Tuesday October 18, 2011
KL’s edge in Islamic finance
By JOHN LOH
German don: Malaysia’s comprehensive regulatory framework a competitive advantage
KUALA LUMPUR: Malaysia's competitive advantage in Islamic finance is its comprehensive regulatory framework, according to a German economics professor.
“Malaysia has the necessary ingredients to be a hub for Islamic finance, such as its capital adequacy requirements, good governance and disclosure policies that are able to meet European financial standards,” said International Centre for Education in Islamic Finance (INCEIF) governing council member Prof Dr Volker Nienhaus.
“The German Bundesbank (central bank of Germany) has even sent its representatives to Malaysia's Securities Commission for training on Islamic finance.”
He said in comparison, the Gulf countries - the other major players in Islamic finance - have surplus liquidity but not capital adequacy. Their legal framework was also uncertain, he said. Nienhaus was speaking at a public lecture on Opportunities for Islamic Finance in the Arab Spring, Asian Summer and European Autumn, organised by INCEIF, Bank Negara's Islamic education arm.
However, Nienhaus cautioned against excessive government intervention in the growth and adoption of Islamic finance, citing the example of Pakistan which took a top-down approach and ended up creating a less-efficient replica of its previous financial system.
“It took them 10 years to reverse this, and now Pakistan maintains a dual financial system,” he said.
Nienhaus said the Arab spring in North Africa and the Middle East had opened up opportunities for the growth of Islamic finance in the region as its current financial system was deficient and did not provide support to the entrepreneurial middle class.
Its existing banks were mainly tied to the discredited elites and focused on trade financing, he said. “Once the political unrest dies down, there will be huge market potential in the Middle East, especially in areas like financing for new businesses and takaful for the young, growing population.”
On Asia's prospects, Nienhaus said although there were concerns the economic slowdown in Europe and the United States would have some spill-over effects in the region, its impact would likely be moderate.
“Much of the trade and growth in Asia is Asian growth, it is within Asia,” he said.
He also argued that the failure of the current global financial system, as seen in Europe and the US, has fostered a more open outlook toward alternative financial systems like Islamic finance.
“Something is clearly wrong with the credibility of the (mainstream) banking sector. Previously, stress tests failed only eight banks and we thought we were safe. Now, the latest news appears to say that almost all banks are bankrupt,” he said.
He said there were notable markets for Islamic finance in Europe owing to the sizeable Muslim populations there, including the United Kingdom (two million Muslims), France (five million), Germany (three million), and the largest in Russia (17 million), as well as smaller numbers in Luxembourg, Belgium and the Netherlands.
He added that each country however had varied approaches to Islamic finance, with some facilitating retail operations and others disregarding it completely.