Zamani Abdul Ghani: Malaysia's role as an international Islamic financial
centre
Keynote address by Mr Zamani Abdul Ghani, Deputy Governor of the Central Bank of
Malaysia, at the International Takaful Summit 2007 "Mainstreaming Islamic Finance:
Malaysia as International Islamic Financial Centre", London, 1 November 2007.
* * *
I. Introduction
I am indeed pleased to be invited to this International Takaful Summit 2007 hosted by the
Islamic Banking and Finance Institute of Malaysia (IBFIM). The occasion of this forum is
indeed an excellent opportunity for the regulators, industry practitioners and investors to
discuss recent developments and key issues in Islamic finance, particularly on takaful. It
would also serve as an excellent platform in providing greater awareness on the innovative
products and services available in the takaful and retakaful market. IBFIM has certainly
played an important role in harnessing the critical talent needs of the Islamic financial
industry, not only in Malaysia, but has extended its role internationally as evidenced by this
inaugural Summit in Europe. This Summit also signifies an important strategic shift in our
promotional approach for the takaful and retakaful industry. This shift is towards a more
active initiative to heighten competitive elements and to draw greater foreign participation in
this industry where Malaysia has a strong edge, and we are positive that this industry will
grow stronger with a win-win partnership with the right partners.
My remarks today will dwell on three areas. The first is to share with you selected major
developments in the Malaysian Islamic finance industry that signify the vast potential for
continued strong growth of Islamic banking and takaful in Malaysia. I will then endeavour to
provide some highlights on how Malaysia has strengthen its position as a preferred platform
for global takaful and retakaful activities, within a broader aspiration for Malaysia to be one of
the key international Islamic financial centres. Finally, I will present some areas in the
development of global Islamic finance, including takaful and retakaful, where Malaysia can
play a major role.
II. Significant developments in Malaysian economy and Islamic financial industry
A decade after the Asian financial crisis, the Malaysian economy including its financial
system is at its strongest position. With this growth, Malaysia has greater economic flexibility
to shift to new areas of growth and thus sustain the development momentum. Economic
growth has been achieved with relative price stability, low unemployment and strong external
balances. The level of savings remains high at 37 percent as a percentage to the GDP while
the level of external reserves remains strong at nearly USD100 billion. GDP per capita at
current prices has increased to about USD 6,000 in 2006. Malaysia has also taken
advantage of globalization to strengthen its economic and financial relationships with the
major trading blocs across the globe. In 2006, the total value of the external trade exceeded
for the first time the RM1 trillion mark. Malaysian investment abroad has also grown in
strength. Foreign direct investment has been sustained, particularly into the new areas of
growth. The private sector continues as the main driver of economic growth for the fifth
consecutive year, while the public sector plays a supportive role.
While Malaysia continues to attract investment, both domestic and foreign from the traditional
sectors, new sectors such as the services, manufacturing and oil and gas sectors are gaining
in importance. The services sector such as information technology services, shared services
and outsourcing as well as financial services, in particular Islamic finance, has increased its
market share.
The Malaysian Islamic banking system saw strong performance in 2006 with higher
profitability, and has remained well capitalized. Islamic banking assets amounting to about
USD34 billion or 13 percent in terms of market share. The takaful sector stands at USD1.7
billion, with the assets growing at an average rate of 27% per annum since the past five
years.
The performance of the Malaysian Islamic capital market has been equally encouraging. Our
capital market has depth and breadth that is supported by an active secondary bond market.
Islamic corporate bonds, or sukuk, now amount to USD36 billion or 48 percent of the total
outstanding corporate bond issuance in Malaysia. The multinationals and multi-lateral
institutions such as the International Finance Corporation and the World Bank has begun to
tap funds from the Malaysian capital market by issuing ringgit sukuks, thus increasing the
market's depth and diversity. The Malaysian private debt securities market, both conventional
and Islamic, is now the second largest market in Asia, the largest being Japan.
More than a quarter century of experience in Islamic finance has set the foundation for the
Malaysian Islamic finance industry to evolve into a competitive industry, providing efficient
platform for innovation. Increased foreign-local collaboration has further accelerated the pace
of innovation. It is within the last five years, in fact, that major innovative initiatives have
taken place. In 2005, Malaysia became the first jurisdiction in the world to put in place a
Shariah-compliant deposit insurance scheme. We do have a comprehensive range of Islamic
financing instruments under both fixed and floating rate product structures to meet the
demand of consumers.
III. MIFC initiatives and Malaysia as takaful & retakaful hub
Malaysia is also well-positioned to provide the linkages through Islamic finance to support the
increasing flow of investment between Asia and other parts of the world, particularly the
Middle East. While world trade has on average expanded by 10% over the period
20012005, Asia's trade with the Middle East has increased on average by 24%. More than half of
the exports from the Gulf States go to Asia and more than one-fifth of its imports are from
Asia. Situated centrally in the Asian time zone, Malaysia offers to serve as an investment
gateway to the region, specializing in Islamic fund and wealth management, and providing a
platform for the issuance of sukuks. For this, we have put in place a comprehensive Islamic
financial system that includes Islamic banking, takaful and Islamic money and capital
markets. These activities are adequately supported by the legal, human capital, Shariah and
regulatory infrastructure, a diversity of players and a wide range of products and services.
To further promote the international dimension of Islamic finance in Malaysia, the Malaysian
Government has also launched an initiative known as the Malaysia International Islamic
Financial Centre or MIFC. The MIFC initiative is specifically undertaken by the collective
efforts of the country's financial and market regulators, including Bank Negara Malaysia, the
Securities Commission, the Labuan Offshore Financial Services Authority (LOFSA) and
Bursa Malaysia, together with the participation of the industry representing the banking,
takaful and capital markets. It is aimed towards building greater intermediation linkages
between the East Asian and Middle East regions which will in turn, further expand
interregional trade and cross border investment flows.
As part of the MIFC initiatives, local and foreign financial institutions are allowed to establish
International Islamic Banks (IIBs), International Takaful Operator (ITOs), as well as
International Currency Business Unit (ICBUs) to undertake international currency business in
Islamic finance with non-residents through either a locally incorporated entity or a branch.
This entity is granted attractive tax packages in terms of a 10-year tax holiday. The Foreign
Investment Committee rules have been further relaxed to allow 100 percent foreign equity
ownership in these financial institutions. In continuously creating an enabling environment for
the efficient functioning of the MIFC, the Malaysian commercial banks and investment banks
are allowed to establish International Currency Business Units (ICBUs) to carry out Islamic
banking business under their existing entities. Foreign institutions are also allowed to take up
to 49% of the equity of domestic takaful operators and Islamic banks.
To enhance the delivery system, an executive committee of key government officials,
financial regulators and industry players has been set up for the effective and efficient
implementation of the MIFC initiatives. Among others, an "executive green lane" has been
accorded to expedite applications by expatriates for long-term employment passes with
multiple entry visas. To allow greater operational flexibility within the Shariah parameters, the
Islamic financial system adopt a conducive stance on Shariah interpretations and practices,
consistent with its international dimensions. It mutually recognizes and accommodates the
various juristic reasoning that has been approved by recognized Shariah advisers.
To accord better access to MIFC information, Bank Negara Malaysia has launched the MIFC
Portal at www.mifc.com as the primary source of comprehensive on-line information on the
MIFC. It provides information on the latest initiatives, incentives and developments in the
MIFC, and enables convenient access to application forms, procedures and guidelines
related to entrance and participation in the MIFC.
Bank Negara Malaysia has received positive response from the local and foreign financial
institutions to participate in the MIFC, particularly in the establishment of International Islamic
Banks (IIBs), International Takaful Operators (ITOs), as well as International Currency
Business Units (ICBUs) of Islamic banks and takaful operators. To date, 14 financial
institutions have been granted approval to set up ICBUs.
IV. Critical areas of contribution - Malaysia's role
In this last segment of my address this morning, allow me to share several key areas in
Islamic finance where Malaysia can play major roles, particularly by capitalizing on various
initiatives and incentives under MIFC banner.
The first area is retakaful. The Malaysian Government has focused efforts towards the
development of the retakaful sector in complementing the encouraging growth and
expansion of the takaful industry. This is a critical response to the challenge of the shortage
of strong and credible retakaful capacity globally which poses an impediment to the growth
momentum of the takaful sector. Besides fulfilling the need for retakaful support from the
takaful operators, and reducing the industry's dependency on conventional reinsurance
support, the retakaful operators will also play key roles in enhancing the technical knowledge
in the market, as well as in promoting product development and innovation in the takaful
industry. For this, Bank Negara Malaysia has taken a strategic move to further strengthen
Malaysia's edge as a retakaful hub by inviting strong and qualified applicants, both local and
foreign, to make Malaysia as their platform for retakaful activities. A strong takaful market in
Malaysia, supported by the experience and expertise of several niche players in retakaful
operation during the last two decades, would provide a strong base for a global retakaful
operation to flourish.
Under this initiative, qualified local and foreign applicants will be allowed to conduct both
Malaysian and international currencies retakaful business. Flexibility is accorded to the
retakaful operators to conduct its retakaful business in Malaysia by way of an incorporated
either entity or a branch. Foreign applicants are also welcomed to conduct retakaful business
in Malaysia through a joint-venture with Malaysian companies. It is anticipated that this
measure would serve as a catalyst in our efforts for Malaysia to become the centre for takaful
and retakaful business through the establishment of a significant number of strong and
reputable retakaful operators.
For the potential investors in these ventures, I wish to highlight that Malaysia maintains a
liberal foreign exchange administration regime where investors are freely able to obtain
ringgit and foreign currencies to fund their investments in Malaysia. Please do forget the
foreign exchange administration rules introduced during the 1997/1998 Asian financial crisis.
We have even further relaxed the foreign exchange administration rules to allow resident and
foreign issuers to raise foreign currency-denominated bonds, including Islamic bonds or
sukuks. Foreigners investing in Malaysia are also free to hedge with onshore banks their
committed flow of funds such as the repatriation of investment proceeds, dividends and
profits from Malaysia as well as the purchase of ringgit assets in Malaysia. There is free
mobility of inward and outward movement of funds relating to both foreign direct investment
and portfolio capital investments.
The second key area that Malaysia can play a major role is sukuk issuance, origination
and trading. The sukuk market serves as an important platform, complementing
conventional bonds in enhancing the effectiveness and efficiency for the mobilization and
allocation of funds within national financial systems and in the international financial system.
Significant economic growth is taking place in Asia and the Middle East following
privatization and implementation of infrastructure projects. This opens up tremendous
opportunities for government entities, multinational corporations and multinational
development institutions to raise funds through the issuance of sukuks to meet their financing
needs. The phenomenal demand for sukuks has been spurred by the high levels of surplus
savings and reserves in Asia and Gulf regions coupled with a rising demand for Islamic
banking instruments from a growing Muslim population in Europe. Apart from the issuance of
a sovereign Islamic sukuk by the Government of Malaysia, and the governments of Dubai
(UAE), Qatar, Bahrain and Pakistan, an increase in number of multilateral agencies are also
issuing sukuks to finance development projects. These developments signify the key role of
the sukuk market in facilitating the economic development process.
Significant progress has in fact been achieved in the development of the Malaysian sukuk
market, underpinned by strong collaboration among the Government, regulatory agencies,
players and investors. By early 2007, Malaysia accounted for 67 per cent, or about
twothirds, of the global outstanding sukuk amounting to about USD47 billion. Malaysia is
important for the global sukuk market, not only because it represents the largest sukuk
market in terms of outstanding size, but also in terms of number of issuance which signifies a
strong edge in market vibrancy.
Malaysia's strong performance in sukuk activities can be attributed to several key factors that
may be similarly leveraged by other issuers and players participating in the Malaysian Islamic
capital market. These are:
(i) Firstly, Malaysia has the strong edge by having an efficient platform for sukuk
issuance and trading activities covering the infrastructure and facilitative rules
that contribute towards efficient price discovery and shorter time to market. The
established legal, regulatory and Shariah frameworks in the Islamic financial
infrastructure are key competitive advantage for Malaysia. These initiatives have
been reinforced by the supporting financial infrastructure including the settlement
and bond information systems. There is no restriction on the use of proceeds, ability
to use international rating services, ability to hedge positions and ability to swap
issuance proceeds into foreign currencies. Submission for foreign currency sukuks
from qualified issuers with at least a single "A-" credit rating would be deemed
approved upon proper filing of documents with the Securities Commission.
(ii) Secondly, Malaysia also has an edge in product innovation. In 2006, the
Malaysian market continued to embrace innovative elements with the launch of
sukuk using concepts such as Mudharabah, Musyarakah and Ijarah. Landmark
issuance such as exchangeable sukuk Musyarakah by Khazanah Nasional Berhad,
marked the world's first issue of its kind, incorporating full convertibility features. The
derivatives market has also been developed with the introduction of Islamic currency
swap and Islamic profit rate swap. An important enabling factor for innovations is the
availability of a pool of experienced talent and resources. In the parallel financial
system existing in Malaysia, the talent and expertise for sukuk and Islamic financial
activities does not derive solely from the 9,000 staff of Islamic financial institutions. It
is also well supported by the workforce of domestic and foreign conventional
financial institutions. Leveraging of expertise is critical in pioneering innovative
products so as to ensure that the product design and structure, as well as the risk
management aspects, are thoroughly addressed.
Moving forward, several initiatives were already in place to further support the international
dimension of the Malaysian sukuk market, such as tax incentives and customized forex rules.
For example, Malaysia has further liberalized our foreign exchange administrative rules to
allow multilateral financial institutions, multinational and national corporations to issue both
ringgit and non-ringgit denominated instruments in our capital market. A number of legal and
regulatory requirements have been further customized to drive down the cost of sukuk
issuance. These measures are key MIFC measures and incentives and these include:
(i) Profits and dividends received by non-resident investors from holding of RM and
non RM Islamic instruments issued in Malaysia are exempted from withholding tax;
(ii) A special purpose vehicle (SPV) for Islamic financing purposes via the Islamic
capital market is not required to comply with the administrative procedures under the
Income Tax Act 1967;
(iii) A company that establishes a SPV is given a tax deduction on the issuance cost of
the Islamic securities incurred by the SPV;
(iv) Tax deduction on issuance cost for all Islamic securities approved by the Securities
Commission; and
(v) Stamp duty exemption for 10 years on instruments relating to Islamic securities
under the MIFC.
Third area is outsourcing, insourcing and white labeling activities. Malaysia's more than
two decades of experience in takaful operation and product design can be systematically
structured as a complete solution to be offered to new takaful operators. Takaful operators in
other jurisdictions may leverage on the services and experience of the Malaysian Islamic
finance and takaful industry by outsourcing certain operational functions, such as product
design and investment activities, thereby allowing them to focus their currently limited
resources to important tasks of expanding the business. Strategic alliance by Malaysians can
also be forged with takaful operators in other jurisdictions to provide total product solution in
the form of white labeling arrangement. I hope more Islamic financial institutions will join over
700 shared services and outsourcing companies currently operating in Malaysia based on
the country's proven political, social and economic stability, IT and physical infrastructure,
deep pool of skilled work force, liberal foreign exchange rules, proficiency in languages and
government continued commitment1.
At this stage, I wish to inform that Malaysia has developed a credible, robust and effective
anti money laundering and counter the financing of terrorism or AMLCFT regime. A group of
international assessors had in early 2007 assessed Malaysia's AMLCFT regime, both at the
financial and non-financial sectors as well as on the conventional and Islamic financial
institutions. This assessment is based on the new and more robust FATF or Financial Action
Task Force 40+9 Recommendations. So far, globally, 40 countries have been evaluated
based on this new FATF Assessment Template. The assessment on Malaysia was ratified at
the APG's (Asia Pacific Group on Money Laundering) July 2007 Annual Meeting in Perth.
The full report on the assessment on Malaysia is published in the APG's website
www.apgml.org. The report shows that Malaysia has performed very well. Malaysia received
only one (1) non-compliance (NC) and is among three (3) countries that have achieved zero
(0) or a single NC grading. Malaysia is also among 3 countries that had achieved a LC
(largely complied) grading with no country receiving full compliance grading on customer due
diligence assessment. Notwithstanding this good performance, we will continue to ensure
that Malaysia collaborate with the international community to stamp out the activities of
money launderers, terrorist finances or other criminal elements.
V. Conclusion
In the decade to the present, Malaysia has significantly transformed our financial sector. The
restructuring, consolidation and reform of the financial sector have strengthened the
capacity, flexibility and resilience of the financial system. In addition, there has been
substantial deepening in several segments of the financial system, including those in takaful,
the sukuk market and Islamic banking. Malaysia has also continued to progressively
liberalize its already open financial system to further enable the free flow of funds into and
out of the system. This transformation has opened up the potential for a range of new
opportunities for participation in the Islamic financial sector in Malaysia and for facilitating
greater financial flows within the region and from other regions.
In conclusion, I wish to invite the business and financial communities attending this Summit
to capitalize on this event to arrange for business meetings on the sideline of this Summit.
Please do explore potential strategic alliance opportunities in Islamic finance, especially in
takaful and retakaful with your Malaysian counterparts.
Thank you.