02:03 GMT +325 September 2017
Live
    Kuala Lumpur

    Malaysia Eyes Starring Role in Islamic Finance

    CC0 / Pixabay
    Opinion
    Get short URL
    11098116

    Southeast Asia is enjoying rapid economic development, while many Muslims have become prosperous in the region. But the Quran forbids charging interest rates on loans. Nevertheless, Malaysia's top banks are offering an alternative approach, known as Islamic finance. Tom McGregor takes a closer look.

    Tom McGregor — The Quran, Islam's holy book, prohibits Muslims from charging interest rates on loans: "Trade is just like interest," according to an English translation posted in quran.com.

    "But, Allah has permitted trade and has forbidden interest," the Quran adds. "Whoever returns to dealing in interest or usury — those are the companions of the Fire; they will abide eternally therein."

    The damning fatwa (Islamic edict) against usury seems counter-productive for Muslims who require loans to purchase homes or to start businesses. Islamic banks face restrictions to generate sufficient profits to succeed.

    But starting in the 1960s, bankers in Muslim-majority Malaysia launched an alternative system, known as Islamic finance, which offers personal finance and commercial instruments that are compliant with Islamic law. Islamic banks can also earn added income in a faith-based manner.

    Shift to profit-sharing

    Most banks issue loans with interest to generate much of their revenues. So, how can Islamic banks boost profits, while tapping into the high-growth potential of the global Muslim community?

    Islamic finance offers the right solution for them. Sharia-compliant banks do not offer loans to customers but engage in profit-sharing. A home buyer would not sign a mortgage agreement with an Islamic bank since it's a loan with interest. Instead, the bank would buy the home outright and resell it at a higher price to the home buyer and then let the purchaser make monthly installment payments to finalize the deal.

    A similar tool is used for banks to provide capital for clients to start their own business.

    If the home buyer and new business owner succeed, the Islamic bank wins by cashing in on profit-sharing, while holding on to a huge pool of assets as collateral.

    Maybank doubles down

    The Malaysian government called for 40 percent of all banking assets nationwide to be sharia-compliant by 2020, from 28 percent — 742 billion Ringgit ($170 billion) in 2016.

    Malaysia's largest Islamic bank, Maybank, aims to double its assets by 2020, compared to 2015.

    As disclosed by the Central Bank, in the past five years Maybank's assets had increased at an annual compound growth rate — 19 percent, compared to the industry average — 13 percent.

    Its target is to reach $300 billion in assets by 2020.

    "There is no reason why we shouldn't be able to continue this growth momentum," the Gulf Times quotes Maybank Islamic Berhad CEO Rafique Merican as saying. "Islamic finance is still outgrowing conventional by a ratio of at least two to one."

    Maybank will introduce new products and embark on a major expansion in Indonesia, home to the world's largest Muslim population. However, prior success does not guarantee strong growth rates in the future.

    Islamic 'One Belt, One Road'

    Chinese President Xi Jinping introduced the One Belt, One Road (B&R) initiative in 2013 with bold plans to invest over $1 trillion on infrastructure in Asia, Africa and Europe.

    The goal is to connect cross-border logistics, trade and investments in the B&R sphere by building more shipping ports, airports, railways and roads that get linked with new industrial zones and energy hubs.

    Malaysia is expected to reap significant benefits from the B&R, working with China to construct and upgrade domestic shipping ports and industrial zones. Islamic finance can play a crucial role here.

    The Global Infrastructure Investment Index 2016, published by World Bank Group, ranks Malaysia as the second most attractive market in Asia and fifth in the world.

    "The Securities Commission Malaysia (SC) has long recognized the promising potential of the Islamic capital market as an alternative avenue for large-scale, long-term fund-raising," CPI Financial quotes SC Chairman Tan Sri Ranjit Ajit Sing as saying.

    Islamic finance — here to stay

    The Muslim population is rising faster than the non-Muslim population, according to a demographics study conducted by the Pew Research Center.

    While extremists attract the most attention from mainstream media in Western countries due to the rising terror threat, most Muslims are, in fact, family-oriented and peaceful.

    Strong ethical values make Muslims more likely to turn to Islamic banks to handle their money affairs since sharia-compliant financial institutions do not invest in alcohol distilleries, casinos and pork products.

    A number of Malaysian banks stand tall as pioneers in Islamic finance and we should anticipate their stars to shine brighter in the years ahead.

     

    Tom McGregor is a commentator and editor for CCTV.com news website, based in Beijing.

    The views expressed in this article are solely those of the author and do not necessarily reflect the official position of Sputnik.

    Related:

    Despite Impending Election, Merkel Rejects Calls for an 'Islam Law'
    While All Eyes Are on Syria, This Jihadist Group Gathers Momentum in Asia
    Malaysian Mufti Says Muslims May Wish Christians Merry Christmas
    Tags:
    Islamic banking, Quran, Koran, Islam, finance, One Belt, One Road, Indonesia
    Community standardsDiscussion
    Comment via FacebookComment via Sputnik
    • Сomment