KUALA LUMPUR, 2 March 2005 — Malaysia said yesterday it has raised the ceiling of foreign ownership in Islamic banks to strengthen international links and boost its aim to become a key Islamic financial hub in the region.
Commercial banks “can sell up to 49 percent of their Islamic banking unit” but must retain control following any sale, Bank Negara Malaysia Governor Zeti Akhtar Aziz told reporters. Under present rules, foreign investors can only hold 30 percent equity in domestic banks.
Bank Negara last year fast-tracked the liberalization of the Islamic banking sector, three years ahead of a World Trade Organization deadline in 2007, by awarding licenses to three Middle East players and allowing more local groups to set up Islamic banking arms. Zeti earlier launched the Islamic banking arm of RHB Bank, bringing to nine the number of full-fledged Islamic banks in the country.
The government has said it would gradually award Islamic banking licenses to all banks as part of efforts to bolster the sector and encourage the expansion of such services offshore.
“The move to issue new licenses and accord legal status to the existing Islamic banking operations of the conventional banks is expected to accelerate the positioning of Malaysia as an attractive Islamic financial hub to the international financial community,” she said. She urged Islamic banks in the country to exploit new growth areas such as wealth management.
Islamic banking, first introduced in Malaysia in 1983, combines Islamic laws, which forbid interest payments, with modern banking principles. Assets in Malaysia’s Islamic banking sector currently represent nearly 10 percent of those in the entire banking system and the government aims to double this by 2010.
Separately, asked about high capital inflows of 11.1 billion ringgit ($2.92 billion) recorded in the December quarter, Zeti said the central bank was monitoring the situation and would move to absorb excess liquidity.
There was no plan to introduce capital controls relating to inflows, she said.
“We still have the capacity to manage the inflow ... there are no plans to introduce administrative controls,” she added. Asked if Bank Negara would review the ringgit peg of 3.80 to the dollar fixed since 1998, she reiterated it was not necessary as economic growth has been “steady and solid”.
There has been a growing chorus of calls for the government to review the peg given the sharp decline of the dollar and rising import costs but Zeti said “the current exchange rate regime is supported by fundamentals”.
The Malaysian economy grew 7.1 percent last year, its fastest pace since 2000 and beating the official target of 7.0 percent. However growth is expected to slow to six percent in 2005, the central bank said Monday.