Malaysia’s economy continued on its recovery path in 2021 amid the reimposition of another nationwide lockdown in June, driven by an improvement in domestic demand and continued robust exports performance. Strong fiscal and monetary policy measures, which cushioned the economic shock, are expected to support GDP growth of between 3% and 4% in 2021. Against this backdrop, Islamic institutions and financial markets have risen to the occasion through their value- and impact-based responses to the COVID-19 pandemic, especially in areas where Islamic finance and sustainability converge.

Review of 2021
Malaysia continued to be a prominent global hub for Islamic finance this year. Its Sukuk market entered 2021 on a strong footing, leading global issuance with a 42.4% market share (US$17.9 billion) in the first quarter. Domestic issuance remained active and broad-based, maintaining Malaysia’s position as a core Sukuk market. Its Islamic banking sector was also on track to deliver a 7% year-on-year growth despite pandemic challenges. All these point to the country’s well-established and deep Islamic capital market.

So far at the time of writing, the government of Malaysia has allocated eight economic stimulus packages and deployed various aid packages worth RM530 billion (US$127.34 billion), of which 62% (RM330 billion (US$79.29 billion)) has been utilized to date. Stricter containment measures taken mid-year, however, have increased financial challenges for the lower- and middle-income groups as well as small businesses.

In response, Islamic financial institutions and Takaful industry players played key roles in assisting their affected customers. Many banks launched their own extended relief programs to affected customers. As of August 2021, total loans under moratorium amounted to RM1.4 trillion (US$336.38 billion), benefiting about 2.6 million customers between the 1st June and the 20th August 2021.

Bank Negara Malaysia’s Shariah Advisory Council was proactive and influential in implementing COVID-19 assistance measures. Under its rulings, Islamic banks alleviated the financial burden of its customers by not compounding profit in the new principal amount for restructured or rescheduled financing. In addition, it also simplified arrangements for restructured financing facilities.

The launch of the Value-based Intermediation (VBI) for Takaful Framework and the issuance of the Perlindungan Tenang [Peaceful Protection] Policy Document in June and July 2021 respectively expanded VBI initiatives in the Islamic finance services sector. Amid the pandemic, banks introduced offerings to cover children with learning disabilities, provide usage-based protection and cater for micro SMEs on e-commerce platforms.

The country’s sovereign sustainability Sukuk issued in April 2021 further strengthened Malaysia’s position as a world leader in Islamic finance. The first to be issued globally, the Sukuk facility combines sustainable finance and Islamic finance in Malaysia’s national sustainability agenda.

The confluence and rapid rise of fintech and digital technology put Malaysia in a unique position to capitalize on the opportunities presented to drive economic recovery and accelerate reach for a more socially and financially inclusive economy. The country’s promotion of a digital economy — as affirmed in its various frameworks, blueprints and incentives — is timely to address the challenges in a post-COVID-19 economy.

Malaysia’s 2021 Digital Economy (MyDigital) Blueprint and the joint Securities Commission Malaysia–UN Capital Development Fund initiative, the FIKRA Islamic Fintech Accelerator Programme launched in May 2021, are further testament to how its regulators have championed the national agenda.

After Singapore, Malaysia will be the second country in the region to issue digital bank licenses. So far, the application process has attracted applications from five consortiums that aim to be a Shariah compliant digital bank, including a Waqf-centric digital bank. The fintech marketplace also saw more players offer Shariah compliant products and services — such as e-wallets, Islamic equity crowdfunding and peer-to-peer financing — to meet customer demand.

The rapid adoption of digital technology has seen the creation of more digital-based fundraising platforms and social finance-based Islamic solutions. Charity crowdfunding initiatives such as Bank Islam’s Sadaqah House, Bank Muamalat’s Jariah Fund and Alliance Islamic’s SocioBiz are some examples.

Through product innovation, Islamic banks introduced social finance initiatives to provide support to those affected by the pandemic, eg Maybank Islamic’s Social Impact Deposit where the bank makes a separate contribution to a Social Impact Assistance Account for every deposit made.

Preview of 2022
Developments seen this year are just the start in Malaysia’s five-year plan for the industry, which is encapsulated in the 12th Malaysian Plan (2021–2025) and Capital Market Masterplan 3 (2021–2025). Expectations for the upcoming five-year Financial Sector Blueprint (2022–2026) is no different. Progress made in 2021 will set the pace and act as a stepping stone for the Islamic finance industry to take a lead role in supporting Malaysia’s economic recovery over their conventional counterparts.

Conclusion
The crisis has sharpened the focus on sustainability and inclusivity in the country’s transformation agenda, and the role digitalization plays in spearheading these efforts. Undoubtedly, these themes will actively shape future policy decisions. It also presents the perfect opportunity for Islamic finance to gain more mainstream relevance globally by making VBI synonymous with responsible and impactful sustainable financing.

Malaysia, as a global leader in Islamic finance, has clearly taken an early lead.

Siew Suet Ming is the chief rating officer at RAM Ratings. She can be contacted at [email protected]