Published in Asia Asset Management August 2009
Malaysia looks like it has a head start in its bid to become an Islamic hub, although the competition to take the top spot is heating up.
Technically, Malaysia possesses the basic ingredients to become the global platform for Islamic funds, including the needed skill sets and knowledge, financial infrastructure, a full legal and regulatory framework, and full commitment by the Government,” said Noripah Kamso, Chief Executive at CIMB-Principal Islamic Asset Management Sdn Bhd.
“Hong Kong, Singapore and the Middle East do not have these factors in place yet,” she added. “Singapore seems to be angling towards Islamic wealth management, while Hong Kong is building up its supply to meet the growing demand from the Chinese Muslim community in China. The Middle East, on the other hand, has the infrastructure but lacks the human capital needed to expand the industry,” Ms Noripah observed.
Malaysia currently represents the major source of Islamic funds issuance worldwide, at more than 60 per cent. It is the second largest issuer of Islamic mutual funds, contributing 27 per cent of the global funds market, behind only Saudi Arabia, which has 28 per cent, according to the Cerulli Report’s Asset Management in the Middle East, 2008.
Data from market regulator Securities Commission shows that out of a total of 582 funds, 149 were Shariah-based, as at September 2008. This translated to RM17.54 billion in net asset value (NAV) or 11.8% of the total industry NAV of RM148.81 billion.
In addition, Shariah-compliant equities formed 64.2% of total market capitalisation in 2008, up marginally from 63.7% the year before, while the value of outstanding sukuk rose to RM211.0 billion from RM199.1 billion in 2007, accounting for 37% of global sukuk issuance.
Malaysia’s takaful industry, meanwhile, doubled in asset size over the last five years with a penetration rate that is expected to reach 20% by 2010, compared to a current rate of 6.5%. Malaysia is the largest takaful player with a 20% share of the global takaful business worth US$4 billion.
“A comprehensive Islamic financial infrastructure – one that adopts global regulatory, legal and Shariah best practices – is required in order to facilitate mainstream acceptability and increase the supply of Islamic securities,” Ms Noripah pointed out.
CIMB-Principal in June launched the CIMB Islamic Greater China Equity Fund, managed by sister company, CIMB-Principal Islamic. The fund, which has raised RM43 million since its inception, offers Shariah-compliant exposure in the Greater China region, including China, Hong Kong and Taiwan.
With Shariah sensitive investible assets in the GCC (Gulf Cooperation Council) states and Asia hitting a whopping US$736 billion in 2008, up from US$267 billion in 2007, it is no wonder that the battle to be the Islamic centre for Asia intensifies.
“The fact is that every country is interested in this area, and more and more countries will get involved,” observed Jennifer Chang, Senior Executive Director at Pricewaterhouse Coopers (PwC).
“Malaysia has a niche position in terms of Islamic finance. We have a lot more years of experience compared with Hong Kong and Singapore,” she said, adding that on top of that, Malaysia also has all the necessary infrastructure to support Islamic finance.
“For example, we have people with a wealth of experience – local people. And we are not just talking about bankers, but also lawyers, Shariah experts some of whom are internationally recognised, accounting firms able to study the impact and structure of Islamic finance, secretarial firms and so on to provide the support needed,” Ms Chang explained.
“In Singapore and Hong Kong, they do not have this to the extent that we do,” she added.
Islamic finance forms a key agenda for Malaysia and enjoys a commitment that comes all the way from the top. The Malaysia International Islamic Financial Centre (MIFC), a collaborative effort by the country’s financial and market regulators and industry players, is keenly focused on the initiative to position the country as a hub for international Islamic finance.
In addition, Islamic finance in Malaysia benefits from tax neutrality and additional tax benefits – policies that are friendly to investors and that cater to industry growth. Currently, Islamic fund management companies are given tax exemptions on fees received until 2016. “This is a major area,” Ms Chang pointed out.
“We have to compete with other parts of the world where there is no tax. This puts us on an even playing field with others,” she remarked. “Other countries that want to do Islamic finance are also looking into their tax legislation.
“At the minimum, they need to ensure that there is tax neutrality,” she emphasised.
Earlier this year, Malaysia’s Securities Commission awarded another three foreign Islamic fund management licenses, this time to Aberdeen Islamic Asset Management, BNP Paribas Islamic Asset Management and Nomura Islamic Asset Management; bringing the total number of fund houses licensed to operate Islamic fund operations in the country to eight.
The first three to get their foot in were Kuwait Finance House (Malaysia), DBS Asset Management and CIMB-Principal Islamic Asset Management; followed late last year by the Kuwait-based Global Investment House and India’s Reliance Capital Asset Management.
Reliance Capital, India’s largest asset management company, has said that it will make Malaysia its international hub for global Islamic investment activities. It plans to launch an Islamic fund in Malaysia soon.
Even before the 30 June liberalisation measures announced by Prime Minister Najib Razak, Malaysia permitted 100% foreign ownership of Islamic fund management companies, in line with its efforts to attract more key players to set up in the country.
Islamic fund management companies are allowed to invest all their assets overseas and are able to tap into RM7 billion worth of seed money from the Employees Provident Fund (EPF).