BURIED in the 2018 Budget, that was tabled by Prime Minister and Finance Minister Datuk Seri Najib Razak recently, are the important details behind the headlines on the handouts, policy initiatives, aspirations and thinking behind the government action.
In the accompanying 2018 Economic Report, for instance, Najib, inter alia, has outlined the aspirations of and progress Malaysia has made towards further enhancing its leadership in the estimated US$2.6 trillion global Islamic finance industry, which is set to give the projected RM2.6 trillion Islamic banking and capital market sector in the country a further fillip.
“Malaysia is renowned as the leader in Islamic finance,” said Najib. As such, “to strengthen its position as a comprehensive and competitive financial centre”, he unveiled a series of measures in further support, especially for the socially responsible investment (SRI) Green Sukuk initiative, Islamic Small and Medium Enterprise and micro-financing, and the multi-billon ringgit halal food and business industry through tax incentives, exemptions and public policy support.
Najib also set the moral compass and ethical basis towards achieving the aspirations under his flagship initiative, the Transformasi Nasional 2050 (TN50)
“This budget is most vital as it summarises all the initiatives that have spurred the economy since I took office in 2009. Indeed it is one of my main report cards to the rakyat and the government under my leadership during my two-term administration.”
This document, he assured, “will chart the course in building a Malaysian nation for the next 30 years crafted on a new canvas based on the Syariah Requirement Framework”.
Najib has been one of the most proactive supporters of Malaysia’s Islamic banking industry over the last decade.
Under his watch, according to the latest Treasury data, total assets of Islamic banks and Development Financial Institutions (DFIs) offering Islamic banking products reached RM783 billion by Aug 1 this year, which is a 9.5 per cent year-on-year increase.
The Malaysian Islamic banking industry today accounts for a 28.8 per cent market share of the total banking system.
Putrajaya’s aspiration is for Islamic finance to have a 50 per cent market share by 2030, in the first decade of TN50.
Islamic finance today accounts for 34.2 per cent or RM578.4 billion of total bank financing, reflecting sustained demand for syariah-compliant financial solutions, which continues on a double-digit year-on-year upward trend. The growing importance of Islamic finance in the Malaysian economy is further underlined by the fact that it accounted for RM460.7 billion of loans outstanding in the banking sector, of which 58.8 per cent was directed towards the household consumer sector.
During his premiership, Najib has presided over the introduction of several world-class policy and legal initiatives relating to the industry. Among them are the comprehensive Islamic Financial Services Act 2013, the Amended Capital Markets Act, the SRI Sukuk Framework in 2014, the establishment of the Investment Account Platform (IAP) last year, which utilises financial technology to provide an efficient intermediation to customers, the Five-Year Islamic Funds and Wealth Management Blueprint early this year, and in July the launch of the world’s first Green Sukuk — a RM250 million offering by Tadau Energy.
Najib unveiled a staggering 30 tax incentives, extensions, exemptions and reductions in his budget. The income tax exemption on Green SRI Sukuk Grant is aimed at encouraging the issuance of green sukuk in Malaysia. The Securities Commision through a statutory fund, the Capital Market Development Fund, will provide a Green SRI Sukuk grant amounting to RM6 million to finance, inter alia, external review expenditure incurred by a Green Sukuk issuer.
This grant is currently subject to income tax, but under the 2018 Budget, it is proposed to exempt it for the assessment period Jan 1, 2018 to Dec 31, 2020.
There are tax exemptions on management fee income for the same assessment period for managers of syariah-compliant funds for both local and foreign investors in Malaysia and for business trusts and real estate investment trusts (REITs) — all aimed at further boosting the Islamic fund sector.
There are also stamp duty exemptions on contract notes for trading of both conventional and syariah-compliant Exchange Traded Funds (ETF) — a pool of stocks that is traded as a stock, and Structured Warrants.
Malaysia leads the world in Islamic ETFs (Exchange Traded Funds), led by i-VCAP, a wholly owned subsidiary of Valuecap, which in turn is owned by Khazanah Nasional Berhad, PNB and Kumpulan Wang Persaraan (Diperbadankan).
Currently, i-VCAP manages four Islamic ETFs traded on Bursa Malaysia under its MyETF brand.
The Islamic capital market is one area where the country has managed to sustain its global leadership position supported by an extensive and facilitative regulatory and tax framework, strong public policy commitment, best-of-its-kind syariah governance and diverse participation of service providers.
One market segment Malaysia has led the way is in sukuk issuance. According to the Treasury, total sukuk issuances in the domestic market accounted for RM83.9 billion or 50.7 per cent of the total bond issuances in the first seven months of this year.
Sukuk outstanding stood at RM719.5 billion, accounting for 57.1 per cent of the total bonds outstanding.
Looking ahead, Najib remains confident that “by leveraging its leading role in the sukuk market and pioneer in innovative products, Malaysia is indeed well-placed to remain ahead in Islamic finance”.
Mushtak Parker is an independent London-based economist and writer