Malaysia takes a leading role in Islamic finance

The historical roots of Islamic finance can be traced back over a thousand years when Muslim traders developed financial tools to meet the requirements of the Shari’ah.

Essentially the Shari’ah interdicted the charging or paying of interest. With the growth of the Gulf States, flush with petrodollars, came an increasing awareness of the advantages of Islamic finance.

There are several hundred Islamic financial institutions worldwide managing an estimated $500 billion, and Malaysia is at the forefront, positioning itself as a strategic hub.

In a recent interview, Tan Sri Dr. Zeti Aziz discussed Malaysia’s role in Islamic finance and offered great insights. During a presentation to the G-8 in April of 2002, Dr. Zeti was invited to speak on the role of Islamic finance. The context was one of turbulent times, as the United States was reeling from the after shocks of 9/11 and very much seeking to curtail funding of terrorist activities around the world; naturally Islamic finance was thought of in many circles to be a facilitator in the field. Nothing could be further from the truth, according to Dr. Zeti. “Because of the many built-in checks and balances, Islamic finance is less vulnerable to terrorist financing.” She went on to say “The level of disclosure and transparency is imbedded in the system along with risk management. This G-8 meeting was a sort of turning point, and Islamic finance was viewed with less suspicion and seen as a competitive and viable alternative to conventional banking.”

There was strong motivation on the part of Malaysia to promote itself as a financial hub. All the way back in 2002 Malaysia drew up a blueprint on how to develop a comprehensive Islamic system which would operate parallel to the conventional banking system. The offerings would be varied and include Islamic money markets, Islamic bonds and Islamic insurance, to name a few of the products.

Out of ten countries vying for the enviable position as the World’s Islamic Financial Center, Malaysia made a bid to host the hub and successfully landed the bid.

According to Dr. Zeti, “Malaysia put forward the bid for several reasons: We had developed a comprehensive financial system and, second, we had done a lot of work on the conventional side, as well as legal support and on the regulatory aspects. On top of that we had undertaken significant financial reforms. We had also been through a recent economic crisis, which had made us stronger. Bottom line being that we had the experience and the confidence.”

Dr. Zeti went on to say “After we developed this Islamic financial system, we were able to liberalize more aggressively, due to the novelty of the system as opposed to the older conventional banking system, which already had 100 years of experience behind it.

“As we progressed, we started encouraging joint ventures with foreign partners with up to 49 percent participation. There would be free flow of funds both into the country and out of the country and foreigners can raise funds in Malaysia to finance projects anywhere in the world.

“Laws on hedging, which in the past, were restricted to one year, were lifted.

“The only aspect of the financial system which I continually get questioned on is on the internationalization of our currency, the Malaysian ringgit. The currency can only be traded in Malaysia during business hours. I will remove restrictions on the Malaysian ringgit when all necessary preconditions are met.”

In conclusion Dr. Zeti strongly believes that Malaysia meets all the criteria of a country with excellent returns on investment. After all, the British came here over 100 years ago and saw the opportunities. Now the world comes and invests, and by the way did you know that the United States is Malaysia’s number one trading partner?