Zeti Akhtar Aziz: Sustaining Malaysia as a platform for international
Islamic finance
Address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Launching
of HSBC Amanah Malaysia Berhad: "Sustaining Malaysia as a Platform for International
Islamic Finance", Kuala Lumpur, 25 November 2008.
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It is my pleasure to be here today at this official launch of "HSBC Amanah Malaysia Berhad"
(HSBC Amanah). This launch is significant in a number of respects. It reflects the continued
expansion of Islamic finance in Malaysia , taking place at a time of great uncertainty in the
glo bal financial system. The launch of HSBC Amanah, as an Islamic subsidiary of an
international financial group, is also significant as it will contribute towards enhancing further
the international dimension of Islamic finance in Malaysia, thus strengthening our
international financial and economic linkages with other parts of the world.
The Islamic subsidiary represents the transformation of the Islamic banking window
operations into a dedicated entity that allows for greater strategic direction and drive of
performance for the Islamic banking business. The advancement of the Islamic subsidiary
institutions structure has the potential to further complement the goals of the group by
providing an alternative model to spur the expansion of the banking business. It will pave the
way for providing strong support in terms of capital, resources and operational infrastructure
to elevate performance. In doing so, it will also contribute towards enriching further the
diversity of players and strengthening the institutional infrastructure of the Malaysian Islamic
banking system.
The continued growth of Islamic finance in Malaysia
The international economic and financial environment is expected to remain very challenging
with several major economies now in recession and continued uncertainties prevailing in the
international financial system. In spite of this, the Asian economies are still growing, albeit at
a more modest pace. The dominance of domestic demand and increasing regional economic
integration have enhanced the prospects for Asia to sustain a modest pace of growth.
In this challenging international financial environment, it is encouraging that Islamic finance
has continued to demonstrate its evolution and strong growth. Islamic finance has now
become a new vehicle contributing to increasing the financial linkages not only within Asia
but also with the rest of the world thereby facilitating cross-border allocation of capital
globally. Indeed, a number of international financial centres have recognised Islamic finance
as an integral part of their financial system in order to complete the suite of financial products
and services being offered, and therefore are actively developing this segment. The Islamic
finance industry has not only continued to grow but it has also been able to present a higher
level of dynamism.
The key indicators of the Islamic banking sector continue to record a progressive pace of
development. The Islamic banking assets have expanded by 23% to RM234.9 billion
compared with a year ago. The Islamic banking industry now accounts for 16.7% of total
assets in the industry. Similar trends can be observed in the growth of deposits that have
reached RM180.4 billion, an increase of 27.7% during this period while, total financing has
also increased by 24.5% to RM143.4 billion. This growth has also accompanied by an
increase in the number of full-fledged Islamic banking branches. From January to September
this year, 93 new branches were opened thereby enhancing the outreach of Islamic financial
products and services.
Another area that has seen significant growth is in the Sukuk market. The Malaysian sukuk
market has expanded significantly with an average annual growth rate of 22 per cent since
2001. Despite the current market conditions that have affected the volume of new bonds and
Sukuk issuance, the Islamic capital market has continued to structure innovative Islamic
financial instruments. By the first half of 2008, the composition of the more innovative Sukuk
Musharakah
had increased to 84% as compared to 58% of the total sukuk issuance in 2007.
In addition, several new Islamic financial products have been introduced including residential
mortgage backed securities, Commodity Murabahah deposit products, commodity based
ujrah Musharakah,
financing, credit card based on , as well as, structured products based on
Mudarabah and Ijarah.
Malaysia has acquired a unique market space for driving Shariah-based innovation by
combining the depth of knowledge with the drive for innovation. The Islamic financial services
industry in Malaysia possesses a conducive environment for innovative advancement that is
supported by a regulatory framework that ensures not only the stability of the system but also
promotes the active and vibrant functioning of the system.
These developments and continued evolution of Islamic finance have demonstrated the
ability to not only meet the rapidly changing requirements of the global economy, but also to
remain competitive in a challenging environment . Following the greater international interest
in Islamic finance, it has gained an increasingly prominent role in the international financial
system. This is reflected by the active involvement from governments, corporate sectors and
global investors from both Islamic and non-Islamic countries.
Potential role of foreign Islamic subsidiaries
The policy for the establishment of foreign Islamic subsidiaries in our Islamic financial system
is also part of the initiative to enhance the outreach of Islamic finance and to strengthen our
international linkages. It reflects part of the further liberalisation of the Islamic financial
services industry in Malaysia. Foreign Islamic subsidiaries have the potential to promote
innovative product development and enhanced international integration of the Islamic
financial system.
Firstly, by leveraging on the global networks available, foreign Islamic subsidiaries are well
positioned to engage in innovative product development in a more cost effective manner.
Malaysia provides an enabling platform such structuring of Islamic financial products and
instruments. The recent establishment of the International Shariah Research Academy
(ISRA) as a premier research entity has further enhanced the infrastructure to facilitate this
innovative process. ISRA focuses on applied research in Shariah and Islamic finance, and
provides the avenue for greater engagement between industry players and scholars. In
addition, the tax neutrality treatment, has paved the way for the introduction of innovative
products such as Ijarah Munthahiah Bithamleek (leasing ending with ownership) and
Musharakah Mutanaqisah (diminishing partnership) in home financing, and currency option
using the concept of Hamish Jiddiyah (security deposit) and Tawarruq (monetisation).
Secondly , foreign Islamic subsidiaries have an important role in enhancing the international
linkages of the Islamic finance industry regionally and internationally. Reinforced by a well
developed legal, regulatory and Shariah framework and with three decades of experience,
our Islamic financial system offers a unique platform as a meeting place between those that
require funds and those with surplus funds. Malaysia has the full complement of the financial
infrastructure, products and institutions. This is reinforced by the adoption of international
regulatory best practices and liberal foreign exchange administration rules. This environment
has encouraged the issuance of ringgit denominated sukuk by multilateral institutions and
foreign multinational corporations in our market. It has also increased participation of
investors in our Islamic financial markets. In a number of the sukuk issuances, the foreign
subscribers (other than from Asian region) represent more than two thirds of total
subscribers. Given the investment opportunities in the East Asian region, there are significant
potential business activities, especially in the Asia-Pacific region. To optimize the business
potential, Islamic financial institutions need to develop their niche strengths and leverage on
Malaysia's resources to extend the operations to both the regional and global market.
As a foreign Islamic banking subsidiary, the potential to provide greater market access in the
domestic economy and improve the overall financial inclusion is also important. This includes
the offering of new financial products to the different domestic economic segments.
Concluding remarks
On this occasion of the official launch of HSBC Amanah Malaysia Berhad, let me take this
opportunity to congratulate HSBC Bank Malaysia Berhad on the initiative to establish its own
of the Islamic banking subsidiary and for its commitment to contribute to the success of
Islamic finance. By allocating dedicated resources in the Islamic subsidiary in Malaysia,
HSBC Bank will enhance its potential to contribute to the advancement of Islamic banking
business going forward.
I wish HSBC Amanah Malaysia Berhad every success in its endeavours.