The World Trade Organization once suggested that properly sequenced liberalization can help contribute to economic recovery. However, Malaysia’s liberalization plans beckon the question of whether the country is being too ambitious in a time of economic turbulence. NAZNEEN HALIM gathers expert opinions on the issue, and uncovers the long lead-up to the announcement.
In April this year, the Malaysian government announced plans to liberalize the financial and banking sectors, offering two new foreign Islamic banking licenses, two licenses for foreign insurance and Takaful agencies and five new licenses to foreign commercial banks. Foreign equity limits were also raised from 49% to 70% for Islamic banks, investment banks and commercial banks, as well as insurance and Takaful companies. The government said it expects the market to be fully open by 2010 with the take-up of the new licenses. Industry experts, on the other hand, are more circumspect. They give it another five years, at least.
Talk of liberalization has already helped spur confidence in the Malaysian economy although no one is willing to say at this point who the new inductees will be. Word on the street, however, is that Manulife will be one of them, on the Takaful side. In addition, when Fitch Ratings affirmed Malaysia Reinsurance’s (Malaysian Re) Insurer Financial Strength rating of “A-” in June, it said Malaysian Re’s various shortcomings (limited geographical diversification, the challenge of maintaining a good performance under present market conditions, potential risk of its existing voluntary cession arrangements) could be reduced as a result of the liberalization. All these are indeed a promising start to Malaysia’s liberalization efforts on both the Islamic and conventional sides.
Sticking to the plan
According to Sridharan Nair, financial services leader at PricewaterhouseCoopers Malaysia (PwC), when the Financial Sector Masterplan was developed in 2001, one of its main focus areas was Islamic finance, with regulators aiming for this sector to constitute up to 20% of the total financial services industry.
In terms of the Takaful sector, Sridharan said the regulators’ main objective was to strengthen the capacity of local Takaful operators. “In 2001, there were only two Takaful operators, and part of the Financial Sector Masterplan was aimed at improving the efficiency and effectiveness of the operators, and encouraging research and development to create new products. And from there, we can observe a substantial year-on-year trend, with the average annual growth rate of Takaful assets accruing by 68% in the five years leading up to 2008, and average annual premium growth at 40%.
“Basically the whole liberalization plan was to position Malaysia as a center, and take action. The main goal was to increase the number of Takaful operators,” Sridharan elucidated.
For those unfamiliar with how it operates, Malaysia has a tendency to take what is known as the “accelerated growth” approach. And perhaps the latest measures are part and parcel of the plan. The country wanted Islamic finance to account for 20% of the total financial services industry by 2010. Despite its impressive performance in the past few years, it still falls far short of the target. So regulators decided to open up the market to see what the foreign players could do.
“Where are we now? In 2000, we had two composite operators, and in 2008 — before the liberalization measures were put into place — we had eight operators. The number of shareholders in these companies also increased, from one public listed company in 2000 to a broader range of investors including banking groups, and local and foreign insurance companies. The customer base has also expanded from being predominantly Muslim, and products have seen diversification from the previously narrow range of family Takaful to investment-linked products,” Sridharan revealed.
Has the masterplan achieved its intended objectives in terms of the Takaful market? Depends on how you look at it. On the one hand, there is now greater awareness and market penetration — from 2% in 2000 to 8% at present, a substantial increase albeit far below what the regulators were targeting. There are also new marketing approaches such as bancaTakaful and a better-trained agency force. On the flipside, Malaysia’s Takaful market has only achieved 10% market share (against the 20% target) and is not considered sufficiently international: “It is still very domestic, very Malaysian.” However, despite this, Sridharan stated: “When you talk to overseas players, they see Malaysia as a benchmark for a very regulated and structured Takaful market.”
The thing is, there are very few provisions in the recent liberalization measures which relate directly to the Takaful industry. The first is that there are to be two licenses given out to foreign entities this year and these are to be restricted to the life insurance business.
Secondly, the limit of foreign equity has been raised from 49% to 70% — or more, on a case-by-case basis — and foreign entities can enter into bancaTakaful arrangements without any restrictions. Commenting on this, Sridharan said: “Previously, there were restrictions as to which banks these foreign entities could partner, but now that’s being lifted, and they have also been given the freedom to employ expatriates.”
Sridharan said the central bank, Bank Negara Malaysia (BNM), had used the phrase “significant value proposition” in detailing the liberalization measures, without defining it. “If you take what BNM is trying to achieve in totality, you could assume that it is trying to position Malaysia as an attractive outsource center to provide Takaful to Asian countries. AT Kearney has actually rated Malaysia as a very attractive outsource center so there is no reason for it not to work. Another ‘significant value proposition’ would be to provide something new in the market. For instance, somebody who comes to Malaysia and realizes that 40% of the population is still uninsured could find it a significant value proposition to sell microTakaful to people who can’t really afford either insurance or Takaful.”
Easy does it …
Among the more talked about issues in the whole liberalization extravaganza is the fact that foreign law firms appear to be paying no attention to Malaysia’s open arms despite the attractive perks such as tax exemptions and an opportunity to become a seminal force in the nascent market.
Most are said to still be awaiting further announcements from BNM, while some have candidly acknowledged that the terms are far from satisfactory, and that it may not be cost-efficient for them to set up shop in Malaysia if they are restricted to international Islamic finance business.
Kenneth Aboud, managing partner at one of the five Magic Circle firms, Allen & Overy, Singapore, was more diplomatic: “We view it as a very cautious move forward. I would note that the scope is even more limited. Foreign firms will be allowed to practice only the international aspects of Islamic finance in Malaysia.
“Given the volumes to date in this area, I think building a business case to establish an office in Malaysia will be difficult in the short term. We are waiting for more details on the liberalization initiative, and we will assess it in due course in light of the current market and our view of the prospects.”
Mohammed Ismail Shariff, partner at Malaysian law firm Skrine & Co also wondered at the Malaysian government’s reluctance to allow the international law firms to practice anything beyond Islamic finance.
“Allowing them to practice only Islamic finance would not justify the substantial amount of time and money they would have to expend to set up a practice in this country. If foreign firms do set up operations here, it would be beneficial to the country and to the legal profession. There is much we can learn from them.”
Whether Malaysia’s liberalization plans take off as expected is subject to time and, of course, effective marketing. However, one thing that must be said is that local players are not threatened by the government’s extension of hospitality to foreign entities. In fact, most welcome the change.
He pointed out, however, that some have said Malaysia is already a crowded market for Takaful and two new licenses may push it to saturation. This can be averted if the licenses are offered to companies with special value propositions, or something different to offer such as microTakaful. Skrine’s Mohammed Ismail is also positive about the change, stating: “I think it is a good thing. There will always be opportunities if we seek them. There is no need to fear competition; it may actually help.”
What then, is Malaysia’s “pull” factor compared to other Asian countries? Allen & Overy’s Aboud revealed: “The pull factor is the opportunity for A&O to further enhance our position as the leading law firm in the international Islamic finance markets. We developed and pioneered the Sukuk structure in use globally when we did the first ever Sukuk issue for Guthrie in Malaysia in 2001.
“We followed that up with deals for Malaysia, Brunei and Indonesia, among others. We would like to continue developing and solidifying our leadership position. From our perspective it will be important to be able to realize economies of scale by focusing on locations where we can maintain critical mass such as Singapore and Hong Kong. Malaysia will eventually need to come to terms with this.”
How will liberalization change the landscape of Islamic finance in Malaysia? Aboud was candid: “If I had to comment on the international Islamic finance market in Southeast Asia to date, I would say, despite all the press to the contrary, it has been slow in developing.”
“We constantly see initiatives and we hear talk about how big a market it’s supposed to be, to say nothing of the Islamic finance conferences in this part of the world every week, but this is not borne out by the numbers. Deal activity falls way short of the hype.”