ISLAMIC bankers have welcomed the announcement by the Malaysian government of several key incentives to ensure the rapid development of the Islamic finance in Malaysia.
In his 2010 budget speech to the Dewan Rakayat (the Malaysian Parliament) last month, Prime Minister Najib Abdul Razak confirmed that his government is extending the existing tax incentives to the Islamic finance industry which ends next year by another five years.
In his budget speech, Najib said the measures are aligned with the government’s continuous commitment to develop Malaysia as an International Islamic financial hub, through the Malaysia International Islamic Financial Center (MIFC) initiative, which was launched in 2006.
The incentives that will be extended until 2015 for the Malaysian Islamic finance sector include:
• Stamp duty exemption of 20 percent on Islamic financing instruments
• Tax exemption on banking profits derived from overseas operations. The exemption is also extended to profits of Takaful (Islamic insurance) companies derived from overseas operations, and
• Double deduction on expenditure incurred in promoting Malaysia as an International Islamic Financial Centre.
Market penetration of Islamic banking in Malaysia is a decent 19 percent of the total Islamic banking assets in the country. Under Malaysia’s Financial Sector Master Plan (FSMP) announced in 2001 by the then government of Prime Minister Mahathir Mohamed and which set out the roadmap for the liberalization of the conventional and Islamic banking and insurance sectors in Malaysia, the target market share for Islamic banking of the total banking system was set at 20 percent by 2010.
It is almost certain that the target will be surpassed during the next year. At the same time total Islamic financing extended in Malaysia last year totaled 118 billion ringgit which constitutes some 20.1 percent of the total financing portfolio of the banking industry.
Similarly, incentives that will be extended until 2015 for the Malaysian Islamic capital market to aid its development include:
• Deduction on expenditure incurred on the issuance of Islamic securities (Sukuk and Islamic private debt securities) approved by the Securities Commission Malaysia (SC), the securities regulator. The incentive is also extended to expenditure incurred on the issuance of Islamic securities (Sukuk and Islamic private debt securities) approved by the Labuan Offshore Financial Services Authority (LOFSA)
• The tax treatment accorded to Special Purpose Vehicle (SPV) established under the Companies Act 1965 to be extended to SPV provisions established under the Offshore Companies Act 1990 electing to be taxed under the Income Tax Act 1967
• The tax exemption on profits received from a non-ringgit sukuk originating from Malaysia approved by the SC be extended to profits received from a non-ringgit sukuk originating from Malaysia approved by LOFSA; and
• Deduction on expenditure incurred in the establishment of stock broking companies.
Malaysia is the world’s largest and most advanced sukuk and Islamic capital market. According to the SC, by the end of August 2009, sukuk worth some 24 billion ringgit were issued compared with 20.8 billion ringgit for the whole of 2008. Similarly the sukuk outstanding at the end of July 2009 totalled 167.73 billion ringgit compared with 152.8 billion ringgit in 2008. Perhaps more importantly, the percentage of outstanding sukuk to total outstanding corporate bonds in the Malaysian market increased from 57 percent in 2008 to 58.2 percent at the end of July 2009.
Malaysia, according to the SC, continues to lead in sukuk issuance, with the domestic market averaging an annual growth rate of 22 percent for the period 2001 to 2007. At the end of 2008, for instance, 62 percent of sukuk outstanding globally were from Malaysia.
Similarly, some 58.2 percent of outstanding corporate bond in Malaysia at the end of 2008 were sukuk. Malaysia also has an active secondary sukuk market with trading volumes averaging 1 billion ringgit per day.
The above measures also fall in with the further liberalization measures for the Islamic finance industry in Malaysia announced by Prime Minister Najib in April earlier this year. Under the new liberalization measures Bank Negara Malaysia, the central bank, will issue:
• Up to two new Islamic banking licences 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) licences in 2009 to players that can offer significant value proposition to Malaysia to spur the development of the takaful industry.
