Malaysian Finance Minister Guan Eng Launches Islamic Economic Blueprint to Support Greater Linkages Between Islamic Finance and the Halal Economy with Further Tax Incentives for Sukuk Issuance and SRI Funds

Malaysian Finance Minister, Lim Guan Eng, in his National Budget 2020 speech

to the Dewan Rakyat (the Parliament) on 11 October 2019, has followed his predecessors in tabling an ambitious budget with several announcements directly related to the Islamic finance and economy sectors, as well as the digital economy.

Budget 2020, which has the overall theme “Driving growth and equitable outcomes towards Shared prosperity”, are anchored by four main themes: i) Driving Economic Growth in the New Economy and Digital Era; ii) Investing in Malaysians: Levelling Up Human Capital; iii) Creating a United, Inclusive and Equitable Society; and iv) Revitalisation of Public Institutions and Finances.

Finance Minister Guan Eng set expenditure at RM297 billion ($US70.95 billion) and projected total revenue to rise to RM244.5 billion (US$58.4 billion), up RM11.2 billion from 2019, leaving a projected budget deficit of RM52.5 billion.

In the Islamic finance sector, the standout development is the establishment by the Ministry of Finance of the ‘Special Committee on Islamic Finance’ (JKKI) chaired by the Deputy Minister of Finance, with the main objective of further promoting and developing the Islamic Finance ecosystem.

To position Malaysia as the centre of excellence for Islamic finance, this special committee will “Formulate the Islamic Economic Blueprint, with all relevant agencies”and “Organise outreach initiatives and professional courses to promote deeper understanding of Islamic Finance nationwide.”

According to Bank Negara Malaysia Deputy Governor Datuk Abdul Rasheed Ghaffour, Islamic banking accounts for 33% of Malaysia’s total banking assets while the Takaful market share stands at 11% for Family Takaful and 10.1% for General Takaful. “The Islamic financial system continues to grow – at a pace faster than the conventional system. As at end-June 2019, financing outstanding of Islamic banks expanded at 8.6% compared to 2.1% for the conventional banks. Meanwhile, new General Takaful contributions grew at 16.4% compared to 6.2% for conventional insurance premiums. However, new Family Takaful contributions grew at 10%, slightly lower to life insurance premiums of 15.4%,” he stressed in a speech at the Islamic Finance Rendezvous Series “Islamic Finance and Halal Industry – Opportunity, Impact, Synergy” held in Johor Baru on 1 October 2019.

In Budget 2020, Minister of Finance Guan Eng gave further incentives to the Sukuk issuance sector. “The current tax deductions on the cost of issuance and additional deductions on Sukuk issuance costs under the principle of Wakalah will be extended for 5 years until year of assessment 2025,” he confirmed.

Similarly, to further promote Islamic fund and Sustainable and Responsible Investment (SRI) fund management activity, the tax exemption for fund management companies managing Sharia’a compliant funds and SRI funds, and the tax deduction on the cost of issuing SRI Sukuk, will be extended for another three years until year of assessment 2023.

To inculcate and encourage philanthropy, the government is extending a tax deduction on donations for charitable giving through Zakat, Waqf and Sadaqah (as well as sports activities and projects of national interest) from its current cap for individuals from 7% of a taxpayer’s aggregate income to 10%, in line with the threshold given to companies.

The tax deduction is also expanded to cash Waqf contributions to state religious authorities, cash Waqf contributions to public universities approved by the state religious authorities to receive Waqaf and cash endowment contributions to public universities.

The Pakatan Harapan coalition government led by Prime Minister Tun Dr Mahathir Mohamed this year also introduced MySalam, a new social and healthcare inclusion protection scheme which provided 4.3 million individuals with Takaful coverage in the event of a critical illness and hospitalisation. The planned expansion of coverage and payments will benefit an additional five million Malaysians.

The Budget 2020 also targets further support for SMEs, especially those involved in the Halal economy, of which Malaysia is an important global component and player. But Halal exports remain modest. As at Q4 2018, Halal exports, according to BNM Deputy Governor Ghaffour, amounted to RM40.0 billion or only 4 percent of total Malaysian exports, of which Halal exports by small and medium enterprises (SMEs) account for a mere 8.4 percent. “To capture the market, businesses in the halal industry need to be agile and be quick to respond to changing consumer preferences and behaviours. This means business practices and processes need to be re-calibrated to be more aligned with sustainable expectations,” he maintained.

To further support SMEs and entrepreneurs, the SME Bank will introduce two new funds where the Government will provide an annual interest/profit rate subsidy of 2% to reduce borrowing costs. These include a RM200 million fund specifically for women entrepreneurs, offering loans of up to RM1 million per SME; and a RM300 million fund to support Bumiputera SMEs with the potential to become regional champions, with priority given to producers of Halal products and manufacturers with high local content.

The government has also increased the size of the Sustainable Development Financing Fund from RM1 billion to RM2 billion. “Last year, the government said it wanted to make Malaysia a global halal hub by 2020 and allocated RM100 million to upgrade the capability of SMEs in the Halal industry via various programmes to increase exports. For 2020, it will allocate RM10 million to the Ministry of Entrepreneur Development to focus on advocacy and awareness for Halal certification, halal product development and providing platforms for local players to tap into the global halal market,” said Finance Minister Guan Eng.

Another important development is the introduction of a new allocation of RM500 million in guarantee facilities for women entrepreneurs.

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