KUALA LUMPUR -- Malaysia's banking system, including Islamic finance, is open to the use of financial technology, said Marzunisham Omar, the country's central bank assistant governor said in a recent interview with the Nikkei Asian Review.
The bank, a key promoter of Islamic finance, is confident the adoption of fintech, such as tools used in crowdfunding, can help the industry to reach untapped markets.
Malaysia's Islamic finance has come a long way since it began in the late 1960s as a means of managing funds for Muslims making pilgrimages to Mecca. Malaysia also has strict prudential measures in place to prevent money laundering and exposure to terrorist financing. Islamic finance conforms to the principles of Shariah Islamic law. The basic idea is to prevent harmful activity, which acts as an additional shield against illicit transactions.
The central bank is now working to incorporate advanced technology into Islamic finance to broaden its appeal and effectiveness. "As a regulator, we recognize and embrace technology advancement," said Marzunisham.
He said four companies are now developing solutions within a regulatory "sandbox" set up by the bank to allow them to test products before they market them commercially.
As Islamic finance has reached "critical mass" in Malaysia, the aim for the central bank is to push for "value-based intermediation" that aims to deliver sustainable impact for the economy without compromising returns.
With the enactment of banking laws and setting up a multiagency body to promote Islamic finance, Malaysia has emerged as a key player in the industry, accounting for one-fifth of the estimated $2 trillion in Islamic financial assets worldwide.
Sharia prohibits charging interest, so observant financiers instead derive income from profit-sharing between the lender and borrower, for example. This serves as an alternative to conventional banking, with promoters touting its cost-effectiveness and ethical values.
To raise the bar further, the central bank, along with Securities Commission Malaysia and the World Bank, introduced the first green sukuk, or Islamic bond, in July. The $250 million sukuk was issued by Tadau Energy to fund a joint project with Edra Global Energy, a unit of state-owned China General Nuclear Power, to develop a 50 megawatt solar power plant in Sabah, in Malaysian Borneo.
"We see it as a pioneering work by Malaysia in the development of Islamic finance [on] the global stage," Marzunisham said.
The country is also leading in the development of qualified professionals through central bank-backed educational institutions that offer professional courses and postgraduate studies for working people. "We are strengthening the professionalism of talent through the Chartered Institute of Islamic Finance Professionals, a professional body in charge of setting standards for Islamic finance practitioners," Marzunisham said.
The institute will introduce two programs later this year that are equivalent to chartered banker qualifications in conventional banking.
Open to all
Contrary to popular belief, Islamic finance is not reserved for Muslims. A growing number of people of other faiths are taking advantage of Sharia-compliant products and services. "In Malaysia, Islamic finance has reached a level of critical mass, where its product offerings are competitive, serving both Muslim and non-Muslim alike," said Marzunisham.
He said that 87% of retail customers for investment accounts, which offer higher returns on deposits but restricted withdrawals and principal protection, are non-Muslims.
Malaysia has positioned itself as the hub of Islamic finance, offering an ecosystem for investors to raise funds. So far, it has attracted issuers from China, Japan and the Middle East. "Foreign direct investment from the Middle East grew threefold from 2008 to $3.8 billion in 2016," said Marzunisham. Three full-fledged Islamic banks from the Middle East have been operating in Malaysia since 2005.
Still, the assistant central bank governor believes more needs to be done to market Islamic finance to the world's estimated 1.5 billion Muslims, especially those living in the 57 countries of the Organization of Islamic Cooperation.
The Malaysian government has several initiatives aimed at position the country as the marketplace for Islamic finance. One is the Malaysia International Islamic Financial Center, which was set up in 2006.
Marzunisham said Malaysia accounted for 46% of the $75 billion in sukuk issued worldwide last year and 33% of the $71 billion in Islamic assets under management, highlighting the country's importance to the industry.
The central bank, through interaction with other financial regulators and multilateral agencies, such as the Asian Development Bank and World Bank, provides expertise on Islamic finance, advising countries on incorporating Islamic principles into their financial systems, strengthening regulations and providing banking supervision, said Marzunisham.
"A significant milestone was in 1983, when we enacted the Islamic Banking Act that led to the establishment of Bank Islam, the country's first" Islamic bank, Marzunisham said.
Later, the Takaful Act, or Islamic insurance law of 1984, was passed, followed by a new central banking act in 2009 that recognized a dual financial system, both conventional and Islamic.