The Malaysian Islamic banking system (MIBS) achieved an encouraging thumbs up in 2010 underlining both the resilience of the industry and its sustained recovery. The latest Bank Negara Malaysia 2010 Financial Stability Report, which is published with the central bank's annual report and was released last week, confirmed that the MIBS "continued to remain resilient throughout 2010 supported by high capitalization, with a risk-weighted capital ratio (RWCR) of 14.9 percent and an improvement in asset quality with non-performing ﬁnancing pegged at 2 percent in an environment of ample liquidity and improved economic conditions."
In terms of proﬁtability, Islamic banking institutions registered a steady and sustained income, thereby improving returns on assets and equity. Total income year-on-year increased from RM9.71 billion in 2009 to RM11.80 billion at Dec. 31, 2010. Similarly, Net income (profit) increased from RM6.10 billion in 2009 to RM6.84 billion at end 2010.
The encouraging proﬁtability, stressed Bank Negara, has enabled Islamic banking institutions to provide competitive returns to their depositors, thus enabling Islamic banking institutions to continue to attract additional deposits. Indeed, total deposits in the MIBS increased from RM235.94 billion to RM277.55 billion for the same period. This represents a 22.6 percent market share of the total banking deposits in the country - up from 20.7 percent in the previous year, and a healthy 15.7 percent increase on the previous year.
The deposit profile is also revealing with almost half in the form of mudharabah (proﬁt-sharing and loss bearing) contracts. Mudharabah General Investment Accounts (GIAs) comprised 33 percent of deposits; followed by Demand deposits at 15 percent; Mudharabah Specific Investment Accounts (SIAs) at 14 percent. Commodity Murabaha and savings each accounted for only 9 percent of deposits. Of the mudharabah deposits, about 70 percent was in the form of GIAs where the depositors have expectations on the protection of their principal investments and certainty of the returns.
In fact, both Malaysian Prime Minister Mohd Najib Abdul Razak and Bank Negara Gov. Zeti Akhtar Aziz, the two architects of MIBS in 2010 - the one pushing a proactive policy and the other the requisite regulatory and supervisory frameworks - must be quietly elated with the progress of the Islamic banking industry in the south east Asian country since it was first introduced way back in 1983.
According to the latest data, total assets, total deposits and total financing in the Islamic banking industry recorded an average market share of the total banking assets, deposits and financing in excess of 22 percent, which is a considerable achievement in a period of a mere 27 years. This clearly meets the target set by the Financial Master Plan of Malaysia for the Islamic banking sector to achieve a 20 percent market share by the end of 2010.
Total Islamic banking assets reached RM350.80 billion at end 2010 - up from the RM303.26 billion, accounting for a market share of 20.8 percent. Similarly, total ﬁnancing allocated by the Islamic banking industry in Malaysia increased from RM186.86 billion to RM222.28 billion for the same period, recording a market share of 22.7 percent.
In terms of capital ratios, RWCR for the Islamic banking system in Malaysia decreased from 15.6 percent in 2009 to 14.9 percent in 2010; core capital ratio similarly decreased from 13.2 percent to 12.7 percent; and return on assets decreased from 1.3 percent to 1.2 percent for the same period respectively. At the same time, the net non-performing ﬁnancing ratio decreased from 2.2 percent to 2.0 percent.
Malaysia also remained the global leader in sukuk issuances, capturing 66 percent or $94 billion of total global sukuk outstanding as at end-2010. Bursa Malaysia is currently the largest sukuk listing exchange in the world with a value of $27.7 billion as at end-2010, exceeding that of any other leading international ﬁnancial center. The global dimension of Malaysia's sukuk market, according to Bank Negara, is reinforced by the continued presence and interest of foreign issuers and investors, which saw four successful issuances of foreign currency-denominated sukuk amounting to $1.85 billion and SG$1.50 billion in 2010.
A major development in 2010 was the coming into force of the new Central Bank of Malaysia Act 2009 (CBA). Within the bank, the Financial Stability Policy Committee which has been in place since 2004, has the responsibility for the deliberation of risks to ﬁnancial stability and the formulation of policy responses to manage such risks. "Recognizing the relationship between ﬁnancial stability and monetary stability, a joint meeting of the Financial Stability Policy Committee and the Monetary Policy Committee was established this year to provide a forum for the effective deliberation and consideration of macro-prudential measures to safeguard ﬁnancial and macroeconomic stability. Pursuant to the CBA, the Financial Stability Executive Committee has also been operationalized with the mandate to approve proposals by the Bank to take actions to avert a risk to ﬁnancial stability where it concerns entities not regulated by the bank or for the resolution of systemically important ﬁnancial institutions," explained Zeti.
Not surprisingly, according to Zeti, the focus of supervisory activities in 2010 was on bolstering the capacity of ﬁnancial institutions to anticipate and respond to emerging risks, and ensuring that identiﬁed risks both to individual institutions and the system as a whole are well managed. The focus was directed in particular at promoting effective governance, and more robust stress testing and capital management processes by the ﬁnancial institutions to ensure their continued resilience under a range of economic and ﬁnancial scenarios. This was complemented by the continuing review of prudential standards to take into account both global and domestic developments.
The seasoned Gov. Zeti, who is arguably the most senior central banker in the world, is only too aware that recovery and progress in the Malaysian banking system must be sustained amidst the challenges emanating from the global and regional financial systems.
Bank Negara as such sees the outlook for domestic ﬁnancial stability in 2011 as positive, and supported by the underlying strengths of the Malaysian ﬁnancial system. Malaysian financial institutions, stressed the central bank, have accumulated strong ﬁnancial buffers totaling RM81.4 billion to withstand external risks and domestic challenges, even under extreme scenarios of credit and market stress. This, in turn, will support the continued functioning of intermediation activities by the ﬁnancial system.
The key challenges to ﬁnancial stability in 2011, according to Bank Negara, are likely to be largely externally driven, as global economic conditions remain fragile. "While expected to be more moderate than in 2010, domestic growth will continue to be underpinned by strong economic fundamentals and further expansion in consumption and investment, although developments in commodity and energy prices will affect cost of living, particularly for average Malaysians living in urban areas. Shifts in global liquidity will continue to pose challenges to the region, including Malaysia," said Bank Negara.
Initiatives to support the development of the Islamic ﬁnance sector continued to be an important agenda for the Malaysian central bank, focusing in particular on capacity building, infrastructure and talent development.
In 2010, Bank Negara also i) participated in the establishment of the International Islamic Liquidity Management Corporation (IILM) which would form part of the international Islamic infrastructure to support the liquidity needs of the global Islamic ﬁnancial system; ii) established a high-level law harmonization Committee was to develop recommendations to improve the certainty and enforceability of Shariah contracts in Malaysia; iii) introduced with the collaboration with the Ministry of Home Affairs and Immigration Department of Malaysia, a special employment pass for Islamic ﬁnance expatriates providing longer tenures and distinct ﬂexibilities with the two-pronged objective of attracting foreign Islamic ﬁnance talent into Malaysia; iv) and strengthened the Shariah advisory profession through the International Shariah Research Academy for Islamic Finance (ISRA), which is in the midst of setting up the Association of Shariah Advisors (ASAS), which in turn will be the body that regulates the conduct, including accreditating Shariah advisers, and establishes the ethical code for Shariah advisers.
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