Asian real estate – bubbles over here, downturns over there
1 December, 2011
Microfinance – up close and personal
2 December, 2011Institutional Investor, December 2011
In 2001, Malaysia set an ambitious target for Islamic finance. Back then, Islamic banking accounted for 6% of the overall Malaysian banking system; the target was for the figure to hit 20% by the end of the decade. But Malaysia didn’t make its target. It beat it.
Today, Islamic banking is 22% of the national market and continuing to grow steadily. Malaysia has fostered the most complete and sophisticated environment for Islamic finance worldwide, with a clear agreement between government, regulator and central bank about what needs to be done to encourage it. The legal and regulatory environment is supportive, there are entrenched Islamic industries from banking to the capital markets, asset management and takaful (insurance), and today the focus is on bringing international Islamic capital into the country through the Malaysia International Islamic Finance Centre (MIFC).
The importance of this may soon become especially clear. It is often said that Islamic finance, being linked to tangible assets, came through the global financial crisis relatively unscathed, since its banks could not have been involved in complex derivatives even if they had wanted to. It may well be that Islamic finance will have to prove its worth again as Europe drags the world into another financial malaise.
“Islamic finance is insulated from the first round effects” of a crisis, Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, tells Institutional Investor. “That is because it is closely linked to the real economy, has built-in checks and balances, profit sharing, and more responsible lending. But of course as the economies slow down, as financial markets get corrected, it will impact our financial institutions. That’s why it is so important to have capital buffers, risk management and sound governance practices; these are equally important for Islamic finance as conventional.”
Governor Zeti was at the heart of initiatives after the global financial crisis to examine how Islamic finance had fared, and to work out what would be needed to strengthen the system for any subsequent crash. One of the key areas was a need for inter-bank liquidity. As a consequence the International Islamic Liquidity Management Corporation was launched by the Islamic Financial Services Board in October 2010 as a vehicle to issue Shariah-compliant financial instruments so as to improve liquidity management for Islamic banks. Kuala Lumpur is the host to this institution.
At the time of writing, IILM has a chief executive and is more or less ready to start issuing securities, which are expected to come early next year. Surely nobody could have expected it would be called upon so quickly, but its success is likely to be vital if the Eurozone situation gets any worse and European banks pull back their lending further. “We saw during the crisis that liquidity became an important issue,” says Zeti. “With the internationalization of Islamic finance, cross-border flows require short-term instruments to effectively manage – not only in stressful conditions but in normal times.” Several issues are expected to be launched each year, typically around $2-3 billion apiece; shareholders in the institution are several of the Islamic world’s major central banks and the Islamic Development Bank and its investment arm.
Current travails notwithstanding, Malaysia’s focus for Islamic finance is international. The award of a so-called megabank Islamic licence is expected shortly, with the specific aim of bringing international Islamic expertise and capital into the country. And the capital markets – Malaysia already having the most vibrant and high-volume domestic sukuk market in the world – will be increasingly cross-border too. “What has been important for us is that we have become more multi-currency,” Zeti says. “We have had a Singapore dollar sukuk this year, then RMB, as well as the dollar sukuks being issued out. We want to develop Malaysia as a centre of origination of sukuks: a meeting place for those who have funds to raise and surplus funds to invest. This is where we are.”
