There is a bright light in Malaysia's financial landscape, its Islamic Finance. Malaysia has been competing with the Middle East countries to wrangle the top spot. Malaysia held a good lead prior to the global financial crisis, and for the last 2 years have edged away from the competition to be a clear leader. The Middle East countries have had to grapple with debt restructuring of its own which weighs heavily on their Islamic Finance focus.
Its not just a matter of prestige to be the center for Islamic Finance, its a viable and attractive area of finance. Its potential is enormous. Lagging behind Malaysia are the usual suspects, Saudi Arabia, Bahrain, Qatar and UAE.
The most active category is sukuk or Islamic Bonds. The main difference is that sukuk does not charge interest but rather claims a portion of the issuer's profits. This year alone international borrowers have sold $9.8bn of Islamic Bonds, with 72% of that being issued in Malaysia. Similar bonds issued by the Persian Gulf nations totaled just $2.5bn collectively this year.
The gulf nations had a major real estate tumble and then had to deal with default of sukuks issued by Saad Group (Saudi Arabia) and Investment Daar (Kuwait).
Considering that there is more than $950bn in assets globally that comply with shariah law (mainly deposits), we are looking at a market with strong growth prospects. Even international big banks have been trying to muscle into that territory to get a slice of the action. The most successful to date include HSBC, Citigroup and DBS.
As an indication of things to come, Saturna Capital, the world's biggest shariah compliant equity fund manager has just set up shop in Kuala Lumpur as did Nomura Securities and India's Reliance Capital Asset Management (all shariah compliant fund managers).
Thanks to the push by Bank Negara and SC, last year Malaysia introduced an online trading platform for murabahah transactions where banks and companies can buy and sell commodities based on a price that includes an agreed upon profit margin.
Safe to say that the bulk of the sukuk issuers in Malaysia have been GLCs and government linked debt. In order for this market to see greater acceptance and adoption, we need more non-GLCs to start tapping the market with greater frequency.
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