Malaysia banking on Islam with fervour

KUALA LUMPUR: Malaysia is banking on religion as the

mainly Muslim Southeast Asian nation embraces Islamic

banking with fervour. 

Islamic financing, based on sharia law which disallows

the payment of interest in favour of profit-sharing,

has found a surprisingly large following among

Malaysia’s 10 million non-Muslims. 

About seven out of 10 Malaysians who opt for Islamic

banking are non-Muslims, a study by professional

services firm Deloitte shows. Islamic banking now

accounts for a tenth of Malaysia’s 780 billion ringgit

($205 billion) total banking assets. Modest as the

share appears, it masks an average annual growth of 37

percent over the past two decades. Malaysia is a

snapshot of a global trend in which a growing number

of governments, firms and consumers are raising funds

through sharia-compliant financing structures. 

Besides the more obvious candidates such as Qatar and

Turkey, non-Muslim governments such as the Philippines

are also considering Islamic bond sales. 

To the mass market, the Islamic banking proposition is

less about religious beliefs and more about economic


While Sharia law does not allow investments in

alcohol, gaming and pork-related industries, adherents

say it is no less profitable than conventional


“You can talk about Islamic everything but at the end

of the day, it’s the bottom line (that) counts a lot.

An Islamic banking system has got to be a business

proposition rather than a sharia proposition,” said

Mustapha Hamat, chief executive officer of the Islamic

Banking and Finance Institute Malaysia, which runs

courses in Islamic banking. Islamic bonds, for one,

are rapidly gaining popularity. These bonds pay no

direct interest, which Muslims consider usury. Instead

they place the proceeds of borrowing in pooled

investments and make regular payments based on


An Islamic bond allows the issuer to tap a larger pool

of funds, including money which can only be invested

in sharia-approved instruments. 

With investable funds in Islamic instruments valued at

around $180 billion in 2002 and growing by 15 percent

a year, Islamic financing becomes a very compelling

proposition. Islamic bonds also offer an alternative

to investors looking beyond the U.S. debt market. The

recent slide in the dollar has ignited concerns that

U.S. assets may be less attractive to foreign

institutions, which are huge holders of Treasury debt.

For the consumer shopping for a housing loan, this

brand of financing offers certainty. 

An Islamic housing loan is based on a contract where

the bank buys the property and sells it to the

consumer at a premium. The customer’s monthly

instalments are fixed, as opposed to conventional

housing loans which depend on market lending rates. 

“With a volatile market, the certainty is some

attraction in using Islamic financing. People enter

into commitments which they are comfortable with,”

said David Vicary, Deloitte Director of Financial


Differing concepts: But the growth of Islamic banking

worldwide is being challenged by differing

interpretations of sharia law. 

For example, what moderate Malaysia sees as

sharia-compliant is not necessarily viewed as such by

more traditionalist Middle East scholars. 

Most of the Islamic bonds issued in Malaysia are based

on the principles of “murabahah” and “al-bai bithaman

ajil”. Under these principles, the financier purchases

an asset from the issuer and sells it back to the same

party at a premium — a notion which Middle East

scholars say is “back-door” interest. 

Malaysia’s global Islamic debt offering last year —

the first Islamic global bond — was a middle ground of

sorts. The bond, known as sukuk, was based on the

“ijarah” concept which is accepted by Middle East

investors. The bond, which was issued through a

special purpose vehicle, involved the issuer’s

purchase of the title to land parcels from a statutory

agency and the subsequent leasing of the same land to

the government, for the tenure of the bond. —Reuters


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