UK cooperation with Malaysia in Islamic finance was reinforced recently by the visit of a high-level Islamic finance delegation headed by the Lord Mayor of the City of London and organized by the Malaysia-United Kingdom Islamic Finance Forum in collaboration with the Commonwealth Business Council. This follows from the memorandum of understanding (MoU) signed in February 2009 between Bank Negara Malaysia, the central bank, and the UK Trade and Investment (UKTI), the UK government entity that supports companies trading internationally and overseas enterprises seeking to locate in Britain, to establish a collaborative framework to promote mutual cooperation in the area of Islamic finance. Under the MoU, a joint council was set up, and the Kuala Lumpur meeting follows the one held in London earlier this year. "The increasing awareness and appreciation of the inherent strengths of Islamic finance and its tremendous potential for advancement have ignited interests amongst the global financial community to venture into this new sphere of finance. Taking advantage of the increasing role of Islamic finance in bringing together different parts of the world with surplus funds in search of investment opportunities, with those that have financing needs, will increase these mutually reinforcing prospects. We look forward to London's participation in this new financial evolution," explained Zeti Akhtar Aziz, governor of Bank Negara Malaysia, to the Lord Mayor's delegation in a meeting in Kuala Lumpur in mid July.
The meeting was specifically organized with the Malaysian financial community to discuss the opportunities and areas of collaboration in Islamic finance -- an important potential avenue for strengthening financial and economic linkages not only between Malaysia and the UK but also with other economies of the world.
The MoU, according to Bank Negara, will pave the way for Malaysia and the UK to strengthen cooperation in the development of talent and expertise, business linkages and infrastructure support in Islamic finance. It will also facilitate the exchange of resources in the development of human capital and promote mutual recognition of common standards in Islamic finance transactions. "The MoU," explained Gov. Zeti at the time, "signifies the establishment of a collaborative partnership between the two countries in the area of Islamic finance and provides the potential to strengthen the inter-linkages amongst key financial centers in Islamic finance in the international financial system."
Despite a long historical relationship, UK bilateral trade with Malaysia in 2008 accounted for only 1.4 percent of their total trade, although Malaysia's bilateral trade in services with Britain accounted for 6.3 percent of Malaysia's trade in services. There are also strong relationships in education and tourism. More recently, the relationship building has extended into the area of Islamic finance as underlined by the above-mentioned MoU.
The UK authorities do have much regard for the systemic approach of Malaysia to developing its Islamic finance industry and architecture. While London has historically looked to the GGC (Gulf Cooperation Council) countries largely in developing its Islamic finance relations and business, bankers both in Kuala Lumpur and London believe that this will change as Malaysian institution expand abroad to both the GCC and Europe. CIMB Islamic Bank already has a presence in both Bahrain and London, and is interested in a license in Saudi Arabia. Malaysian banks see this as a logical extension linking Kuala Lumpur with the GCC and the UK.
The early development of Islamic finance was very much domestic-centered, explained Zeti. "This recent decade has seen the internationalization of Islamic finance. This has increased the potential for strategic partnerships between international financial centers that will bring with it mutually reinforcing benefits. Malaysia has developed a comprehensive Islamic finance industry founded on a strong legal and regulatory framework, with a diversified number of Islamic banking and Takaful institutions and a well-developed Islamic money and capital market."
Indeed, today, Islamic financial assets comprise 17 percent of the total assets of the banking system in Malaysia and the daily average volume transacted in the local Islamic money market is RM6 billion. The sukuk market which has been expanding at an average annual rate of 22 percent, now accounts for more than 50 percent of the Malaysian bond market. Zeti reminded the UK visitors that Malaysia has recently intensified its pace of liberalization, when in April, the government announced further liberalization measures that included new licenses to be offered in Islamic banking and Takaful. More specifically, up to two new mega Islamic banking licenses will be issued to foreign players with minimum paid up capital of $1 billion to enhance global interlinkages and leverage on global developments in Islamic finance.
Existing domestic Islamic banks that wish to scale up their operations and expand into global markets are also given greater flexibility to enter into strategic partnerships with foreign players to raise their capitalization to $1 billion with a higher foreign equity limit of up to 70 percent. At the same time Malaysia is allowing up to five top international law firms with expertise in international Islamic finance to offer legal services in international Islamic finance in Malaysia.
Zeti stressed that several factors are important in sustaining the internationalization of Islamic finance, including the development of international Islamic financial markets to enhance the liquidity of the instruments and the risk management capacity of the players; the high level of international cooperation to ensure financial stability of the international Islamic financial system; the development of human capital; and international integration of Islamic finance would be facilitated by the mutual recognition of financial standards and products across jurisdictions. In the area of Shariah, there has already been the progressive convergence of Shariah views and rulings, and the mutual recognition of financial standards and products across jurisdictions, said Zeti.
By Mushtak Parker
© Arab News 2009
