance institutions and 68 educational institutions training a workforce of professionals to manage this growing pool of capital.
This transformation did not occur overnight. The seeds began, back in 1963, with the establishment of Tabung Haji (TH), a fund initially established with the simple purpose of helping its clients to save for the pilgrimage to Makkah, that has since grown into a financial institution with global reach and a recognised leader in Islamic finance.
“TH grew hand in hand with the nation,” says its Chairman, Dato’ Sri Abdul Azeez Bin Abdul Rahim. “We are now involved in plantations, Islamic finance, real estate, oil and gas, ICT, tourism, and marine services.”
TH is the only institution of its kind in the world and today it manages more Sharia-compliant funds than any other institution in the country. It now has a total of around RM50 billion in savings and more than 8 million depositors nationwide, placing it as one of Asia’s premier Islamic organisations.
TH has various social programmes to its credit, especially in education. Its nationwide Iqra’ Project provides school supplies, such as uniforms, books and bags, as well as tutoring support for English and mathematics for children in rural and remote areas every year.
With a keen focus on results, TH can boast equally of its bottom line and its superior Islamic financial products. In 2013, it achieved an income of RM3.7 billion, an increase of 34 per cent from RM2.8 billion in 2012.
“TH helps pilgrims save money and be able to perform Hajj. Pilgrims save their money with us and we give a high competitive dividend for their savings. The dividend is higher than Islamic and conventional banks,” Mr Azeez emphasises. “This year we gave 6 per cent and on top of that, we gave an additional 2 per cent to assist them to increase their savings.”
TH is also the proud and responsible owner of a number of prominent real estate properties, including Unilever’s UK Headquarters in Leatherhead, Surrey, along with 10 Queen Street Place and 151 Buckingham Palace Road in London. “So far we have invested more than £500 million in real estate in the UK with the focus on properties that generate competitive returns,” Mr Azeez continues. “It is the place to be for us, as it shows tremendous growth prospects. I believe the ties between Malaysia and the UK are growing stronger than ever.”
Several important factors have combined to allow Sharia-compliant finance to flourish in Malaysia, starting with the infrastructure put in place by the central bank. Malaysia has also been a pioneer in shaping enablers such as Islamic jurisprudence, a tax regime that creates a level playing field, effective accounting standards and a robust regulatory framework. It boasts one of the strongest financial regulatory infrastructures anywhere, allowing the conventional and Islamic market to run parallel.
Malaysia also leads in its standards of documentation, education and professionalism, with institutions like the International Islamic University Malaysia (IIUM), the Accounting Research Institute (ARI) and the International Centre for Education in Islamic Finance (INCEIF) setting industry standards for the sector worldwide. “If you want to be active in Islamic finance, this is the best place to come,” says Prof Normah Omar, Director of ARI.
Another product of this system to have reached global prominence is Maybank Islamic, which now manages $30 billion in Sharia-compliant assets. A further credit to its reputation and leadership, Maybank Islamic’s CEO, Muzaffar Hisham, was honoured as the Islamic Banker of the Year in 2013 at the Asset Triple A Islamic Finance Awards. He has been generating significant growth at the Islamic banking unit in the Maybank Group, while furthering its development in the regional and global banking ecosystems.
“Maybank Islamic looks at facilitating cross-border transaction for our clients in the region by developing the retail sector in order to bring the benefits of Islamic banking to the entire community,” he explains.
Over the past five years Malaysia has opened its financial sector to competition. “The competition of international players created a more efficient market. The authorities have created a conducive environment for investors,” says Mr Muzaffar.
More competition has made the industry stronger. “Islamic financing has certain structures that provide a good value proposition to clients, comparative pricing, and risk features that are different from commercial banking,” he continues. “Now, if we look at the 2008-2009 crisis we have again a situation characterised by a deficient market with misallocation of resources. We believe that Islamic banking can play a key role in creating more efficient banking.”
As the sector gains ground, Mr Muzaffar views the UK as a natural partner. “Islamic finance will play a key role in enhancing the UK and the Middle East relations with Asean. We are facilitating the investment of high net worth clients in the UK’s real estate market.”
Like many of his counterparts in traditional and Islamic finance, TH’s chairman looks forward to the spread of this business expertise in the West, particularly with the efforts being made in the UK. “We are confident that London will become a main player in Islamic finance and a hub for Islamic investment,” says Mr Azeez. “Islamic finance has gained tremendous traction over the last four decades. It is no longer a niche but a mainstream offering.”
Part of this growing appeal, experts argue, owes itself to Islamic finance’s code of ethics. “Islamic finance has a very good feeling with consumers because its policy is based on the sharing of trust and risk,” says Dr Zaha Rina Zahari, an expert on Islamic finance.
“Most customers of Islamic banks or financial products are happier because they feel that the bank shares the risk they take, and that helps to build customer confidence.”
This helps explain its growing popularity with Muslims and non-Muslims alike. Currently, 50 per cent of Islamic finance customers in Malaysia do not identify themselves as Muslim.
“The reason why we are leaders in this sector is because we’ve been in it for a long time,” Dr Zahari emphasises. “We have worked to build awareness over a period of more than 20 years. In Malaysia, there is greater awareness of the existence of the alternative Islamic market and more people in business use Islamic finance.”
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