Islamic banking expected to 40% of Malaysia’s financial sector by 2020

Islamic financial business is at the heart of the Tun Razak Exchange project, with some experts calculating that Sharia-compliant transactions could account for up to half of the business that will go through the new centre when it is complete.

Islamic financial business is at the heart of the Tun Razak Exchange (TRX) project, with some experts calculating that Sharia-compliant transactions could account for up to half of the business that will go through the new centre when it is complete.
Dato' Azmar Talib, the chief executive of 1 Malaysia Development Berhad (1MDB), the real estate business overseeing the project, says Islamic banking comprises about a quarter of Malaysia's domestic financial market in terms of assets and financing, but this is expected to reach 40 per cent by 2020, when TRX will be well developed.
"We intend to use Malaysia's strengths, particularly in Islamic finance, to provide the infrastructure that will enable innovation, attract skilled talents and promote ease of doing business in the sector," he says.
Others are even more positive about Kuala Lumpur's potential in the global race to build the leading Islamic financial market. Many analysts believe the competition will come down to a three-way pull between KL, Dubai and London.
Malaysia has longevity on its side, and a developed domestic market. About 60 per cent of primary market sukuk (Islamic bond) issuance was in KL in the first half of this year.
Mohammad Daud Bakar, the chairman of the Sharia Advisory Council of Malaysia's central bank, says the country has advantages in Islamic finance, such as a developed pensions funds industry, takaful (insurance) and long-term project finance.
"We have established private Islamic ratings agencies that vet the sukuk, and we are the only country with a Sharia-compliant equivalent of the American mortgage firms like Freddie Mae," Mr Bakar says.
But despite the strength of the domestic industry, Malaysia faces some challenges in the international market. "Around 90 per cent of our issuance is in local currency, so we don't trade in London. Malaysia has never issued any global sukuk. London uses hard currency, and has deep pockets of dollar reserves, which we do not," he adds.
"But I believe the UAE will be a leader in this market in the future. It has dollar reserves and will be in a position to take business from London."
Mr Bakar also points to the potential of the Saudi market. "It is booming because of all the infrastructure that needs to be financed there. It's a booming market and will probably overtake KL in terms of value of issuance, if not volume," he says.
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