How Malaysia became a global Islamic financing hub

Badlisyah Abdul Ghani, head of CIMB Islamic, explains why Malaysia stands at the forefront of Islamic financing.

Soft-spoken Badlisyah Abdul Ghani is head of CIMB Islamic - a unit of CIMB Bhd., Malaysia's largest investment bank. He is the point man for developing Shariah-compliant products. This is an Islamic law, which prohibits paying or receiving interest and bans investments in tobacco, alcohol or gambling businesses. Here he explains how Malaysia has come to forefront of the industry.

What Islamic finance products do you have?

Ghani: Well CIMB is an investment bank, so typically we sell investment banking products that are Shariah compliant. This basically embraces bonds and corporate fundraising, but we also have some retail products for high net-worth individuals in the form of IPO financing. In addition, we have fund-asset management products that are essentially Islamic. These include four Islamic unit trusts, four Islamic private equity funds and we're launching an Islamic property fund, as well as an Islamic infrastructure fund.

CIMB is also in the midst of consolidation with sister company, Bumiputra-Commerce Bank Berhad - the second largest lender in Malaysia - to become the country's first truly universal banking group. Following this consolidation we'll also roll out Islamic commercial banking products.

Which investment options have been generating the most interest?

The Islamic Unit Trust has been in the market since 1996. Of course because it's an open-ended fund people come and people go into it. Our Islamic private equity fund has been very exciting. This launched in 2002 and represented the first Asian-based Islamic private equity fund. But then because of Sars we re-launched it in 2003. Over 50% of the fund is taken up by Middle East investors, which is exciting for us because it's the first time the majority of such a fund seeking investment opportunities in Malaysia has been taken up by Middle Eastern investors.

Are you planning to offer any new Shariah-compliant investment opportunities?

Malaysia will have a suite of Islamic derivative offerings by year end. The most anticipated one is the Islamic profit rate swap, which is supposed to be a Shariah-compliant solution for an interest rate swap. The Islamic-compliant derivatives will work the same way as any conventional derivatives, but the contracts entered into will be slightly different. The end effect is the same.

It's just like an Islamic bond, or Sukuk, the contracts are different (it's a sale and lease-back) but the net effect is the same result as a conventional FRN. So with derivatives there will be a trade of an asset, which will result in a swap transaction. It's important that there is a trade on an asset, as under Shariah, an investment can't be of an intangible nature.

We have also just come out with an Islamic ABS transaction, which we did for Musyarakah One Sukuk Sdn Bhd. The issue size was M$2.5 billion and it marks the first Malaysian ABS transaction using the Musyarakah principle, which is essentially a joint venture.

This was then followed by a first Islamic mortgaged-backed issue for Cagamas, a government entity. The security was to the tune of M$2.05 billion. This paper followed the same documentation structure for Musyarakah One that CIMB developed. This paper was sold regionally, but because priority was given to local investors only about 10% was allocated to regional investors in Hong Kong and Singapore. And it was quite well received - oversubscribed by five times. This was the first time anyone, anywhere in the world did a Musharaka bond. But a few months later a Middle East issuer also came into the market with a Musyarakah bond.

Do you think it's fair to say that Malaysia is positioning itself as the Islamic finance hub of Asia?

I think Malaysia can already claim to be the centre where most Islamic instruments are concerned. We have investment opportunities ranging from the bond market to asset management. We will be offering Islamic derivatives by the end of this year, so that people can manage their currency and interest rate risks.

Such offerings only enhance Malaysia's position because as far as we're concerned Malaysia is already at the forefront as an international Islamic finance centre. For many years, foreigners have come in and participated in our Islamic capital market and we have gone out and sold our products as well.

To us we are not a "budding" international Islamic financial centre, we are already there.

Historically, however, some Middle Eastern investors have questioned whether Malaysian Islamic investments are truly compliant. Do you think Malaysia is perhaps too liberal in its interpretations?

In order to answer this question you need to understand the history. The Middle East market has always styled itself as an asset management centre. They never developed their Islamic banking sector when they first entered the market. Whereas Malaysia developed the banking sector first, then the capital market and then the asset management. So we went through the thought process of how to do banking vis-à-vis Islamic contracts.

So when the Middle East was commenting about Malaysia, they were commenting from an asset-management perspective. So they, at the time, could not see the rationale of doing things the way we were doing them.

But then when they started to look into Islamic banking for the consumer as well as corporates in the early 1990s, they began to realise that to do banking they needed to do what Malaysia was doing and so they followed.

In the recent World Islamic Economic Forum held here in Malaysia (in early October) the majority of Middle East delegates accepted what we have done in Malaysia. There was a statement made by renowned scholars from the Middle East at the conference saying that now we understand why Malaysia did it that way.

So there is no longer any controversy on the matter - except of course for a few individuals, but individuals are entitled to their own opinion and there will always be some differences.

If you look at how things are done, Malaysia has always come out with the product first and then the Middle East followed no matter what they said about it. Malaysia was the first to trade stocks on the stock exchange that were Islamic compliant. We said consumer banking (like personal financing, credit cards, etc) could be done - 30 years later the Middle East followed our example. And the trading of debt on the capital market, we said that that could be done in 1990 - they only started it in 2001. So it will take them time to understand why things are done in a certain matter but I think ultimately they understnd.

Talking to other bankers in other countries, they say the reason Malaysia is the Islamic finance hub is because in many cases you've just gone ahead and created a product and made the offer - instead of spending the entire time asking, 'should we or shouldn't we do this?' - You've put the product out on the market and let the market decide if there is interest.

That's a fair observation. But to be fair to countries like Indonesia, Brunei and other countries in the Middle East, we have had the sound foundation of law on our side. Much depends on the laws they inherited from Colonial days. In Malaysia, we were lucky because the Supreme Court acknowledged that Islamic law is the law of the land, although it is not stated in the constitution that Islam is the constitutional legal foundation, it is recognised as such by the Supreme Court, and this is from the British time. So what we inherited allowed us to develop it. So to be fair to the other jurisdictions - they want to do it, but they are limited by laws.

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