Is Malaysia Becoming a Hub For Islamic Finance in Asia?

Yes, Malaysia can be already dubbed as a center for Islamic finance in South East Asia, if not Asia.

Recently, Malaysian Islamic banking groups launched The Corporate Murabahah Master Agreement (CMMA) to boost Islamic finance money market. This is to ensure the market remains vibrant, volatile and nice-to-jump-in. To put it in layman's terms, CMMA is a standard document for deposit taking between financial institutions and corporate customers; where you can see the standard agreement would specify a common modus operandi for Islamic financial institutions in accepting deposits via commodity Murabahah.

But an interesting question quotes: "Do halal financial instruments hold up better than conventional and traditional bonds and stocks?" Or to put it in another way, "Is Islamic finance much safer than conventional finance?"

Islamic Finance: The basis, standard and core concept of Islamic finance has always been in the 'shared risk' area. As a start, you might find this more plausible than conventional trading, since the concept of Islamic finance itself calls for collateral backing by an individual or an entity in the middle of a financial instrument (more famously known as "Sukuk"). Sukuk is an Arabic term for "financial certificate."

Although there may be some arguments to whether many Islamic financial products are structured using LIBOR (London Interbank Offered Rate), a benchmark or reference rate for short-term interest rates worldwide calculated daily), there is no doubt to one thing - Islamic financial models (think concept) disguises its risk profiles to a certain extent. Because ruling on Shariah-compliance has been heavily emphasized and focused, there are a few factors that we could 'miss' - The more important factors to determine whether or not it adds positive value to an economy's financial system.

BUT, halt. That's generalization. Doesn't work this way in all ends. For a country like Malaysia, an economic stronghold in Asia in Islamic finance growing rapidly as an Islamic hub, authorities have considered many ends of conventional banking before introducing sophisticated finance products that are Islamic-based. They have one major problem - "Non-compliance with Islamic principles".

The Asset Way: One of the most famous ways of going about 'interest rates' (as Islamic principles disallow charging of interest rates) is to sell assets. This method has been used for years and there are many ways to go about it. Let's start.

Mr. A wants a RM10,000 personal loan. In conventional banking, the bank lends Mr. A the requested amount of money and charge an interest rate of say 1% per annum. Repayment 5 years. For Islamic financial products, that's not Halal.

So what they do is, the financial institution will take a readily available asset, price it above the agreed rate, sell it to Mr. A and immediately requests that Mr. A sells it back at the 'loan price'. So the bank may sell it to Mr. A at RM20,000 and he will have to sell it back to the financial institution immediately at RM10,000.

Shariah-compliance: Islamic financing has taken a brand new approach in introducing new methods of handling conventional banking; in its essence to serve its own population with compliance to its dos' and do nots'.

Can Islamic financing in Malaysia thrive, with its introductory of what some people call 'pseudo-Islamic Shariah'? Should we look into the ways of what Muslim scholars introduced to us as another way through conventional banking so that we're more secure?

Article Source: http://EzineArticles.com/?expert=Ken_Low

Malaysia Progressively Liberalising Its Islamic Finance System To Attract Foreigners

Malaysia has been progressively liberalising its Islamic financial system to increase foreign participation, as it forms an integral and competitive component of the country's overall financial system.

The Islamic financial system operates in parallel with the conventional banking system, servicing both the Muslim and non-Muslim communities.

Pointing this out, the Raja Muda of Perak, Raja Dr Nazrin Shah Saturday said the syariah principles which underline Islamic finance have contributed towards its stability and resilience in facing issues such as the current global financial turmoil.

"Therefore, it comes as no surprise that during the current global financial turmoil, Islamic funds have seen less volatility and risk, and as a result have performed better compared with conventional funds," he said.

He said this in his speech at a luncheon talk with investors in conjunction with the Malaysia International Islamic Financial Centre (MIFC) roadshow to Kuwait and Saudi Arabia, here.

Liberalisation of Malaysia's Islamic financial system has taken the form of the issuance of new licences and increasing foreign participation in Islamic banks and takaful companies, coupled with new licences issued to foreign fund managers and foreign stockbroking firms.

Raja Dr Nazrin also cited syariah injunctions like those prohibiting excessive leverage and speculative financial activities as having insulated Islamic funds from too much risk exposure, thus limiting their exposure to the meltdown of the financial system in the United States and Europe.

"It therefore comes as no surprise that during the current global financial turmoil, Islamic funds have seen less volatility and risk, and as a result have performed better compared with conventional funds," he said.

Raja Dr Nazrin said Malaysia believed there was tremendous upside potential for Islamic finance and that the current financial turmoil provides an opportunity for Islamic finance to position itself as a complementary, if not alternative, to conventional finance by providing investors with other asset classes and markets that provide stability.

He said over the last few years, there has been increasing interest among the Middle Eastern investors in the Asian market with Saudi Arabia financial institutions already having made their presence felt in Malaysia including Al-Rajhi Bank and Rsud Bank's shareholding in Asian Finance Bank.

To date, one of the more prominent investments in Malaysia is the Saudi Telecom's US$3 billion stake in local telco firm, Binariang.

"We welcome the continued participation of Saudi financial institutions and investors in Malaysia, especially to take advantage of the numerous opportunities offered under the MIFC initiatives," he said.

Raja Dr Nazrin also explained that Malaysia could be the perfect gateway for investors to take advantage of the Asean region which comprises a potential market of about 600 million people and a combined gross domestic product of US$1 trillion.

The MIFC was launched in 2006 as part of Malaysia's initiative to globally integrate within the international Islamic financial community, and to position the country as an international Islamic financial centre.

Since then, significant progress has been made as the Islamic financial system in Malaysia today comprises the Islamic banking institutions, the takaful (insurance) and re-takaful industry, and the Islamic money and capital markets.

Raja Nazrin said significant progress has been achieved, in particular, in positioning Malaysia as a centre for the origination, distribution and trading of Islamic bonds or sukuk.

"The Malaysian sukuk market has now evolved into the world's largest Islamic bond market, accounting for about 60 percent of the global sukuk outstanding.

"Malaysia is also becoming a centre for Islamic fund and wealth management services and for international Islamic banking business, as well as a centre for Islamic finance education, training, consultancy and research," he said.