Banking Comeback
Resilient and competitive, Malaysian finance is thriving

Innovation and upgrading continue to dominate Malaysian banking as the financial sector consolidates its restructuring process

The Malaysian banking sector has emerged from the 1997-1998 Asian financial crisis bigger, better, and stronger. Forced by the crisis to restructure, consolidate, and streamline, the sector decreased from 30 banks to its ten main players today and underwent a modernization process that has resulted in a shiny new and highly efficient financial services sector that continues to promote innovation and upgrading in preparation for its full liberalization in 2007. As Managing Director of Bumiputra Commerce Bank and Chairman of the Association of Banks in Malaysia Rozali bin Mohamed Ali says, the financial crisis is now just a distant memory. He comments, “All that is in the past now. What we have now in this country is a financial sector that is extremely forward-looking, fully capable to manage risks and generate business, and superior in the kinds of products and services it can offer.”

The driving force behind the banking sector’s recovery has been the government’s Financial Sector Master Plan (FSMP), which was adopted in 2001 to transform Malaysia’s financial sector into a more resilient, competitive, and dynamic system that supports the growth of the economy. A key element in the plan is the creation of a core of strong financial institutions that are technology driven and ready to face the challenges of liberalization and globalization. Consequently, the banking sector has been investing heavily in IT, restructuring its branch networks, and expanding services. Reforms have also extended to the capital markets. Yusli Mohd Yusoff, CEO of Bursa Malaysia, says that the exchange has worked to increase the transparency of publicly listed companies and improve the risk management practices of brokers and investment banks, as well as increase restrictions on capital adequacy requirements. He explains, “Our focus is to make sure that the best companies will come for listing on our market, as this will serve as an advertisement to investors from all over the world.”

ZETI AKHTAR AZIZ Governor of the Central Bank	ROZALI BIN MOHAMED ALI Managing Director of Bumiputra Commerce Bank

Apart from its consolidation and modernization, one of the most striking developments in the Malaysian banking sector over the past three years has been its success in expanding Islamic financial services, as evidenced by the landmark issuing of Shariah compliant bonds in 2002. As part of the FSMP, which has outlined several targets for the expansion of Malaysia’s Islamic banking industry, the government is aiming for a 20% share of the country’s banking and insurance market to be occupied by Islamic financial services providers by 2010. This is hardly an unrealistic goal as the explosion in demand for these services had already boosted its share to 10% by 2003, and Malaysia currently boasts the world’s highest Islamic banking growth rate. This is undoubtedly due to the fact that the country has been a pioneer in the sector and has significantly expanded the scope of Islamic banking to provide a wide choice of financial instruments. There are currently over 50 generic Islamic banking products and services in the country to meet a diverse array of business needs, and the Islamic money market and insurance industry is also rapidly expanding. “Malaysia has more than two decades of experience in Islamic financing,” says Governor of the Central Bank, Zeti Akhtar Aziz. “We aim to develop a complete Islamic financial system, not only in banking but the whole infrastructure – financial markets, Islamic insurance and specialized financial institutions, to offer products such as mortgages, credit guarantees, and deposit insurance. We also have a regulatory and supervisory framework to address the unique risks and issues of Islamic finance.”

Principled approach to finance puts Islamic insurance on the podium of up-and-coming business

The Takaful concept is being embraced by a growing market of people orientated financial businesses

Among Malaysia’s pioneering efforts in the area of Islamic financial services is Takaful, or Islamic insurance. Relying on the concepts of risk sharing, mutual assistance, and profit sharing, Takaful was introduced in the country in 1984, after having been used in Sudan and Saudi Arabia, and has been building a loyal base of clients from both Muslim and non-Muslim backgrounds ever since. Takaful is an Arabic term derived from the root word ‘Kafala’, which means to take care of one’s needs, and is used in Malaysia instead of the term Islamic Insurance in order to convey that the financial products are available to all Malaysians, not only those of the Muslim faith.

Mohd Fadzli Yusof, CEO of Takaful Malaysia, states, “One important feature of our product is that is it not only meant for Muslims, but also for non-Muslims. It is a business transaction in which anyone can use the product. It is certainly value for money and can be viewed as a value-added product.”

Insurance products are based on the principles of Takaful, which means that at the end of the contract, profit from unused premiums is shared between the company and the client, whereas with conventional insurance all profits remain with the insurance provider. “Islamic insurance is therefore quite a revolution and a radical departure from the practices of conventional insurance,” explains Mr. Yusof. “It not only provides insurance cover, but also the opportunity to earn profit. In a nutshell, Islamic insurance is actually one part insurance and the other part investment.”

MOHD FADZLI YUSOF CEO of Takaful Malaysia

Takaful clients seem to agree. Net contributions for both general and family Takaful increased by 14% in 2003 boosting the industry’s market share to 5.4% of total net contributions in the Malaysian insurance sector. As such, the central bank has predicted that Takaful is likely to continue to grow in importance and become a viable provider of financial security and risk transfer mechanism for both the public and businesses. Takaful operators have expanded from two in 2001 to four in 2003, with more than 11,000 agents nationwide. Particular growth has been registered in family Takaful, which covers the many different types of insurance needs of the family unit such as mortgages, education, housing, and lifetime income, among others. The fact that Takaful abides by international and Malaysian accounting standards and is governed by a credible regulatory framework is also luring new business from multinationals such as oil companies, which are enjoying unprecedented returns from the product.

Not surprisingly, the interest of regional neighbors is on the rise. Mr. Yusof states, “Many countries approached us after they saw that our industry had grown successfully. First we focused our attention on our ASEAN neighbors, such as Brunei, Indonesia, and Singapore. Later, we worked with Sri Lanka and also Saudi Arabia. Other interested countries include Kuwait, Qatar, Bangladesh and Thailand.”