Malaysia’s pioneering role in the development of Islamic banking and finance has gained worldwide recognition.
The public’s demand to have an Islamic commercial bank offering Islamic banking products and services continued until a commercial Islamic bank was set up in 1983, licensed as Bank Islam Malaysia Bhd (BIMB) under the Islamic Banking Act (IBA) 1983.
To allow BIMB to stabilise its standing in the banking environment, Bank Negara Malaysia (BNM) granted it a 10-year exclusivity to operate as the sole Islamic bank in the country.
In the same year, Government Investment Certificates were issued under the Government Funding Act 1983 to support liquidity management in BIMB’s operation.
A year later, the first Islamic insurance company was established under the name Syarikat Takaful Malaysia Bhd and regulated by the Takaful Act 1984.
In 1990, another historic development was that Malaysia became the first country to issue sukuk (Islamic bonds) with a modest issue size of RM125 million by Shell MDS Sdn Bhd.
As the 10-year exclusivity granted to BIMB expired in 1993, BNM offered the first three licences in an interest-free scheme, namely Skim Perbankan Tanpa Faedah (SPTF) to Maybank, UMBC and Bank Bumiputra Malaysia Bhd.
This scheme allowed the conventional banks to open Islamic banking windows, and the number of banks participating in SPTF grew tremendously.
When the number of players increased, liquidity management became the main hurdle.
To solve this issue, the Islamic Interbank Money Market was launched in 1994 by the Malay-sian government, the first of its kind in the world.
The main problems that faced the SPTF banking scheme were fund management and regulatory issues, since the conventional banks were governed under the Banking and Financial Institutions Act 1989 while full fledged Islamic banks were under the IBA 1983.
Consequently, starting from 2005, Bank Negara called upon the conventional banks to open Islamic windows as their Islamic subsidiaries, licensed under the IBA 1983.
Since then, almost all local banks set up their own Islamic subsidiaries except for a few international banks such as Citibank and United Overseas Bank.
In the same year, the central bank also issued licences to international Islamic banking institutions to compete with local Islamic financial institutions (IFIs).
The first bank having such a licence was Kuwait Finance House followed by Al-Rajhi Bank.
To create a holistic ecosystem for Islamic banking and finance in the country, the regulator also set up a few entities to cater for research and human capital development.
These include the International Centre for Education in Islamic Finance that was set up in 2005, the Islamic Banking and Finance Institute Malaysia in 2007, the International Shariah Research Academy and the Asian Institute of Finance in 2008.
Malaysia also hosted the Islamic Financial Services Board in 2002 to develop the Islamic finance agenda.
Another initiative was the introduction of Syariah Governance Framework in 2011 aimed at strengthening syariah supervision in the system in mainly four areas which are syariah advisory, syariah review, syariah audit, and syariah research.
This paved the way, in turn, for a more extensive revamp of Islamic banking institutions under the Islamic Financial Services Act (IFSA) 2013.
IFSA was designed to create a better governance structure and parallel playing field for both Islamic and conventional banking in the country.
In this journey, hiccups that arose along the growth path of Islamic banking and finance (IBF) were also addressed by remedial measures.
Indeed, even before the enactment of IFSA 2013, many amendments were made to existing laws and regulations to accommodate the needs of IBF operations in the country.
In 2017, Malaysia marked another milestone through the introduction of the strategic intermediation concept, namely Value-Based Intermediation (VBI).
According to BMM, statistics on the development of IBF in Malaysia showed unparalleled growth in the Islamic banking market share and its annual growth rate.
Islamic financial institutions are thus urged to explore new strategies to maintain growth and sustainability through active participation in the VBI agenda.
VBI requires the IFIs to develop innovative Islamic financial products and services that contribute to social well being, the environment and the economy since VBI focuses on the 3Ps, namely people, planet and profit.
Under this concept, the performance of IFIs as intermediaries in the financial system operation will be assessed not only from their financial performances but also non-financial aspects such as engagement and impact on the three areas just mentioned.
The Sadaqa House product that was launched by Bank Islam in January 2018 is a good example of this approach.
This concept actually reflects the higher goals (maqsad) of the Islamic economic system, which is social justice.
IAIS Malaysia played a key role in this initiative.
Malaysia has evidently succeeded in positioning itself a world leader in IBF, thanks to the active participation and support of the government and BNM.
Yet the journey is not over. Our next instalment looks at some of the IFIs products that have come under criticism.
The author is a research fellow at the International Institute of Advanced Islamic Studies (IAIS) Malaysia.
Published in: New Straits Times, Thursday 7 February 2019
Financial inclusion or access to finance at an affordable cost has, since the early 2000s, been a focus of renewed concern for many governments and central banks.
The World Bank’s 2017 Global Findex Database discovered that about 1.7 billion people worldwide remain unbanked — without an account at a financial institution or a mobile money provider. The United Nations Development Programme’s Sustainable Development Goals (SDGs), therefore, seeks to improve financial access into its main development agenda.
A plethora of academic evidence confirms that financial inclusion can support the achievement of broader sustainable development goals.
As a business established within the ambit of Syariah principles, values and goals, Islamic finance aims to promote economic wellbeing and creates socio-economic justice; and serve as a catalyst for development, in line with the spirit of the UN sustainable development agenda.
The International Monetary Fund, in its press release on May 9, also acknowledged that “the growth of Islamic finance presents important opportunities to strengthen financial inclusion, deepen financial markets, and mobilise funding for development by offering new modes of finance and attracting unbanked populations that have not participated in the financial system.”
Islamic finance could contribute to the financial inclusion agenda through two main mechanisms: profit and loss sharing (PLS) or risk-sharing instruments, like musharakah and mudharabah, as an alternative to conventional debt-based financing and risk transfer; and Islamic social finance instruments, such as zakat, waqf (endowment fund), shadaqah, and qard hasan (benevolent loan), which complement PLS instruments.
PLS promotes the financial inclusion agenda because the concept can offer access to finance to low-income segments at an affordable and fair rate: the imposition of cost and the distribution of profit are based on the actual performance of the business.
As a result, the optimum application of PLS will create an equitable distribution of income and wealth among partners or between wealth owners and entrepreneurs, presenting the concept of justice and fairness in financial dealings.
Risk transfer underlying the conventional financial system, on the other hand, implies asymmetric exposures to economic risk, and does not, therefore, promote economic justice and financial inclusion.
Furthermore, social finance, mandated or otherwise, is an integral part of the Islamic financial system to offer equal opportunity to financial access to the low-income segments, that is, the underserved and poor, “so that it may not (merely) make a circuit between the wealthy among you” (QS 59:7).
Islamic social finance instruments help improve financial access via various initiatives, such as microfinance empowerment and poverty alleviation programmes.
Financial technology (fintech) is a perfect device to reinforce the role of Islamic finance in promoting the financial inclusion agenda. The use of digital finance, such as blockchain and crowdfunding, can lower transactional costs and minimise asymmetric information.
Santander FinTech issued a report in 2015 estimating that blockchain could reduce transactional costs attributable to cross-border payment, securities trading and regulatory compliance between US$15 billion (RM62 billion) and US$20 billion per annum by 2022.
Furthermore, the ability of blockchain to transmit and to record the ownership of the digital assets and immutably store information — where all blockchain participants have access to the same information — might significantly reduce information asymmetries.
Fintech can also open financial access to unbanked individuals. According to World Bank estimate, there are approximately 240 million to 334 million people in developing economies that could participate in crowdfunding.
It is also a powerful tool to widen access and outreach of Islamic social finance instruments such as zakah, waqf and sadaqah.
Bank Negara Malaysia Assistant Governor, Datuk Ahmad Hizzad Baharuddin, at the Association of Shariah Advisers’ Shariah Fintech Forum 2017, affirmed that fintech promises to revolutionise finance and bring a broader range of benefits to financial institutions and the public.
The writer is a research fellow at the International Institute of Advanced Islamic Studies Malaysia
Published in: New Straits Times, Friday 19 October 2018
Over the last few years, environmental preservation has been the focus of renewed investor attention, as evidenced by growing interest in socially responsible investment (SRI) instruments. Green sukuk, a syariah-compliant SRI instrument for renewable energy and other environmental sustainability projects, is an important and commendable initiative.
Malaysia, being home to the world’s largest sukuk market, has pioneered the issuance of green sukuk. On July 27, the Securities Commission announced the debut of the world’s first green sukuk under its SRI sukuk framework. This milestone is the result of a joint effort between SC, Bank Negara Malaysia and the World Bank Group to facilitate the development of green financing and investor participation in SRI sukuk.
Issued by Tadau Energy Sdn Bhd, a Malaysian-based renewable energy and sustainable technology investment firm, and structured on the Syariah principles of istisna’ (manufacturing sale) and ijarah (leasing), the RM250 million Green SRI Sukuk Tadau is to finance the construction of large scale solar (LSS) photovoltaic power plants in Kudat, Sabah, with a tenure of two to 16 years.
Following the success of Green SRI Sukuk Tadau, Quantum Solar Park Malaysia Sdn Bhd launched the world’s largest green SRI sukuk — RM1 billion — in October to fund the construction of Southeast Asia’s largest solar photovoltaic plant project in three districts: Kedah, Melaka and Terengganu.
More green sukuk is expected to be issued in Malaysia to support environmentally sustainable infrastructure projects and to strengthen the country’s position as the main catalyst for Syariah-compliant green instruments.
Certainly, the future of green sukuk in Malaysia is promising for a number of reasons. Firstly, the government aspires, as envisioned in the 2014 Budget speech, to position Malaysia as the home for SRI as part of its ambition to make Malaysia a green technology hub by 2030.
In response, SC revised its sukuk guidelines in 2014, incorporating new requirements for the issuance of SRI sukuk. The new sukuk guidelines state that the proceeds of SRI sukuk can be used to preserve the environment and natural resources, conserve the use of energy, promote the use of renewable energy and reduce greenhouse gas emissions.
Also, a number of incentives have been offered to stimulate greater utilisation of SRI instruments as a fundraising channel. These include tax deductions on the issuance costs of SRI Sukuk approved or authorised by SC and tax incentives for green technology activities. The government also introduced a special financing scheme, Green Technology Financing Scheme, with a total fund allocation of RM5 billion until 2022 to support the development of green technology.
Secondly, a substantial increase in the demand for both energy supply and energy financing in Malaysia has opened up room in which green sukuk can grow. The government has put in place a renewable energy generation target of 7,200 megawatts by 2020. Malaysia’s Green Technology Master Plan also aims to boost the growth of its green technology sector, with a targeted revenue of RM180 billion alongside the creation of 200,000 green jobs by 2030.
Thirdly, there is a growing awareness of SRI among both conventional and Muslim investors. Green sukuk facilitates and increases the broader participation of conventional investors in the sukuk market, especially those looking for more ethical and socially responsible investment opportunities. It helps bridge the gap between sustainable investors and sukuk investors who aim to place their money in a scheme that complies with certain values.
Other positive factors include the design of sukuk, which is naturally supportive of green principles because it requires a specific pool of assets. Also, the progress of green sukuk is, and has evolved into, an indispensable part of the natural evolution of the global Islamic financial market.
Islam is fully supportive of the idea of green financing. The Quran and the prophetic traditions emphasise the importance of environmental conservation and sustainability. Islam commands mankind, as the vicegerents of God, to take care of the environment and nature, and to avoid any act that is detrimental to them. This corresponds to the principal purposes of syariah (maqasid al-Syariah) which are intended to realise public benefit (maslahah) and eliminate harm and destruction (mafsadah), outlined under five main headings: protection of life, preservation of religion, upholding the integrity of the human intellect, protecting the family and protection of lawfully-owned property.
Al-Qardhawi, however, added environmental conservation and preservation as another ultimate objective of syariah, having an equally important position as the five goals.
On the whole, green sukuk, like other SRI instruments, is a funding channel that plays an important role in the preservation of the environment and the sustainability of the earth. Islamic finance should, therefore, provide more avenues for the growth of green sukuk as a financial instrument for sustainable development.
The writer is a research fellow at the International Institute of Advanced Islamic Studies Malaysia
Published in: New Straits Times, Saturday 17st March 2018
Islamic financial products have evolved from simple and straightforward structures to highly sophisticated and multifaceted instruments. During the 1980s and 1990s, Islamic financial products were dominated by deposits and savings, syndicated project financing, syariah-compliant stocks and mutual funds.........................Download the full article in pdf attachment (below)
Waqf (an Islamic endowment of property to be held in trust and used for a charitable, or religious purpose; or a Muslim religious or charitable foundation created by an endowed trust fund) has a long history in Islam. It has played — and, in many cases, continues to play — a pivotal role in the advancement of socio-economic well-being of the Muslim community..........................Download the full article in pdf attachment (below)
Islamic finance has witnessed, over the last few years, a remarkable growth at 15 to 20 per cent Compounded Annual Growth Rate (CAGR), emerging as one of the fastest growing financial sectors in the world. The total assets of the Islamic financial industry in 2015 was around US$2 trillion (RM8.3 trillion) and estimated to surpass US$4 trillion by 2020. This industry’s rapid growth undoubtedly creates a huge demand for new expertise.........................Download the full article in pdf attachment (below)
Who would have thought that two Chinese corporates with serious mainland connections would be spearheading capital market innovation in Malaysia’s ringgit market, notching up a number of notable firsts in the process? Their entry into the sukuk market with debut issuances, coincidentally last Thursday, marks a new milestone in the five decades of the contemporary Islamic finance industry..............................Download the full article in pdf attachment (below)
Although still in its infancy, there are already six crowdfunding companies operating in Malaysia. One of them was co-founded by Elain Lockman, an actuarial science graduate with a Masters in operational research who was one of the early employees at MDEC. She also had stints at iPerintis [now called Petronas ICT) and Malaysia Debt Ventures before venturing on her own as a consultant for tech clients such as DiGi Telecommunications, Packet One Networks, Green Science and MSC Management Services. Last year, she helped found Ata Plus with two other business partners. Elain talks to SAVVY about what crowd-funding is all about and its prospects in Malaysia..............................Download the full article in pdf attachment (below)
THE International Monetary Fund (IMF), especially under its current managing director, Christine Lagarde, has been a proactive supporter of Islamic banking, and, together with the World Bank, has declared it a priority for its operations in countries with Islamic banking. In a recent report titled “Ensuring Financial Stability in Countries with Islamic Banking”, IMF economists have thrown down the gauntlet to its board with a plan of action that, if approved, would have game-changing implications for the regulation and development of the industry, thus further promoting its stability and soundness............................Download the full article in pdf attachment (below)
When first conceptualised in the 1950s and 1960s, it was envisioned that Islamic banks would take the form of a publically-owned social service, similar to that of education and health. Islamic banks would offer current accounts that would not earn interest and saving accounts that paid dividends on the basis of partnership. The capital made available from the saving accounts is considered as investment, thus, would be used by businessmen through partnership agreements where profits and losses would be shared......................Download the full article in pdf attachment (below)