Malaysia is emerging as a major competitive Islamic banking market for international banking giants such as HSBC, Citigroup, Deutsche Bank and Standard Chartered Bank.
All of them have standalone Islamic banking subsidiaries in Malaysia apart from Deutsche Bank, which has a dedicated Islamic banking window.
In addition, major global Islamic banks such as Saudi Arabia's Al-Rajhi Bank and Kuwait Finance House have also entered the market and in many respects overtaking the Western banking giants in this niche market.
Al-Rajhi Bank's branch network in Malaysia, for instance, is much higher than all the other foreign banks.
In April, Bank Negara Malaysia (BNM), the central bank, approved an international Islamic banking (IIB) license for Deutsche Bank AG, the parent company of Deutsche Bank (Malaysia) Bhd (DBMB).
The Deutsche IIB is authorized to conduct a full range of Islamic banking activities in non-ringgit foreign currency out of Malaysia.
The IIB license regime, which falls under the Malaysia's Islamic Banking Act of 1983, came into force in August 2006 following the launch of the Malaysia International Islamic Financial Centre (MIFC) initiative, which has the core mandate of promoting Malaysia as a major hub for international Islamic finance.
At the same time, DBMB's own dedicated Islamic banking window launched a Shariah-compliant custody and fund services product called Islamic Securities Services in April 2010. The bank claims it is the first such Shariah-compliant product in the Malaysian market.
According to Ridzal Sheriff, head of Global Transaction Banking at DBMB, Islamic Securities Services is targeted at both domestic and foreign Islamic fund providers and "facilitates DBMB's clients in achieving Shariah-compliance in their operational and day-to-day activities while ensuring Shariah transparency to their end investors."
It also provides value-added services to Islamic fund clients in their management of Shariah compliance and governance activities, including the provision of Shariah-tagging, income cleansing and financial statement preparation.
Foreign bankers stress that Kuala Lumpur is an attractive location as a regional hub for Islamic banking partly because of the Malaysian government's proactive support for the industry.
In fact, the IIB regime has an attractive tax incentives package, including tax exemption till 2016 on income earned from international banking and Takaful operations conducted in foreign currencies, either as a subsidiary or a branch.
It also features stamp duty exemption till 2016 on instruments executed pertaining to Islamic banking and Takaful businesses conducted in foreign currencies, and tax exemption on any profits paid out by an Islamic bank to non-resident depositors, subject to certain conditions.
The regime also allows up to 100 percent foreign equity ownership in the establishment of such banks and also has the flexibility to employ expatriates with expertise to contribute to the development of Islamic financial system in Malaysia
Furthermore, a fast and easy immigration approval system is in place for such expatriates trained in Islamic finance and their immediate family members.
However, despite the above tax incentives and the wider IIB regime, only four foreign banks have received the IIB licenses from Bank Negara so far, although according to market players the number of applications is set to increase as foreign financial institutions see South and East Asia as key growth centers for Islamic finance over the next decade and Kuala Lumpur as the hub to facilitate these growth opportunities.
The other three IIB banks include Unicorn International Islamic Bank Malaysia Bhd, a wholly-owned subsidiary of Unicorn Investment Bank of Bahrain; PT Bank Syariah Muamalat Indonesia Tbk, a subsidiary of Bank Muamalat of Indonesia; and Al-Rajhi Bank KSA, a branch of Al-Rajhi Bank in Saudi Arabia, the world's largest Islamic bank in terms of assets and capital.
It is not clear whether this slow uptake is to do with a lack of applicants or a reflection of the stringent authorization bar set by the Malaysian central bank.
According to criteria from the Malaysia International Islamic Financial Centre (MIFC), financial institutions that apply for IIB licenses "must be well-established and reputable financial institutions with a sound track record. They have to adopt international banking practices formulated by the Bank for International Settlements (BIS) or any other international standard-setting body and they have to be regulated and supervised by a competent home regulatory authority."
CEO of Deutsche Bank Malaysia Raymond Yeoh is confident that the bank will leverage its innovation in wholesale Islamic finance through the new Islamic banking license and make its Shariah-compliant products more easily available to clients in Asia, while contributing to Malaysia's position as an international Islamic finance center.
"We aim to provide a range of products from simple flow requirements to more tailored structures that meet the individual needs of its corporate and institutional clients," he stressed.
Similarly, Jamzidi Khalid, head of Islamic Banking at Deutsche Bank AG, stressed that the IIB license "greatly increases our competitive position, while contributing to the market's broader development. This is particularly true of the Islamic bond market, where we hope to leverage our position as the number one arranger of conventional international bonds in Asia."
Al-Rajhi Bank (Malaysia) commends Malaysia's Islamic banking initiatives including the IIB regime. The bank received an IIB license from BNM in 2009 to establish Al-Rajhi Bank KSA, a branch of Al-Rajhi Bank in Saudi Arabia, which will operate as an offshore investment bank in the MIFC.
"The reason we have done it this way is because we want to leverage off our parent's balance sheet to do transactions in the region. We have not been active in the sukuk market hitherto because we have been working for over a year to get the structures Shariah-compliant. We are now talking to certain clients to see if we can issue Sukuk for them in the course of this year," explained Ahmed Rehman, CEO of Al-Rajhi Bank (Malaysia).
