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Malaysia Aims To Become World Leader In Islamic Finance

by Mary Swire, for LawandTax-News.com, Hong Kong

18 August 2006


Bank Negara, Malaysia's central bank, is launching a new initiative which aims to place Malaysia at the vanguard of the development of Islamic Finance in the region.

The Malaysian International Financial Centre will be a joint initiative between Bank Negara, the Malaysian Securities Commission, the Labuan Offshore Financial Services Authority and the Malaysian stock exchange Bursa Malaysia. Its central function will be to allow Islamic financial products and services that are transacted in international currencies to be conducted from anywhere in Malaysia.

Islamic banks must abide by Shariah laws, under which 'unethical' investments, such as in companies involved in alcohol, tobacco, gambling or weapons, are banned. Interest is also not permitted under Shariah law.

Presently, only banks and insurance companies in the offshore center in Labuan, which lies off the cost of Borneo, are able to offer Islamic financial services in foreign currencies.

"Islamic financial products and services transacted in international currencies may be conducted from anywhere in Malaysia" under the new initiative, bank Governor Dr. Zeti Akhtar Aziz, told an Islamic finance forum earlier this week.

"This is also expected to enhance the capability of foreign players that have identified Malaysia as their center to serve the regional market," she added.

Dr. Zeti went on to explain that in the first phase, the MIFC initiative will introduce measures and incentives to promote the centre in the offering of Islamic financial products and services to the international and domestic financial community.

Under this first phase:

Malaysian Islamic banks that are offering Islamic financial services in international currencies will be granted approval under the existing licence to set up an International Currency Business Units within the institutions. These new divisions will have their own accounts separate from the ringgit transactions of the head offices, while at the same time sharing the same infrastructure with the head offices. This division may benefit from tax and other incentives that may be introduced.

This measure will apply to the Islamic banks and takaful operators licensed under the Islamic Banking Act and Takaful Act respectively to operate in the Islamic financial system as well as to the existing financial institutions which are eligible to participate in the Islamic financial services. This is also expected to enhance the capability of the foreign players that have identified Malaysia as their centre to serve the regional markets. International entities will also be able to participate via foreign interest of up to 49% in Islamic banks and takaful companies. Investment funds set up in Malaysia will be able to enjoy the Double Tax Agreements that Malaysia has entered into with over 60 treaty partner countries.

Bank Negara Malaysia will issue new conditional licences under the Islamic Banking Act to qualified foreign and Malaysian financial institutions to conduct the full range of Islamic banking business in international currencies and enjoy the same tax incentives as those accorded to the International Currency Business Units. The new entities will be termed licensed International Islamic banks.

The business that a licensed International Islamic bank would be allowed to undertake includes the wide-ranging business of Islamic commercial banking, Islamic investment banking and Islamic leasing in international currency.

Bank Negara Malaysia will also issue new conditional registrations under the Takaful Act to qualified foreign and Malaysian insurance companies to conduct the full range of takaful business in international currencies. Similar tax treatment will be accorded to these entities as that for the banks. The new entities will be termed International Takaful Operators.

The Labuan offshore Islamic banks and the Islamic divisions of the offshore banks as well as offshore takaful operators will be given greater flexibility in their business operations by allowing the opening of operational offices anywhere in Malaysia with no limitation on staffing, to conduct non-ringgit business while maintaining their presence in Labuan. The measure would allow the six existing offshore Islamic banks and Islamic investment banks operating in offshore centre Labuan to participate in the MIFC.

Incentives will be given to attract the best foreign talents and market players to the MIFC to spur innovation and offering of attractive Islamic financial instruments. This is to further strengthen the large pool of highly trained workforce with vast experience in Islamic finance already in Malaysia. Further incentives will also be introduced to spearhead the aspiration of developing Malaysia as a centre of education excellence in Islamic finance to complement the MIFC.

"We believe that these measures and initiatives will serve as a catalyst in our efforts for Malaysia to become a centre of origination, issuance and trading of Islamic capital market and treasury instruments, Islamic fund and wealth management, international currency Islamic financial services, and takaful and retakaful business," said Dr. Zeti.

"It is also aimed at positioning Malaysia as the gateway for tapping investment opportunities in this rapidly growing region," she added.

Profits of Malaysia's Islamic banks last year surpassed one billion ringgit (US$272 million, EUR227 million) for the first time, according to Dr. Zeti.


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