Abdulkader Thomas stressed two important issues from day one as a teaser for day two. Firstly, the role of the Malaysian International Islamic Financial Center as a vehicle to develop the Islamic market space, with the value proposition of a well-regulated market providing opportunities for both issuers and investors. Secondly, Dr Nik Ramlah Mahmood’s point in the keynote address on front-to-back Shariah compliance in Malaysia.

Abdulkader then asked members of the panel what they thought was the key component of growth in the Malaysian Islamic finance industry. Daud Abdullah singled out three factors as having contributed to Malaysia’s success story:

1. The government’s clear articulation of plans — for example, the Financial Sector Master Plan;
2. Creation and connection between the environments of Islamic finance — banking, Takaful and the money market; and
3. Mutually re-enforcing elements of strong legal, tax and regulatory environment.

Daniel Mah, sharing the perspective of an offshore financial center, first gave an overview of the role of the Labuan Offshore Financial Services Authority (LOFSA). Commencing operations in 1990, LOFSA has grown to incorporate about 6,000 companies listed in it with eight full-fledged Islamic banks and many Takaful windows. The key driver of Islamic finance at LOFSA, Mah said, is the cost saving feature and efficiency of the delivery system.

Driver, commenting from a Takaful perspective, said the young population demographic in Malaysia and Indonesia presents a vast amount of opportunities and potential growth. “A young population means there will be at least two to three active generations that will grow older and subscribe to Takaful. That’s why I perceive Malaysia and Indonesia as the two most dynamic and interesting markets,” he said.

Responding to Abdulkader’s question regarding investment opportunities in Malaysia, Daud revealed that the property sector (real estate), transportation (shipping and aircraft) and oil and gas are on Asian Finance Bank’s radar. “In addition, AFB is doing research on opportunities in the two major development plans by the Malaysia government for the southern and northern regions. We will be opening our second branch in Johor and a third in the north in conjunction with the development plan,” he said.

When a participant asked what needs to be done to encourage MIFC, Daud suggested that the key is to increase marketing efforts and articulation of the value proposition that Malaysia has to offer. The challenge, he said, is for the players to figure out the target segments and what products to offer these segments.

Driver concurred with Daud that tax is just a headline grabber and marketing is the key. “It is easy to set up an international financial center and give tax incentives. However, big players look for a stable and transparent business environment. The Malaysian government has successfully executed the first two steps — plan and initiate it — but there needs to be an ongoing marketing effort to tell the players again and again about the benefits and value proposition that MIFC can offer,” Driver suggested.

Faizah Jamaludin of Skrine then directed a question to Mah on whether LOFSA is looking into amending the Offshore Companies Act (OCA), which has a clause that prohibits shipping operations as now the shipping industry is booming. In response, Mah said the OCA does allow ship financing — it only prohibits ship operations in the sense of having enrichment, cruise activities and plying between Malaysian ports (shipping activities from Port Klang to Bintulu, for example). However, plying between international routes is allowed by OCA, he said.

In responding to a final question from another participant regarding whether the Takaful industry is considering providing credit enhancers in the funding operations of Islamic banks, Driver said it is possible to dissect the risks in project financing, for example into performance and issuer default risk, and pricing these risks. However, a more crucial consideration before this product really takes off is the ability of the Takaful industry to carry those risks in their portfolio and make profit. This really calls for the development of the re-Takaful industry, said Driver, concluding the session.