Malaysia has become the world hub of the booming Islamic banking
CAIRO – While modifying legal structures to be more adaptable to Islamic finance, Malaysia is leading world markets in Islamic banking, consolidating its position as a hub of the sector, The Borneo Post newspaper reported Monday, January 3.
“The findings of a survey by a GCC (Gulf Cooperation Council)-owned research house show that Malaysia has a clear lead over other financial centers,” Zakariya Othman, the head of RAM Rating Services, a leading Malaysian company in providing credit-rating services, said.
“[The leadership is] in terms of regulatory and legislative frameworks, infrastructure, range of products and services, risk management and audit as well as statistical, marketing and education of Islamic finance.”
Malaysia’s leading position was not achieved only through issuing sukuk or even establishing Islamic banks.
Such success, Othman said, followed a special plan adopted by the country to secure its share in the growing industry.
The plan included developing a comprehensive Islamic financial system to be able to compete with the broader financial landscape.
Islamic banking assets in Malaysia reached 337.6 billion ringgit ($109 billion) in July, accounting for 20 percent of the country’s total.
Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.
The Islamic banking system is being practiced in 50 countries worldwide, making it one of the fastest growing sectors in the global financial industry.
A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.
Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.
To consolidate its position, Malaysia is modifying its legal structure to be adaptable to Islamic banking.
“Regulatory structures and legal frameworks need to be established to encourage the influx of business in that particular jurisdiction,” said Othman, a panel member at the 17th Annual World Islamic Banking Conference 2010 in Manama, Bahrain.
Malaysia has introduced a number of regulations to raise the competency of civil courts when hearing Islamic banking and finance cases.
Moreover, the new Central Bank of Malaysia Act 2009, which came into effect in 2009, made it mandatory for the courts to refer to the Shari`ah Advisory Council on rulings about Shari`ah matters.
“The subject matter dealt with in the civil courts in Islamic finance cases is finance and not Islam,” Othman noted.
“As such, Islamic finance cases can be submitted under the jurisdiction of the civil courts. However, the judge should have full knowledge of Shari`ah.”
Islamic banks have proved a success because of rules that forbid investing in collateralized debt obligations and other toxic assets that cause financial crises.
Islam forbids Muslims from usury, receiving or paying interest on loans.
Transactions by Islamic banks must be backed by real assets — not shady repackaged subprime mortgages and banks cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.
Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.
Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.