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Malaysia Islamic banking outperforms competition

Written by John Guzman

Islamic banking is relatively new form of banking system compared with traditional banking. Even in predominantly Muslim Malaysia, traditional banking still accounts for the bulk of the overall industry assets. A welcome development is that Islamic banking in the country is catching up and government support is outstanding making Malaysia a viable global center of the industry.

Islamic banks are poised to account for 25% of Malaysian banking sector by 2017, as of now it accounts for 21% says RAM Ratings. While, Islamic banking penetration in the country currently stands at 23%. Future growth will rest on the back of sound regulations by Bank Negara Malaysia (BNM). The implementation of Islamic Financial Services Act 2013 (IFSA) is essential to the future growth of the industry.

The IFSA enhances regulatory framework and now requires Islamic banks to comply with Shariah and operational standards issued by BNM and the International Shariah Research Academy in all aspects of their business objectives and operations, as pointed by Su Yin Foo, last week in her ‘New era for Islamic banking in Malaysia‘ article in the Borneo Post. As complying with Shariah is the most important aspect of Islamic banking, the IFSA reiterates the need for Islamic banks to observe Shariah.

Likewise under the IFSA, Islamic banks are required to diversify investment products, they offer to customers. Investment products with deposit products shall be distinguished under IFSA, as well. The differentiation will allow institutions to develop a wider range of products, for different classifications, to meet diverse needs, the Association of Islamic Banking Institutions Malaysia (AIBIM) said, in a Reuters’ report. Although under the new rule, institutions will incur cost in educating customers, however, the benefit will redound to the industry as a whole.

Wan Rizaidi Wan Mamat Saufi of Hong Leong Islamic Banking Bhd. (HLIBB), in an interview conducted by The Malaysian Reserve, expressed his concerns about challenges that would still remain unresolved, even with the new act implemented. Where there still remains grey areas relating to Sharia compliance, according to Mr. Wan Rizaid.

In another sign of the Malaysian Islamic banking actually evolving into the global hub of the industry, Dubai recently showed interest in importing Islamic finance courses from Malaysia. The Dubai delegation regarded Malaysia’s leading reputation in the industry. As a part of their visit, the delegation visited the International Islamic University Malaysia (IIUM), identified as a global hub for Islamic Finance education. According to The National, they also visited the offshore financial center of Labuan International Business and the Finance Centre, which conducts research on Islamic wealth management.

With the expertise of Malaysia in the industry, Islamic banking dominance in the country becomes a matter of time. Also, it has the potential to tap overseas markets. Indonesia, being its closest Muslim neighbour with a huge population and low penetration rate, Malaysia has tons of opportunities waiting to be explored.

–Edited by Mohamed P.Hassan

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