|The Labuan International Islamic Finance Lecture Series I|
THE LABUAN INTERNATIONAL ISLAMIC FINANCE LECTURE SERIES I
Sheraton Hotel, Labuan
" THE ROLE OF MALAYSIA IN THE
Ladies and gentlemen
Assalamualaikum Warahmatullahi Wabarakatuh and a very good afternoon
Ladies and gentlemen,
2. The topic of my talk today is "Malaysia's Role in the Internationalization of Islamic Finance". Malaysia has played a significant role in the Islamic world, at both the political and business level. Our leadership position in the Organization of Islamic Conference and other various international organizations have given Malaysia a platform to share some of our developmental experiences with member countries in particular in Islamic finance. In this respect, we are determined to contribute towards strengthening and improving the lives of the global ummah.
3. The Islamic civilization had flourished and contributed greatly to mankind many centuries ago. The greatness of the various Islamic empires and the multitude of innovations and inventions were recorded and acknowledged for posterity. A global renaissance is long overdue and indeed, we are seeing a rejuvenation of Islamic awareness in the Muslim community. This rejuvenation is very much visible especially in the area of Islamic finance.
4. Islamic values are universal and the fundamentals of Islam are applicable to all aspects of life. One of the pillars of Islamic values is the value of fairness. It is this principle that balances the scales of risk and profit that form the basic foundation of Islamic finance. Building on these tenets of business principles, the global significance of Islamic finance has grown considerably which is practiced in over 60 countries. Shariah-compliant assets of Islamic banks and window-based conventional banks have exceeded USD400 billion. The market capitalization of the Dow Jones Islamic Index is in excess of USD10 trillion. Islamic mutual funds totaled over USD300 billion while the aggregate issuance of Islamic sovereign and private debt sukuk has reached the USD50 billion mark. Islamic finance is now truly recognized as a sector with very strong growth potential in the global financial market.
Ladies and gentlemen,
5. Malaysia has embarked on the pioneering effort to develop a comprehensive Islamic financial system for over 20 years now. We are one of the earliest to recognize the potential to create a financial system compatible with Islamic principles that provides an alternative to the conventional system.
6. In the area of institutional development, the first Islamic financial institution established was the Pilgrim Fund Board or Lembaga Tabung Haji, founded in 1969. Its objective is to mobilize savings of Muslims intending to perform the Haj, with the pool of savings being invested in Shariah permissible instruments. The Tabung Haji model has been adopted elsewhere around the world. The institutionalizing of Tabung Haji as a Shariah-compliant organization paved the way for a more structured institutional development in Islamic banking and finance. In 1983, we introduced the Islamic Banking Act and established Malaysia's first full-fledged Islamic bank. For Islamic insurance, the Takaful Act of 1984 was legislated.
7. The Islamic financial system was further complemented with the inception of the Islamic interbank money market in 1994 followed by the availability of short and long term financial instruments. These Shariah compliant investments and instruments have been providing the Islamic banking institutions with funding and liquidity requirements, fully supported by the state-of-the-art technology services including settlement and custodian systems, funds transfer and scripless Islamic securities and commercial papers.
9. In the area of regulatory development, the Islamic Financial Services Board (IFSB) was established in Kuala Lumpur in the year 2002 to develop international prudential regulatory standards globally to enhance soundness and stability of Islamic financial system. Bank Negara Malaysia is the founding member of IFSB together with 15 other full members that comprises central banks, monetary and supervisory authorities. Thus far, two standards have been issued, namely the standards for Capital Adequacy and the Guiding Principles for Risk Management for Islamic financial institutions. Bank Negara Malaysia will be implementing these IFSB standards for adoption by Malaysian Islamic banking institutions with effect from the year 2007.
10. The regulatory development effort is also strengthened with the establishment of the International Islamic Financial Market (IIFM) in the previous year. The IIFM provides the market mechanism to facilitate capital mobilization, stimulate creation and trading of Islamic financial instruments, enhance investment opportunities and facilitate efficient liquidity management by Islamic financial institutions.
11. For the orderly development of an Islamic Capital Market (ICM), the Securities Commission has initiated various measures. Over the past decade, Malaysia ICM has witnessed the proliferation of products and services ranging from equities, unit trust funds, structured products, derivatives, index, fund management and stock broking services. At present, there are 89 Islamic unit trusts, about 85% of the listed stocks are Shariah-compliant and 46% of the corporate bond market are Islamic bonds. It is fair to say that Malaysia now has the most comprehensive Islamic capital market in the world.
Ladies and gentlemen,
12. The Government had played an effective role as the catalyst for the development of Islamic finance. This role will continue in the future. The role of the public sector is to provide the most conducive environment possible for the private sector to flourish. However, it is the private sector that must carry the baton in to further develope Islamic finance.
13. While the Malaysian Islamic financial markets offer a comprehensive range of product and services in banking, takaful, and capital markets, we have witnessed Islamic institutions developing into originators of a wide range of Islamic products and services. This is a marked development from the early days when the financial institutions took on the business model of adapting conventional structures as templates for "off-the-shelf"â„¢ Islamic products largely for the retail market.
14. Having built up their knowledge of the underpinning Shariah principles and in line with the growth of demand in Islamic banking products, private institutions now realized the potential of Shariah-compliant products as a viable driver of profitability, market differentiation and enhancer of shareholder value. The next stage was the assimilation of Shariah principles for wholesale banking and finance products and services. This has been done successfully and I am confident that the industry will continue to do so, moving up the value chain, developing increasingly sophisticated structured products applicable to the needs of an increasingly demanding domestic and international markets.
Ladies and gentlemen,
15. I am pleased to note that from a policy-driven industry, Islamic finance has since developed to a more market-driven initiative. In 2005, the Malaysian Islamic banking system grew at an impressive pace, with higher profitability and positive trends in all key indicators. The aggregated Islamic banking assets amounted to RM117 billion, takaful assets at RM6.2 billion and Islamic private debt securities amounted to RM125 billion. In the first half of 2006 alone, a total of 26 new corporate sukuk issues with a total value of RM23 billion were announced. The contribution of Islamic issues in the development of depth and breadth in the domestic bond market is critical. As of end of June this year, sukuk issues made up of 70% of the total Malaysian bond market. The aggregate value of Malaysia's sukuk issues places it as the largest Islamic bond market in the world. Our leading position is further demonstrated by the fact that of the global market capitalization of Islamic banks, 11% was from Malaysian Islamic banking institutions.
16. As for offshore issues, Labuan IOFC was the jurisdiction for the issuance of the world's first global sovereign sukuk that is the USD600 million Malaysian Government sukuk. The issuance of the global sovereign sukuk signified a new era in international Islamic finance. Numerous institutions including those from Asia, Middle East, Europe, North America and Indian sub-continent subscribed to the groundbreaking issue. It was the catalyst and precursor to the development of the international sukuk market. I am pleased that the sovereign issue which were twice over-subscribed, placed Labuan IOFC in the annals of international Islamic finance history. In fact, the sukuk won numerous awards in the year of its issuance, among them;
- Best Asian Sovereign Bond of Year - Euromoney
17. The Malaysian sovereign sukuk was listed on the Labuan International Financial Exchange (LFX), making a milestone in Islamic finance. Since then, many issues have been listed at the LFX both domestically and internationally. The total issuance of Islamic papers listed at LFX now totaled USD2.1 billion.
Ladies and gentleman,
18. Malaysia would further enhance its position as the leader in Islamic finance. The environment is conducive. The country offers social, political and economic stability. We also have the experience. Our handling of the Asian crisis in 1998 served as a case study on macroeconomic policies and the lesson learnt had served us well and is now a subject of dissertation by academicians and practitioners alike. Malaysia's stable and consistent monetary and fiscal policies are the key foundation for us to lead in the Islamic finance arena.
19. The stability also enables the Government to promote the orderly development of the market especially in preparing the domestic players to the challenges posed by a more liberalized market.
20. Our efforts in the development of Islamic finance are comprehensive and all encompassing. The three regulatory bodies have put in place a sustainable and market-friendly framework of legislation, rules and regulations and guidelines to encourage and facilitate the healthy growth of the Islamic finance industry. In order to increase the industry with the necessary pool of talent, several institutions of Islamic learning have been established. The International Centre for Education in Islamic Finance (INCEIF), the Islamic Banking and Finance Institute Malaysia (IBFIM), the International Centre for Leadership in Finance (ICLIF) and institutions of higher learning, amongst others, are centres of research and study of all relevant areas of Islamic banking, finance and economics. The presence of Islamic scholars and the contribution of progressive academicians have assisted us in our efforts to place Malaysia as a respected repository of Islamic finance knowledge.
21. The establishment of INCEIF comes from the recognition of the need to invest in human capital to advance the Islamic financial industry forward to greater heights. Bank Negara Malaysia has allocated an endowment fund of RM500 million for this purpose. The objective of INCEIF is to produce high-calibre practitioners and professionals in Islamic finance as well as specialists and researchers in the disciplines of Islamic finance. INCEIF will leverage on the wealth of experience of the Islamic finance industry, both in Malaysia and abroad, to provide its graduates with value added insights and perspectives, in particular for their research programmes. Malaysia's experience in Islamic finance for over more than two decades will also provide a training environment, including for internships for developing Islamic finance professionals.
22. In developing and promoting Shariah dynamism and harmonization on the international front, Bank Negara Malaysia undertook two important initiatives in 2005. The first was the Shariah Scholars Dialogue and the second was the establishment of the RM200 million Shariah Scholars Fund in Islamic Finance. This fund would be used for promoting Shariah dialogues, offering of scholarships and research grants on the study of Shariah in Islamic finance.
Ladies and gentlemen,
23. Malaysia's role in the international sphere to promote Islamic banking and finance industry has been exemplary. We have played defining roles in multi-lateral organizations such as the Islamic Development Bank, the International Islamic Financial Market Board, the Islamic Financial Services Board and many other organizations.
24. The Kuala Lumpur Declaration signed by the Government of Malaysia and the Islamic Development Bank in 2004 established a framework that governed a working relationship of mutual assistance that further extends Malaysia's capabilities beyond its borders to the OIC member countries. The Securities Commission recently signed a Memorandum of Understanding with the Dubai Financial Services Authority, establishing yet another bridge for a seamless and facilitative environment between the two jurisdictions. LOFSA holds the chairmanship of the Task Force for the Mobilization of Funds - a multi-lateral committee under the aegis of the Islamic Development Bank vested with the responsibility of encouraging the movement of funds between the OIC nations.
25. While the various regulatory bodies continue to provide various linkages abroad, it is important that the private sector gathers its capacities and capabilities to venture beyond the home territory, exporting its expertise and extending their brands abroad. The experience of venturing into a foreign marketplace can provide our local financial institutions useful opportunities and lessons, an experience that would be relevant in this increasingly liberalized market environment.
26. A number of Islamic financial institutions from the various GCC countries are already operating in Malaysia. These institutions have introduced new levels of product innovation in the market. It is noteworthy that the staffing of these institutions has been sourced locally. We should see similar levels of inventiveness on the part of the local financial institutions. A new spirit of research and product development must be seen as an integral part of corporate responsibility. We would continue to be proactive in the development of local human capital. The domestic Islamic financial institutions need to maintain their meaningful roles not only within the local marketplace but also extend their expertise abroad.
Ladies and gentlemen,
27. An important requisite for the establishment of an international financial centre is the free flow of capital across its borders. Malaysia now maintains a liberal foreign exchange administration regime. In 2004, Bank Negara Malaysia liberalized the Foreign Exchange Administration Rules where there is free mobility of inward and outward movement of funds relating to both foreign direct investment and portfolio capital investments. Foreigners investing in Malaysia are free to hedge with onshore banks their committed flow of funds such as the repatriation of investment proceeds, dividend and profits from Malaysia as well as the purchase of ringgit assets in Malaysia. In addition, investors are freely able to obtain ringgit and foreign currency to fund their investments in Malaysia. Measures to allow non-residents, in particular, multinational corporations and multilateral agencies to issue ringgit denominated bonds in Malaysia have led the International Finance Corporation and the International Bank for Reconstruction and Development to issue their first ever Islamic bond issuances in Malaysia. The Labuan offshore jurisdiction, while maintaining its complementary role to the domestic market, also has independent legislation that safeguards the confidentiality and security of its investors and depositors. These safeguards will not be compromised, save only when there is a demonstrable cause of suspicion of illegitimate activities. Enabling legislation, rules, regulations and guidelines, creation of intellectual talent, a liberal foreign exchange regime and accommodating requirements for entry into the market all serve towards creating Malaysia as a credible hub in the arena of Islamic finance.
28. Having put in place the necessary Islamic financial infrastructure, the Malaysian Islamic financial system is now well positioned to become internationally integrated with the international Islamic financial system. In this regard, the Government had announced the positioning of Malaysia as an Islamic financial centre a visionary initiative to propel Islamic banking and finance into a new era. This initiative would position Malaysia as an Islamic financial centre (MIFC) that specializes in the origination, distribution and trading of Islamic capital market and treasury instruments, Islamic fund and wealth management, international currency Islamic financial services, and takaful and retakaful business. It will also have more diversified players with onshore and offshore capabilities, providing a comprehensive range of Islamic financial products and services for the international market. Malaysia will also be positioned as a centre for education and training excellence in Islamic finance.
29. The recently announced MIFC initiatives and tax incentives serve as a catalyst in promoting financial services in international Islamic currencies to be carried out from anywhere in Malaysia, making Malaysia a preferred choice in fulfilling the business and financial needs of the institutions. The MIFC which is treated as a national agenda by the Government, was launched amidst the backdrop of a strong domestic Islamic banking and financial system and regulatory regime, robust and diversified Malaysian economy, stable political environment and a well established and comprehensive legal framework. The initiative would offer opportunities for foreign institutions to operate anywhere in the country and enjoy a multitude of fiscal and operational benefits. The initiatives and tax incentives are as follows:-
(i) First, Malaysian Islamic banks and takaful operators that are offering Islamic financial products and services in non-Ringgit currencies will be granted approval under the existing license to establish International Currency Business Units (ICBU) within the institutions. The establishment of the ICBU will enhance their capacity and capability in conducting Islamic financial services transactions in international currencies. The ICBUs are encouraged to tap global funds particularly from the Middle East and other Muslim countries, and generate greater flow of foreign funds into Malaysia. The ICBU enjoys a 100% tax exemption for up to 10 years on adjusted income derived from activities carried out in foreign currencies;
(ii) Second, Bank Negara Malaysia will also issue new conditional licenses under the Islamic Banking Act to qualified foreign and Malaysian financial institutions to conduct the full range of Islamic banking business in international currencies. In addition, Bank Negara Malaysia will grant new conditional registrations under the Takaful Act to qualified foreign and Malaysian financial institutions to conduct the full range of takaful business in international currencies. These institutions will enjoy the same 0% tax incentives as that accorded to the ICBU, thus will attract new players to MIFC;
(iii) Third, greater flexibility are given to Labuan offshore Islamic banks and the Islamic divisions of offshore banks as well as offshore takaful operators and insurance companies with Islamic windows to open operational offices anywhere in Malaysia without having the need to maintain physical presence in Labuan, making it more conducive to be closer to the business and commercial centres in Malaysia;
(iv) Fourth, to promote Islamic fund and wealth management activities and attract fund managers to set up operations in Malaysia, local and foreign fund managers located in Malaysia are accorded with 100% income tax exemption for their chargeable income, for managing Islamic funds for foreign investors;
(v) Fifth, to promote Malaysia as a preferred choice for Islamic capital markets and a centre for sourcing of funds, the Government has accorded tax incentives in relation to the issuance of Islamic financial instruments. The Special Purpose Vehicle (SPV) set for the purpose of Islamic financing is exempted from income tax. The company that established the SPV is also given a deduction on the cost of issuance of the Islamic bonds incurred by the SPV. Current tax exemption on interest income received by non-residents from financial institutions established under the Banking and Financial Institutions Act 1989 has now been expanded to include profits income received by non-residents from financial institutions established under the Islamic Banking Act 1983;
(vi) Sixth, expenses incurred prior to the commencement of an Islamic stock broking business are allowed to be tax deductible, subject to the company must commence its business within a period of 2 years from the date of approval by the Securities Commission;
(vii) Seventh, the Government has extended the expiring tax incentives on deduction of issuance cost of Islamic products for another 3 years until the year of assessment 2010;
(viii) Eighth, to enhance the development of Real Estate Investment Trusts (REITs) in Malaysia, including Islamic REITs, and attract foreign investments, several tax incentives are given. Resident and non-resident individual investors and other local entities that receive dividends from REITs listed on the Bursa Malaysia are subject to a final withholding tax of 15% for 5 years. For foreign institutional investors, particularly pension funds and collective investment funds that receive dividends from REITs listed on the Bursa Malaysia are subject to a final withholding tax of 20% for 5 years. REITs are also exempted from tax on all income provided that at least 90% of their total income is distributed to the investors; and
(ix) Ninth, to encourage Malaysian-owned banks including Islamic financial institutions to expand their operations abroad, profits of newly established branches overseas or remittances of new overseas subsidiaries are given income tax exemption for 5 years. This is subject to the condition that the branch or subsidiary must commence operations within a period of 2 years from the date of approval by Bank Negara Malaysia.
These measures are testimony to the Government's commitment to make Malaysia a competitive Islamic financial hub. The recent budget announcement gave a resounding support to this MIFC initiative.
30. Malaysia continues its efforts towards making Malaysia as a centre for education and training excellence in Islamic finance. To increase the number of experts in the field of Islamic finance, individuals pursuing Islamic finance courses at local institutions of higher learning including at the International Centre for Education in Islamic Finance (INCEIF) are given a relief of RM5,000 per annum on study fees for such courses.
31. To ensure this national agenda will be on the right track and strategic recommendations will be effectively and efficiently implemented, an MIFC Executive Committee comprising heads of relevant Ministries, agencies and industry representatives has been set up. This committee will provide direction and address any impediments in a speedy and cohesive manner. It will function as a one-stop body and will leverage on all the Government machineries and apparatus to facilitate the smooth implementation of the MIFC initiatives. Bank Negara Malaysia is the secretariat of the Committee.
33. One of the critical factors of success of the MIFC initiative is certainly promotional efforts abroad. To this end, LOFSA, together with Bank Negara Malaysia and the Securities Commission, will organize various road-shows and conferences overseas. LOFSA's years of experience as a promoter of Labuan IOFC will serve in good stead to carry this responsibility. I am pleased to note that LOFSA has been granted a total sum of RM80 million under the Ninth Malaysian Plan to part finance these promotional activities.
Ladies and gentlemen,
34. An area of initiative that could be undertaken for international Islamic finance is the treatment of income derived from Islamic finance across the globe. Currently, individual countries rely on local conventional-based tax legislation to govern the treatment of income from Islamic finance activities. In most cases, such legislation is inadequate to deal with the intricacies of Islamic financing. For these reasons, profits from Islamic finance could be taxed differently depending on the individual country's tax legislation and how these profits are viewed.
35. The inadequacy of local tax legislation in most countries to deal with these issues may result in the taxation inefficiencies for Islamic investors. These uncertainties and inconsistencies represent a significant obstacle to the cross border movement of Islamic capital. However, this inadequacy also presents an opportunity for innovation. LOFSA can take the lead to study the development of an Islamic Model Tax Convention, similar to the OECD developed Double Taxation Agreement (DTA). The objective of an Islamic Model Tax Convention is to provide a framework of clear and transparent rules for the uniform taxation of such income in the signatory countries. The framework will facilitate the flow of Islamic funds across international borders. Such a framework will make possible for market players to package and price Islamic products with greater lucidity and certainty. LOFSA's experience gained from the many years of networking abroad and with its working knowledge in regards to the issues of international taxation will place it in good position to undertake this study. LOFSA's efforts in spearheading this initiative will certainly enhance the country's standing and prestige amongst the OIC countries.
36. The role of LOFSA and Labuan is indeed paramount. Labuan as an international offshore financial centre that has achieved considerable critical mass over the last decade has a critical role to play in the development of the Islamic financial services sector in Malaysia generally and specifically, towards realising the establishment of MIFC. Given the tremendous growth, demand and opportunities in the global Islamic financial sector, and given the presence in Labuan of a whole host of international financial services intermediaries, Labuan is well poised to seize the opportunities in the offshore Islamic financial services sector by offering a wide range of Islamic products and services to enhance integration and international connectivity with the global markets. The role of Labuan is therefore pivotal in developing and creating an active primary and secondary market for listing and trading of offshore Islamic products. Such efforts will enhance market liquidity whilst offering products that meet the different risk-return profile of non-Ringgit Islamic investors. These cannot be achieved by the regulator alone. The efforts of LOFSA in promoting Labuan as an IOFC must be complemented by the industry. In this regard, the Labuan International Financial Exchange (LFX) as an offshore exchange should therefore act as a focal point for the trading of offshore Islamic products. Such Islamic products that should be considered by Labuan would include sukuk (including convertible and exchangeable sukuk), mutual funds, REITs and global depository receipts (GDR) and other structured investment products. Labuan intermediaries on the other hand, must do more to promote the many services that they offer to the international financial community.
37. The promotion of Labuan in the area of international Islamic financial services however cannot be done independently of or in isolation from the efforts by onshore regulators. Labuan must be promoted to complement and augment the Islamic financial products and services that are offered onshore. Hence Labuan's role in developing and promoting the off-shore Islamic financial services sector must be part of coordinated and integrated efforts amongst regulators and market players to position Malaysia as the international Islamic financial sector (MIFC). It is for this reason that LOFSA should join forces with the on-shore players and regulators to co-organise road shows, reverse-road shows and other strategic promotional initiatives to reach out and attract global investors and issuers. With Labuan's active participation towards overall developmental and promotional efforts of Malaysia's Islamic financial services sector, it should contribute significantly to our aspiration to enhance the integration and connectivity of Malaysia's Islamic financial services sector with the global markets.
Ladies and gentlemen,
38. Malaysia's mission is to develop a vibrant, innovative and competitive international Islamic financial services industry that is supported by high calibre human talents, world-class infrastructure and best international standards and practices. We will be steadfast in our commitment to extend all that is necessary to ensure that this mission is accomplished in a timely manner. The Government of Malaysia together with the private sectors will continue to play an important role in shaping the international direction and growth of Islamic finance. Insya Allah, with Allah's grace, we will succeed. On that note, I thank you.
Assalamualaikum Warahmatullahi Wabarakatuh.
|Terakhir Dikemaskini Isnin, 13 Februari 2012 10:56|