Malaysia has come a long way in Islamic finance since its first Islamic bank was established in 1983, and the first Islamic insurance company (takaful) established only a year after. Our Islamic financial sector is currently seen as one of the most progressive and attractive in the world. Given the numerous incentives planned and further liberalisation in the coming years, it has enjoyed strong and sustainable growth, thanks to the government’s efforts to make Malaysia an International Islamic Finance Hub Jennifer Chang and Nik Shahrizal Sulaiman reports.
Despite the volatile international financial markets and uncertainties following the global economic crisis, Malaysia’s Islamic finance industry recorded commendable growth. As at end 2011, total assets in the Islamic banking sector increased by 23.8% - about 22.4% of the total banking system’s assets. Malaysian Islamic banks and takaful operators have also attained global recognition - 39 are ranked among the world’s top 500 Islamic financial institutions, and another 21 institutions within the top 100 as ranked by The Banker Magazine (2011 rankings).
Robust fundamentals and provisions
The underlying success of Malaysia’s IF sector owes much of its encouraging development to the tax legislations and regulations which appropriately incentivise and provide tax neutrality for industry players to engage in the Islamic finance sector. These include the Islamic Banking Act 1983, the Takaful Act 1984 and other similar guidelines issued by regulatory bodies. These form good frameworks which allow the Islamic financial system to co-exist and flourish within the existing conventional banking and financial system.
Two important sections within the Malaysian Income Tax Act 1967 which serve to place Islamic financial products at par with conventional financing are Section 2(8) and Section 2(7). This means that for purposes of Islamic financing, all underlying/additional sale and purchase of assets required for Shariah purposes will be ignored for tax purposes, and that the concept of ‘profit’ is treated as ordinary interest from a tax perspective. Tax incentives such as income tax exemptions for licensed Islamic banks and fund managers, reduced stamp duty costs and tax exemptions for non-resident Islamic finance experts abound in reducing transaction costs, indirectly stimulating Islamic financial activity.
2012 Budget Allowances
In the Budget 2012 announcement, there were significant announcements to further boost the growth of Islamic finance in the region. These provisions include:
• A tax deduction on expenses incurred for sukuk wakala for a three year period, which is designed to encourage sukuk issuance both within and outside Malaysia.
• An extension of the income tax exemption given for non ringgit sukuk issuance and transactions for a further three years.
• Establishing a Shariah-compliant SME Financing Fund totalling RM2 billion to be managed by selected Islamic banks. In addition, the government will establish a Shariah-compliant Commercialisation Innovation Fund to help SMEs bring new products to market. Again these funds will be available through selected Islamic banks.
These moves are seen as further catalysts towards fulfilling Malaysia’s ambitions to become a major hub for Islamic finance – particularly, cross border sukuk issuances. For the property investor, the government proposed a Shariah-compliant fund to finance speculative house building.
Exciting times ahead
Despite an increasingly challenging environment, Islamic finance has continued to hold its own and prove its potential as a viable, comprehensive and competitive solution in meeting funding and investment requirements. The basis on which Islamic finance is formed – the emphasis on profit and risk sharing, fairness, transparency and disclosure – offers a comprehensive and competitive solution in meeting funding and investment requirements for businesses. Embraced in its entirety, Islamic finance presents new opportunities to support the economy and provide greater financial stability.
For Malaysia, it is clear that whatever improvements currently being planned and implemented to further shape and strengthen our Islamic financial landscape, the future of Islamic finance looks bright. However, the industry will need to continue to better itself to maintain its lead over increasing regional and international competition.
Article contributed by Jennifer Chang and Nik Shahrizal Sulaiman. Jennifer and Nik are Senior Executive Director with and Executive Director in PwC’s Tax and Assurance practices respectively. Jennifer has extensive experience in the areas of tax and financial services in Australia and Malaysia, while Nik specialises in the area of Islamic finance and is part of PwC’s Global Islamic Finance Team. They can be contacted at firstname.lastname@example.org and email@example.com respectively.