Islamic Finance News, March 2015:

The striking “hourglass” shaped Tabung Haji tower along busy Jalan Tun Razak in the capital epitomises Malaysia’s meteoric rise in the Islamic banking business.

It is a symbolic building. Tabung Haji houses the pilgrimage fund board involved in facilitating thousands of Muslim pilgrims’ travel to the Holy Land since 1962, and was prelude for the growth of a vibrant Islamic financing model.

Malaysia’s vision was clear. Capitalising on Tabung Haji success story, the government wanted to make Kuala Lumpur a powerful Islamic financial marketplace.

After decades of continuous effort, Malaysia is now globally known for its thriving Islamic financial sector.

Nearly a fifth of domestic banking business are Shariah-based, operating comfortably along conventional banks and it captured 63 percent or RM133 billion worth of global sukuk issuance in the first half of 2014, says reports.

Now, protagonists eye bigger dreams. A financial district — Tun Razak Exchange (TRX) – three kilometres from Tabung Haji complex — is being planned to further spur the local economy and financial sector.

Proposed TRX dubbed as “Wall Street for Malaysia” will be a big boost for the country as it will consolidate its position as global Islamic finance leader.

“Malaysia is banking on TRX to be a dedicated international financial hub, promoting Kuala Lumpur as a new nucleus of global economic growth,” Dr Nafis Alam, Director of Centre for Islamic Business and Finance Research, at Nottingham University (Malaysian campus) told The Malaysian Reserve.

The government is turning 70 acres of idle land into a financial and business township, boasting 25 buildings, five-star hotels and residential towers — with gross development value of RM26 billion.

The proposed financial district is seen as a next stage of infrastructure development, after the government established dozens of institutions nationwide aimed at developing Islamic finance, from setting up regulating bodies to opening up education institutes to produce both talent and research for innovative products.

Talent

Bank Negara Malaysia has been busy spearheading multiple initiatives such as The International Centre for Educational in Islamic Finance (INCEIF), Malaysia International Islamic Finance Centre (MIFC), International Shariah Research Academy for Islamic Finance (ISRA) and Islamic Financial Services Board to set the global industry standards based in Kuala Lumpur, and created market linkages and professionals for the fast growing industry.

The MIFC had projected about 22,000 professional would be needed between 2011 and 2020 to serve the domestic Islamic financial industry.

INCEIF, meanwhile, provides a bedrock for Islamic finance education in the country, nurturing academics and researchers alike to supply the much needed quality human capital.

Along with BNP Paribas Malaysia Bhd, INCEIF established the Centre of Islamic Wealth Management, to focus on the growing wealth sector, asset management and capital market – aimed at moulding talents for the industry.

With TRX in the horizon, the demand for such talent will be even stronger. In turn, having a dedicated financial hub can help further catalyse the depth and field of talent in Islamic finance.

The so-called cluster effect of having companies from the same industry or similar profile operating next to each other cannot be discounted, although how successful TRX will be translating this into reality remains a question.

A right mix of global brands operating side by side with support businesses such as sharia law firms, and maybe even regulators, is needed to create a conducive business environment not just for operations, but also for innovation.

This set-up can be attractive for a mobile group of talent pool.

“TRX is a good platform for players to interact with each other better … It will bring all stakeholders and players and existing infrastructure in one centralised location, easing interaction,”

“There are Malaysians and foreigners who studied and trained here, but working outside Malaysia. If there is a right environment, they may prefer to come back,” said Prof Dr Mohamad Akram Laldin, executive director of International Shariah Research Academy for Islamic Finance (ISRA).

Malaysia is currently home to two of the top five global Islamic banks, namely the Al Rajhi Bank and Kuwait Finance House. The government continues to woo more foreign financial institutions into the country, Islamic or otherwise.

TRX, for example, has announced incentives for both developers and tenants, with a strong focus for spurring Islamic finance industry.

According to its website, among the incentives are offered to qualifying TRX marquee status companies operating in the financial services sub-sectors such as retail and merchant banking, insurance, Islamic banking, Takaful operators and capital markets services.

Product and market

Certainly, Malaysia has all the ingredients to be a leader in the US$1 trillion Shariah banking industry and dominates key sectors in the worldwide Islamic economy, for instance in halal food, pharmaceutical and cosmetics and financing.

Track records are impressive. The 2014-15 Global Islamic Economy Indicator report revealed Malaysia, United Arab Emirates and Bahrain as “having the healthiest Islamic economy ecosystem” among 70 countries surveyed.

“Strong Islamic finance regulatory framework and experience of over 30 years in Islamic banking gives Malaysia an edge to sustain its position at the top. Compared to regional financial centres such as Hong Kong, Luxembourg and Singapore, Malaysia is placed at zenith when it comes to Islamic finance,” said Nafis.

Competition though is on the rise, and Malaysia needs to be more innovative to remain the leader.

While Sukuk is an important growth sector for Islamic finance, the industry should focus on business design and regulatory enablement for key growth opportunities – such as takaful, zakat, waqf and private equity – in order to create a truly global demonstration effect, said Iqbal Ahmad Khan, a prominent banker and CEO of Fajr Capital Group based in Dubai.

“I would also like to see greater efforts to create new products focused on savings and investments, which could lead to the democratisation of wealth.”

“Malaysia can play an important role in positioning Islamic finance as a new model for financial inclusion by developing a robust grassroots retail proposition. Another area where Malaysia can play a leading role is in asset management in the real economy,” Khan said.

The report published By Thomson Reuters last December showed Malaysia was far ahead as the most developed Islamic economy scoring 116.5 points, only trailed by UAE (71.6) and Bahrain (64.8).

Again, in the Islamic finance sector, Malaysia easily outclassed others, with 162.2 points, Bahrain (94.7) and in the third place was UAE (80.9).

A dedicated financial hub, one that caters strongly to Islamic finance, can bolster Malaysia’s future success and rival reputable financial centres such as Dubai, Mannan (Bahrain), Doha, and Riyadh, as well as emerging non-traditional cities such as London or Luxembourg.