“DEVELOPING A VIABLE MODEL OF
ISLAMIC FINANCE IN MALAYSIA”
Ladies and Gentlemen,
Assalamualaikum warahmatullahi wabarakatuh, and a very good morning to all.
- This year marks the 30th year of official diplomatic relations between the Sultanate of Oman and Malaysia. Over this period, our bilateral relations have achieved significant development in a number of key areas including education, culture, business and trade. Bilateral trade between Oman and Malaysia stood at USD740 million in 2011, a very substantial increase from USD265 million in 2010.
- Almost exactly a year ago, a large Malaysian delegation comprising senior government officials and business leaders led by the Minister of International Trade and Industry visited Oman to explore further opportunities for collaboration between the public and private entities of both countries. This, I am certain, will further enhance our bilateral trade and business relations.
- In addition to the cordial ties already established between our two nations, Oman has special significance for my family. My father, His Majesty Sultan Azlan Muhibbuddin Shah visited this beautiful country in 1991 as a guest of the state. It is therefore very heartening for me to note the success that the Sultanate has achieved, especially given its recent 40th anniversary celebrations led by His Majesty Sultan Qaboos, and particularly in its proactive pursuit of its long-term development strategy towards realising the “Vision for Oman’s Economy 2020”. Coincidentally, this is something that Oman and Malaysia have in common; Malaysia has its own “Vision 2020” where the objective is for the country to achieve fully-developed status by that year.
- Having adopted its Vision in 1995, Oman is now in its eighth five-year national development plan that focuses on diversification, industrialization and privatization, with tourism and gas-based industries being among the key components of the government’s diversification efforts. The development strategy has progressively met the demand for economic growth and sustainability through job creation, foreign investments and the expansion of the private sector’s role.
- Given its progress, I look forward to Oman’s growing and catalytic role in the Middle East and the North African region, and indeed the rest of the world, particularly in the development of Islamic finance.
- Before I proceed further, please allow me to express my appreciation to the organisers of this year’s Oman Islamic Economic Forum for inviting me to deliver this address. The subject of Islamic finance is indeed very close to my heart, and I am delighted to be given this opportunity to share my views with such a prominent audience here today.
Recent Developments in Islamic Finance in Oman
- Since the decree made by His Majesty Sultan Qaboos in May 2011 which paved the way for the introduction of Islamic finance in Oman, I have followed with great interest the initiatives that have been undertaken towards the establishment and development of the Islamic financial industry in this country.
- The commitment and emphasis of the Omani Government in ensuring an orderly and sound development of Islamic finance, in general, and the Islamic banking industry, in particular, has been clearly demonstrated by the pace with which the relevant building blocks are being put in place. The issuance of a Circular by the Central Bank of Oman in June 2011 establishing the preliminary requirements for Islamic banking, followed by the release of the Islamic Banking Regulatory Framework in December 2012, culminating in the launch of Bank Nizwa in January of this year – the first institution in Oman offering dedicated Islamic banking services – marks the beginning of what I believe will be an increasingly significant segment of the country’s financial services sector.
- The commitment demonstrated by the Government of Oman towards developing a vibrant Islamic financial industry is very similar to the experience in Malaysia when the Islamic Banking Act was passed in 1983 and with it, came the establishment of Bank Islam – the first full-fledged Islamic bank in Malaysia. Since then, the Malaysian government has remained fully committed to promoting and facilitating the progress of the Islamic finance industry, initially for the domestic market and subsequently on the international front.
- Malaysia’s commitment towards developing Islamic finance globally is reflected in part through the implementation of the Malaysia International Islamic Financial Centre initiative – or MIFC – for which I have the honour of being the Financial Ambassador. The MIFC initiative, launched in 2006, aims to position Malaysia as the international hub for Islamic financial activities, and the centre for thought leadership and innovation in Islamic finance. This initiative is spearheaded by the Central Bank of Malaysia and the Securities Commission, and enjoys the support of government ministries and agencies, industry players, training and development institutions and professional service providers that collectively make up the MIFC Community.
- One of the programmes under the MIFC initiative comprises promotional activities in the form of road shows and business missions to profile Malaysia’s capabilities and value propositions in respect of Islamic finance in the Asia Pacific region, the Middle East and Europe. This programme has enabled countries in these regions to gain a better understanding of Islamic finance and Malaysia’s commitment in this area, while exploring potential areas of collaboration as well as trade and business opportunities.
Islamic Finance Values
Ladies and Gentlemen,
- Islamic finance finds its strength largely from the universality of its underlying principles and values, which emphasize fairness and transparency, prohibit riba, gharar and maysir, and abhor excessive speculation and profiteering.
- If the role of finance is to promote economic growth through the allocation of financial resources and the management of financial risks, then Islamic finance enhances such economic functions through a set of disciplines and objectives as defined by the Maqasid al-Shariah. Indeed, compliance with these objectives is what gives Islamic finance its unique value proposition.
Global Islamic Finance Industry
- The Islamic finance industry has registered a highly impressive annualized growth rate of almost 15% over the past 10 to 15 years to reach a size of about USD1.3 trillion globally. While this growth has been achieved primarily in Muslim-majority countries, an increasing number of non-Muslim-majority jurisdictions have also been developing their Islamic finance industry, including the United Kingdom, Luxembourg and Hong Kong.
- It is also very encouraging to note that many multinational financial institutions and professional advisory and services firms have been broadening their internal capabilities and allocating significant resources into Islamic finance as they acknowledge the tremendous commercial potential of this particular market segment.
- The size of Islamic financial assets is forecast to reach USD1.8 trillion by 2016, while cross-border financing and investment activities are expected to accelerate especially in the Islamic capital market as emerging economies embark on infrastructure spending.
- In this regard, Malaysia has identified that the next stage of growth of its Islamic financial services sector, comprising Islamic banking, Islamic capital market and Takaful, will be achieved primarily through greater internationalization. This view is presently captured in both the Financial Sector Blueprint and the Capital Market Masterplan 2 which chart the ten-year strategic development plans for the Malaysian financial markets, including Islamic finance, up to the year 2020.
Islamic Finance in Malaysia
Ladies and Gentlemen,
- At this point, let me share with you some perspectives on Malaysia’s efforts, past and present, in developing a vibrant Islamic finance industry. These efforts have laid a strong foundation for the growth of the industry, as reflected by its comprehensive ecosystem comprising the full complement of infrastructure, products and players; all contributing to the depth and breadth of the industry while at the same time, adding to the richness, diversity and maturity of the financial system in the country.
- The beginning of the Islamic finance industry in Malaysia has been commonly linked to the establishment of the Pilgrims Fund Board in 1969, which created demand for Shariah-compliant investment opportunities. Nevertheless, the initial legal framework for the Islamic finance industry was put in place through the introduction of the Islamic Banking Act in 1983 and the Takaful Act in 1984.
- As I had mentioned earlier, the enactment of the Islamic Banking Act in 1983 enabled the country’s first Islamic bank – Bank Islam – to be established. About a decade later, the Islamic Banking Scheme was introduced to allow financial institutions to offer Islamic banking products and services through so-called ‘Islamic windows’. The availability of these Islamic windows contributed immensely to the growth in utilization of Islamic banking products and services among both Muslim and non-Muslim customers. Malaysia’s Islamic banking assets reached USD164.9 billion as at December 2012, with an average growth rate of 18-20% annually.
- Similarly, significant milestones in the development of Malaysia’s Takaful industry have been achieved. With the enactment of the Takaful Act in 1984, the first Takaful company was established in 1985 and this momentum has pushed Malaysia’s Takaful industry to become a significant contributor to Malaysia’s overall Islamic financial system. As at the end of 2012, total assets of Malaysia’s Takaful industry amounted to USD6.4 billion, with a market penetration of 13.0%.
- The Malaysian Islamic capital market has also registered tremendous progress. The issuance of the world’s first Malaysian Ringgit corporate Sukuk in 1990 by a Malaysian subsidiary of the Shell group, the launch of the first Shariah-compliant unit trust fund in 1993, and the introduction of the screening methodology for Shariah-compliant stocks in 1997 are but some of the early milestones. The Islamic capital market reached a size of USD460 billion as at the end of 2012, after registering an average growth of about 14% per annum over the past decade.
- The launching of the Financial Sector Masterplan and the first Capital Market Masterplan in 2001 represented a significant milestone in the history of the Malaysian financial and capital markets. It was also instrumental in enabling the development of Islamic finance in the country. The two Masterplans set out the broad strategies for the development of the Malaysian financial services sector covering both conventional and Islamic finance over the ten-year period to 2010. They were predominantly directed towards putting in place the necessary building blocks, such as strengthening the regulatory and supervisory framework, enhancing the capacity and capability of domestic financial institutions in order to increase their level of effectiveness and competitiveness, and developing the framework on consumer and investor education and protection.
Ensuring the Sustainability of Islamic Finance
Ladies and Gentlemen,
- In order to ensure the sustainability of the Islamic finance industry in the country, Malaysia has taken an approach that effectively places Islamic finance at par with its conventional counterpart. In the areas of regulation and supervision, the overall philosophy is to ensure that investors and consumers of Islamic financial products and services enjoy the same level of protection, clarity, consistency, governance and other best practices as those that apply in the conventional financial market.
- Furthermore, through the provision of facilitative legal and tax frameworks, Malaysia seeks to achieve a level playing field between conventional and Islamic finance, while also extending selected incentives to encourage further development of targeted segments of the Islamic finance industry.
- While we strive to achieve parity in certain areas, the unique differentiation between Islamic and conventional financial products and services remains. As we continue to innovate and develop new products, we must ensure that they remain true to the underlying Shariah principles. Effective governance of these Shariah aspects is therefore imperative in ensuring the integrity and credibility of Islamic finance. In this regard, both the Central Bank of Malaysia and the Securities Commission have put in place robust Shariah governance frameworks, anchored by a central Shariah Advisory Council for each of the regulators. This approach is aimed at ensuring consistency in terms of Shariah rulings and legal clarity on Shariah issues.
- Recent amendments to the relevant Acts have further reinforced the roles and functions of the Shariah Advisory Council whereby they are accorded the status as the sole authoritative body on Shariah matters pertaining to their respective areas of Islamic finance. In addition, the courts and arbitrators are required to refer to the rulings of these Councils for any proceedings relating to Islamic financial business, and such rulings shall be binding.
- Malaysia also has a dedicated High Court bench to hear cases related to Islamic finance, while the resolution of disputes through arbitration is facilitated by the Islamic Finance Arbitration Rules of the Kuala Lumpur Regional Centre for Arbitration.
Collaboration in Islamic Finance
Ladies and Gentlemen,
- Islamic finance is still a relatively young industry that has its fair share of ‘growing pains’. At the same time, it exists and operates within a global, and predominantly, conventional financial system that itself is going through arguably the most challenging and tumultuous period in history, exacerbated by the increasing interconnectedness across markets. Given such an environment, it is imperative that we seek and maximize every opportunity to engage and collaborate in our efforts to address challenges in developing the Islamic finance industry. In this regard, Malaysia looks forward to sharing its experiences with Oman.
- The financial market regulators of Malaysia and Oman, I have been informed, enjoy a very cordial relationship. In September 2011, a senior delegation from the Capital Market Authority of Oman visited Malaysia and met with our Securities Commission and several other important stakeholders to discuss issues relating to the development and regulation of the Islamic capital market.
- More recently in March this year at Oxford, I had the opportunity to meet with His Excellency Sheikh Abdullah Salem Al Salmi, the Executive President of Capital Market Authority of Oman at the 4th annual Islamic Finance Roundtable organised by the Securities Commission of Malaysia and the Oxford Centre for Islamic Studies. This annual Roundtable represents an important collaboration to promote thought leadership in the field of Islamic finance. Such collaborative arrangements are critical in spurring further development and innovation as well as addressing issues and challenges in Islamic finance globally.
- Another potential area for collaboration, which is also one of the most critical issues faced by the industry today, is human capital development. The strong growth of Islamic finance has put increasing pressure on the supply of suitably qualified professionals, especially those with cutting-edge know-how of mainstream financial markets coupled with in-depth knowledge of Shariah principles that underlie Islamic financial transactions.
- In view of the pressing need to develop the necessary skills and competencies on a global scale, several institutions have been established in Malaysia with the primary aim of training Islamic finance professionals. These are the International Centre for Education in Islamic Finance (INCEIF), the Islamic Banking and Finance Institute of Malaysia (IBFIM) and the Securities Industry Development Corporation (SIDC).
- Leveraging on these institutions, Oman and Malaysia can embark on joint initiatives to develop a pool of professionals to drive innovation and growth of the Islamic finance industry. Other capacity-building initiatives are equally important and can be pursued such as in the area of applied Shariah research which is currently being undertaken by the International Shariah Research Academy for Islamic Finance (ISRA) to ensure that Shariah expertise keeps pace with the rapid growth and increasing sophistication of the industry.
- In short, there is great potential for our two countries to harness our collective resources and forge mutually beneficial collaboration in all of these areas.
Ladies and Gentlemen,
- As we attempt to look at what potentially lies ahead, I cannot help but feel optimistic about the prospects for Islamic finance. The growing recognition of Islamic finance as a viable alternative to conventional finance will spur further development of the key components of the Islamic finance ecosystem globally and at the same time drive greater product and service innovation in the market. It will also encourage broader collaborative efforts among various jurisdictions to facilitate cross-border Islamic financial transactions and activities. These all point towards a steady and sustainable growth of Islamic finance.
- Against this backdrop, I am very confident that the concerted efforts and initiatives of the Sultanate of Oman to develop its Islamic finance industry will gain substantial momentum and yield the desired outcome, and I wish you great success.
- I also sincerely look forward to the opportunities for our countries to explore areas of mutual collaboration.