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The approval by Bank Negara Malaysia, the central bank, of the application of a consortium led by Rusd Investment Bank to establish a fully-fledged Islamic bank in Malaysia, is the latest manifestation of Kuala Lumpur’s drive toward the further globalisation of its Islamic banking, finance and insurance sector.

Bank Negara confirmed the licence approval on October 11 to the consortium comprising Rusd Investment Bank, Qatar Islamic Bank, and Global Investment House. At the same time, the Malaysian central bank also approved an Islamic banking licence for Al-Rajhi Banking & Investment Corporation (Arabic). This comes five months after the approval of a similar licence to Kuwait Finance House. In September 2003, Malaysia announced that it was inviting applications from qualified foreign players for three onshore fully-fledged Islamic banking licences.

The move signals a virtual repositioning of Malaysia’ pioneering and some say ambitious Financial Sector Master Plan (FSMP) launched in 2001, with the effective merger of Phases Two and Three at least as far as the Islamic banking and finance sector is concerned. Under Phase Two which is due for completion in 2007, Bank Negara would give new Islamic banking licenses to qualified domestic players. Only after that was the intention to open the Islamic financial services sector to qualified foreign players. But with the change in policy, Bank Negara has brought forward its financial sector liberalisation plans by three years.

In July 2004, Bank Negara approved universal Islamic banking licenses for RHB Capital and Commerce Asset-Holding (CAHB), two of the 10 so-called anchor banks in Malaysia. RHB is setting up a dedicated Islamic bank through its 70%-owned subsidiary RHB Bank; while CAHB is doing the same through its subsidiary Bumiputra Commerce Bank.

This brings the number of Islamic banks approved in Malaysia to seven including the pioneering Bank Islam Malaysia (BIMB), set up in 1983, and the more nascent Bank Muamalat Berhad established two years ago. Bank Negara hopes that with this market expansion will come increased competition and choice.

“The approval of the banking licence,” says Saleh Jameel Malaikah, chairman of Rusd Bank and one of the more experienced Islamic bankers of his generation, “is a significant milestone for Rusd Bank in its efforts to bring the financial strength and Islamic banking experience of top Islamic financial institutions of the GCC to the new Islamic bank in the process of being established in Malaysia.”

Malaikah is confident that the participation of a wider-based investor group from the GCC countries, with the appropriate capital strength, strong credit and risk management expertise, and a commitment to providing value-added Islamic financial services, will provide a strong foundation for the new Islamic bank in achieving its business objectives.

“The proposed bank,” he adds, “will be a befitting vehicle to achieve our goal of enhancing the business and financial collaboration between the GCC economies and Malaysia in particular, and the Asean region in general. We will seek to establish broader shariah-compliant business and financial linkages between the two regions in target sectors including healthcare, higher education, water and wastewater treatment, oil and gas, agro-based and food industry, biotechnology, and tourism.”

Malaikah is one of the few bankers from the GCC that is familiar with the Malaysian banking sector, and country and credit risk. During his previous role as chief executive of the banking division of the Jeddah-based Dallah AlBaraka Group (DBG), he forged close relations with Malaysia.

Rusd Bank, whose shareholders comprise primarily Islamic insurance companies from the Middle East & North Africa (MENA) region, is leading the consortium setting up the proposed Islamic bank in Malaysia. Its heavyweight partners are Qatar Islamic Bank, the premier Islamic bank in Qatar with investments as diverse as in the GCC, Middle East, US and Europe, with a 70% equity stake; followed by Rusd Bank with 20%; and Global Investment House, the Kuwait-based investment bank which is building up a name in equity research, real estate, bonds and structured finance – both conventional and Islamic.

Naseeruddin Khan, managing director of Rusd Bank, which is keen to emphasise its Malaysian credentials, welcomes Bank Negara’s opening up of the Malaysian financial sector and economy to foreign participation, and stresses that within two years Rusd Bank has succeeded in bringing FDI (foreign direct investment) flows to Malaysia through equity participation in the proposed new Islamic bank.

Two years ago, Naseeruddin Khan was the main driver behind the establishment of Rusd Investment Bank, an offshore bank incorporated in Labuan in Malaysia, and regulated by the Labuan Financial Services Authority, focusing primarily on value-added new business areas such as Islamic wealth management, future financial planning, asset management, and trust business.

Bank Negara’s action is a further manifestation of a declaration of intent on the part of the government of new prime minister Abdullah Badawi, who in April this year was returned to power in a landslide general election victory. During a speech in Oxford on October 1, Badawi confirmed that he would like Malaysia to take the lead in energising trade and services in the Muslim world.

Malaysia has set itself the ambitious target of achieving a 20% market share for Islamic banking deposits of the total market share of banking deposits in the country by 2010. Currently, the figure is about 10.3% with some six years to go. Similarly, Islamic banking assets accounted for 9.73% or RM85.2bn of the total assets of the Malaysian banking sector at the end of March 2004; and Takaful assets for 5.6% or RM4.6bn of the total insurance sector assets.
Kuala Lumpur, for some years now disappointed at the level of intra-Islamic cooperation in trade and investment, including in the Islamic banking sector, is keen to promote Malaysia as a profit center for GCC investors. While it has successfully attracted western and Asian FDI flows, investors from the capital rich GCC countries have largely been conspicuous by their absence. Malaikah is confident that the three proposed Islamic banks owned by foreign players will make their contribution to achieving this target.

Malaysia has invested significantly in building a world class business and financial architecture over the last two decades under its Vision 2020 banner; and the policies of the Mahathir government in tackling the impact of the Asian financial crisis has been uniquely successful and vindicated, with even the IMF acknowledging this.

In a post 9/11 environment, however, there are signs that GCC institutions and investors, because of investment diversification reasons, are slowly opening up to Malaysian business and risk. GCC institutions and Islamic bankers are impressed with Malaysian progress in developing its Islamic banking and finance sector, especially from a systemic point of view.

Not surprisingly, Malaikah acknowledges that Malaysia has achieved significant progress in product development and transactions in Islamic banking and finance, and has made an important contribution to support cross-border Islamic finance as well. “There is now a wider acceptance of Islamic financial products in Malaysia,” he says, “and the future prospects are very exciting, driven by the positive economic outlook for the country, which in turn shall spur greater demand for financial services.”