In 2004 Malaysia’s Central Bank brought forward the Islamic banking sector`s liberalization, initially scheduled for 2007, by dishing out three new licences to Islamic financial institutions from the Middle East.
To grow the home market, it issued five new licences for domestic banks to create Islamic subsidiaries. So far, RHB Islamic Bank has opened its doors and the rest are expected to set up shop this year.
Bank Negara said in its annual report that the move to speed up the liberalization programme stemmed from the rapid development and steady performance of the Islamic banking industry over the years. The presence of these foreign players would position Malaysia as an international Islamic financial hub.
The three Middle Eastern players are Kuwait Finance House, Al-Rajhi Banking & Investment Corporation and a consortium of Islamic financial institutions represented by Qatar Islamic Bank, RUSD Investment Bank Inc, and Global Investment House.
The measures and guidelines introduced during the year include allowing institutions to determine a reasonable ceiling profit rate, taking into account the institution’s risk management capabilities, business strategies and market outlet to guidelines on directorship in Islamic banks issued.
Several revisions were made to the framework of rate of return for greater flexibility, and in line with the implementation of the market risk capital adequacy framework for conventional banking institutions, a similar framework for Islamic banks was issued in September with full compliance expected from the 1st April this year.
Bank Negara also introduced a policy on Takaful coverage for financing-I (Islamic financing) in October 2004, whereby Islamic banking institutions were required to offer Takaful plans as the first choice to their customers in the offering of protection for Islamic financing that needs coverage.
Bank Negara also continued to play an active role on the 65-member International Financial Services Board via its council and technical committee.