Richard Meyer discusses Malaysia’s attempt to be the global hub for Islamic Finance
Last year, emails sent to Islamic finance leaders in Malaysia went largely unanswered. The powers that be were fine holding conferences and producing glossy pamphlets. They were more than happy giving speeches and spending money. What they had trouble doing was engaging their audience one on one, without the help of PR minders, and defending the proposition that Kuala Lumpur was becoming the global hub for Islamic Finance
It wasn’t a good sign at all. Malaysia just didn’t seem ready to act as a bridge between the world of Islamic Finance and the rest of the world. This year, it’s like Malaysia is another country. To be sure, the government proper is still in hiding (though they do answer emails). The Shariah scholarsthe learned individuals who issue rulings on what investments are permissible under Islamic, or Shariah laware not eager to talk to the press. But the people central to the Malaysian push to become a center of Islamic finance are more than helpful.
At the center of Malaysia’s strategy is an official policy of promotion. The government is putting real weight behind Islamic finance in an effort to strengthen the sector and draw business. In addition to sponsoring conferences, publishing information and producing slick videos, it is also offering some material support. Islamic financial institutions are being given a 10-year tax holiday (expiring 2016), while Islamic financial transactions are being exempt from any capital controls.
The government has also worked to strengthen its regulations to boost confidence. Unlike some jurisdictions, Malaysia has decided not to give Islamic finance a free pass, and insists that the sector and its products be subject to oversight and be rated. This is particularly important in light of what has happened over the past year. Countries like Dubai have been found lacking in terms of disclosure and compliance and fared poorly as markets globally collapsed. In better-regulated Malaysia not a single major bank went under or needed a bailout. That has not gone unnoticed.
Every financial product that comes to market has to be approved by the Central Bank or the Securities Commission,” says Raja Teh Maimunah Raja Abdul Aziz, the new global head of Islamic Capital Market at Bursa Malaysia, the local stock exchange. You will never have a product that is not regulated by somebody.
Most of all, perhaps, it is Malaysia’s efforts on the Islamic side of the equation that underpins its bid to be the hub for Islamic finance. The country has taken the lead in the training of Islamic scholars, in the conducting of Islamic finance research and in the recording of Islamic finance rulings, or fatwas.
We have a single national Sharia council and we actually have a published edition of our Sharia fatwas, says Raja Teh. We don’t have what you have in some countries where the fatwas are a bit of a mystery, where you don’t know the thought process because there are so many different schools.
Malaysia has also been an innovator, working to create useful and compelling but still Shariah-compliant products. While the story before was primarily Islamic bankingretail “windows” where Muslims could deposit their money in accounts that don’t technically pay interestthe story now revolves around sophisticated financial instruments and an active Islamic capital market. The country has everything from the basic sukuk, which can best be described as an Islamic bond, to REITs. It has also developed a commodity trading platform and is currently trying to figure out how to make derivatives that work under Shariah law.
I am completely convinced that it is a major center for a number of reasons, not least of which is government support, but also the leadership that has been shown by regulatory authorities, by the central bank and the Securities Commission here, says David Vicary, chairman of Global Islamic Finance at Deloitte. It has provided a very comprehensive Islamic finance infrastructure. It’s the only one of its kind in the world, no one else comes close in terms of money markets, capital markets, the Bursa, the legislative encouragement.
You have operational infrastructure and you have faculty and expertise here, Vicary continues. You have the only university that only does Islamic Finance. You have got Shariah leadership colleges and the world recognizes it. I spend a lot of time in the Gulf and everyone looks at Malaysia as the role model.
Indeed, the model may be beginning to work. Capital market products in Malaysia are trading at tight spreads, often tighter than non-Islamic products. And the world seems to be taking notice. Bankers are starting to bring Fortune 500 clients from the US to Malaysia to discuss the possibility of raising money via the issuing of Islamic securities.
“Malaysia has been successful in establishing the most active, broadest and deepest sukuk market in the world,” says Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank, “the most liquid Islamic Interbank money market, and the single largest indigenous Islamic banking sector anywhere in the world.”
Still, questions remain and Malaysia’s role as a hub for Islamic Finance is far from a given. The country’s aggressive pursuit of business, for example, can be as much a liability as an asset. Many potential issuers and most investors would regard Malaysia’s approach as positive. But others, particularly investors from strict Islamic nations, could see the Malaysian way as dangerously liberal. Islamic law, with its proscriptions against gambling and alcohol, is after all inherently conservative. In marketing itself globally, and in pushing the envelope so aggressively with respect to new products, Malaysia always runs the risk of alienating its base.
Islam has many schools of thought and Malaysian scholars follow Shafi’i, one of four schools of legal thought within Sunni Islam. But in finance, the country has taken a Big Tent approach and says that it will accept as legitimate any Shariah interpretation that comes from a recognized scholar regardless of their leanings. This is all well and good, but problems still arise. Raja Teh gives an example. When she was marketing the Bursa Suq Al-Sila, the Shariah commodities trading platform developed in Malaysia and approved locally, she found a diverse range of opinions. In Bahrain, it was readily accepted. In Qatar, one bank approved it, another said it was not acceptable.
“The Koran was designed to be timeless and it was designed to be widely interpreted,” Raja Teh says. “When the Shafi’i school does not provide a solution, we look toward the other schools to provide a solution, because the schools all refer to the one book. We accept and respect all schools of thought.”
“We are OK with all, liberal as long as we are not in contradiction with the Koran,” she adds. “We will do something that will suit you, within the ambit of what is permissible. But it is because we are tolerant and accept all schools that we receive criticism and sometimes accusations that we are too liberal.”
“The Gulf would consider Malaysia to be more on the liberal side,” says Vicary. “I wouldn’t debate that. Some of the things done in Malaysia wouldn’t be done in the Gulf. But Shariah is open to interpretation; that is why it has remained flexible and vibrant for the past 1400 years. There will be differences of opinion and debate. In the area of Islamic finance, 95% of fatwas issued by the different schools are in complete agreement and only 5% are in disagreement. And I believe that disagreement is healthy because that allows for product development and debate.”
The market may not totally agree. While the progress made by Malaysia on the scholarship front is generally acknowledged, practical issues related to the diversity of Islamic thought confront western companies seeking to issue Shariah compliant securities. To be safe, they need to at least get opinions from scholars in each of the main schools. To be truly safe, especially if the sale is large and needs to be sold in some of the more conservative countries, they may have to seek out and get the approval of certain widely accepted scholars, individuals universally recognized as above reproach. The added time and expense, and the risk and uncertainty, appears to be slowing the acceptance of Islamic finance in the West.
“Malaysia has well-trained Shariah staff available to advise on issues, but those Shariah scholars are opining on one viewpoint,” says Christopher Richardson, an attorney at Vinson & Elkins. “If you took the same product and ran it by scholars in Saudi Arabia, Pakistan, the UAE or Egypt, they might have a different view. You could easily have trouble marketing that product to investors in other jurisdictions.”
But the perhaps most worrying question about the development of an Islamic finance hub, is why would Western issuers be interested in becoming involved in the first place?
Some market participants argue that Islamic Finance is safer than conventional finance. This is true, to a point. In theory all Shariah compliant paper must be backed by real transactions. And speculation and leverage is discouraged. But critics point out that Islamic finance is only stable if Shariah laws are followed and note that adherence can easily weaken in the face of conflict of interest or political pressure. They also worry about concentration of risk. Many Islamic financial transactions are based on property because it is a real asset that easily meets the Shariah demand for something tangible to back every deal. If property prices fall, as they did last year, Islamic securities can become especially unattractive.
Promoters also say that companies in the West are going to accept Islamic finance because of the need for capital. There is little liquidity in the US and Europe following the Fall, the argument goes, and Islamic countries have money. This assertion is becoming less compelling by the day, especially as the world economy recovers and following the drop in the price of oil from the $147 high.
The truth is, institutions in Muslim countries don’t demand that all investments are Shariah-compliant. Practitioners say that funds in predominantly Muslim countries follow a 20-60-20 rule: 20% of their assets must go into Shariah-compliant investments, 60% can go into either Shariah compliant or conventional investments, and 20% are committed strictly to conventional finance.
Bankers don’t necessarily disagree. But they say that the Shariah-compliant world will be considered by and attract western issuers simply because it increases options and makes more capital available to corporations. It may not be the case that a western company has to issue a sukuk, but it probably wouldn’t hurt.
A lot of funds are sitting in the Middle East waiting to be absorbed, says Encik Musa Abdul Malek, CEO of HSBC Amanah. By issuing Islamic paper you are bringing in new investors. You can access a bigger pool of capital and tap into the whole world. That is one of the main arguments for the development of Islamic finance.
See Also: Back in the day: Malaysia has come a long way despite itself. But it still has a ways to go