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Feature: Malaysia banking on Islam with fervour

KUALA LUMPUR: Malaysia is banking on religion as the mainly Muslim Southeast Asian nation embraces Islamic banking with fervour.

Islamic financing, based on sharia law which disallows the payment of interest in favour of profit-sharing, has found a surprisingly large following among Malaysia’s 10 million non-Muslims.

About seven out of 10 Malaysians who opt for Islamic banking are non-Muslims, a study by professional services firm Deloitte shows. Islamic banking now accounts for a tenth of Malaysia’s 780 billion ringgit ($205 billion) total banking assets. Modest as the share appears, it masks an average annual growth of 37 percent over the past two decades. Malaysia is a snapshot of a global trend in which a growing number of governments, firms and consumers are raising funds through sharia-compliant financing structures.

Besides the more obvious candidates such as Qatar and Turkey, non-Muslim governments such as the Philippines are also considering Islamic bond sales.

To the mass market, the Islamic banking proposition is less about religious beliefs and more about economic sense.

While Sharia law does not allow investments in alcohol, gaming and pork-related industries, adherents say it is no less profitable than conventional investments.

“You can talk about Islamic everything but at the end of the day, it’s the bottom line (that) counts a lot. An Islamic banking system has got to be a business proposition rather than a sharia proposition,” said Mustapha Hamat, chief executive officer of the Islamic Banking and Finance Institute Malaysia, which runs courses in Islamic banking. Islamic bonds, for one, are rapidly gaining popularity. These bonds pay no direct interest, which Muslims consider usury. Instead they place the proceeds of borrowing in pooled investments and make regular payments based on profits.

An Islamic bond allows the issuer to tap a larger pool of funds, including money which can only be invested in sharia-approved instruments.

With investable funds in Islamic instruments valued at around $180 billion in 2002 and growing by 15 percent a year, Islamic financing becomes a very compelling proposition. Islamic bonds also offer an alternative to investors looking beyond the U.S. debt market. The recent slide in the dollar has ignited concerns that U.S. assets may be less attractive to foreign institutions, which are huge holders of Treasury debt.

For the consumer shopping for a housing loan, this brand of financing offers certainty.

An Islamic housing loan is based on a contract where the bank buys the property and sells it to the consumer at a premium. The customer’s monthly instalments are fixed, as opposed to conventional housing loans which depend on market lending rates.

“With a volatile market, the certainty is some attraction in using Islamic financing. People enter into commitments which they are comfortable with,” said David Vicary, Deloitte Director of Financial Services.

Differing concepts: But the growth of Islamic banking worldwide is being challenged by differing interpretations of sharia law.

For example, what moderate Malaysia sees as sharia-compliant is not necessarily viewed as such by more traditionalist Middle East scholars.

Most of the Islamic bonds issued in Malaysia are based on the principles of “murabahah” and “al-bai bithaman ajil”. Under these principles, the financier purchases an asset from the issuer and sells it back to the same party at a premium — a notion which Middle East scholars say is “back-door” interest.

Malaysia’s global Islamic debt offering last year — the first Islamic global bond — was a middle ground of sorts. The bond, known as sukuk, was based on the “ijarah” concept which is accepted by Middle East investors. The bond, which was issued through a special purpose vehicle, involved the issuer’s purchase of the title to land parcels from a statutory agency and the subsequent leasing of the same land to the government, for the tenure of the bond. —Reuters

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