When heads of states and ministers from several Islamic countries meet in Malaysia at the World Islamic Economic Forum from October 1 to 3, a powerful message will be delivered from the south-east Asian country that has actively promoted itself as a world leader in Islamic banking and finance. The organisers of the summit believe they are well-positioned to replicate the success of other global forums such as the annual economic summit at Davos, Switzerland, by holding a regular event of a similar kind for the Muslim world.
At a time when Islamic countries face political and economic challenges, proponents of closer economic co-operation between Muslim countries have seldom before found as receptive an audience as in the past few years. In the wake of 9/11, there has been an intense focus from the Western world on a variety of issues tied to Islamic finance, most notably the relatively unregulated nature of the business in many countries – prompting concerns over its implications for money laundering and terrorist financing.
Leading scholars argue that the example that Malaysia has set in placing greater emphasis on the development of supporting infrastructure, such as a clear policy for taxation of all banks including Islamic ones, provides a model for others to emulate. This has been backed by the central bank’s constant public support and the preference of a large number of consumers for patronising Islamic banks.
“You have to have some of the basics working together in the correct manner and that is what has gone in favour of Malaysia,” says Mohammad Daud Bakar, a leading Malaysian scholar of Islamic banking and finance.
Market capitalisation
Dr Bakar says the evidence of Malaysia’s success comes in the shape of the robust growth of market capitalisation of Islamic banks which, at 11% of the entire banking sector this year, stands among the highest in the Islamic world. The Malaysian government has set itself a target of raising this to 20% by the end of the decade – an ambitious target which many say is considerably ahead of quite a few other Islamic countries.
Recently, in important moves to promote Islamic finance, three foreign investors – Kuwait Finance House, Al Rajhi of Saudi Arabia and a consortium made up of a Saudi and a Qatari bank – have been given licences to set up Islamic finance outlets in Malaysia. Analysts say this could be just the start of an influx of investors from the oil-rich Arab world heading to Malaysia.
State support is crucial
Rafe Haneef, a Malaysian who heads Islamic banking at Dutch bank ABN-AMRO, believes the most important lesson for countries looking at the Malaysian case is the success reaped by the sector following strong support from the government.
“The Malaysian government has provided the necessary infrastructure while the central bank has been supportive. This is in contrast to some other countries where there is demand from consumers but not enough support from the authorities,” he says.
The country has successfully given birth to a significant community of proponents of Islamic banking and finance who are eager to spread the message around the world. “Malaysia has become the model for many others as one sees more delegations from Malaysia than say the GCC [Gulf Cooperation Council] at conferences [on Islamic finance],” says Rushdi Siddiqui of the Dow Jones Islamic Index, based in New York.
Ready for the world?
Many analysts, however, still question the extent to which Malaysia is ready to become a significant global player, perhaps even an exporter of Islamic banking and finance initiatives. Part of this concern is driven by questions over the country’s ability to tap into the large amount of liquidity generated from the Middle East in the light of high oil prices in the past year or so.
This is despite the Malaysian market offering relatively more products than the Middle East, where consumer products are still being developed.
“The pattern of developments in Malaysia has been interesting. In spite of the large oil revenues, investors from the Middle East are either keen to invest in their own region and if they were to head out, the first port of call is usually a Western destination,” says an Islamic banker in Kuala Lumpur. “While Malaysia has been more successful in this field than many other countries, there’s no great rush from oil-rich investors to turn to Malaysia.”
Entry to the Malaysian market by such investors must be preceded by international – primarily Western – financial institutions and banks, he says. “Once you have a firmly established track record as a world-class recipient of investments and Westerners feel comfortable, then a host of people will come through.”
Afraid to venture out
Mr Siddiqui takes the view that the Malaysian model can succeed further, if local investors were more aggressive in venturing into high-profile initiatives in the Western world to showcase their achievements. “The Islamic Bank of Britain [IBB] and the proposed Islamic investment bank in Europe have investors from the GCC behind them. It would be very interesting if Malaysian investors and institutions did something similar in the US, Canada or Australia,” he says.
Islamic bankers in Malaysia are concerned about their failure to attract some of the best young graduates and train them to take over key responsibilities at mid-career and, eventually, senior positions. The majority of younger professionals, armed with highly sought-after qualifications and good credentials, still see mainstream banks as their first choice.
“If a young MBA graduate from one of the world’s leading business schools was to consider entering the market, he or she is more than likely to aim first for a mainstream bank. This is because Islamic banks and financial institutions are still seen as peripheral to the business,” says another leading Islamic banker in Kuala Lumpur. He believes that for the future and long-term success, Islamic banks from different countries will have to pool resources to attract some of the best students at undergraduate level and train them. “If there was a globally accepted and high-quality Islamic finance MBA located in a leading university, that may help. It’s essentially the question of the world’s first Harvard or Stanford equivalent Islamic banking and finance MBA,” he says.
Bankers also warn that the fast-paced growth of consumer finance in the Malaysian market creates the danger of a clash between a fundamental tenet of Islam and the way in which Islamic banking and finance is supposed to progress. Essentially, the banks should discourage prospective borrowers from accumulating unnecessary debt, they say.
“Basically, Islam forbids the use of interest [which is used] as a tool used by mainstream banks. So the question is, can Islam strongly encourage Muslims to accumulate debt?” remarks a European-based Malaysian business executive, who is in negotiations to set up an Islamic financial institution in his homeland.
“The problem with the Malaysian model is that if you have too many consumer products on offer, then when do you reach the point at which you say this is basically opposed to the ways in which Islam sets the limits on how Muslims should conduct their finances?” he says.
Competition next door
Leading analysts believe that Malaysia cannot remain unaware of new competition growing in neighbouring Singapore – an important economy where new initiatives are aimed at developing Islamic asset management initiatives. This is in contrast to the Malaysian model of developing more retail-based services. Bankers warn that without further growth and consolidation of this industry, there is a possibility that Singapore will position itself to eventually become the lead player in south-east Asia.
