BANK Negara announced yesterday plans to issue up to three new licences to qualified foreign players to set up Islamic banking operations locally by next year to further liberalise the Islamic banking sector.
The move will effectively bring forward the Islamic banking liberalisation timetable to 2004, from the 2007 target date outlined in the Financial Sector Masterplan.
Applications for the new licences close on March 31 next year.
Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said the decision to fast track the entry of foreign players into the local Islamic banking sector was made after the government expressed satisfaction with the achievement of the industry so far, which had exceeded the objectives envisaged in the master plan.
“We have met our objectives beyond our earlier expectations,” Zeti said, citing the Islamic banking sector's rapid progress since 1983, such as having 10.5% of deposits in the total banking system and its ability to tap into more than 15% of the bonds market.
Zeti was speaking to reporters after delivering her keynote address at a luncheon organised by the Malaysian Institute of Directors in Kuala Lumpur yesterday.
The progress of Islamic banking had also been noted by the latest Economic Report, which said its total assets had risen to RM79.5bil from RM370mil in 1983. And, from a single Islamic bank , there are now two, while all 33 banks and finance companies in the country are offering Islamic banking products.
In Budget 2004, the government had proposed tax deduction on expenses incurred by an Islamic bond issuer for five years to promote Islamic corporate financing.
In a statement issued earlier, Bank Negara said the move was part of an overall effort to strengthen the global integration of the domestic Islamic banking system and increase the potential to tap new growth opportunities, as well as facilitate international trade and investment flows between Malaysia and the rest of the world.
“It is also a step forward in the development of Malaysia as a regional financial centre for Islamic banking and finance,” the statement said.
Analysts said Bank Negara's latest move was a sign that the local Islamic banking sector had fully grown and was able to compete with other foreign players and local banks offering Islamic products.
“The presence of international players may eventually help Islamic banking products to be widely accepted both locally and abroad,” said a Mayban Securities Sdn Bhd banking sector analyst said, adding that it could also bring more Islamic banking expertise to the country.
Analysts said that despite the success of Islamic banking in the country, Islamic banking products had received limited success abroad, particularly outside the Middle East region.
“For Islamic banking to gain worldwide appeal, Malaysia could leverage the strength of international banking players to further promote Islamic banking, particularly in corporate finance,” said another analyst with a local brokerage.
Analysts agreed that competition would hot up in the local Islamic banking operations.
“Competition will likely increase, but the actual impact will depend very much on the products being offered by these banks, and their target market,” said the Mayban Securities analyst, who noted that local players had a 20-year headstart in the industry to compete effectively with new foreign players.
Bank Negara had outlined several criteria to assess the applications, including the applicant being a financially sound licensed foreign Islamic banking institution or a foreign financial institution with experience in Islamic banking business.
Zeti said application would also be open to foreign banks in Malaysia, which were currently allowed to offer Islamic banking products and services through Islamic banking windows. “If such banks were to apply for, and obtain a full Islamic banking licence, they will no longer be allowed to offer such products and services through the existing arrangement,” she added.
Bank Negara said applicants must also be regulated by a competent home regulatory authority, preferably with a strong national jurisdiction and must be able to demonstrate in their business plan that they would have the expertise and resources to contribute constructively to the local Islamic banking sector.
In addition, the applicants would also be required to submit business plans, which must contain details of the competency, integrity, qualifications of their senior management, a proposed operating plan and internal control, as well as their projected financial condition for the first three years.
Bank Negara would also require applicants to submit the proposed ownership structure, source of capital, shareholders, financial strength, and details of their previous banking and non-banking business ventures.
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