Learning lessons from Malaysia

06 September 2012

The Gulf’s Islamic banks could learn much from the global leader of sharia-compliant finance – Malaysia

Despite the impressive strides made by Gulf-based Islamic lenders in recent years, the region’s sharia-compliant finance sector remains a relative minion when compared with mighty Malaysia.

The Asian nation currently dominates the global issuance of sukuk and is the world’s recognised leader in Islamic financing and funds management.

While the assets held by the GCC’s top 20 Islamic lenders surpassed $250bn in 2011, Malaysia’s total Islamic finance assets were valued at $1.2 trillion during the same period.

Even more impressive was the rate of growth of these assets, which rose to 21.6 per cent of total banking assets held in Malaysia in 2011, compared with 12 per cent in 2006.

Sharia-compliant funds held under management in Malaysia provided investors with a reliable shelter during the financial storm that swept across global markets in 2008-09.

In contrast, while the GCC’s leading Islamic lenders enjoyed strong growth in recent years, others remain cobbled by escalating debts accumulated during the financial crisis.

This trend highlights the continuing frailty of the Gulf’s Islamic finance sector. It also suggests Gulf financial regulators could learn a great deal by studying the strategies implemented by their Malaysian counterparts.

Indeed, the Asian country’s success has been underpinned by a more liberal interpretation of Islamic financing regulations, with a strong emphasis on providing effective measures to attract foreign investment. This includes tax incentives and foreign ownership caps of 70 per cent for Islamic banks.

By comparison, the ownership structures of Gulf-based Islamic banks remain staunchly indigenous. While this trend is fine if attracting investment from local markets is the primary goal, it will do little to inspire interest from foreign investors looking to park funds in the Gulf.

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