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Islamic Malaysia – Is Malaysia Becoming a Hub For Islamic Finance in Asia?

Islamic Malaysia – Is Malaysia Becoming a Hub For Islamic Finance in Asia?

Yes, Malaysia can be already dubbed as a center for Islamic finance in South East Asia, if not Asia.

Recently, Malaysian Islamic banking groups launched the Corporate Murabahah Master Agreement ( CMMA ) to boost Islamic finance money market. This is to ensure the market remains vibrant, volatile and nice-to-jump-in. To put it in layman's terms, CMMA is a standard document for deposit taking between financial institutions and corporate customers; where you can see the standard agreement would specify a common modus operandi for Islamic financial institutions in accepting deposits via commodity Murabahah.

But an interesting question quotes: "Do halal financial instruments hold up better than conventional and traditional bonds and stocks?" Or to put it in another way, "Is Islamic finance much safer than conventional finance?"

Islamic Finance: The basis, standard and core concept of Islamic finance has always been in the 'shared risk' area. As a start, you may find this more plausible than conventional trading, since the concept of Islamic finance itself calls for collateral backing by an individual or an entity in the middle of a financial instrument (more famously known as "Sukuk"). Sukuk is an Arabic term for "financial certificate."

Although there may be some arguments to where many Islamic financial products are structured using LIBOR ( London Interbank Offered Rate ), a benchmark or reference rate for short-term interest rates worldwide calculated daily), there is no doubt to one thing – Islamic financial models (think concept) disguises its risk profiles to a certain extent. Because ruling on Shariah-compliance has been heavily emphasized and focused, there are a few factors that we could 'miss' – The more important factors to determine whether or not it adds positive value to an economy's financial system.

BUT, halt. That's generalization. Does not work this way in all ends. For a country like Malaysia, an economic stronger in Asia in Islamic finance growing rapidly as an Islamic hub, authorities have considered many ends of conventional banking before introducing sophisticated finance products that are Islamic-based. They have one major problem – "Non-compliance with Islamic principals".

The Asset Way: One of the most famous ways of going about 'interest rates' (as Islamic principals disallow charging of interest rates) is to sell assets. This method has been used for years and there are many ways to go about it. Let's start.

Mr. A wants a RM10,000 personal loan. In conventional banking, the bank lending Mr. A the requested amount of money and charge an interest rate of say 1% per annual. Repayment 5 years. For Islamic financial products, that's not Halal.

So what they do is, the financial institution will take a readily available asset, price it above the agreed rate, sell it to Mr. A and immediately requests that Mr. A sells it back at the 'loan price'. So the bank may sell it to Mr. A at RM20,000 and he will have to sell it back to the financial institution immediately at RM10,000.

Shariah-compliance: Islamic financing has taken a brand new approach in introducing new methods of handling conventional banking; in its essence to serve its own population with compliance to its dos 'and do nots'.

Can Islamic financing in Malaysia thrive, with its introductory of what some people call 'pseudo-Islamic Shariah'? Should we look into the ways of what Muslim schools introduced to us as another way through conventional banking so that we're more secure?

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