In an effort to mainstream its financial sector, including Islamic finance, and to encourage cross-border financial and economic links, the Malaysian government has further liberalized its financial sector for foreign players.
The measures announced at the end of April by Prime Minister Najib Razak, have been welcomed by the international banking community and Islamic banks, including those in the Middle East. “These liberalization measures will be implemented over the period of 2009 to 2012,” explained Premier Najib, “and 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 (gross domestic product) 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.” Bank Negara Malaysia, the central bank, is quick to point out that the latest measures are 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.
However, it is no secret that 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 Al-Rajhi Bank of Saudi Arabia; Kuwait Finance House; and Qatar Islamic Bank. Two years ago Bank Negara also approved the acquisition of a substantial minority stake by Dubai International Group in the flagship Bank Islam Malaysia Berhad (BIMB), the first Islamic bank to be authorized in Malaysia in 1983. Bank Negara stresses that the new measures are aimed at enhancing “interlinkages to leverage on global developments in Islamic finance and reinforce Malaysia’s position as an international Islamic financial hub.”
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
• these banks can be 100 percent foreign-owned
• they must have a paid-up capital of at least $1 billion
• and up to two new family Takaful (Islamic insurance) licenses in 2009 to players that can offer significant value proposition to Malaysia to spur the development of the Takaful industry.
Malaysia will give 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 those which will reinforce Malaysia’s position as an international Islamic financial hub.”
The government has also changed the ceilings for foreign equity ownership in onshore Malaysian Islamic banks, investment banks, insurance companies and Takaful operators from the current 49 percent to 70 percent. This means that foreign shareholders can have a majority equity stake in a Malaysian financial institution in the above categories, which does not include commercial domestic Malaysian banks where the foreign equity shareholding remains at the current 30 percent. Where this happens, the paid-up capital of the bank must be a minimum of $1 billion.
Such alliances, stresses the government, would strengthen business potential and enhance growth prospects of financial institutions through the international expertise and global networks of foreign shareholders.
But between the lines, the Malaysian financial sector liberalization will remain highly selective and aimed at enhancing the maximum benefits to the country.
The liberalization plan, says Bank Negara, will be supplemented with sufficient safeguards to ensure that the overall financial intermediation function of the financial system remains intact, effective and sound. Capacity and institutional building efforts will continue to be pursued, complemented by enhancements to the regulatory, supervisory and surveillance framework to preserve the resilience of the financial system.
The government is also giving locally incorporated foreign commercial banks greater flexibility to increase branches so as to achieve greater financial inclusion and insurance penetration in the country. Locally incorporated foreign commercial banks will be allowed to establish four new full-fledged branches with effect in 2010 and 10 microfinance branches with effect from this year. Similarly, the government is easing visa requirements for the employment of expatriates in specialist areas that can contribute to the development of the financial sector.
The measures make Malaysia the most open market for Islamic finance and insurance in the world and reinforces Kuala Lumpur’s leadership in the sector. It remains to be seen whether other Islamic financial markets such as Bahrain, Saudi Arabia, the UAE, Turkey, Qatar and Kuwait take up the challenge to liberalize their own markets.
