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Malaysia’s  Budget Targets IF Incentives

The Islamic finance industry features strongly in the first national budget of Malaysia’s new Pakatan Harapan coalition government, led by Prime Minister Tun Mahathir Mohamed, which came into power in May 2018.

The Budget 2019 tabled in the Malaysian Parliament on 2 November 2018 by Finance Minister Lim Guan Eng. set expenditure at RM314.6 billion (US$75.53 billion) and projected total revenue to rise to RM261.8 billion (US$63.03 billion), up from RM236.5 billion (US$56.94 billion) in 2018. The budget includes plans for widespread public spending cuts, sales of non-strategic assets and a one-off dividend of RM30 billion (US$7.2 billion) by the state-owned energy firm, Petronas Nasional, to help boost revenue.

The three focus areas of Budget 2019 are implementing institutional reforms, ensuring the socio-economic well-being of Malaysians and fostering an entrepreneurial state. However, there are several specific provisions aimed at the Islamic finance industry to further enhance Malaysia as a global leader. In this respect the Ministry of Finance will set up a Special Committee on Islamic Finance together with Bank Negara Malaysia (BNM) and Securities Commission Malaysia (SC).

To further advance Malaysia’s dominance of the Sukuk market, the Government will extend double tax deduction for additional expenditure incurred when issuing Ijarah and Wakalah Sukuk, as well as for additional expenditure incurred by the companies issuing retail bonds or Sukuk, for 2 years of assessment beginning 2019.

“Small-and-Medium-sized Enterprises (SMEs),” stressed Minister Guang Eng., “constitute 98.5 per cent of businesses in the country and is the primary engine of economic growth for the nation. Therefore, to ensure that SMEs continue to thrive, especially in the principal industries, the Government will implement several measures.”

In the Islamic finance space, these include i) the establishment of a RM1 billion (US$2340 million) SME Sharia’a Compliant Financing Scheme made available via Islamic financial institutions to finance exporters of halal products, where the Government will provide a profit rate subsidy of 2 per cent; ii) the allocation of RM100 million to upgrade the capability of the SMEs in the halal industry through various programmes in order to increase exports and to make Malaysia a global halal hub by 2020; and iii) the encouragement of SME exports through financing by the Export-Import Bank of Malaysia Berhad (EXIM Bank) by making available RM2 billion (US$480 million) worth of credit and Takaful facilities to SME exporters.

In the Takaful and pension space, there are several micro-provisions aimed especially at B40 households (the bottom 40 per cent of the wage-earning population). This is an important step in the Government’s efforts to establish a comprehensive social safety net in collaboration with state pension fund, EPF, SOCSO, and other social safety institutions. “It is also the Government’s intent that as the B40 households understand the benefit of insurance and Takaful, they will over time acquire their own protection policies,” added Minister Guang Eng.

BNM, for instance, launched the Perlindungan Tenang Scheme in 2017 to make available affordable, accessible and simple insurance and Takaful products for Malaysians costing as little as less than a packet of cigarettes a month. The Government proposes to a stamp duty exemption for all Tenang Insurance and Takaful products for two years beginning 1 January 2019. Similarly, to encourage a higher life insurance and Family Takaful take up rate, the combined tax relief for EPF contribution and life insurance or Takaful deduction will be separated into RM4,000 for EPF contributions or approved provident fund and RM3,000 for Takaful or life insurance premiums.

At the same time, in partnership with the private insurance/Takaful industry, the government will pilot a national B40 Health Protection Fund to provide free protection for B40 households against the top 4 critical illnesses for up to RM8,000 and up to 14 days of hospitalisation income cover at 50 Ringgit per day starting 1 January 2019.  This means that hospitalisation income of RM700 per annum is available.  Great Eastern Life Insurance is contributing the initial seed funding of RM2 billion to this fund to be managed by BNM. The government expects the fund size to grow with more partnerships and contributions with other insurance and Takaful companies.

At the same time, for housewives under the e-Kasih programme, the Government has introduced the Sharia’a Compliant Employees Provident Fund (EPF) i-SURI contribution scheme where husbands are incentivised to contribute for their wives’ retirement savings. For the e-Kasih beneficiaries whose husbands contribute at least RM5 monthly into their wives’ retirement savings, the Government will contribute RM40 a month. An allocation of RM45 million is provided for this scheme.

There are also other provisions aimed at the B40 income groups including a RM1 billion (US$240 million) fund to be established by BNM and available from 1 January 2019 to assist first time buyers getting on to the property ladder for purchases up to RM150,000.  The funds will be disbursed through AmBank, CIMB Bank, Maybank, RHB Bank and BSN through a concessionary financing rate as low as 3.5 per cent per annum for two years and will be exempted from stamp duty, as well as benefiting from RM25 million of mortgage guarantees provided by the government and disburse through Cagamas Berhad, the National Mortgage Finance Corporation.

There are also various provisions to incentivize investments in green technology, including a RM2 billion Green Technology Financing Scheme (GTFS) made available at selected commercial banks and a RM1 billion Sustainable Development Financing Fund by the state-owned development financial institution Bank Pembangunan Malaysia Berhad to support the Agenda 2030 for Sustainable Development as well as the 17 Sustainable Development Goals (SDG) under the United Nations Development Programme.

Perhaps equally interesting is the stated intention of the government to privatise infrastructure assets by setting up the world’s first “Airport Real Estate Investment

Trust (REIT)”, whereby investors of the Airport REIT will receive returns arising from user fees collected from Malaysia Airports Holdings Bhd, which has the concession to operate these airports. The Government hopes to raise RM4 billion from selling a 30 per cent stake of the REIT to private investment institutions.

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