Sarawak building a solid foundation for growth in Islamic finance and insurance

The Malaysian government has worked to position itself as the world’s Islamic financial centre, with Sarawak now home to a variety of Islamic financial institutions as well. The federal authorities have largely achieved this through several major steps. In 2006 the government both established the Malaysia International Islamic Financial Centre and liberalised regulations on foreign issuance of Islamic bonds. Then, in 2013, it instituted the Islamic Financial Services Act 2013 (IFSA), focused on regulation and oversight of Islamic financial institutions, and introduced the issuance of murabaha- structured government investment issues (GIIs). The RM4bn ($1.22bn) GIIs proved particularly popular and were oversubscribed by nearly three-fold.

IFSA, which repealed the Islamic Banking Act 1983 and the Takaful Act 1984, is aimed at guaranteeing that all Islamic contracts and transactions adhere to the operational standards of the country’s central bank, Bank Negara Malaysia (BNM), and comply with the principles of sharia. IFSA also absorbed components of the Payment System Act 2003 and the Exchange Control Act 1953. The end result was a broadening of the BNM’s power to enforce compliance on the part of banks and firms dealing in Islamic financial instruments.

STRENGTH IN NUMBERS: Given the country’s well-established regulatory foundation, it comes as little surprise that Malaysia now leads the world in Islamicfinancial instruments and issues, according to the IMF. As of the end of June 2013, Malaysia accounted for 60.4%, or $148.2bn, of the total global outstanding sukuk (sharia-compliant bonds), at $245.3bn.

“Malaysia’s robust governance framework has supported the growth of its Islamic finance industry, facilitated product innovation and sukuk issuances by the Malaysian government, financial institutions as well as corporations from varied industry sectors,” Simon Chen, an Islamic finance specialist with Moody’s in Singapore, told local press in May 2014.

Indeed, in the past five years Malaysia has seen the assets of its Islamic banking industry nearly double, according to RAM Ratings, reaching RM423bn ($128.7bn) by end-February 2014, or 21% of banking sector assets, up from RM220bn ($66.9bn) at end-2009. The industry’s ratio of financing to deposits also increased, from 76% at end-2012 to 82% by end-February 2014, indicating that competition for Islamic deposits may be intensifying as the industry grows.

Statistics from the BNM show the country’s Islamic banking sector had RM487.2bn ($148.2bn) in assets at end-2014, up 12.4% year-on-year and nearly 30% greater than the RM376bn ($114.4bn) in 2012.

TAKING UP TAKAFUL: An important offshoot of the Islamic banking industry in Malaysia and Sarawak is takaful, or Islamic insurance. Thanks to global drivers like Malaysia, Saudi Arabia, Qatar and the UAE, recent forecasts suggest the takaful market could see growth of around 15% in 2015, to reach $20bn. While Sarawak is home to a non-Muslim majority, takaful – like Islamic banking – is available to all, as advocates are keen to stress, offering an alternative to conventional policies.

At an Islamic finance symposium held in September 2014, the president of the Islamic Dakwah Foundation Malaysia, Asyraf Wajdi Dusuki, announced the government’s goal that takaful account for 40% of the nation’s insurance market by 2020, double the current 20%.

There is strong potential for takaful in the country due to its largely underexploited market. Take-up is likely to be aided by a takaful plan announced in the 2014 budget that affords protection in the event of death or permanent disability due to an accident for households with monthly incomes of under RM3000 ($912.60). “Given the large untapped market that still exists, with only 54% of the population having a life insurance or family takaful policy, there is significant room for growth in Malaysia,” Etiqa Takaful CEO Ahmad Rizlan Azman told local press in December 2014.

As of 2014, Malaysia already accounted for 71% of total gross takaful contributions across ASEAN, according to EY’s “Global Takaful Insights 2014” report, with its net contribution of family takaful at RM4.5bn ($1.4bn).