LONDON, 29 September 2003 — In a dramatic move, Malaysia has brought forward its banking liberalization plan by three years. Bank Negara Malaysia, the central bank, last week announced that it would issue up to three new licenses to qualified foreign players. Phase One of the Plan (2001-2003) will see the enhancement of the capacity and capability of the country’s ten domestic banking groups. During Phase Two (2003-2007), Bank Negara will issue new licenses to domestic players “to increase competition and performance”. In the final phase (2007-2010), Bank Negara will open up the financial sector to qualified foreign banks in effort “to drive domestic banks to better performance, efficiency, and innovation”.

Bank Negara Governor Dr. Zeti Akhtar Aziz said that pace of liberalization would also take into account the stage of development of the domestic banking sector and would be based on fundamental developments rather than response to events.

The most significant development is that it is aimed at the Islamic banking sector. The three new licenses will be issued to Islamic banks. Does this mean that Malaysia’s Islamic banking sector, by far the most developed in the world, has now reached a stage of maturity and stability and is in a strong position to withstand foreign competition?

The statistics tend to support the proposition. At the end of 2002, Islamic banking deposits as a percentage of total banking deposits broke the 10 percent barrier to reach 10.2 percent or 53.4 billion ringgit, compared with 9.5 percent or 47.1 billion ringgit in 2001. The Financial Sector Master Plan has targeted the Islamic banking market share to reach 20 percent by 2010.

Islamic banking assets at end of 2002 reached 68.1 billion ringgit - up 15.5 percent on 2001 and 8.9 percent of the total assets of the banking sector. More encouragingly, total Islamic financing increased by a whopping 30.2 percent or 36.8 billion ringgit at end 2002 compared with the previous year, constituting 8.1 percent of the total financing in the banking sector, and up from the 6.5 percent in 2001.

This progress does make the target of 20 percent by 2010 eminently achievable. The current 10.2 percent is an impressive milestone, and excludes the vast deposit base of non-bank Islamic financial institutions such as Tabung Haji (The Pilgrims Management Board) which has assets in excess of 10 billion ringgit; and Bank Rakyat Kerjasama, the country’s dedicated Islamic cooperative bank, which incidentally has a large number of non-Muslim depositors and members.

Last week Bank Negara also published the criteria under which the applications for the three Islamic banking licenses would be considered. The applicant should be a financially sound foreign Islamic bank or a foreign financial institution (conventional) but with experience in Islamic banking business. These include Standard Chartered Bank, UBS Group, Citigroup, HSBC, and ANZ. Citigroup and UBS already owned dedicated Islamic banks in Bahrain - Citi Islamic Investment Bank and Noriba Bank respectively. The applicant must be regulated in its country of domicile where it must have a good reputation. It will have to demonstrate through its business plan that the new Islamic bank in Malaysia will have the expertise and resources that can contribute constructively to the development of the domestic Islamic financial sector and the economy of Malaysia.

The proposed ownership structure, says Bank Negara, is important. Applicants will have to submit the source of financing; and identify the major shareholders and their financial strength, and business experience and records.

Any of the three new Islamic banks must be locally incorporated under the 1983 Islamic Banking Act, which means that they cannot be registered offshore. The proposed banks must have a minimum capital of $78.95 million and can be wholly foreign-owned. It could be a subsidiary or a joint venture with local Malaysian investors. Bank Negara stresses that the move is part of an overall efforts “to strengthen the global intergration 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.”

The Malaysian move should be an eye opener for the Gulf and Middle East countries. There are some moves to open up the market to regional banks, but even here the process is painstakingly slow.