KUALA LUMPUR, 2 April 2007 — In yet another manifestation of its strong support for the global Islamic finance sector, Malaysia has further liberalized its foreign investment rules to allow 100 percent foreign equity ownership of Islamic financial institutions (IFIs) in the country.
Such IFIs are now also allowed to buy properties for their own use, while the acquisition of properties and land for commercial purposes as part of Islamic financing activities “will only be subject to a one-time approval.”
The move was announced by Premier Abdullah Badawi at the Global Islamic Finance Forum held in Kuala Lumpur over the last week. Badawi also confirmed that “full stamp duty exemption for 10 years has been granted on (Islamic) foreign currency instruments executed by these participants, and on instruments relating to (Malaysian) ringgit as well as foreign currency Islamic securities.” These exemptions take effect immediately.
Similarly, approval has also been granted to fully exempt from withholding tax any profits or income on non-residents’ investments in non-ringgit Islamic securities, including Sukuk issued in Malaysia.
The global Islamic finance industry is expanding at a spectacular growth, with assets under management now estimated at $1.2 trillion. Malaysia’s own Islamic banking system totals 133 billion ringgit in assets, about 12 percent of the total banking system. The government has set the Islamic finance sector a target of 20 percent market share of the banking sector by the year 2010, which Islamic bankers stress is eminently achievable.
All these measures are part of a new strategy to accelerate the sector’s growth, under the new brand of the MIFC (Malaysia Islamic Financial Center), which was officially launched by Badawi last September.
The MIFC has a general secretariat and council comprising various Malaysian ministries and government agencies, which is chaired by Dr. Zeti Akhtar Aziz, the governor of Bank Negara Malaysia (the central bank).
To ensure a more effective delivery of this MIFC strategy, which aims to make the country the top location for origination, issuance and trading of Islamic financial instruments including Sukuk, the government has set up an executive committee of key officials, regulators and industry leaders. “An ‘executive green lane’ has been accorded by the immigration department to the Malaysian Islamic Financial Center (MIFC) Secretariat to help expedite applications by expatriates for long-term employment passes with multiple-entry visas. This will hopefully facilitate the greater movement of talent and expertise in the area of Islamic finance in Malaysia,” Badawi said.
Malaysia’s securities regulator, the Securities Commission lost no time in explaining the procedures for the issuance of foreign currency-denominated bonds and Sukuk by qualified issuers such as the Malaysian government, foreign governments, multilateral development banks (MDBs), multilateral financial institutions (MFIs), agencies or national corporations of the Malaysian or foreign governments, foreign multinational corporations and resident corporations.
Under the Securities Commission’s Practice Note 1A, a submission to the commission by an issuer with a credit rating of at least single “A-” (A minus), will be deemed approved upon filing of the prescribed documents with the commission at least two working days prior to the issuance of the bond or Sukuk. International credit ratings and legal documentation governed by the laws of England and the United States will also be acceptable.
According to the Securities Commission, “under the facilitative regulatory framework, both resident and non-resident issuers are free to utilize the proceeds from the issuance onshore and offshore.
The issuers are also free to hedge to the full amount of the underlying commitment. Non-resident investors are free to invest in foreign currency-denominated bonds and Sukuk onshore and there are no restrictions on the repatriation of capital, profits and income earned from Malaysia, including any coupon or profit earned from their investments.” Bank Negara is also set to diversify issuance of its Islamic monetary notes away from Bai Inah and Ijarah to Murabaha, of which the current outstanding is 8 billion ringgit. In fact, Zeti last week announced that Bank Negara, together with the Securities Commission and Bursa Malaysia and industry players, have established the Commodity Murabaha House, which will act as a liquidity management scheme for Islamic bank overnight and short-term deposits, based on using crude palm oil as the underlying commodity traded for investment. Bank Negara has executed CMP (Commodity Murabaha Program) master agreements with eight Islamic banking institutions to promote the use of the instrument for liquidity management.
“This initiative is the continuation from the commodity Murabaha acceptance initiative as the issuance involves the securitization of the acceptance facility,” Zeti said. The benefits of issuing the Islamic monetary notes under this structure, she added, included, providing IFIs an additional instrument to manage liquidity risk on a short-term basis.
It is a familiar financial instrument whose structure has been widely used for retail banking and syndication products in the Middle East and providing an opportunity for new investors to invest in Islamic financial papers in the Malaysian market, thus diversifying the investor base.