Zeti did not identify the parties involved nor the countries
of domicile of the main shareholders, suffice to say they are not Malaysian.
“This is final jigsaw to our financial system. Under the Malaysia International
Islamic Financial Center (MIFC) Initiative we went to promote international
business. The conditions of authorization for these mega banks are very
demanding. Not only must they have a minimum $1 billion paid up capital which
is very significant, but they must also have a top management team based on the
fit and proper criteria and a business plan that can justify the capital.
“We have identified two parties who are making preparations
in concrete terms in their submissions to us. It is likely that we would
announce the issuance of the first (full) license by the end of this year.
These banks would engage in some retail business but the focus is international
business. These licenses would also promote our linkages around the world — not
only with the Middle East and Africa, but also with Europe and the US,” she
These licenses are pursuant to the financial liberalization
measures announced in April 2009 by Malaysian Prime Minister Mohd Najib bin
“These liberalization measures which will be implemented
over the period 2009 to 2012, are in line with the government’s initiative to
promote structural change within the economy and diversify sources of growth to
further drive economic expansion. The financial services sector is an integral
component of the economy, and has increased its share in GDP from 9.2 percent
in 2000 to 11 percent in 2008. More than 140,000 workers are employed by
banking institutions and insurance companies in Malaysia,” he explained.
They are also in line with the provisions and timetable set
out in the Financial Sector Master Plan (FSMP) announced in 2001. Indeed,
according to Bank Negara Malaysia, some 90 percent of the FSMP initiatives have
been completed. The FSMP comprises measures and a timetable for the
liberalization of the conventional and Islamic banking and insurance sectors.
Bank Negara fast-tracked the liberalization of the Islamic financial sector by
three years through the issuance in 2006/7 of dedicated Islamic banking
licenses to Alrajhi Bank of Saudi Arabia; Kuwait Finance House; and Qatar
Islamic Bank. Bank Negara two years ago also approved the acquisition of a
substantial minority stake by Dubai International Group in the flagship Bank
Islam Malaysia Berhad (BIMB), and has since then also given Islamic banking
licenses to HSBC Amanah and Standard Chartered Saadiq.
Under the new liberalization measures Bank Negara will issue
up to two new Islamic banking licenses in 2009 under the Islamic banking Act
1983 to world class foreign players to establish new Islamic banks, which can
be 100 percent foreign owned and must have a paid-up capital of at least $1
Malaysia is giving priority to those market players “who
have the capacity to contribute in areas where there are gaps in our financial
system and in which there are new areas of growth in the financial system, as
well as that which will reinforce Malaysia’s position as an international
Islamic financial hub.”
Zeti insisted that the parties that applied for the mega
banking licenses would also have to satisfy other wide-ranging requirements.
The conditional licenses would only be upgraded to full licenses upon meeting
all the requirements of authorization. Indeed one of the parties has satisfied
these requirements and the license will be issued soon.
Malaysia stands to gain much from these mega banks. The
experienced teams they have promised to bring in, added Zeti, would contribute
to product and human capital development in the Islamic finance industry.
Similarly, expertise in foreign exchange markets would contribute significantly
to Malaysia’s financial system.
Zeti also shed some light on the newly-launched
International Islamic Liquidity Management Corporation (IILM), which was
launched in Kuala Lumpur at the end of October 2010 and which has a authorized
capital of $1 billion of which $75 million is paid in.
BNM together with Saudi Arabian Monetary Agency (SAMA) are
two largest subscribers to the equity of $10m each, followed by a $5m
subscription each by the central banks of Luxembourg, Mauritius, Qatar,
Indonesia, Turkey, Sudan, UAE, Nigeria and Iran and the Islamic Development
Bank (IDB) and its private sector funding arm, the Islamic Corporation for the
Development of the Private Sector (ICD).
The IILM has one main objective to facilitate liquidity
management across borders for Islamic finance. The only participants in the
IILM are central banks, monetary authorities and multilateral agencies.
“Liquidity management is part of the role of central banks,” reminded Zeti, “we
inject or withdraw liquidity from the system. There are very strict criteria
for the eligibility of assets. It is not the shareholders themselves that would
allocate assets. Central banks can nominate entities to donate assets, which
can be monetized. They will issue Islamic commercial papers against these
assets through special purpose vehicles. They will be the primary dealers and
they will create the markets. As such a network of primary dealers would have
access to these instruments. But we don’t want scenarios like pension funds in
California buying all the papers in the primary market. They can buy some but
the market has to be much wider.”
IILM will issue papers periodically in tranches in different
currencies. The first two tranches will be in the US dollar and the Euro. The
Corporation will also by business-driven with top class management.
From a financial stability perspective, warned Zeti, it is
important that liquidity in the financial system does not evaporate; or the
system is dysfunctional because of inadequate liquidity.
“The need is for highly-rated short-term instruments that
can be traded in the international market. In Islamic finance we don’t have
liquidity management instruments but institutions hold highly liquid assets. If
the assets can be traded through the IILM then much fewer of these assets will
be held by the institutions,” she added.