Malaysia Allows Onshore Islamic Foreign Currency Services

August 15, 2006

Malaysia is allowing qualified banks and insurers to offer foreign-currency services that comply with Islamic law as part of a push to make the country an Islamic financial hub, the central bank said Monday.

Islamic financial institutions can now set up foreign-currency units that share infrastructure with their head offices but are separate from transactions in the local currency, the ringgit, said Zeti Akhtar Aziz, governor of Malaysia’s central bank, Bank Negara.

Previously, only banks and insurance companies in the country’s offshore center in Labuan — an island off Borneo — could offer Islamic financial services in foreign currencies.

“Islamic financial products and services transacted in international currencies may be conducted from anywhere in Malaysia,” Zeti said when opening an Islamic finance forum.

“This is also expected to enhance the capability of foreign players that have identified Malaysia as their center to serve the regional market.”

The central bank will also give “conditional licenses” that allow qualified foreign and local financial institutions to conduct Islamic banking — from commercial and investment banking to leasing in international currencies, she added.

Three foreign Islamic banks are currently permitted to operate in Malaysia — Kuwait Finance House, Saudi Arabia’s Al-Rajhi Banking and Investment, and a consortium led by Qatar Islamic Bank.

Islamic banks operate on Shariah laws, which ban investments that pay interest or that derive profit from alcohol, tobacco, pork, gambling or weapons.

Zeti said profits of Malaysia’s Islamic banks last year surpassed one billion ringgit (US$272 million, euro227 million) for the first time.

She said 26 new corporate Islamic bond issues with a total value of 23 billion ringgit (US$6.3 billion, euro5.2 billion) were announced in the first half of 2006, representing 71 percent of all corporate bond issues in the period.

To make Malaysia an attractive regional Islamic financial gateway, Zeti said the country will adopt “a policy of mutual recognition and accommodate various juristic reasoning” approved by recognized Shariah advisers.

There is no standard Shariah interpretation in Islamic finance globally. Some Middle East investors have debated the validity of some Islamic instruments used in Malaysia. Issuers in Malaysia are increasingly trying to narrow the gap between regions by using structures for securities and hedging instruments that meet standards of the Middle East.

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