AsianInvestor spoke to Professor Shamsher Mohamad Ramadili Mohd about what Malaysia should be doing to develop itself as an Islamic finance and investment hub. He is a professor of finance and accounting at the International Centre for Education in Islamic Finance, also known as INCEIF – the global university of Islamic finance. It was set up by the country’s central bank, Bank Negara Malaysia, to develop human capital for this area.

There was a report in the Financial Times in May that sharia-compliant funds’ asset base dropped by some 10% last year, as they’ve largely failed to get institutional investors on board. What’s your take on this?
My take is that Islamic funds may be a unique niche in the market, but they are just another asset class, and investors are really just interested in returns. Sharia-compliant products have higher costs and constraints than conventional ones – such as extra screening and restrictions on where they can invest – so I don’t know how they can effectively compete with conventional funds.

On paper it looks nice to have sharia-compliant assets, but institutions have a target to achieve, and if they can’t achieve it, they will withdraw from an investment and do something else.

There is a need for more incentives to invest in sharia funds, especially from a cost point of view. Hong Kong and Singapore are learning from us and making the necessary changes on that front to attract investors who are keen in this special investment class.

Specifically, what is needed to attract investors to Islamic funds?
They should be competitive and have special tax advantages, and a proper, harmonised legal and regulatory infrastructure. Sharia boards set different standards – they need to agree on a common framework. There should be more complete investment propositions, better liquidity and adequate valuation processes.

And they should be able to get rid of the very strict screening process. After all, the current screening mechanisms are not 100% compliant, as it is almost impossible to find investment propositions that completely fit with sharia requirements.

However, in the interest of developing this sector and of the public in general, scholars have allowed some 5–10% investment in non-compliant investments, provided that 5–10% of the earnings will be ‘cleansed’ by contributing to some charitable purposes. So why not just allow 25–50% investment in non-compliant sectors, which will allow more interest from conventional investors?

The cost structure is also a big issue – compared to conventional products, there are high costs for the different layers of screening and restrictions on asset classes. Another challenge is the relatively low liquidity, though there are now measures being taken to improve this situation.

Malaysia is making inroads by trying to liberalise rules, taxation, etcetera, but there is a need to look at the effectiveness of these measures. If the Islamic finance sector is to grow, we have to look at these things or it will just become another asset class in a conventional portfolio in the long term to stay competitive.

Investment in sukuk seems to be growing faster than that in other sharia assets. Do you think this will continue?
The sukuk market will definitely grow. They are being issued in places like Hong Kong and the UK, as well as in Malaysia and the Middle East. Sharia-compliant funds are likely to be more successful on the bond side.

Malaysia has first-mover advantage in this area and strong government support to develop the Islamic finance industry in general, and the sukuk market in particular has made Malaysia the choice for international investors for issuing sukuks. What we need now is to ensure that our position as a global hub for sukuks and Islamic banking is maintained through whatever measures necessary.

Islamic private banking also seems to be becoming a bigger focus.
Yes, there is a keen interest in Malaysia to develop an Islamic private banking sector. We are learning from Singapore and other international financial jurisdictions that have developed a healthy private banking sector for high-net-worth individuals (HNWIs). We are hoping we can develop this niche area in the next three to five years. There is a big potential to attract HNWIs from the Middle East.

If you look at Hong Kong and Singapore, they have the infrastructure to allow to allow them to develop this sector more competitively that other jurisdictions that are new starters. And they are looking to build frameworks for sharia finance.

We are looking in Malaysia too to develop this niche market in Islamic private banking. We hope to learn from the established conventional private banking sectors of the world to develop this sector.

What are the global banks doing in this area?
They are looking to help, but they also have restrictions – they have to perform for shareholders. If they cannot earn enough returns, they will not get involved. In fact, a lot of the big banks have withdrawn from Islamic private banking, as they find a lot of potential challenges. These include lack of availability of sharia-compliant products, lack of liquidity of most compliant assets, inadequate valuation tools for compliant assets, extra costs for screening and maintaining sharia boards, lack of scale in funds and lack of appropriate expertise to help in developing and managing sharia-compliant portfolios.

This is where we can come in to address these issues, probably in partnership with the big players in the private banking sector globally. 

Do you see Hong Kong and Singapore challenging Malaysia as sharia finance and investment centres?
Yes. Although Malaysia has been the big first mover on Islamic finance and funds, Hong Kong and Singapore are trying to compete and it might not take too long – perhaps within the next decade – for them to catch up if we were to be complacent. They are learning from us and, being international financial centres, they already have the advantage of strong financial infrastructure to attract a lot of interest from the global investment community.

They have a cost advantage, strong reputation, and they can attract talent – and usually firms use conventional people to work on Islamic finance products.

What are those other markets doing on this front?
Hong Kong is looking more at sukuk issuance and Islamic banking. It is amending its financial and legal infrastructure, tax structures and incentives to accelerate the development of sharia-compliant investments. We might see Islamic windows set up there rather than fully fledged Islamic banks. They would do well because they would attract funds from Middle East clients, who might prefer to go to Hong Kong or Singapore than Kuala Lumpur.

How has INCEIF been involved with this?
One thing the government has done very well in Malaysia is to provide training and human resources for Islamic finance industry. INCEIF is unique in that it trains people specifically to serve this sector. We have produced quite a large number of graduates and are further improving the quality of our graduates that are serving the Islamic finance industry globally. We are the only university in the world that specifically trains human resources for the Islamic finance industry.

Professor Shamsher
Tel: +603 7651 4000
Email: [email protected]