LONDON, 25 September 2006 — Malaysia threw down the gauntlet to global financial centers in September when Prime Minister Abdullah Badawi announced in Kuala Lumpur that his government was officially establishing the Malaysian International Islamic Financial Center (MIFC).

Although Malaysia has over 23-years of experience in regulating and developing the Islamic financial system, and whose Islamic financial architecture is by far the most advanced in the Muslim world, it has been operating as a global Islamic financial center de facto but not de jure.

The Malaysian government, recognizing that Islamic finance is now a phenomenon that is becoming globalized, has moved to institutionalize the country as the major international Islamic finance hub serving ASEAN, East Asia, South Asia and the Middle East.

The official language in this respect is now much more assertive and confident — the government now talks about Malaysia as “the International Islamic Financial Center”. In the past it would say that Kuala Lumpur is an international Islamic financial center.

Not surprisingly, Bank Negara (central bank) officials have been on road shows to Europe, the Middle East and East Asia in recent weeks promoting the MIFC. Their task has been made a little more uphill given that Badawi’s announcement was done without any attempt at hype or spin or even the usual over-the-top promotion.

“We want to leverage the Malaysian model, experience and track-record in regulating and developing Islamic Finance since 1983. The MIFC is official government policy underpinned by an act of parliament introduced in early September,” confided a senior Bank Negara official.

Given Malaysia’s systemic approach to such things, the MIFC has a general secretariat that is answerable to Bank Negara. The chief executive of the secretariat has yet to be appointed, but a number of applications are being processed.

The secretariat also has a governing council, whose chairman is Bank Negara Governor Dr. Zeti Akhtar Aziz, and comprises representatives from 11 agencies and ministries including the Prime Minister’s Department, the Ministries of Foreign Affairs; of International Trade & Industry; Domestic Trade; Education; Human Resources Development; Commerce; Rural Communities and Finance.

The Malaysian Islamic banking and finance system is large and growing all the time — $30.9 billion of Islamic banking assets; $1/7 billion of Takaful assets; $34 billion of outstanding Islamic corporate bonds; and a Islamic money market with a monthly turnover of $15 billion.

The MIFC, according to the Bank Negara official, has five focus points. These are promoting Malaysia as the regional and international Islamic financial hub; developing Islamic finance education through the RM500 million International Center for Education in Islamic Finance, the world’s first certification on Islamic Finance program; developing MIFC as the leading brand and “Malaysia as the Center of Choice;” promoting the internationalization of Malaysian Islamic financial institutions though strategic alliances and joint ventures; and developing MIFC as a “one-stop center” for Islamic banking, finance and Takaful (insurance).

At the same time, the Badawi Government had made some important legal changes and concessions in facilitating the new MIFC policy. The have liberalized the domestic onshore foreign currency regulations for Islamic finance, allowing Malaysians and for that matter anyone to have foreign currency domestic banking accounts and investments.

Previously this could be done only through special accounts through the offshore center at Labuan and with permission from Bank Negara. The new policy applies both the Islamic and conventional banking, and is being implemented through the international currency business units (ICBUs), in the case of Islamic banking, for Islamic banks and for Takaful. In addition, International Takaful Operators (ITOs) are now allowed “non-ringgit composite (general and family) Takaful business and Re-Takaful business in Malaysia under the Takaful Act 1984 with non-residents in international currencies’.”

As an extra incentive, the government has afforded tax-free status for the ICBUs and the ITFO’s. It is not clear for how long this tax holiday applies.

The tax holidays have also been afforded to foreign and local fund managers managing Islamic funds for foreign investors, which means Gulf investors can now invest in Malaysian Islamic unit trusts and equities in US dollars or Euros, without the fear of local currency risks; and to international Islamic banks licensed in Malaysia such as Al-Rajhi Bank, Kuwait Finance House and Arab Finance House conducting business in foreign currencies.

One area, which the Government has held back, is the liberalization of ownership of local Islamic financial institutions. Foreign ownership is still confined to 49 per cent, which was increased last year from 20 percent. Asked when Malaysia will fully liberalize its Islamic finance ownership regime, the Bank Negara official stressed: “when the Malaysian market is fully matured. One cannot equate Kuala Lumpur with New York or London.” At least not yet.