Malaysia and Islamic banking industry: insights for D-8 finance, banking, and insurance cooperation

Kuala Lumpur, Malaysia | November 28, 2007 by D-8 Secretariat

Islamic banks should be given more attractive tax breaks and further incentives to help them develop into global players in line with the government’s vision of making Malaysia a global Islamic banking hub. According to industry players, most are already aware of the need to look beyond the domestic market and invest in human capital, among others, to compete in the international arena, reported by Malaysian TheStar Online newspaper.

Affin Islamic Bank Bhd chief executive officer Kamarul Ariffin Mohd Jamil said Islamic banks currently were too domestic-focused. He said that in the Malaysian context, Islamic banking assets make up just 11% of the entire banking system assets. Thus, it is difficult for Islamic banks to make an impact globally. He also said that due to their size, local Islamic banks lacked regional networking and distribution.

For Malaysia to be a hub, these banks must have the ability to distribute products and services internationally, especially in wealth management and Islamic capital market, he added.

Kamarul cited the example of Singapore’s DBS group that had, together with a group of Middle Eastern investors, established the Islamic Bank of Asia earlier this year with an initial capitalisation of US$500mil.

The new entity was larger than many of the existing Islamic banks in Malaysia and would have the advantage of leveraging on DBS’ wide regional presence, he said.

According to Kamarul, there is also a dearth of resources in Islamic finance. “We lack human expertise to produce new innovative syariah-compliant products.”

“This issue is compounded by the fact that some Islamic banks regard research and development as ‘expenses’ and are hence reluctant to invest in this area,” he noted.

CIMB Islamic Bank executive director and CEO Badlisyah Abdul Ghani said the government should extend tax benefits offered to Malaysian Islamic bankers returning from overseas to Malaysian Islamic bankers committed to working in Malaysia. Without this, the industry would lose a lot of its talented and experienced Islamic bankers to overseas financial centres, he said.

Hong Leong Islamic Bank managing director Khalid Mahmood Bhaimia said there was talent shortage currently in the industry and more scholarships or financial incentives should be given to those keen on studying Islamic banking and finance.

“Apart from the lack of general public awareness and understanding of Islamic financial products, Islamic financial institutions also need to be able to better understand the market and exercise innovation in product development instead of merely doing a ‘cut and paste’ of products introduced in other markets,” Khalid said.

Badlisyah said the government should also encourage intermediaries as well as corporates to undertake more Islamic syndicated facilities.

This could be in the form of stamp duty exemption to corporate and tax-exempt revenue for banks operating their syndication team in Malaysia, he added.

RHB Islamic Bank CEO Jamelah Jamaluddin, on the other hand, said while Islamic banking allowed players to do musyarakah and provided them the flexibility of going into operating lease with partners, current tax laws were not in their favour as expenses incurred on the operating lease could not be offset against total bank income.

She hoped the current cap imposed on expenses from operating lease be waived, hence allowing Islamic banks to “expense fully”.

D-8 Organisation is at highest awareness to this issue, and paying a serious attention on the importance of Islamic finance for supporting the member states cooperation in institutional developments of finance, banking and insurances. The organisation just had organised its 1st Meeting on Financial Infrastructure Development in D-8 Countries, on November 26, 2007 in Cairo, Egypt.

D-8 will also hold meeting to discuss and focus on Islamic Finance, especially Sukuk and related issues in investment and infrastructure development in 2008 in Malaysia.

Several years ago, the development of Islamic finance was regarded as an infant industry and considered concentrated only in countries where the Muslim population was significant. “But in recent years, Islamic finance has made a rapid growth and is present in more than 75 countries both in Muslim and non-Muslim dominated communities,” said D-8 Secretary General, Dipo Alam.

He noted that there is a growing number of the international financial centers that are beginning to offer Islamic financial products and services such as in London, Singapore and Hong Kong. The number of Islamic banking institutions worldwide including conventional banks that are offering Islamic banking services have doubled to more than 300. The total Islamic financial assets under their management are now estimated to exceed one trillion US dollars, about fivefold its magnitude five years ago.

“Therefore Islamic finance, particularly the takaful industry, I believe has a bright future prospects within the globe, especially D-8 countries that also represented major population and economy of OIC member countries,” Dipo Alam concluded during the Meeting on Financial Infrastructure Development in D-8 Countries, in Cairo last Monday.

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