Exclusive Deepdive – Malaysia Changing IF Policy Playbook

Malaysian PM Anwar Ibrahim Proposes Wide-ranging Reforms and Initiatives in New Sukuk Structures, Islamic Trade and Social Finance to Promote Inclusive and Sustainable Growth, Good Governance to Restore Confidence and Combat Inequality Through Social Justice

Reformasi (Reform) ‘Reformasi’ and more recently ‘Islah’ – both denoting reform – have been the catchphrases of Malaysia’s septuagenarian Prime Minister Anwar Ibrahim well before he assumed office on 22 November 2022. To what extent reform has been embedded in the government’s economic stewardship to date is still too premature to realistically assess, but judging by the Prime Minister’s recent policy pronouncements, Islah pertaining to the country’s Islamic finance sector seems to be gaining traction.

It is important to separate the rhetoric of aspiration from the limitations of the country’s financial system, including its Islamic finance industry, in terms of critical mass and depth and ability at regular resource mobilisation especially in the international capital market, and of course through an independent evaluation of the policy and market delivery and impact of these initiatives, in terms of their contribution to GDP (1% in 2023), socio-financial inclusion, sustainability and development impact, and economic upliftment of society in general.

This is imperative because Malaysia arguably has the global market’s most developed Islamic finance architecture in place and is a jurisdiction in which the industry is of systemic importance. According to Bank Negara Malaysia (BNM), the market share for Islamic financing reached 45.6% of the total banking system financing in FY2023, up 7.7% on the previous year, and more than double the y-o-y 3.4% growth rate for the conventional financing system and the 5.3% rate for the overall banking sector. This translated into RM1,049.7bn (US$219.42bn) of financing in 2023 compared to RM974.4 bn (US$203.68bn) in 2022. Similarly, according to the Securities Commission Malaysia (SC), the Islamic Capital Market (ICM) consolidated its dominance in 2023 accounting for 64% of the overall capital market with a total size of RM2,426.77bn (US$507.91bn).

These impressive achievements occurred over the last four decades largely under the watch of Dr Mahathir Muhammed’s 22-year premiership and his forward-thinking financial regulators. Only time will tell to what extent Anwar Ibrahim’s reform agenda is a consolidation of the Islamic finance proposition of Mahathir (his former mentor), or whether it is a reinvention under the current government’s Malaysia MADANI Economy Framework (Ekonomi MADANI) tied in with a revamping of BNM and SC’s value-based intervention strategy.

PM Ibrahim has been busy trumpeting the value proposition of his Ekonomi MADANI whether at the Global Forum on Islamic Economics and Finance (GFIEF) in Kuala Lumpur on 28-29 May 2024, at the IsDB Annual Meetings in early May in Riyadh, and at the 15th International Conference on Islamic Economics and Finance in February 2024 in Kuala Lumpur.

“As we navigate the complexities and uncertainties of these post-normal times,” emphasized PM Ibrahim, “the principles of Islamic economics and finance remain even more relevant to resolve the core conundrums which the world is facing. These include lifting abject poverty, ensuring food security and enabling equal opportunity to comprehensive education. This is why we must embark on a holistic ‘Islah’, a reform agenda for positive change and a force for good in the global economy.”

The Islamic finance ecosystem, he reiterated, needs to evolve progressively, placing greater emphasis on value-based finance, transcending the profit-driven motives or to embrace a higher purpose where wealth is not just accumulated among the few but circulated to uplift communities, and investment carries a balanced promise of prosperity. Not surprisingly, Ekonomi Madani is precisely focussed on linking and aligning Islamic finance to sustainability and manifested through the Prime Minister’s Belanjawan MADANI vision on how Islamic finance can further leverage on the sustainability concept for the development of the sector.

Its three pillars are: i) Inclusive and sustainable economic growth; ii) Institutional reforms and good governance to restore confidence; and iii) Combating inequality through social justice.

According to Adnan Zaylani Mohamad Zahid, Deputy Governor of Bank Negara Malaysia, the word MADANI has its roots in Arabic and means “being developed in terms of thinking, spirituality and mentality”. The Malaysia MADANI concept – or civil society, he emphasised, “envisions a country that looks beyond economic wellbeing and materialism to one which emphasises humanity and good values like fair, just and effective governance. MADANI is an acronym for a policy that embraces six core values – keMampanan (Sustainability), KesejAhteraan (Prosperity), Daya Cipta (Innovation), hormAt (Respect), keyakiNan (Trust) and Ihsan (Compassion).”

In the above respect, the Prime Minister announced several new Islamic finance related investment initiatives at GFIEF. These include: 

  • The Retirement Fund (KWAP), Malaysia’s largest public sector pension fund for civil servants, mandated to invest up to RM3bn (US$640mn) in Shariah-compliant investments into supporting high growth domestic companies and catalyse the venture investment ecosystem. This investment will target key economic sectors including food security, education, the silver economy and healthcare, energy transition, digital economy, financial inclusion, and other impact-related critical themes under the Ekonomi MADANI framework.
  • The introduction of a new Wakalah Bil-Khadamat Sukuk structure under the Government of Malaysia Shariah-compliant Securities universe, with the inaugural issuance planned for 2025.
  • Innovating Sukuk structures, particularly to best meet the needs of climate and energy transition together with sustainability, building on past innovations such as SRI Sukuk Ihsan structures and linkages to Waqf.
  • Labuan International Business and Financial Centre (IBFC), via its Islamic Digital Asset Centre (IDAC) initiative, will actively raise and invest funds digitally based on blockchain technology, by initiating Islamic asset backed tokens and an Islamic digital finance sandbox.
  • Islamic banking industry’s collective pledge of facilitating RM2.67bn (US$570mn) in secured financing facilities through the Halal Development Corporation’s Halal Integrated Platform to support development of the Halal products industry in Malaysia.
  • The SC will establish Malaysia’s first Social Exchange, a structured approach for participation of private capital in projects with positive social outcomes. This will benefit entities such as NGOs, social enterprises, and State Islamic Religious Councils.

However, he went further by pledging ongoing steadfast Government support for the facilitation of Islamic social finance initiatives in Malaysia. These include:

  • A further commitment of RM100mn (US$21.19mn) to upscale iTEKAD, which is championed by BNM and comprises a partnership of Islamic financial institutions with micro entrepreneurs, empowering them through blended finance programmes, combining seed capital, training grants and loans funded. Last year, the Government approved an initial allocation of RM10mn (US$2.11mn) to iTEKAD.
  • The introduction of “a new blended finance innovation” – a pilot programme on Greening Halal Businesses, which is a collaboration between the IsDB, the Malaysian Ministry of Finance, BNM and the World Bank. The aim is to assist halal businesses in Malaysia to transition to greener and sustainable practices by providing technical capacity building, tools to measure and report greenhouse gas emissions, and transition financing including certifications.
  • The introduction of Project Hassan, a collaboration between Lembaga Zakat Negeri Kedah (LZNK), the MIFC Leadership Council (MLC), Association of Islamic Banking and Financial Institutions Malaysia (AIBIM) and INCEIF University to upscale Zakat initiatives to elevate socioeconomic conditions of rural communities including paddy farmers in Kedah. The Government is allocating RM10mn to the Project.
  • PM Ibrahim is also keen to advance the Waqf ecosystem in Malaysia. In March 2024, he approved a RM100mn grant towards the establishment of a MARA Waqf Endowment Fund, focused on crowding in private contributions towards furthering education and entrepreneurship.
  • The Government has also extended tax incentives to cover stock based Waqf initiatives, building on the model already implemented under Wakaf Amanah Saham Nasional Berhad.
  • In the 2024 National Budget, PM Ibrahim, who also serves as Malaysia’s Finance Minister, set aside RM500mn (US$105.94mn) of loan financing for the development of property developments on Waqf land.
  • The SC is in the process of introducing fundraising for Waqf developments through P2P financing and equity crowdfunding platforms, with the Government providing matching funding through MyCIF at a 0% financing rate.

One area which PM Ibrahim flagged up is in the vital trade finance sector. Islamic trade finance is estimated to account for less than 5% of total trade finance in OIC member states. Reliable data collation is fragmented, underdeveloped, and often dated because of poor disclosure and lack of transparency. The fact that intra-OIC trade and investment has not even hit 25% of their total exports and imports and FDI flows, suggests what an uphill struggle it remains for Member States to upscale their bilateral and multilateral trade and investment flows.

According to the ICIEC 2023 Annual Report, a deeper dive into intra-OIC trade dynamics reveals an intriguing paradox. While 2021 marked a zenith for intra-OIC imports at US$436.0bn, a subsequent contraction to US$365.4bn in 2022 raises pertinent questions about the internal trade synergies and potential barriers within the OIC ecosystem. Similarly, the export narrative mirrors this trend, with intra-OIC exports peaking in 2021 but retracting in 2022. The retraction, however, is almost certainly due to the pandemic, the supply chain disruptions caused by the Ukraine conflict and the sluggish global economic recovery.

Prime Minister Ibrahim is right in calling for greater focus to enhance the efficiency and transparency across the end-to-end supply chain in the potentially multi-trillion-dollar Halal economy. The dissonance between the wider Halal economy and the estimated US$3.5 trillion Islamic finance industry is stark albeit improving incrementally.

The irony is that Vanilla Murabaha, Murabaha Syndications, Tawarruq (Commodity Murabaha) and Instalment Sale, estimated at almost US$1trillion per annum, are established Islamic trade finance contracts across the market segments and in the various hybrid Sukuk structures. They are internationally accepted mainstream trade finance products which have been accessed even by major Western, Japanese, and South Korean multinationals.

However, the reliable data is simply not available, especially relating to what extent Islamic trade finance is directed to the Halal economy. A senior official from Malaysia’s Halal Development Corporation attending a major convention in London earlier this year agreed that the global industry does have a major bottleneck in reliable and up-to-date data and research in various aspects of the value chain, including the connectivity to the Islamic finance industry.

Towards supporting global OIC trade, Malaysia, according to PM Ibrahim, plans to implement G2G facilitation leveraging on Islamic trade finance, for a portion of economic cooperation between the OIC states. Whether such interventions “will help turbo-charge the growth of [the] Islamic economy” is highly doubtful.

While Export Credit Agencies and multilateral insurers, such as ICIEC, in AMAN Union member states have generally witnessed some growth in their operations – both conventional and Sharia’a-compliant – largely linked to government COVID-19 mitigation emergency packages, the reality is that the culture of credit and political risk insurance (PRI) in many markets remains underdeveloped.

The Joint Strategic Collaboration signed in April 2024 between the International Credit Insurance & Surety Association (ICISA), the leading industry trade association representing trade credit insurance and surety companies internationally, and the AMAN Union, is a potential gamechanger in enhancing the culture and business of trade and investment insurance in Member States common to both. (The AMAN Union is the forum comprising Commercial and Non-commercial Risks Insurers and Reinsurers in OIC Member States and of the Arab Investment and Export Credit Guarantee Corporation (DHAMAN).)

However, the gap between the conventional and Islamic credit insurance cohorts is, in almost every aspect, particularly stark and has cost the OIC countries billions of dollars in opportunity costs lost especially because of the lack of Sharia’a compliant opportunities for their economies in general and the Halal economy specifically.

An analysis done last year by Turk Eximbank showed that the total capital base of AMAN Union member entities was a mere US$13.6bn at end 2021 – up on the US$10bn in 2020, of which Saudi EXIM accounted for 59% in 2021. Total AMAN Union Business Insured in 2021 reached a mere US$49bn – up 17% on 2020, of which the top 5 members accounted for 83% of total business insured, led by Turk Eximbank at 48% and ICIEC at 20%.

In contrast, ICISA members, who account for 95% of the world’s private credit insurance business, insured nearly €3.2 trillion (US$3.43 trillion) in trade receivables insured and billions in infrastructure guaranteed in 2023 – up 4.5% YoY. According to the latest data from ICISA, premiums written in 2023 increased by 5% to €8.2bn (US$8.79bn), while claims paid increased by 11.4% reaching €3.2bn (US$3.43bn).

Similarly, the latest data from The Berne Union (International Union of Credit and Investment Insurers), the not-for-profit professional association representing the global credit and political risk insurance industry, shows that 2023 was an encouraging year for export credit with members providing over US$3 trillion in new support for cross-border trade, with expansion across almost all business lines, which augurs well for 2024 and beyond.

The importance of credit and investment insurance cannot be overstated. For an industry that has been around for over a century, the challenge ahead is to enhance awareness and market education among policy makers; regulators; multilateral, national and private sector insurers, and export credit agencies (ECAs); banking institutions, insurance providers, exporters, importers, investors, and SMEs. Today, around 90% of all global trade relies on some form of credit, insurance or guarantees, issued by a bank, insurer, or specialist financial institution. As it has done for over a century, the credit insurance industry will continue to evolve and adapt to meet challenges – societal, environmental, and economic – that lie ahead and support the real economy.

Credit and investment insurance typically acts as a catalyst that provides financing to the real economy through export and import flows and promotes foreign direct investment (FDI) movements across the globe. By protecting exporters and banks against the risk of non-payment, defaults and expropriation, credit insurance enables cross-border trade and investment. Perhaps this is a core challenge which Prime Minister Ibrahim can champion under Ekonomi Madani, how to upscale such cover dramatically both nationally, regionally and in the world of Islamic finance. Currently, ICIEC is the only Sharia’a compliant multilateral insurer in the world.

ICIEC, which marks its 30th anniversary this year, has cumulatively insured business to date surpassing US$108.3bn since it started operations in 1995, comprising US$86.2bn in export credit insurance and US$22.1bn in investment insurance. ICIEC has also underwritten policies since inception totalling US$51bn in support of intra-OIC trade and business at end FY2023, and cumulative business insured by SDG Impact since inception of US$77.8bn.

However, despite these remarkable achievements, the 57 OIC markets remain grossly underserved in terms of Sharia’a compliant risk mitigation and credit enhancement solutions. Malaysia for instance has the Malaysian Eximbank, which is dominated more by its role as a trade fund as opposed to a credit and investment insurer. There are those who also question the merger in April 2023 between Danajamin Nasional Berhad, Malaysia’s first and only Financial Guarantee Insurer for the local bond and Sukuk market, with Bank Pembangunan Malaysia Berhad (BPMB) Group, the national development bank owned by the Malaysian Ministry of Finance focused on financing sectors deemed strategic to national economic development.

They stress that development impact finance and the provision of credit and investment insurance and guarantees are two highly differentiated and defined lines of business. The fear is that BPMB’s development activities and mandate would consume its new-found financial guarantees business.

Similarly, the OIC countries have 31 SWFs with assets under management more than US$3 trillion. The greatest boost to the Islamic finance sector would be a much greater engagement of SWFs in the sector through playing a market maker role in Sukuk issuances, Murabaha syndications, vanilla, and big ticket Murabaha financings and so on. Even a small percentage of such activity directed to the Islamic finance sector could result in a massive injection of capital and financing.

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