Malaysia as the World’s Islamic Finance Marketplace

Malaysia’s experience in Islamic finance began as early as in 1963 where the Pilgrims Management and Fund Board (Lembaga Tabung Haji) was established to provide Shariah compliant pilgrimage savings scheme for Muslims to perform Hajj. Realising the growing needs for Islamic financial products and services in the market, Bank Negara Malaysia has taken strides in Islamic finance developments since the 1980s and has been at the frontier of global initiatives towards promoting growth of the industry. By giving due recognition for Islamic finance to operate alongside conventional finance in a dual financial environment in the country, a greater diversity of product offerings enables the meeting of various financial needs tailored to different types of customer.
For Malaysia, being a multiracial country with majority of its population being Muslims, Islamic finance has served as a viable and vibrant alternative to its conventional counterpart. The application of multiple Shariah contracts promote the offering of a broad range of Islamic finance products that can cater to more diverse customer needs and preferences. To date, there are more than 100 Islamic financial products offered by our Islamic financial institutions. With the diversification of Islamic banking business that is driven by the Shariah contracts, the expansion of Islamic banking products and services will further support its growing demand in the country.
The Islamic financial system in Malaysia derives its synergy from four key components namely Islamic banking, takaful, Islamic capital market and Islamic fund management. These sectors have been steadily influencing the mainstream of financial market with overall growth rate averaging at 20% over the last 20 years.
With more than three decades of experience, Malaysia’s journey in Islamic finance can be marked in three phases where a gradual and pragmatic approach is adopted to create a sustainable and credible Islamic financial ecosystem. The key milestones of each development stage are depicted in diagram 3.
Malaysia, a Gateway to ASEAN and Asia
Malaysia has developed the world’s most comprehensive and sophisticated Islamic finance marketplace that has grown from strength to strength for over 30 years. Today, Malaysia’s Islamic finance marketplace is open to the world. The features of our marketplace, as illustrated in diagram 4, have been made accessible for all to capitalise on Malaysia’s expertise, innovation and deal flows towards the global expansion of Islamic finance business.
Malaysia serves as a cost-effective gateway into ASEAN with its 617 million population, GDP of US$2.3 trillion and total trade at US$2.5 trillion. Furthermore, ASEAN and its emerging markets are a gateway between the powerful growth economies of greater Asia which include China, India, Japan and Korea, a region known for its high savings rates. In terms of private wealth, the Asia Pacific region (ex-Japan) was the fastest-growing in 2013, growing at a rate of 30.5% to reach US$37 trillion. Global private wealth is projected to grow at a compounded annual growth rate (CAGR) of 5.4% over the next 5 years to reach an estimated US$198 trillion by end 2018, of which the Asia Pacific region (ex-Japan) will account for about half of that total growth in private wealth at a projected CAGR of 10.5% to reach US$61 trillion by end 2018. To tap the ASEAN and Asian region, as well as globally, Malaysia welcomes the global financial community to come and capitalise with Malaysia’s expertise, innovation and deal flow for multi-currency Islamic finance business deals anywhere in the world. Malaysia’s comprehensive Islamic finance ecosystem comprises banking, sukuk, equities, takaful, re-takaful, wealth management, talent development and professional ancillary services.
The following areas are business opportunities available to foreign issuers, investors and talent from Malaysia’s Islamic finance marketplace:
1) Sukuk
The global sukuk market continued its growth momentum with strong prospects. It reached a stock value of US$268 billion at the end of 2013 and since 2000 has grown at a cumulative average rate of 50% per annum. As at 31 March 2014, total sukuk outstanding globally amounted to US$272 billion, with Malaysia holding the largest market share of 58.8% or USD161 billion. Malaysia remains a key marketplace for sukuk issuances in the first quarter of 2014 with USD19.6 billion or 63.1% of market share.
An interesting development in the global sukuk market is the emerging trend of sovereign sukuk issuances by leading conventional financial markets such as London and Hong Kong that will further fuel global sukuk growth. The aim of issuing the sukuk is to profile the centres as financial centres that offer a complete financial solution, both in the conventional and Islamic space. The UK £200 million 5-year sovereign sukuk Ijarah is targeted to be issued in an immediate term and will be the first western country to issue sovereign sukuk. The Hong Kong Government also plans to issue a US$500 million sukuk in 2H2014. Malaysia’s established expertise in the sukuk market will present opportunities for our financial players and professional services firms to profile and enhance their global capabilities in providing Islamic financial advisory and services at the international level.
Future growth prospect for the sukuk market is tremendous. Growth is expected to remain concentrated in the GCC and Asian regions as sukuk are increasingly being used to fund infrastructure projects estimated to be US$2 trillion and US$8.3 trillion respectively till 2020. In Malaysia, the government is aiming for 40% of domestic financing to be Shariah-compliant by 2020, up from 29% in 2010. Turkey and Indonesia have the potential to develop strong domestic sukuk markets. Both governments are highly supportive and have taken steps to put in place specific legislations and initiate benchmark sovereign issuances. The rapid development in the global sukuk market presents business opportunities for Malaysian Islamic finance players to focus their business beyond the domestic market to expand their reach regionally and internationally.
2) Socially Responsible Investments (SRI)/ Ethical Finance
Malaysia offers an end-to-end ecosystem for international investors, issuers, sovereigns, corporates and talents looking for Shariah-compliant ethical investments, fund raising and financial businesses. Our marketplace offers the expertise, innovation and deal-flows to tap the growing opportunities for Islamic finance where global Islamic financial assets reached US$1.8 trillion in 2013 and are forecasted to exceed US$4 trillion by the end of the decade. A wider global interest in Islamic finance is derived from a growing commitment to ‘ethical finance’ or socially responsible investments, which has close affinity to Islamic finance in its link to the real economy and seeks to maximize both financial returns and social good and upholding strong governance. As at end 2011, the global worth of professionally managed assets in ethical investments totalled US$13.6 trillion, representing untapped opportunities for both financial sectors. To support the growth in this sector, Malaysia will introduce the SRI Sukuk Framework, ESG Index and SRI Fund, amongst others.
3) Green Technology
The global market for green technology is forecasted to grow to EUR4.4 trillion by 2025, from the current level of EUR2 trillion with solar projects continuing to take off in India, Australia, the Middle East and China. From the values of sustainability and social responsibility, which are common between the green technology and Islamic finance sectors, global green technology manufacturers are beginning to look to Malaysia’s Islamic finance marketplace where as at end 2013, Islamic financing made up 38% of the total RM3.5 billion (approximately US$1.1 billion) Green Technology Financing Scheme, up from 18% of total allocation the previous year, for green projects based in Malaysia. Malaysia’s sukuk marketplace is well established for the issuances of multi-currency “green” sukuk.
4) Aviation
The aviation industry provides increasing opportunities for Shariah-compliant financing. Strong global growth is projected in the aircraft sector in the next 20 years, i.e. 34,000 aircrafts (valued at US$4.5 trillion) are expected to be delivered, of which the largest order at 35% has come from Asia Pacific. This is in-line with worldwide demand for air passenger and air cargo traffic which are forecasted to grow an average of 5.0% and 5.2% p.a., respectively. In addition, the complementary global aviation MRO (Maintenance, Repair and Overhaul) sector is forecasted to grow at 4.4% p.a. from 2009 to 2019, to be worth approximately US$64 billion in 2019. Essentially, aircraft acquisition and other aviation financing activities can be financed via the Islamic banking and capital markets. This will lead to high value economic benefits for Malaysia and other jurisdictions where the Islamic finance and aviation sectors are priority economic sectors, as is the case of Malaysia’s Economic Transformation Programme.
5) Islamic Wealth Management
The global Islamic fund industry recorded US$71.6 billion in asset under management (AUM) in 2013, achieving 7% Y-o-Y growth with total number of funds growing from 975 to 1,049. Saudi Arabia and Malaysia continue to lead the industry in terms of AUM and number of funds domiciled. Malaysian Islamic funds stood at at US$30.5 billion (RM97.5 billion) in AUM or approximately 31.3% of the total Islamic fund industry as at end 2013. The country’s 19 Islamic fund managers and a well-developed regulatory framework and accommodative policies encourage growth of Islamic funds in Malaysia.
Demand from investors, banks, pension funds and sovereign wealth funds in both traditional and non-traditional Islamic markets help to support the industry’s growth. Rising wealth in the GCC whose wealth tied to rising oil prices and gas exports, and increase in the number of HNWIs globally further fuelled the growth for the industry. Islamic funds in Asia are poised for continued growth as private wealth in Asia Pacific (ex-japan) is expected to grow at a project CAGR of 10.5% to reach an estimated US$61 trillion by end 2018. Islamic funds domiciled in North America and Europe have the potential to tap the socially responsible investment market which stands at USD13.6 trillion. Likewise the global SRI markets can tap Malaysia’s Shariah-compliant ethical funds.