Malaysian Islamic Financial Market Liberalisation is a 'Revelation' for Foreign Banks

The opening up of the Islamic finance market through the liberalisation measures announced in April 2009 by Prime Minister Mohd Najib Abdul Razak and over the years, and Malaysia's interest in developing cross-border activity have been a revelation, confirms Richard Thomas, CEO of Gatehouse Bank plc, the latest Islamic investment bank to be authorised by the UK s Financial Services Authority (FSA). "I have been looking at Malaysia for the last 20 years and found it a difficult market to penetrate in the past. But suddenly with the new regime and the liberalisation; and the work done by Governor Dr Zeti Akhtar Aziz at Bank Negara Malaysia (BNM) and Chairman Zarinah Anwar at the Securities Commission of Malaysia (SC) has really made the difference between mere interest and practical development. We are directly engaged with the work done by both. We have some small direct equity investment in Malaysia but we are also working very closely with the authorities there and with Bursa Malaysia, the stock exchange, in developing future products,"added Richard Thomas. From the banking side bankers stress that they are seeing progress on standardising capital markets and money market products which now allows London and Kuala Lumpur to cooperate in the future in banking and finance. In terms of asset management there are a lot of opportunities for Malaysia as a destination for capital, but also as a source of capital for regional investment. The above sentiments are virtually universal in the Islamic finance sector, which sees Kuala Lumpur providing essential leadership to the global industry. At the same time, Malaysia is a strong supporter of mainstreaming Islamic finance as part of the global financial system, and is also keen to encourage cross-border financial and economic links between Malaysia and the member countries of the Islamic Development Bank and the major financial markets of the world. These liberalisation measures which will be implemented over the period 2009 to 2012, explained Prime Minister Mohd Najib Abdul Razak, are in line with the Government's initiative to promote structural change within the economy and diversify sources of growth to further drive economic expansion. The financial services sector is an integral component of the economy, and has increased its share in GDP from 9.2 per cent in 2000 to 11 per cent in 2008. More than 140,000 workers are employed by banking institutions and insurance companies in Malaysia. The latest measures are in line with the provisions set out in the Financial Sector Master Plan (FSMP) announced in 2001 by the then Government of Prime Minister Dr Mahathir Mohamed and which set out the roadmap for the liberalisation of the conventional and Islamic banking and insurance sectors in Malaysia. According to BNM, around 90 per cent of the FSMP initiatives have already been completed. BNM fast-tracked the liberalisation of the Islamic financial sector under the FSMP by three years through the issuance in 2006/7 of dedicated Islamic banking licences to Al-Rajhi Bank of Saudi Arabia; Kuwait Finance House; and a consortium led by Qatar Islamic Bank. BNM two years ago also approved the acquisition of a substantial minority stake by Dubai International Group in the flagship Bank Islam Malaysia Berhad (BIMB), the first Islamic bank to be authorised in Malaysia in 1983. BNM stresses that the new measures are aimed at enhancing interlinkages to leverage on global developments in Islamic finance and reinforce Malaysia's position as an international Islamic financial hub. Under the new liberalisation measures announced by the Government, BNM will issue up to two new Islamic banking licences in 2009 under the Islamic Banking Act 1983 to world class foreign players to establish new Islamic banks with paid-up capital of at least USD1bn; and up to two new family Takaful (Islamic insurance) licences in 2009 to players that can offer significant value proposition to Malaysia to spur the development of the Takaful industry. Malaysia, according to Prime Minister Mohd Najib Abdul Razak, will give priority to those market players who have the capacity to contribute in areas where there are gaps and in which there are new areas of growth in the financial system, as well as to reinforce Malaysia's position as an international Islamic financial hub. Several applications for licences have been received from major players, and these are being processed accordingly. The Government has also changed the ceilings for foreign equity ownership in onshore Malaysian Islamic banks, investment banks, insurance companies and Takaful operators from the current 49 per cent to 70 per cent. This means that foreign shareholders can have a majority equity stake in a Malaysian financial institution in the above categories, which does not include commercial domestic Malaysian banks where the foreign equity shareholding remains at the current 30 per cent. Where this happens, the paid-up capital of the bank must be maintained at a minimum of USD1bn. Such alliances would strengthen business potential and enhance growth prospects of Malaysian financial institutions through the international expertise and global networks of foreign shareholders. The liberalisation plan, will be supplemented with sufficient safeguards to ensure that the overall financial intermediation function of the financial system remains intact, effective and sound. Capacity and institutional building efforts will continue to be pursued, complemented by enhancements to the regulatory, supervisory and surveillance framework to preserve the resilience of the financial system. The Government is also giving locally-incorporated foreign commercial banks greater flexibility to increase branches so as to achieve greater financial inclusion and insurance penetration in the country. Locally-incorporated foreign commercial banks will be allowed to establish four new full-fledged branches with effect in 2010 and ten microfinance branches with effect from this year. Similarly, the Government is easing visa requirements for the employment of expatriates in specialist areas that can contribute to the development of the financial sector.@ MIFC eNewsletter