Malaysia banking with fervor on Islam
Malaysia banking with fervor on Islam
Liau Y-Sing, Reuters, Kuala Lumpur
Malaysia is banking on religion as the mainly Muslim Southeast
Asian nation embraces Islamic banking with fervor.
Islamic financing, based on sharia law which disallows the
payment of interest in favor of profit-sharing, has found a
surprisingly large following among Malaysia's 10 million non-
Muslims.
About seven out of 10 Malaysians who opt for Islamic banking
are non-Muslims, a study by professional services firm Deloitte
shows.
Islamic banking now accounts for a tenth of Malaysia's 780
billion ringgit (US$205 billion) total banking assets. Modest as
the share appears, it masks an average annual growth of 37
percent over the past two decades.
Malaysia is a snapshot of a global trend in which a growing
number of governments, firms and consumers are raising funds
through sharia-compliant financing structures.
Besides the more obvious candidates such as Qatar and Turkey,
non-Muslim governments such as the Philippines are also
considering Islamic bond sales.
To the mass market, the Islamic banking proposition is less
about religious beliefs and more about economic sense.
While Sharia law does not allow investments in alcohol, gaming
and pork-related industries, adherents say it is no less
profitable than conventional investments.
"You can talk about Islamic everything but at the end of the
day, it's the bottom line (that) counts a lot. An Islamic banking
system has got to be a business proposition rather than a sharia
proposition," said Mustapha Hamat, chief executive officer of the
Islamic Banking and Finance Institute Malaysia, which runs
courses in Islamic banking.
Islamic bonds, for one, are rapidly gaining popularity. These
bonds pay no direct interest, which Muslims consider usury.
Instead they place the proceeds of borrowing in pooled
investments and make regular payments based on profits.
An Islamic bond allows the issuer to tap a larger pool of
funds, including money which can only be invested in sharia-
approved instruments.
With investable funds in Islamic instruments valued at around
$180 billion in 2002 and growing by 15 percent a year, Islamic
financing becomes a very compelling proposition.
Islamic bonds also offer an alternative to investors looking
beyond the U.S. debt market. The recent slide in the dollar has
ignited concerns that U.S. assets may be less attractive to
foreign institutions, which are huge holders of Treasury debt.
For the consumer shopping for a housing loan, this brand of
financing offers certainty.
An Islamic housing loan is based on a contract where the bank
buys the property and sells it to the consumer at a premium. The
customer's monthly installments are fixed, as opposed to
conventional housing loans which depend on market lending rates.
"With a volatile market, the certainty is some attraction in
using Islamic financing. People enter into commitments which they
are comfortable with," said David Vicary, Deloitte Director of
Financial Services.
But the growth of Islamic banking worldwide is being
challenged by differing interpretations of sharia law.
For example, what moderate Malaysia sees as sharia-compliant
is not necessarily viewed as such by more traditionalist Middle
East scholars.
Most of the Islamic bonds issued in Malaysia are based on the
principles of "murabahah" and "al-bai bithaman ajil". Under these
principles, the financier purchases an asset from the issuer and
sells it back to the same party at a premium -- a notion which
Middle East scholars say is "back-door" interest.
Malaysia's global Islamic debt offering last year -- the first
Islamic global bond -- was a middle ground of sorts.
The bond, known as sukuk, was based on the "ijarah" concept
which is accepted by Middle East investors. The bond, which was
issued through a special purpose vehicle, involved the issuer's
purchase of the title to land parcels from a statutory agency and
the subsequent leasing of the same land to the government, for
the tenure of the bond.