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Thursday, 21 February 2013

Malaysia banks on reforms to spur Islamic finance growth



KUALA LUMPUR, Feb 21 — Regulatory reforms are underway to help Malaysia’s Islamic banking industry expand further, but for government plans to succeed, they will need to be matched by action from some reluctant banks.
The government originally aimed for 20 per cent market share for Islamic banks by 2010, but despite double-digit growth in both lending and assets, the sector has fallen shy of this mark.
Islamic banks have added RM111.6 billion in assets over the past two years, bringing their share of total banking assets in Malaysia to 19.6 per cent in December 2012, central bank data shows.
Their share of loan business crossed the 20 per cent mark in January 2012, reaching 21.3 per cent last December.
Malaysia now aims for an even more ambitious target — a 40 per cent share of Islamic domestic financing by the year 2020 — and intends to make the industry more international, according to the country’s master plan for capital markets development.
To achieve this, regulators have introduced new rules over the past two years and are preparing to release a brand-new legal framework for Islamic finance this year.
But private-sector banks need initiatives of their own, including steps to address a leadership vacuum and to strengthen their overseas strategies, says Ashar Nazim, Islamic financial services leader at consultants Ernst & Young.
“In the absence of these initiatives, these numbers are very ambitious — 40 per cent is very difficult from population dynamics alone,” he said.
Strategy
Malaysia’s proactive Islamic finance policies have made it a global model, but regulators have refrained from directing the strategy of Islamic banks.
“The market has to be demand-driven,” central bank governor Zeti Akhtar Aziz said at a media conference in September. “We can put the enabling environment, but we can’t require banks to offer products and services.”
That makes the issue of who decides banks’ strategy important, and critics believe bank boards often fail to give direction.
“Board composition is very vanilla, very ordinary,” Nazim said. “The quality of boards is under heavy criticism, that is where the struggle is.”
Few of Malaysia’s Islamic lenders have ventured overseas and only a handful have a significant regional presence. Some have established presences in Indonesia, but the vast bulk of their revenues remain domestic.
CIMB Islamic, the Islamic arm of CIMB, derives around 10 per cent of its earnings from business in Indonesia, Singapore and Brunei, according to the bank.
“I don’t think we’ll see a significant shift... but we are really endeavouring for our business overseas to contribute more than the 10 per cent,” said Badlisyah Abdul Ghani, chief executive of CIMB Islamic.
“There is no point in setting up business in a new market if we can’t be competitive; there are certain parameters that need to be in place before we can operate effectively. Government support is the main criterion.”
Beyond Indonesia, Islamic banks see little chance for expansion of the industry in Asia; although China has a large Muslim population, there are major regulatory obstacles and a lack of infrastructure in the country’s Muslim areas.
That leaves the Middle East, but for many Malaysian banks, that is seen as a step too far. With the exception of a few representative offices, no Malaysian bank has ventured into the Middle East.
“There are small markets in the Middle East such as Bahrain, Qatar and Oman, but these are city states and they are already well-banked,” said Rafe Haneef, chief executive of HSBC Amanah Malaysia.
Maybank Islamic, the Islamic arm of Malayan Banking, has said expansion plans will focus on Southeast Asia, with further plans for China, London and the Middle East. Its Indonesian unit was converted into a full-fledged Islamic bank in 2010.
Structure
At home in Malaysia, Islamic banks’ expansion is hampered by their structure, analysts believe: they are mostly subsidiaries of conventional banking groups and leverage the branch networks of their parents to reach out to customers.
For instance, Public Islamic Bank distributes its products through the 248 branches of its parent, Public Bank, the country’s third largest lender. Bank Islam, the country’s largest standalone Islamic lender, has less than half the assets of Maybank Islamic.
“Our model leverages on the joint network. I am personally not so keen to set up branches,” said the chief executive of another Malaysian Islamic bank, noting: “We are bottomline-driven.” The executive declined to be named.
This contrasts with the Gulf, which has major, standalone Islamic banks such as Saudi Arabia’s Al Rajhi Bank, Bahrain’s Al Baraka Banking Group and Abu Dhabi Islamic Bank.
Using conventional bank branches reduces costs and risks. But it can also reduce the appeal of Islamic banking to some customers, while it may dilute management’s focus on the Islamic side of the business and constrain the Islamic operation’s room for manoeuvre.
Malaysian regulators have been actively promoting the concept of creating a very large, standalone Islamic bank, and have even created a specific licence for such a “mega” bank. It would be defined as having paid-up capital of US$1 billion (RM$3.1 billion), compared with RM300 million for a regular banking licence.
The theory is that such a large Islamic bank could compete because of its size and also because it would be able to choose its strategy independently from a conventional parent. So far, however, there has been little concrete interest in the financial community to establish such a bank.

(The Malaysian / 21 Feb 2013)


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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Study on Cross-Border Tax On Islamic Finance



A new study into the cross border tax burden on Islamic finance transactions in the Middle East and North Africa region, relative to the tax burden placed on conventional finance, underscores the importance of regional tax legislative changes to equalize the tax treatment of shariah-compliant financial options.

The study reviewed the tax treatment of four common Islamic finance structures, commodity murabaha, sukuk, salaam and istisna in eight MENA region countries: Egypt, Jordan, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Turkey and also in the Qatar Financial Centre.

The report shows that while simpler Islamic finance transactions can be carried out in some of these countries without prohibitive tax costs, only Turkey and the QFC have a tax system that enables sukuk (bond) transactions to be carried out without excessive tax costs.

Islamic finance is of growing importance within the MENA region, but the taxation systems of almost all countries were developed in an environment of conventional finance. This can mean that Islamic finance suffers a tax burden that is not suffered by conventional finance. The study aims to support local authorities to revise their regimes to make Islamic finance transactions across borders as competitive as conventional finance in tax terms.

Most Islamic finance transactions seek to achieve economic outcomes that are similar to those achieved by conventional finance. However, to achieve these economic outcomes the Islamic finance transactions typically require more component steps than the equivalent conventional financial transactions, which results in the greater tax burden.

The additional transactions required by Islamic finance are at risk of being subject to transfer taxes or to taxes on income or gains. This can be seen most clearly by considering the sukuk transactions (bond), reviewed in detail in the report, where in many cases a transaction, which is economically equivalent to the issue of a conventional bond secured on real estate, gives rise to transfer tax and capital gains tax liabilities, makeing the sukuk transaction prohibitively expensive to carry out.

The study, led by Islamic finance consultant Mohammed Amin with support from regional branches of PwC and Ernst and Young, considers two alternative approaches to the modification of tax law to facilitate Islamic finance which, for simplicity, the authors term the Malaysian approach and the United Kingdom approach.


The Malaysian approach is based upon the regulatory authorities putting in place a process for advance determination of whether a transaction does or does not constitute Islamic finance. For those transactions that are certified as being Islamic finance transactions, tax law can be modified relatively easily to give these Islamic finance transactions the same taxation outcome as the equivalent conventional transactions. Where intermediate transactions are necessary to effect the Islamic finance structure, the intermediate transactions can readily be disregarded for tax purposes.

The United Kingdom approach is based upon the philosophical objective of separating religious matters from tax law. Accordingly, the United Kingdom does not want the tax treatment of a transaction to depend on whether or not it is Shariah compliant. Indeed, the United Kingdom wishes to keep all religious references out of tax law. Accordingly, the United Kingdom has proceeded by defining certain kinds of transactions using purely secular free-standing language which makes no reference to Islam or to Islamic finance. Once the transactions have been defined, their tax treatment can be specified in a manner that results in the same tax treatment that will be given to equivalent conventional finance transactions. The United Kingdom approach requires much more complex drafting of tax law since no reference can be made to external Islamic finance sources; conversely, it has the merit of keeping religion out of tax law.

In the case of Muslim majority countries, such as those in the MENA region, the study recommends the Malaysian approach as being quicker and simpler to implement.


The report is described as being “Phase One.” Subject to resources, the team intends to extend the work by looking in a similar way at matters such as the impact of consumption taxes like Value-Added Tax on Islamic finance transactions.


(Global Tax New / 21 Feb 2013)


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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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