IT IS no secret that Malaysia is intent on becoming a hub for Islamic
banking. As part of its strategy to enhance its financial competitiveness
and increase its links with other economies, it brought forward the
liberalisation of its Islamic banking sector to 2004, three years ahead of
the World Trade Organisation's deadline.
Currently, there are nine full-fledged Islamic financial institutions
operating in the country (see box story). However, before they go all out,
some quarters feel that there are many issues that need to be addressed.
For instance, isn't Malaysia, with a population of 25 million, too small
to support so many Islamic banks? Secondly, how will our local banks
(full-fledged banks as well as conventional banks with Islamic windows) be
affected by the presence of global players? Is our infrastructure ready to
absorb a second Islamic banking system, as opposed to conventional
banking? Will Singapore, which is also hoping to become an Islamic banking
hub, be a threat? Do these issues warrant immediate attention?
Malaysian Business takes a look at the upside and downside of these
factors that could hinder the growth of Islamic banking here and
regionally.
The Issues Debated
An expert on Islamic banking, Professor Bala Shanmugam says, `Only 10%
of Malaysian banking assets are in Islamic accounts and personal loan. The remaining 90% are
held in conventional accounts, serviced by 10 Malaysian banks, not
including the foreign banks.' He questions, `Does this not sound lopsided?
`Now that nine full-fledged Islamic banks have been given licences, how offering Islamic products. Many countries are only beginning to create an
Islamic infrastructure, while Malaysia has both a conventional and Islamic
system running concurrently. Not surprisingly, Malaysia is looked upon as
an Islamic banking role model.'
Bala puts it differently. He maintains that as far as separate
accounting systems are concerned, the conventional banks in the country
are not required by law to have two separate accounting systems as yet.
However, it is understood that the Malaysian Accounting Standards Board
will issue a set of Islamic accounting standards later this year, and more
will follow suit.
Meanwhile, Baljeet adds that the establishment of the Bahrain- based
Accounting & Auditing Organisation for Islamic Financial Institutions
(AAOIFI) encourages the standardisation of Islamic accounting.
As for Jesvin, she says, `The Islamic banking system, while able to
exist parallel to the conventional system, requires its own technical
infrastructure, regulation and set of principles. The separate accounting
principles are part of the requirements, given the nature of the
operations.' Jesvin may have her point. Although the cost of complying
with additional regulatory requirements could be expensive, what is
important is to look at the potential of Islamic banking as a whole, which
should more than offset the cost of compliance.
In BNM's view, while some areas of Islamic banking transactions may
require a different set of accounting treatments as dictated by the unique